UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED June 30, 2006
Commission File Number 0-2525
Huntington Bancshares Incorporated
|
|
|
Maryland
|
|
31-0724920
|
(State or other jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or organization)
|
|
Identification No.)
|
41 South High Street, Columbus, Ohio 43287
Registrants telephone number
(614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2)
has been subject to such filing requirements for the past 90 days.
þ
Yes
o
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
þ
Accelerated filer
o
Non-accelerated filer
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o
Yes
þ
No
There were 237,531,790 shares of Registrants without par value common stock outstanding on July 31,
2006.
Huntington Bancshares Incorporated
INDEX
2
Huntington Bancshares Incorporated
Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
(in thousands, except number of shares)
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(Unaudited)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
876,121
|
|
|
$
|
966,445
|
|
|
$
|
976,432
|
|
Federal funds sold and securities
purchased under resale agreements
|
|
|
365,592
|
|
|
|
74,331
|
|
|
|
121,310
|
|
Interest bearing deposits in banks
|
|
|
37,576
|
|
|
|
22,391
|
|
|
|
22,758
|
|
Trading account securities
|
|
|
113,376
|
|
|
|
8,619
|
|
|
|
328,715
|
|
Loans held for sale
|
|
|
298,871
|
|
|
|
294,344
|
|
|
|
395,053
|
|
Investment securities
|
|
|
5,124,682
|
|
|
|
4,526,520
|
|
|
|
3,849,955
|
|
Loans and leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial loans
|
|
|
7,473,158
|
|
|
|
6,809,208
|
|
|
|
6,206,393
|
|
Commercial real estate loans
|
|
|
4,558,610
|
|
|
|
4,036,171
|
|
|
|
4,518,875
|
|
Automobile loans
|
|
|
2,059,836
|
|
|
|
1,985,304
|
|
|
|
2,045,771
|
|
Automobile leases
|
|
|
2,042,215
|
|
|
|
2,289,015
|
|
|
|
2,458,432
|
|
Home equity loans
|
|
|
4,888,958
|
|
|
|
4,638,841
|
|
|
|
4,683,577
|
|
Residential mortgage loans
|
|
|
4,739,814
|
|
|
|
4,193,139
|
|
|
|
4,152,203
|
|
Other consumer loans
|
|
|
591,990
|
|
|
|
520,488
|
|
|
|
501,897
|
|
|
Total loans and leases
|
|
|
26,354,581
|
|
|
|
24,472,166
|
|
|
|
24,567,148
|
|
Allowance for loan and lease losses
|
|
|
(287,517
|
)
|
|
|
(268,347
|
)
|
|
|
(254,784
|
)
|
|
Net loans and leases
|
|
|
26,067,064
|
|
|
|
24,203,819
|
|
|
|
24,312,364
|
|
|
Operating lease assets
|
|
|
131,943
|
|
|
|
229,077
|
|
|
|
353,678
|
|
Bank owned life insurance
|
|
|
1,070,909
|
|
|
|
1,001,542
|
|
|
|
983,302
|
|
Premises and equipment
|
|
|
365,763
|
|
|
|
360,677
|
|
|
|
356,697
|
|
Goodwill
|
|
|
571,697
|
|
|
|
212,530
|
|
|
|
212,200
|
|
Other intangible assets
|
|
|
64,141
|
|
|
|
4,956
|
|
|
|
5,376
|
|
Accrued income and other assets
|
|
|
1,178,042
|
|
|
|
859,554
|
|
|
|
1,071,134
|
|
|
Total assets
|
|
$
|
36,265,777
|
|
|
$
|
32,764,805
|
|
|
$
|
32,988,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic offices
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits non-interest bearing
|
|
$
|
3,530,828
|
|
|
$
|
3,390,044
|
|
|
$
|
3,221,352
|
|
Interest bearing
|
|
|
20,585,420
|
|
|
|
18,548,943
|
|
|
|
18,677,408
|
|
Deposits in foreign offices
|
|
|
476,684
|
|
|
|
470,688
|
|
|
|
431,816
|
|
|
Total deposits
|
|
|
24,592,932
|
|
|
|
22,409,675
|
|
|
|
22,330,576
|
|
Short-term borrowings
|
|
|
2,125,932
|
|
|
|
1,889,260
|
|
|
|
1,266,535
|
|
Federal Home Loan Bank advances
|
|
|
1,271,678
|
|
|
|
1,155,647
|
|
|
|
903,864
|
|
Other long-term debt
|
|
|
2,716,784
|
|
|
|
2,418,419
|
|
|
|
3,034,154
|
|
Subordinated notes
|
|
|
1,255,278
|
|
|
|
1,023,371
|
|
|
|
1,046,283
|
|
Allowance for unfunded loan commitments and letters of credit
|
|
|
38,914
|
|
|
|
36,957
|
|
|
|
37,511
|
|
Deferred income tax liability
|
|
|
615,543
|
|
|
|
743,655
|
|
|
|
784,504
|
|
Accrued expenses and other liabilities
|
|
|
709,560
|
|
|
|
530,320
|
|
|
|
954,772
|
|
|
Total liabilities
|
|
|
33,326,621
|
|
|
|
30,207,304
|
|
|
|
30,358,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
237,361,333; 224,106,172 and 230,842,020 shares, respectively
|
|
|
2,552,094
|
|
|
|
2,491,326
|
|
|
|
2,487,981
|
|
Less 20,504,922; 33,760,083 and 27,024,235 treasury shares respectively.
|
|
|
(457,758
|
)
|
|
|
(693,576
|
)
|
|
|
(526,814
|
)
|
Accumulated other comprehensive loss
|
|
|
(44,091
|
)
|
|
|
(22,093
|
)
|
|
|
(720
|
)
|
Retained earnings
|
|
|
888,911
|
|
|
|
781,844
|
|
|
|
670,328
|
|
|
Total shareholders equity
|
|
|
2,939,156
|
|
|
|
2,557,501
|
|
|
|
2,630,775
|
|
|
Total liabilities and shareholders equity
|
|
$
|
36,265,777
|
|
|
$
|
32,764,805
|
|
|
$
|
32,988,974
|
|
|
See notes to unaudited condensed consolidated financial statements
3
Huntington Bancshares Incorporated
Condensed Consolidated Statements of Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
(in thousands, except per share amounts)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Interest and fee income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
445,924
|
|
|
$
|
352,341
|
|
|
$
|
845,270
|
|
|
$
|
677,936
|
|
Tax-exempt
|
|
|
520
|
|
|
|
383
|
|
|
|
1,029
|
|
|
|
695
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
60,517
|
|
|
|
37,355
|
|
|
|
112,960
|
|
|
|
75,590
|
|
Tax-exempt
|
|
|
5,894
|
|
|
|
4,341
|
|
|
|
11,606
|
|
|
|
8,648
|
|
Other
|
|
|
9,048
|
|
|
|
7,906
|
|
|
|
15,825
|
|
|
|
15,562
|
|
|
Total interest income
|
|
|
521,903
|
|
|
|
402,326
|
|
|
|
986,690
|
|
|
|
778,431
|
|
|
Interest expense
|
|
|
173,032
|
|
|
|
104,559
|
|
|
|
321,346
|
|
|
|
193,727
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
20,969
|
|
|
|
7,086
|
|
|
|
35,634
|
|
|
|
11,914
|
|
Federal Home Loan Bank
advances
|
|
|
17,077
|
|
|
|
8,663
|
|
|
|
31,565
|
|
|
|
17,346
|
|
Subordinated notes and
other long-term debt
|
|
|
48,630
|
|
|
|
40,118
|
|
|
|
92,270
|
|
|
|
78,346
|
|
|
Total interest expense
|
|
|
259,708
|
|
|
|
160,426
|
|
|
|
480,815
|
|
|
|
301,333
|
|
|
Net interest income
|
|
|
262,195
|
|
|
|
241,900
|
|
|
|
505,875
|
|
|
|
477,098
|
|
Provision for credit losses
|
|
|
15,745
|
|
|
|
12,895
|
|
|
|
35,285
|
|
|
|
32,769
|
|
|
Net interest income after provision for credit losses
|
|
|
246,450
|
|
|
|
229,005
|
|
|
|
470,590
|
|
|
|
444,329
|
|
|
Operating lease income
|
|
|
14,851
|
|
|
|
38,097
|
|
|
|
34,241
|
|
|
|
84,829
|
|
Service charges on deposit accounts
|
|
|
47,225
|
|
|
|
41,516
|
|
|
|
88,447
|
|
|
|
80,934
|
|
Trust services
|
|
|
22,676
|
|
|
|
19,113
|
|
|
|
43,954
|
|
|
|
37,309
|
|
Brokerage and insurance income
|
|
|
14,345
|
|
|
|
13,544
|
|
|
|
29,538
|
|
|
|
26,570
|
|
Bank owned life insurance income
|
|
|
10,604
|
|
|
|
10,139
|
|
|
|
20,846
|
|
|
|
20,243
|
|
Other service charges and fees
|
|
|
13,072
|
|
|
|
11,252
|
|
|
|
24,581
|
|
|
|
21,411
|
|
Mortgage banking income
|
|
|
20,355
|
|
|
|
(2,376
|
)
|
|
|
38,187
|
|
|
|
9,685
|
|
Securities gains (losses), net
|
|
|
(35
|
)
|
|
|
(343
|
)
|
|
|
(55
|
)
|
|
|
614
|
|
Gains on sales of automobile loans
|
|
|
532
|
|
|
|
254
|
|
|
|
980
|
|
|
|
254
|
|
Other income
|
|
|
19,394
|
|
|
|
24,974
|
|
|
|
41,834
|
|
|
|
42,371
|
|
|
Total non-interest income
|
|
|
163,019
|
|
|
|
156,170
|
|
|
|
322,553
|
|
|
|
324,220
|
|
|
Operating lease expense
|
|
|
10,804
|
|
|
|
28,879
|
|
|
|
25,411
|
|
|
|
66,827
|
|
Personnel costs
|
|
|
137,904
|
|
|
|
124,090
|
|
|
|
269,461
|
|
|
|
248,071
|
|
Net occupancy
|
|
|
17,927
|
|
|
|
17,257
|
|
|
|
35,893
|
|
|
|
36,499
|
|
Outside data processing and other services
|
|
|
19,569
|
|
|
|
18,113
|
|
|
|
39,420
|
|
|
|
36,883
|
|
Equipment
|
|
|
18,009
|
|
|
|
15,637
|
|
|
|
34,512
|
|
|
|
31,500
|
|
Professional services
|
|
|
6,292
|
|
|
|
9,347
|
|
|
|
11,657
|
|
|
|
18,806
|
|
Marketing
|
|
|
10,374
|
|
|
|
6,934
|
|
|
|
17,675
|
|
|
|
12,770
|
|
Telecommunications
|
|
|
4,990
|
|
|
|
4,801
|
|
|
|
9,815
|
|
|
|
9,683
|
|
Printing and supplies
|
|
|
3,764
|
|
|
|
3,293
|
|
|
|
6,838
|
|
|
|
6,387
|
|
Amortization of intangibles
|
|
|
2,992
|
|
|
|
204
|
|
|
|
4,067
|
|
|
|
408
|
|
Other expense
|
|
|
19,734
|
|
|
|
19,581
|
|
|
|
36,025
|
|
|
|
38,579
|
|
|
Total non-interest expense
|
|
|
252,359
|
|
|
|
248,136
|
|
|
|
490,774
|
|
|
|
506,413
|
|
|
Income before income taxes
|
|
|
157,110
|
|
|
|
137,039
|
|
|
|
302,369
|
|
|
|
262,136
|
|
Provision for income taxes
|
|
|
45,506
|
|
|
|
30,614
|
|
|
|
86,309
|
|
|
|
59,192
|
|
|
Net income
|
|
$
|
111,604
|
|
|
$
|
106,425
|
|
|
$
|
216,060
|
|
|
$
|
202,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares basic
|
|
|
241,729
|
|
|
|
232,217
|
|
|
|
236,349
|
|
|
|
232,021
|
|
Average common shares diluted
|
|
|
244,538
|
|
|
|
235,671
|
|
|
|
239,451
|
|
|
|
235,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income basic
|
|
$
|
0.46
|
|
|
$
|
0.46
|
|
|
$
|
0.91
|
|
|
$
|
0.87
|
|
Net income diluted
|
|
|
0.46
|
|
|
|
0.45
|
|
|
|
0.90
|
|
|
|
0.86
|
|
Cash dividends declared
|
|
|
0.250
|
|
|
|
0.215
|
|
|
|
0.500
|
|
|
|
0.415
|
|
See notes to unaudited condensed consolidated financial statements
4
Condensed Consolidated Statements of Changes in Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
Treasury Shares
|
|
Comprehensive
|
|
Retained
|
|
|
(in thousands)
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Income (Loss)
|
|
Earnings
|
|
Total
|
|
Six Months Ended June 30, 2005 (Unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
257,866
|
|
|
$
|
2,484,204
|
|
|
|
(26,261
|
)
|
|
$
|
(499,259
|
)
|
|
$
|
(10,903
|
)
|
|
$
|
563,596
|
|
|
$
|
2,537,638
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202,944
|
|
|
|
202,944
|
|
Unrealized net gains on investment securities
arising during the period, net of reclassification
of net realized gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,248
|
|
|
|
|
|
|
|
5,248
|
|
Unrealized gains on cash flow hedging derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,935
|
|
|
|
|
|
|
|
4,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
213,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared ($0.415 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(96,212
|
)
|
|
|
(96,212
|
)
|
Treasury shares purchased
|
|
|
|
|
|
|
|
|
|
|
(1,818
|
)
|
|
|
(44,178
|
)
|
|
|
|
|
|
|
|
|
|
|
(44,178
|
)
|
Stock options exercised
|
|
|
|
|
|
|
1,882
|
|
|
|
852
|
|
|
|
16,159
|
|
|
|
|
|
|
|
|
|
|
|
18,041
|
|
Other
|
|
|
|
|
|
|
1,895
|
|
|
|
203
|
|
|
|
464
|
|
|
|
|
|
|
|
|
|
|
|
2,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period (Unaudited)
|
|
|
257,866
|
|
|
$
|
2,487,981
|
|
|
|
(27,024
|
)
|
|
$
|
(526,814
|
)
|
|
$
|
(720
|
)
|
|
$
|
670,328
|
|
|
$
|
2,630,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2006 (Unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
257,866
|
|
|
$
|
2,491,326
|
|
|
|
(33,760
|
)
|
|
$
|
(693,576
|
)
|
|
$
|
(22,093
|
)
|
|
$
|
781,844
|
|
|
$
|
2,557,501
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216,060
|
|
|
|
216,060
|
|
Cumulative effect of change in accounting principle
for servicing financial assets, net of tax of $6,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,110
|
|
|
|
12,110
|
|
Unrealized net losses on investment securities
arising during the period, net of reclassification
of net realized gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,707
|
)
|
|
|
|
|
|
|
(35,707
|
)
|
Unrealized gains on cash flow hedging derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,709
|
|
|
|
|
|
|
|
13,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared ($0.50 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(121,103
|
)
|
|
|
(121,103
|
)
|
Shares issued pursuant to acquisition
|
|
|
|
|
|
|
53,366
|
|
|
|
25,350
|
|
|
|
522,390
|
|
|
|
|
|
|
|
|
|
|
|
575,756
|
|
Stock based compensation expense
|
|
|
|
|
|
|
8,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,547
|
|
Treasury shares purchased
|
|
|
|
|
|
|
|
|
|
|
(12,931
|
)
|
|
|
(303,943
|
)
|
|
|
|
|
|
|
|
|
|
|
(303,943
|
)
|
Stock options exercised, net of related tax effects
|
|
|
|
|
|
|
(1,196
|
)
|
|
|
880
|
|
|
|
18,445
|
|
|
|
|
|
|
|
|
|
|
|
17,249
|
|
Other
|
|
|
|
|
|
|
51
|
|
|
|
(44
|
)
|
|
|
(1,074
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period (Unaudited)
|
|
|
257,866
|
|
|
$
|
2,552,094
|
|
|
|
(20,505
|
)
|
|
$
|
(457,758
|
)
|
|
$
|
(44,091
|
)
|
|
$
|
888,911
|
|
|
$
|
2,939,156
|
|
|
See notes to unaudited condensed consolidated financial statements.
5
Huntington Bancshares Incorporated
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 30,
|
(in thousands of dollars)
|
|
2006
|
|
2005
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
216,060
|
|
|
$
|
202,944
|
|
Adjustments to reconcile net income to
net cash provided by operating activites:
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
35,285
|
|
|
|
32,769
|
|
Depreciation on operating lease assets
|
|
|
23,666
|
|
|
|
61,263
|
|
Amortization of mortgage servicing rights
|
|
|
|
|
|
|
9,948
|
|
Other depreciation and amortization
|
|
|
37,679
|
|
|
|
39,153
|
|
Mortgage servicing rights impairment charges
|
|
|
|
|
|
|
6,471
|
|
Mortgage servicing rights valuation adjustment
|
|
|
(10,669
|
)
|
|
|
|
|
Stock-based compensation expense
|
|
|
8,547
|
|
|
|
|
|
Deferred income tax (benefit) expense
|
|
|
(123,830
|
)
|
|
|
4,305
|
|
Increase in trading account securities
|
|
|
(27,290
|
)
|
|
|
(19,085
|
)
|
Originations of loans held for sale
|
|
|
(1,318,453
|
)
|
|
|
(1,065,372
|
)
|
Principal payments on and proceeds from loans held for sale
|
|
|
1,313,926
|
|
|
|
893,788
|
|
Losses (gains) on sales of investment securities
|
|
|
55
|
|
|
|
(614
|
)
|
Gains on sales/securitizations of loans
|
|
|
(980
|
)
|
|
|
(254
|
)
|
Increase of cash surrender value of bank owned life insurance
|
|
|
(20,846
|
)
|
|
|
(20,243
|
)
|
Increase (decrease) in payable to investors in sold loans
|
|
|
4,498
|
|
|
|
(134,561
|
)
|
Other, net
|
|
|
(235,146
|
)
|
|
|
(113,052
|
)
|
|
Net cash used for operating activities
|
|
|
(97,498
|
)
|
|
|
(102,540
|
)
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Increase in interest bearing deposits in banks
|
|
|
(12,089
|
)
|
|
|
(360
|
)
|
Net cash received for acquisition
|
|
|
66,507
|
|
|
|
|
|
Proceeds from:
|
|
|
|
|
|
|
|
|
Maturities and calls of investment securities
|
|
|
241,871
|
|
|
|
207,874
|
|
Sales of investment securities
|
|
|
376,263
|
|
|
|
1,476,685
|
|
Purchases of investment securities
|
|
|
(1,024,048
|
)
|
|
|
(1,273,933
|
)
|
Net loan and lease originations, excluding sales
|
|
|
(246,265
|
)
|
|
|
(1,056,834
|
)
|
Purchases of equipment for operating lease assets
|
|
|
(10,934
|
)
|
|
|
(8,353
|
)
|
Proceeds from sale of operating lease assets
|
|
|
82,139
|
|
|
|
174,427
|
|
Proceeds from sale of premises and equipment
|
|
|
4,100
|
|
|
|
989
|
|
Purchases of premises and equipment
|
|
|
(12,645
|
)
|
|
|
(28,500
|
)
|
Proceeds from sales of other real estate
|
|
|
6,767
|
|
|
|
41,899
|
|
|
Net cash used for investing activities
|
|
|
(528,334
|
)
|
|
|
(466,106
|
)
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Increase in deposits
|
|
|
495,827
|
|
|
|
1,562,607
|
|
Increase in short-term borrowings
|
|
|
157,532
|
|
|
|
59,302
|
|
Proceeds from issuance of subordinated notes
|
|
|
250,000
|
|
|
|
|
|
Proceeds from Federal Home Loan Bank advances
|
|
|
2,162,050
|
|
|
|
557,789
|
|
Maturity of Federal Home Loan Bank advances
|
|
|
(2,148,969
|
)
|
|
|
(925,013
|
)
|
Proceeds from issuance of long-term debt
|
|
|
935,000
|
|
|
|
|
|
Maturity of long-term debt
|
|
|
(635,549
|
)
|
|
|
(975,000
|
)
|
Tax benefits in excess of recognized compensation cost for share-based payments
|
|
|
668
|
|
|
|
|
|
Dividends paid on common stock
|
|
|
(103,096
|
)
|
|
|
(92,520
|
)
|
Repurchases of common stock
|
|
|
(303,943
|
)
|
|
|
(44,178
|
)
|
Net proceeds from issuance of common stock
|
|
|
17,249
|
|
|
|
18,041
|
|
|
Net cash provided by financing activities
|
|
|
826,769
|
|
|
|
161,028
|
|
|
Change in cash and cash equivalents
|
|
|
200,937
|
|
|
|
(407,618
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
1,040,776
|
|
|
|
1,505,360
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,241,713
|
|
|
$
|
1,097,742
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
194,505
|
|
|
$
|
95,611
|
|
Interest paid
|
|
|
463,979
|
|
|
|
279,823
|
|
Non-cash activities
|
|
|
|
|
|
|
|
|
Common stock dividends accrued, paid in subsequent quarter
|
|
|
46,884
|
|
|
|
39,613
|
|
Stock 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 or
Commission) 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 2005 Annual Report on Form 10-K (2005 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 2006 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. 123 (revised 2004),
Share-Based Payment
(Statement No. 123R)
Statement No. 123R was issued in December 2004, requiring that the
compensation cost relating to share-based payment transactions be recognized in the financial
statements. That cost will be measured based on the fair value of the equity or liability
instruments issued. Statement No. 123R covers a wide range of share-based compensation
arrangements including share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. Statement No. 123R replaces FASB Statement
No. 123,
Accounting for Stock-Based Compensation (Statement No.123)
, and supersedes Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25).
Statement No. 123, as originally issued in 1995, established as preferable a fair-value-based
method of accounting for share-based payment transactions with employees. Effective January 1,
2006, Huntington has adopted Statement No. 123R. The impact of adoption to Huntingtons results
of operations is presented in Note 10.
FASB Statement No. 154,
Accounting Changes and Error Corrections a replacement of APB Opinion
No. 20 and FASB Statement No. 3 (Statement No. 154)
In May 2005, the FASB issued Statement No.
154, which replaces APB Opinion No. 20,
Accounting Changes
, and Statement No. 3,
Reporting
Accounting Changes in Interim Financial Statements
. Statement No. 154 changes the requirements for
the accounting for and reporting of a change in accounting principle. Statement No. 154 is
effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. The impact of this new pronouncement was not material to Huntingtons financial
condition, results of operations, or cash flows.
FASB Statement No. 155,
Accounting for Certain Hybrid Financial Instruments, an amendment of FASB
Statements No. 133 and 140 (Statement No. 155)
On February 16, 2006, the FASB issued Statement
No. 155, which amends Statement No. 133 to simplify the accounting for certain derivatives embedded
in other financial instruments (hybrid financial instruments) by permitting fair value
remeasurement for any hybrid financial instrument that contains an embedded derivative that
otherwise required bifurcation, provided that the entire hybrid financial instrument is accounted
for on a fair value basis. Statement No. 155 also establishes the requirement to evaluate interests
in securitized financial assets to identify interests that are freestanding derivatives or that are
hybrid financial instruments that contain an embedded derivative requiring bifurcation, which
replaces the interim guidance in Derivative Instrument Group Issue D1,
Recognition and Measurement
of Derivatives: Application of Statement No. 133 to Beneficial Interests in Securitized Financial
Assets
. Statement No. 155 amends Statement No. 140,
Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilitiesa replacement of FASB Statement No. 125
(Statement No. 140), to allow a qualifying special-purpose entity to hold a derivative financial
instrument that pertains to beneficial interests other than another derivative financial
instrument. Statement No. 155 is effective for all financial instruments acquired or issued after
the beginning of the first fiscal year that begins after September 15, 2006, with earlier adoption
allowed. Huntington adopted Statement No. 155 effective January 1, 2006, with no impact to
reported financial results.
7
FASB Statement No. 156,
Accounting for Servicing of Financial Assets an amendment of FASB
Statement No. 140
(
Statement No. 156)
In March 2006, the FASB issued Statement No. 156, an
amendment of Statement No. 140. This Statement requires all separately recognized servicing rights
be initially measured at fair value, if practicable. For each class of separately recognized
servicing assets and liabilities, this statement permits Huntington to choose either to report
servicing assets and liabilities at fair value or at amortized cost. Under the fair value approach,
servicing assets and liabilities are recorded at fair value at each reporting date with changes in
fair value recorded in earnings in the period in which the changes occur. Under the amortized cost
method, servicing assets and liabilities are amortized in proportion to and over the period of
estimated net servicing income or net servicing loss and are assessed for impairment based on fair
value at each reporting date. The statement is effective for fiscal years beginning after September
15, 2006, and allows early adoption as of the beginning of a fiscal year for which the entity has
not previously issued interim financial statements. Huntington elected to adopt the provisions of
Statement No. 156 for mortgage servicing rights effective January 1, 2006, and has recorded
mortgage servicing right assets using the fair value provision of the standard. The adoption of
Statement No. 156 resulted in an $18.6 million increase in the carrying value of mortgage servicing
right assets as of January 1, 2006. The cumulative effect of this change was $12.1 million, net of
taxes, which is reflected as an increase in retained earnings in the Condensed Consolidated
Statement of Shareholders Equity.
(See Note 5.)
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. The Company will be required to recognize 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 effective date for application of this interpretation is
for periods beginning after December 15, 2006. The cumulative effect of applying the provisions of
this Interpretation must be reported as an adjustment to the opening balance of retained earnings
for that fiscal period. Huntington is currently evaluating the impact this Interpretation will
have on its consolidated financial statements.
Proposed FASB amendment to FAS 132,
Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans an amendment of FASB Statements No. 87, 88, 106 and 132R
In March 2006,
the FASB issued an Exposure Draft, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans. This Exposure Draft would amend the FASB Statements No. 87, 88, 106 and
132R. The intent of the Exposure Draft is to require an employer to recognize in its statement of
financial position the overfunded or underfunded status of its defined benefit plans and to
recognize as a component of other comprehensive income, net of tax, the actuarial gains and losses
and prior service costs and credits that arise during the period. A final statement is expected in
the third quarter of 2006. The Company is reviewing the Exposure Draft and evaluating the impact
on its consolidated financial statements. Management estimates that, based on the carrying value
of its net pension asset at December 31, 2005, the proposed standard would result in a write-down
of its pension asset by $155.7 million pre-tax, which would decrease other comprehensive income by
$101.2 million in the period that the standard is adopted.
Note 3 Formal Regulatory Supervisory Agreements
On March 1, 2005, Huntington announced that it had entered into a formal written agreement
with the Federal Reserve Bank of Cleveland (FRBC), and The Huntington National Bank (Bank) had
entered into a formal written agreement with the Office of the Comptroller of the Currency (OCC),
providing for a comprehensive action plan designed to enhance corporate governance, internal audit,
risk management, accounting policies and procedures, and financial and regulatory reporting. The
agreements called for independent third-party reviews, as well as the submission of written plans
and progress reports by Management and would remain in effect until terminated by the banking
regulators.
On October 6, 2005, Huntington announced that the OCC had lifted its formal written agreement
with the Bank dated February 28, 2005, and that the FRBC written agreement remained in effect.
Huntington was verbally advised that it was in full compliance with the financial holding company
and financial subsidiary requirements under the Gramm-Leach-Bliley Act (GLB Act). This
notification reflected that Huntington and the Bank met both the well-capitalized and
well-managed criteria under the GLB Act.
On May 10, 2006, Huntington announced that the FRBC notified Huntingtons board of directors
that Huntington had satisfied the provisions of the written agreement dated February 28, 2005, and
that the FRBC, under delegated authority of the Board of Governors of the Federal Reserve System,
had terminated the written agreement.
8
Note 4 Business Combination
On March 1, 2006, Huntington completed its merger with Canton, Ohio-based Unizan Financial
Corp. (Unizan). Unizan operated 42 banking offices in five metropolitan markets in Ohio: Canton,
Columbus, Dayton, Newark, and Zanesville.
Under the terms of the merger agreement announced January 27, 2004, and amended November 11,
2004, Unizan shareholders of record as of the close of trading on February 28, 2006, received
1.1424 shares of Huntington common stock for each share of Unizan. The assets and liabilities of
the acquired entity were recorded on the Companys balance sheet at their fair values as of the
acquisition date. Unizans results of operations have been included in the Companys consolidated
statement of income since the acquisition date.
The following table shows the excess purchase price over carrying value of net assets
acquired, preliminary purchase price allocation, and resulting goodwill:
|
|
|
|
|
(in thousands)
|
|
March 1, 2006
|
|
Purchase price
|
|
$
|
575,793
|
|
Carrying value of net assets acquired
|
|
|
(194,996
|
)
|
|
Excess of purchase price over carrying value of net assets acquired
|
|
|
380,797
|
|
|
Purchase accounting adjustments:
|
|
|
|
|
Loans and leases
|
|
|
17,466
|
|
Premises and equipment
|
|
|
421
|
|
Accrued income and other assets
|
|
|
257
|
|
Deposits
|
|
|
748
|
|
Subordinated notes
|
|
|
2,845
|
|
Deferred federal income tax liability
|
|
|
11,838
|
|
Accrued expenses and other liabilities
|
|
|
8,047
|
|
|
Goodwill and other intangible assets
|
|
|
422,419
|
|
Less other intangible assets:
|
|
|
|
|
Core deposit intangible
|
|
|
(45,000
|
)
|
Other identifiable intangible assets
|
|
|
(18,252
|
)
|
|
Other intangible assets
|
|
|
(63,252
|
)
|
|
Goodwill
|
|
$
|
359,167
|
|
|
Of the $63.3 million of acquired intangible assets, $45.0 million was assigned to core deposit
intangible, and $18.3 million was assigned to customer relationship intangibles. The core deposit
and customer relationship intangibles have useful lives ranging from 10 to 15 years.
Goodwill resulting from the transaction totaled $359.2 million and was assigned to Regional
Banking and the Private Financial and Capital Markets Group in the amount of $341.2 million and
$18.0 million, respectively.
9
The following table summarizes the estimated fair value of the net assets acquired on
March 1, 2006 related to the acquisition of Unizan:
|
|
|
|
|
(in thousands)
|
|
March 1, 2006
|
|
Assets
|
|
|
|
|
Cash and due from banks
|
|
$
|
66,544
|
|
Interest bearing deposits in banks
|
|
|
3,096
|
|
Investment securities
|
|
|
300,416
|
|
Loans and leases
|
|
|
1,665,006
|
|
Allowance for loan and lease losses
|
|
|
(22,187
|
)
|
|
Net loans and leases
|
|
|
1,642,819
|
|
|
Bank owned life insurance
|
|
|
48,521
|
|
Premises and equipment
|
|
|
20,980
|
|
Goodwill
|
|
|
359,167
|
|
Other intangible assets
|
|
|
63,252
|
|
Accrued income and other assets
|
|
|
22,012
|
|
|
Total assets
|
|
|
2,526,807
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Deposits
|
|
|
1,696,124
|
|
Short-term borrowings
|
|
|
79,140
|
|
Federal Home Loan Bank advances
|
|
|
102,950
|
|
Subordinated notes
|
|
|
23,464
|
|
Deferred federal income tax liability
|
|
|
11,838
|
|
Accrued expenses and other liabilities
|
|
|
37,498
|
|
|
Total liabilities
|
|
|
1,951,014
|
|
|
Purchase price
|
|
$
|
575,793
|
|
|
Huntingtons consolidated financial statements include the results of operations of Unizan
only since March 1, 2006, the date of acquisition. The following unaudited summary information
presents the consolidated results of operations of Huntington on a pro forma basis, as if the
Unizan acquisition had occurred at the beginning of 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(in thousands, except per share amounts)
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Net interest income
|
|
$
|
262,195
|
|
|
$
|
259,317
|
|
|
$
|
517,487
|
|
|
$
|
511,932
|
|
Provision for credit losses
|
|
|
(15,745
|
)
|
|
|
(14,561
|
)
|
|
|
(36,395
|
)
|
|
|
(36,101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for
credit losses
|
|
|
246,450
|
|
|
|
244,756
|
|
|
|
481,092
|
|
|
|
475,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
163,019
|
|
|
|
163,347
|
|
|
|
327,337
|
|
|
|
338,574
|
|
Non-interest expense
|
|
|
(252,359
|
)
|
|
|
(266,091
|
)
|
|
|
(502,620
|
)
|
|
|
(542,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
157,110
|
|
|
|
142,012
|
|
|
|
305,809
|
|
|
|
272,082
|
|
Provision for income taxes
|
|
|
(45,506
|
)
|
|
|
(32,029
|
)
|
|
|
(88,306
|
)
|
|
|
(62,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
111,604
|
|
|
$
|
109,983
|
|
|
$
|
217,503
|
|
|
$
|
210,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.46
|
|
|
$
|
0.43
|
|
|
$
|
0.89
|
|
|
$
|
0.82
|
|
Diluted
|
|
|
0.46
|
|
|
|
0.42
|
|
|
|
0.88
|
|
|
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
241,729
|
|
|
|
257,451
|
|
|
|
244,799
|
|
|
|
257,255
|
|
Diluted
|
|
|
244,538
|
|
|
|
261,032
|
|
|
|
247,901
|
|
|
|
260,723
|
|
The pro forma results include amortization of fair value adjustments on loans, deposits, and
debt, and amortization of newly created intangibles and post-merger acquisition related charges.
The pro forma number of average common shares outstanding includes adjustments for shares issued
for the acquisition and the impact of additional dilutive securities but does not assume any
incremental share repurchases. The pro forma results presented do not reflect cost savings, or
revenue enhancements anticipated from the acquisition, and are not necessarily indicative of what
actually would have occurred if
10
the acquisition had been completed as of the beginning of the
periods presented, nor are they necessarily indicative of future consolidated results.
Note 5 Goodwill and Other Intangible Assets
Changes to the carrying amount of goodwill by line of business for the six months ended June
30, 2006, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional
|
|
Dealer
|
|
|
|
|
|
Treasury/
|
|
Huntington
|
(in thousands)
|
|
Banking
|
|
Sales
|
|
PFCMG
|
|
Other
|
|
Consolidated
|
|
Balance, January 1, 2006
|
|
$
|
199,970
|
|
|
$
|
|
|
|
$
|
12,560
|
|
|
$
|
|
|
|
$
|
212,530
|
|
Goodwill acquired during the
period
|
|
|
341,200
|
|
|
|
|
|
|
|
17,967
|
|
|
|
|
|
|
|
359,167
|
|
Impairment losses recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2006
|
|
$
|
541,170
|
|
|
$
|
|
|
|
$
|
30,527
|
|
|
$
|
|
|
|
$
|
571,697
|
|
|
As further described in Note 4, goodwill acquired during 2006 was a result of the completion
of the merger with Unizan. 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
30
th
of each year.
At June 30, 2006, Huntingtons other intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
Gross
|
|
Accumulated
|
|
Net
|
(in thousands)
|
|
Carrying Amount
|
|
Amortization
|
|
Carrying Value
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold purchased
|
|
$
|
23,655
|
|
|
$
|
(19,224
|
)
|
|
$
|
4,431
|
|
Core deposit intangible
|
|
|
45,000
|
|
|
|
(3,010
|
)
|
|
|
41,990
|
|
Borrower relationship
|
|
|
6,570
|
|
|
|
(182
|
)
|
|
|
6,388
|
|
Trust customers
|
|
|
11,430
|
|
|
|
(327
|
)
|
|
|
11,103
|
|
Other
|
|
|
382
|
|
|
|
(153
|
)
|
|
|
229
|
|
|
Total other intangible assets
|
|
$
|
87,037
|
|
|
$
|
(22,896
|
)
|
|
$
|
64,141
|
|
|
Amortization expense of other intangible assets for the three months ended June 30, 2006, and
2005, was $3 million and $0.2 million, respectively. Amortization expense of other intangible
assets for the six months ended June 30, 2006 and 2005 was $4.0 million and $0.4 million,
respectively.
The estimated amortization expense of other intangible assets for the next five annual fiscal
years are as follows:
|
|
|
|
|
|
|
|
Amortization
|
|
Fiscal year:
|
|
Expense
|
|
|
|
2007
|
|
|
9,815
|
|
|
2008
|
|
|
8,653
|
|
|
2009
|
|
|
7,748
|
|
|
2010
|
|
|
6,949
|
|
|
2011
|
|
|
6,229
|
|
|
Note 6 Loan Sales and Securitizations
Automobile loans
Huntington sold $218.4 million and $53.4 million of automobile loans in the second quarter of
2006 and 2005, resulting in pre-tax gains of $0.5 million and $0.3 million, respectively. For the
six-month periods ended June 30, 2006 and 2005, sales of automobile loans totaled $388.2 million
and $53.4 million, resulting in pre-tax gains of $1.0 million and $0.3 million, respectively.
11
Huntington adopted Statement No. 156 as of January 1, 2006. Automobile loan servicing rights
are acccounted for under the amortization provision of that statement. A servicing asset is
established at an initial carrying value based on the relative 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 and six months ended June 30, 2006 and 2005, and the fair value at the end of each period were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
(in thousands)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
Carrying value, beginning of period
|
|
$
|
9,610
|
|
|
$
|
17,046
|
|
|
$
|
10,805
|
|
|
$
|
20,286
|
|
New servicing assets
|
|
|
1,364
|
|
|
|
332
|
|
|
|
2,362
|
|
|
|
332
|
|
Amortization
|
|
|
(1,989
|
)
|
|
|
(3,050
|
)
|
|
|
(4,182
|
)
|
|
|
(6,290
|
)
|
Impairment charges
|
|
|
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value, end of period
|
|
$
|
8,985
|
|
|
$
|
14,262
|
|
|
$
|
8,985
|
|
|
$
|
14,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, end of period
|
|
$
|
10,486
|
|
|
$
|
14,842
|
|
|
$
|
10,486
|
|
|
$
|
14,842
|
|
|
|
|
|
|
|
|
|
|
|
|
Huntington has retained servicing responsibilities on sold automobile loans and receives
annual servicing fees from 0.55% to 1.00% of the outstanding loan balances. Servicing income, net
of amortization of capitalized servicing assets, amounted to $3.4 million and $2.6 million for the
three months ended June 30, 2006 and 2005, respectively. For the six months ended June 30, 2006
and 2005, servicing income was $6.8 million and $5.0 million, respectively.
During the second quarter of 2006, Huntington transferred $1.2 billion automobile loans and
leases to a trust in a securitization transaction. The securitization did not qualify for sale
accounting under Statement No. 140 and, therefore, is accounted for as a secured financing.
Residential Mortgage Loans
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. Effective January 1, 2006, the Company early adopted Statement No. 156. The same
risk management practices are applied to all MSRs and, accordingly, MSRs were identified as a
single asset class and were re-measured to fair value as of January 1, 2006, with an adjustment to
retained earnings.
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. 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 servicing 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 and
six months ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(in thousands)
|
|
2006
|
|
|
2006
|
|
Carrying value, beginning of period
|
|
$
|
N/A
|
|
|
$
|
91,259
|
|
Cumulative effect in change in accounting principle
|
|
|
N/A
|
|
|
|
18,631
|
|
|
|
|
|
|
|
|
Fair value, beginning of period
|
|
|
123,257
|
|
|
|
109,890
|
|
New servicing assets created
|
|
|
7,434
|
|
|
|
13,211
|
|
Servicing assets acquired
|
|
|
565
|
|
|
|
2,474
|
|
Change in fair value during the period
|
|
|
4,988
|
|
|
|
10,669
|
|
|
|
|
|
|
|
|
Fair value, end of period
|
|
$
|
136,244
|
|
|
$
|
136,244
|
|
|
|
|
|
|
|
|
N/A, Not applicable
|
|
|
|
|
|
|
|
|
12
MSRs do not trade in an active, open market with readily observable prices. While sales of
MSRs occur, the precise terms and conditions are typically not readily available. Therefore, the
fair value of MSRs is estimated using a discounted future cash flow model. The model considers
portfolio characteristics, contractually specified servicing fees and assumptions related to
prepayments, delinquency rates, late charges, other ancillary revenues, costs to service, and other
economic factors. Changes in the assumptions used may have a significant impact on the valuation
of MSRs.
A summary of key assumptions and the sensitivity of the MSR value at June 30, 2006 to changes
in these assumptions follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decline in fair value
|
|
|
|
|
|
|
due to
|
|
|
|
|
|
|
10%
|
|
20%
|
|
|
|
|
|
|
adverse
|
|
adverse
|
(in thousands)
|
|
Actual
|
|
change
|
|
change
|
Constant pre-payment rate
|
|
|
10.44
|
%
|
|
$
|
(5,252
|
)
|
|
$
|
(10,168
|
)
|
Discount rate
|
|
|
9.39
|
|
|
|
(5,344
|
)
|
|
|
(10,293
|
)
|
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.
Prior to 2006, servicing rights were evaluated quarterly for impairment based on the fair
value of those rights, using a disaggregated approach. The fair value of the servicing rights was
determined by estimating the present value of future net cash flows, taking into consideration
market loan prepayment speeds, discount rates, servicing costs, and other economic factors.
Temporary impairment was recognized in a valuation allowance against the mortgage servicing rights.
Changes in the impairment allowance of mortgage servicing rights for the three and six months
ended June 30, 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(in thousands)
|
|
2005
|
|
|
2005
|
|
Balance, beginning of period
|
|
$
|
(1,015
|
)
|
|
$
|
(4,775
|
)
|
Impairment charges
|
|
|
(10,231
|
)
|
|
|
(11,411
|
)
|
Impairment recovery
|
|
|
|
|
|
|
4,940
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
(11,246
|
)
|
|
$
|
(11,246
|
)
|
|
|
|
|
|
|
|
Below is a summary of servicing fee income earned during the three and six months ended June
30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
(in thousands)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
Servicing fees
|
|
$
|
5,996
|
|
|
$
|
5,464
|
|
|
$
|
11,920
|
|
|
$
|
10,858
|
|
Late fees
|
|
|
551
|
|
|
|
504
|
|
|
|
1,161
|
|
|
|
1,009
|
|
Ancillary fees
|
|
|
88
|
|
|
|
171
|
|
|
|
341
|
|
|
|
297
|
|
|
|
|
|
|
Total fee income
|
|
$
|
6,635
|
|
|
$
|
6,139
|
|
|
$
|
13,422
|
|
|
$
|
12,164
|
|
|
|
|
|
|
13
Note 6 Investment Securities
Listed below are the contractual maturities (under 1 year, 1-5 years, 6-10 years and over 10
years) of investment
securities at June 30, 2006, December 31, 2005, and June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
December 31, 2005
|
|
June 30, 2005
|
|
|
Amortized
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
Amortized
|
|
|
(in thousands)
|
|
Cost
|
|
Fair Value
|
|
Cost
|
|
Fair Value
|
|
Cost
|
|
Fair Value
|
U.S. Treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year
|
|
$
|
699
|
|
|
$
|
704
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
1-5 years
|
|
|
21,924
|
|
|
|
21,083
|
|
|
|
23,446
|
|
|
|
22,893
|
|
|
|
23,949
|
|
|
|
23,821
|
|
6-10 years
|
|
|
504
|
|
|
|
522
|
|
|
|
753
|
|
|
|
782
|
|
|
|
248
|
|
|
|
267
|
|
Over 10 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. Treasury
|
|
|
23,127
|
|
|
|
22,309
|
|
|
|
24,199
|
|
|
|
23,675
|
|
|
|
24,197
|
|
|
|
24,088
|
|
|
Federal agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year
|
|
|
350
|
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-5 years
|
|
|
32,033
|
|
|
|
30,619
|
|
|
|
31,058
|
|
|
|
30,047
|
|
|
|
15,221
|
|
|
|
15,010
|
|
6-10 years
|
|
|
549
|
|
|
|
519
|
|
|
|
|
|
|
|
|
|
|
|
19,775
|
|
|
|
19,568
|
|
Over 10 years
|
|
|
1,252,384
|
|
|
|
1,194,850
|
|
|
|
1,278,540
|
|
|
|
1,248,975
|
|
|
|
1,118,023
|
|
|
|
1,108,410
|
|
|
Total mortgage-backed Federal agencies
|
|
|
1,285,316
|
|
|
|
1,226,335
|
|
|
|
1,309,598
|
|
|
|
1,279,022
|
|
|
|
1,153,019
|
|
|
|
1,142,988
|
|
|
Other agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year
|
|
|
45,000
|
|
|
|
44,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-5 years
|
|
|
249,604
|
|
|
|
237,742
|
|
|
|
296,945
|
|
|
|
286,754
|
|
|
|
410,298
|
|
|
|
403,883
|
|
6-10 years
|
|
|
50,000
|
|
|
|
45,922
|
|
|
|
52,440
|
|
|
|
49,712
|
|
|
|
198,210
|
|
|
|
193,763
|
|
Over 10 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other Federal agencies
|
|
|
344,604
|
|
|
|
327,948
|
|
|
|
349,385
|
|
|
|
336,466
|
|
|
|
608,508
|
|
|
|
597,646
|
|
|
Total Federal agencies
|
|
|
1,629,920
|
|
|
|
1,554,283
|
|
|
|
1,658,983
|
|
|
|
1,615,488
|
|
|
|
1,761,527
|
|
|
|
1,740,634
|
|
|
Municipal securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year
|
|
|
42
|
|
|
|
42
|
|
|
|
65
|
|
|
|
65
|
|
|
|
65
|
|
|
|
65
|
|
1-5 years
|
|
|
103
|
|
|
|
103
|
|
|
|
145
|
|
|
|
145
|
|
|
|
166
|
|
|
|
165
|
|
6-10 years
|
|
|
154,360
|
|
|
|
150,215
|
|
|
|
144,415
|
|
|
|
143,597
|
|
|
|
102,460
|
|
|
|
103,599
|
|
Over 10 years
|
|
|
430,118
|
|
|
|
421,243
|
|
|
|
400,156
|
|
|
|
401,043
|
|
|
|
393,905
|
|
|
|
402,053
|
|
|
Total municipal securities
|
|
|
584,623
|
|
|
|
571,603
|
|
|
|
544,781
|
|
|
|
544,850
|
|
|
|
496,596
|
|
|
|
505,882
|
|
|
Private label CMO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6-10 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over 10 years
|
|
|
749,019
|
|
|
|
731,031
|
|
|
|
402,959
|
|
|
|
393,569
|
|
|
|
424,521
|
|
|
|
420,103
|
|
|
Total private label CMO
|
|
|
749,019
|
|
|
|
731,031
|
|
|
|
402,959
|
|
|
|
393,569
|
|
|
|
424,521
|
|
|
|
420,103
|
|
|
Asset backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-5 years
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
31,663
|
|
|
|
31,659
|
|
|
|
34,625
|
|
|
|
34,636
|
|
6-10 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over 10 years
|
|
|
1,949,008
|
|
|
|
1,948,538
|
|
|
|
1,757,031
|
|
|
|
1,757,121
|
|
|
|
1,011,868
|
|
|
|
1,015,621
|
|
|
Total asset backed securities
|
|
|
1,979,008
|
|
|
|
1,978,538
|
|
|
|
1,788,694
|
|
|
|
1,788,780
|
|
|
|
1,046,493
|
|
|
|
1,050,257
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year
|
|
|
1,900
|
|
|
|
1,900
|
|
|
|
1,700
|
|
|
|
1,700
|
|
|
|
1,200
|
|
|
|
1,200
|
|
1-5 years
|
|
|
8,795
|
|
|
|
8,780
|
|
|
|
10,997
|
|
|
|
11,051
|
|
|
|
12,109
|
|
|
|
12,382
|
|
6-10 years
|
|
|
1,050
|
|
|
|
985
|
|
|
|
2,062
|
|
|
|
2,063
|
|
|
|
1,555
|
|
|
|
1,573
|
|
Over 10 years
|
|
|
44
|
|
|
|
43
|
|
|
|
44
|
|
|
|
43
|
|
|
|
87,657
|
|
|
|
87,939
|
|
Non-marketable equity securities
|
|
|
146,957
|
|
|
|
146,957
|
|
|
|
89,661
|
|
|
|
89,661
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
|
108,025
|
|
|
|
108,253
|
|
|
|
55,058
|
|
|
|
55,640
|
|
|
|
5,657
|
|
|
|
5,897
|
|
|
Total other
|
|
|
266,771
|
|
|
|
266,918
|
|
|
|
159,522
|
|
|
|
160,158
|
|
|
|
108,178
|
|
|
|
108,991
|
|
|
Total investment securities
|
|
$
|
5,232,468
|
|
|
$
|
5,124,682
|
|
|
$
|
4,579,138
|
|
|
$
|
4,526,520
|
|
|
$
|
3,861,512
|
|
|
$
|
3,849,955
|
|
|
Duration in years
(1)
|
|
|
|
|
|
|
3.0
|
|
|
|
|
|
|
|
2.8
|
|
|
|
|
|
|
|
3.0
|
|
|
|
|
|
(1)
|
|
The average duration assumes a market driven pre-payment rate on securities subject
to pre-payment.
|
14
Based upon its assessment, Management does not believe any individual unrealized loss at
June 30, 2006, represents an other-than-temporary impairment. In addition, Huntington has the
ability to hold these securities for a time necessary, including to maturity, to recover the
amortized cost. There were no securities classified as held to maturity at June 30, 2006.
Other securities include Federal Home Loan Bank and Federal Reserve Bank stock, corporate
debt, and marketable equity securities.
Note 8 Other Comprehensive Income
The components of Huntingtons other comprehensive income in the three and six months ended June
30, 2006 and 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
(in thousands)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
Unrealized gains and losses on investment securities arising during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net (losses) gains
|
|
$
|
(26,652
|
)
|
|
$
|
39,881
|
|
|
$
|
(55,223
|
)
|
|
$
|
8,716
|
|
Related tax benefit (expense)
|
|
|
9,616
|
|
|
|
(14,067
|
)
|
|
|
19,480
|
|
|
|
(3,069
|
)
|
|
|
|
|
|
Net
|
|
|
(17,036
|
)
|
|
|
25,814
|
|
|
|
(35,743
|
)
|
|
|
5,647
|
|
|
|
|
|
|
Reclassification adjustment for net losses (gains) from sales
of investment securities realized during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized net losses (gains)
|
|
|
35
|
|
|
|
343
|
|
|
|
55
|
|
|
|
(614
|
)
|
Related tax (benefit) expense
|
|
|
(12
|
)
|
|
|
(120
|
)
|
|
|
(19
|
)
|
|
|
215
|
|
|
|
|
|
|
Net
|
|
|
23
|
|
|
|
223
|
|
|
|
36
|
|
|
|
(399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrealized net (losses) gains on investment securities arising during the period,
net of reclassification of net realized gains and losses
|
|
|
(17,013
|
)
|
|
|
26,037
|
|
|
|
(35,707
|
)
|
|
|
5,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on cash flow hedging derivatives arising during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net (losses) gains
|
|
|
6,702
|
|
|
|
(12,417
|
)
|
|
|
21,091
|
|
|
|
7,592
|
|
Related tax benefit (expense)
|
|
|
(2,346
|
)
|
|
|
4,346
|
|
|
|
(7,382
|
)
|
|
|
(2,657
|
)
|
|
|
|
|
|
Net
|
|
|
4,356
|
|
|
|
(8,071
|
)
|
|
|
13,709
|
|
|
|
4,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive (loss) income
|
|
$
|
(12,657
|
)
|
|
$
|
17,966
|
|
|
$
|
(21,998
|
)
|
|
$
|
10,183
|
|
|
|
|
|
|
Activity in accumulated other comprehensive income for the six months ended June 30, 2006
and 2005, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains
|
|
|
|
|
|
|
|
|
|
|
|
|
and losses on
|
|
|
Unrealized gains on
|
|
|
Minimum
|
|
|
|
|
|
|
investment
|
|
|
cash flow hedging
|
|
|
pension
|
|
|
|
|
(in thousands)
|
|
securities
|
|
|
derivatives
|
|
|
liability
|
|
|
Total
|
|
|
Balance, December 31, 2004
|
|
$
|
(12,683
|
)
|
|
$
|
4,252
|
|
|
$
|
(2,472
|
)
|
|
$
|
(10,903
|
)
|
Period change
|
|
|
5,248
|
|
|
|
4,935
|
|
|
|
|
|
|
|
10,183
|
|
|
Balance, June 30, 2005
|
|
$
|
(7,435
|
)
|
|
$
|
9,187
|
|
|
$
|
(2,472
|
)
|
|
$
|
(720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
$
|
(34,016
|
)
|
|
$
|
15,206
|
|
|
$
|
(3,283
|
)
|
|
$
|
(22,093
|
)
|
Period change
|
|
|
(35,707
|
)
|
|
|
13,709
|
|
|
|
|
|
|
|
(21,998
|
)
|
|
Balance, June 30, 2006
|
|
$
|
(69,723
|
)
|
|
$
|
28,915
|
|
|
$
|
(3,283
|
)
|
|
$
|
(44,091
|
)
|
|
15
Note 9 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 for the
potential issuance of common shares for dilutive stock options. The calculation of basic and
diluted earnings per share for each of the three and six months ended June 30, 2006 and 2005, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
(in thousands, except per share amounts)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
Net income
|
|
$
|
111,604
|
|
|
$
|
106,425
|
|
|
$
|
216,060
|
|
|
$
|
202,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding
|
|
|
241,729
|
|
|
|
232,217
|
|
|
|
236,349
|
|
|
|
232,021
|
|
Dilutive potential common shares
|
|
|
2,809
|
|
|
|
3,454
|
|
|
|
3,102
|
|
|
|
3,341
|
|
|
|
|
|
|
Diluted average common shares outstanding
|
|
|
244,538
|
|
|
|
235,671
|
|
|
|
239,451
|
|
|
|
235,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.46
|
|
|
$
|
0.46
|
|
|
$
|
0.91
|
|
|
$
|
0.87
|
|
Diluted
|
|
|
0.46
|
|
|
|
0.45
|
|
|
|
0.90
|
|
|
|
0.86
|
|
The average market price of Huntingtons common stock for the period was used in
determining the dilutive effect of outstanding stock options. Dilutive potential common shares
include stock options and options held in deferred compensation plans. Dilutive potential common
shares are computed based on the number of shares subject to options that have an exercise price
less than the average market price of Huntingtons common stock for the period.
Options to purchase 5.6 million and 2.6 million shares during both the three months and six
months ended June 30, 2006 and 2005, 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 $25.68 and $26.96 per share and $25.67 and $26.92 for
the three months and six months ended June 30, 2006 and 2005, respectively.
Note 10 Stock-Based Compensation
Huntington sponsors nonqualified and incentive stock option plans. These plans provide for the
granting of stock options to officers, directors, and other employees at the market price on the
date of the grant. 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 26.2
million options to purchase shares of common stock authorized for issuance under the plans at June
30, 2006, 20.5 million were outstanding and 5.7 million were available for future grants. 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.
On January 1, 2006, Huntington adopted the fair value recognition provisions of Statement No.
123R relating to its stock-based compensation plans. Prior to January 1, 2006, Huntington had
accounted for stock-based compensation plans under the intrinsic value method promulgated by APB
Opinion 25,
Accounting for Stock Issued to Employees
, and related interpretations. In accordance
with APB 25, compensation expense for employee stock options was generally not recognized for
options granted that had an exercise price equal to the market value of the underlying common stock
on the date of grant.
Under the modified prospective method of Statement No. 123R, compensation expense was
recognized during the three and six months ended June 30, 2006, for all unvested stock options,
based on the grant date fair value estimated in accordance with the original provisions of
Statement No. 123 and for all stock based payments granted after January 1, 2006, based on the
grant date fair value estimated in accordance with the provisions of Statement No. 123R.
Stock-based compensation expense was recorded in personnel costs in the consolidated statements of
income. Huntingtons financial results for the prior periods have not been restated.
16
The following table presents the unfavorable impact of adoption of Statement 123R on
Huntingtons income before income taxes, net income, and basic and diluted earnings per share for
the three and six months ended June 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(in tmillions, except per share amounts)
|
|
June 30, 2006
|
|
June 30, 2006
|
Income before income taxes
|
|
$
|
(4.3
|
)
|
|
$
|
(8.5
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
(2.8
|
)
|
|
|
(5.6
|
)
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
Diluted
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
Prior to the adoption of Statement 123R, Huntington presented all tax benefits of deductions
resulting from the exercise of stock options as operating cash flows in the consolidated statements
of cash flows. Statement 123R requires the cash flows from tax benefits resulting from tax
deductions in excess of compensation costs recognized for those options (excess tax benefits) to be
classified as financing cash flows. As a result, the benefits of tax deductions in excess of
recognized compensation cost included in net financing cash flows for the six months ended June 30,
2006 was $0.7 million.
Consistent with the valuation method used for the disclosure only provisions of Statement No.
123, Huntington uses the Black-Scholes option-pricing model to value stock-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
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
4.61
|
%
|
|
|
3.63
|
%
|
|
|
4.58
|
%
|
|
|
4.02
|
%
|
Expected dividend yield
|
|
|
4.18
|
|
|
|
3.24
|
|
|
|
4.20
|
|
|
|
3.42
|
|
Expected volatility of
Huntingtons common stock
|
|
|
22.2
|
|
|
|
26.3
|
|
|
|
22.2
|
|
|
|
26.3
|
|
Expected option term (years)
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average grant date fair value
|
|
$
|
4.20
|
|
|
$
|
5.01
|
|
|
$
|
4.23
|
|
|
$
|
4.89
|
|
The following pro forma disclosures for net income and earnings per diluted common share for
the three and six months ended June 30, 2005, are presented as if Huntington had applied the fair
value method of accounting of Statement No. 123 in measuring compensation costs for stock options.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
(in millions, except per share amounts)
|
|
June 30, 2005
|
|
June 30, 2005
|
|
Pro forma results
|
|
|
|
|
|
|
|
|
Net income, as reported
|
|
$
|
106.4
|
|
|
$
|
202.9
|
|
Pro forma expense, net of tax
|
|
|
(2.9
|
)
|
|
|
(5.8
|
)
|
|
Pro forma net income
|
|
$
|
103.5
|
|
|
$
|
197.1
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic, as reported
|
|
$
|
0.46
|
|
|
$
|
0.87
|
|
Basic, pro forma
|
|
|
0.45
|
|
|
|
0.85
|
|
Diluted, as reported
|
|
|
0.45
|
|
|
|
0.86
|
|
Diluted, pro forma
|
|
|
0.44
|
|
|
|
0.84
|
|
17
Huntingtons stock option activity and related information for the six months ended June
30, 2006, 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, 2006
|
|
|
21,004
|
|
|
$
|
21.11
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
58
|
|
|
|
23.82
|
|
|
|
|
|
|
|
|
|
Acquired
(1)
|
|
|
655
|
|
|
|
16.56
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(882
|
)
|
|
|
17.37
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
(340
|
)
|
|
|
22.70
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006
|
|
|
20,495
|
|
|
$
|
21.10
|
|
|
|
5.2
|
|
|
$
|
62,471
|
|
|
Exercisable at June 30, 2006
|
|
|
12,882
|
|
|
$
|
20.13
|
|
|
|
4.7
|
|
|
$
|
52,845
|
|
|
|
|
|
(1)
|
|
Relates to option plans acquired from the merger with Unizan.
|
The aggregate intrinsic value represents the amount by which the fair value of underlying
stock exceeds the option exercise price. The total intrinsic value of stock options exercised
during the six months ended June 30, 2006, was $5.9 million.
Huntington issues shares to fulfill stock option exercises from available shares held in
treasury. At June 30, 2006, the Company believes there are adequate shares in treasury to satisfy
anticipated stock option exercises in 2006.
The following table summarizes the status of Huntingtons nonvested options for the six months
ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant Date
|
|
(in thousands, except per share amounts)
|
|
Options
|
|
|
Fair Value
|
|
|
Nonvested at January 1, 2006
|
|
|
7,956
|
|
|
$
|
5.53
|
|
Granted
|
|
|
58
|
|
|
|
4.23
|
|
Acquired
(1)
|
|
|
19
|
|
|
|
4.61
|
|
Vested
|
|
|
(112
|
)
|
|
|
5.35
|
|
Forfeited
|
|
|
(308
|
)
|
|
|
5.51
|
|
|
Nonvested at June 30, 2006
|
|
|
7,613
|
|
|
$
|
5.52
|
|
|
|
|
|
(1)
|
|
Relates to option plans acquired from the merger with Unizan.
|
As of June 30, 2006, the total compensation cost related to nonvested awards not yet
recognized was $21.7 million with a weighted-average expense recognition period of 2.2 years. The
total fair value of options vested during the six months ended June 30, 2006, was $0.6 million.
The following table presents additional information regarding options outstanding as of June
30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
|
Options Outstanding
|
|
|
Exercisable Options
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Range of
|
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
|
|
|
Exercise
|
|
Exercise Prices
|
|
Shares
|
|
|
Life
(Years)
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
$9.91 to $15.00
|
|
|
773
|
|
|
|
5.1
|
|
|
$
|
14.23
|
|
|
|
773
|
|
|
$
|
14.23
|
|
$15.01 to $20.00
|
|
|
7,940
|
|
|
|
5.0
|
|
|
|
18.06
|
|
|
|
6,567
|
|
|
|
17.67
|
|
$20.01 to $25.00
|
|
|
9,516
|
|
|
|
5.9
|
|
|
|
22.74
|
|
|
|
3,294
|
|
|
|
21.58
|
|
$25.01 to $28.35
|
|
|
2,266
|
|
|
|
2.6
|
|
|
|
27.22
|
|
|
|
2,248
|
|
|
|
27.24
|
|
|
Total
|
|
|
20,495
|
|
|
|
5.2
|
|
|
$
|
21.10
|
|
|
|
12,882
|
|
|
$
|
20.13
|
|
|
18
Note 11 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
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(in thousands of dollars)
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Service cost
|
|
$
|
4,414
|
|
|
$
|
3,547
|
|
|
$
|
383
|
|
|
$
|
353
|
|
Interest cost
|
|
|
5,539
|
|
|
|
4,754
|
|
|
|
565
|
|
|
|
778
|
|
Expected return on plan assets
|
|
|
(8,319
|
)
|
|
|
(6,716
|
)
|
|
|
|
|
|
|
|
|
Amortization of transition asset
|
|
|
|
|
|
|
(1
|
)
|
|
|
276
|
|
|
|
276
|
|
Amortization of prior service cost
|
|
|
|
|
|
|
|
|
|
|
95
|
|
|
|
95
|
|
Settlements
|
|
|
1,000
|
|
|
|
750
|
|
|
|
|
|
|
|
|
|
Recognized net actuarial loss
|
|
|
4,377
|
|
|
|
2,672
|
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit expense
|
|
$
|
7,011
|
|
|
$
|
5,006
|
|
|
$
|
1,138
|
|
|
$
|
1,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Post Retirement Benefits
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(in thousands of dollars)
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Service cost
|
|
$
|
8,723
|
|
|
$
|
7,092
|
|
|
$
|
720
|
|
|
$
|
706
|
|
Interest cost
|
|
|
11,078
|
|
|
|
9,507
|
|
|
|
1,130
|
|
|
|
1,556
|
|
Expected return on plan assets
|
|
|
(16,539
|
)
|
|
|
(12,812
|
)
|
|
|
|
|
|
|
|
|
Amortization of transition asset
|
|
|
|
|
|
|
(2
|
)
|
|
|
552
|
|
|
|
552
|
|
Amortization of prior service cost
|
|
|
1
|
|
|
|
1
|
|
|
|
190
|
|
|
|
189
|
|
Settlements
|
|
|
2,000
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
Recognized net actuarial loss
|
|
|
8,754
|
|
|
|
5,345
|
|
|
|
(362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit expense
|
|
$
|
14,017
|
|
|
$
|
10,631
|
|
|
$
|
2,230
|
|
|
$
|
3,003
|
|
|
|
|
|
|
There is no expected minimum contribution for 2006 to the Plan. Although not required,
Huntington made a contribution to the Plan of $29.8 million in June 2006.
Huntington also sponsors other retirement plans, the most significant being the Supplemental
Executive Retirement Plan and the Supplemental Retirement Income Plan. These plans are nonqualified
plans that provide certain former officers and directors of Huntington and its subsidiaries with
defined pension benefits in excess of limits imposed by federal tax law. The cost of providing
these plans was $0.6 million and $0.5 million for the three-month periods ended June 30, 2006 and
2005, respectively. For the respective six-month periods, the cost was $1.3 million and $1.1
million.
19
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 $2.6 million and $2.4 million for the three months
ended June 30, 2006 and 2005, respectively. For the respective six-month periods, the cost was
$5.1 million and $4.9 million.
Note 12 Commitments and Contingent Liabilities
Commitments to extend credit
:
In the ordinary course of business, Huntington makes various commitments to extend credit that
are not reflected in the financial statements. The contract amounts of these financial agreements
at June 30, 2006, December 31, 2005, and June 30, 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
June 30,
|
(in millions)
|
|
2006
|
|
2005
|
|
2005
|
|
Contract amount represents credit risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
4,021
|
|
|
$
|
3,316
|
|
|
$
|
2,947
|
|
Consumer
|
|
|
3,595
|
|
|
|
3,046
|
|
|
|
2,983
|
|
Commercial real estate
|
|
|
1,764
|
|
|
|
1,567
|
|
|
|
1,480
|
|
Standby letters of credit
|
|
|
1,121
|
|
|
|
1,079
|
|
|
|
968
|
|
Commercial letters of credit
|
|
|
54
|
|
|
|
47
|
|
|
|
61
|
|
Commitments to extend credit generally have fixed expiration dates, are variable-rate, and
contain clauses that permit Huntington to terminate or otherwise renegotiate the contracts in the
event of a significant deterioration in the customers credit quality. These arrangements normally
require the payment of a fee by the customer, the pricing of which is based on prevailing market
conditions, credit quality, probability of funding, and other relevant factors. Since many of these
commitments are expected to expire without being drawn upon, the contract amounts are not
necessarily indicative of future cash requirements. The interest rate risk arising from these
financial instruments is insignificant as a result of their predominantly short-term, variable-rate
nature.
Standby letters of credit are conditional commitments issued to guarantee the performance of a
customer to a third party. These guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most
of these arrangements mature within two years. The carrying amount of deferred revenue associated
with these guarantees was $3.6 million, $4.0 million, and $3.2 million at June 30, 2006, December
31, 2005, and June 30, 2005, respectively.
Commercial letters of credit represent short-term, self-liquidating instruments that
facilitate customer trade transactions and generally have maturities of no longer than 90 days. The
merchandise or cargo being traded normally secures these instruments.
Commitments to sell loans:
Huntington enters into forward contracts relating to its mortgage banking business. At June
30, 2006, December 31, 2005, and June 30, 2005, Huntington had commitments to sell residential real
estate loans of $341.5 million, $348.3 million, and $534.3 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 June 30, 2006, approximately $62.0 million of automobile loans related to this commitment were
classified as held for sale.
20
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.
Note 13 Derivative Financial Instruments
A variety of derivative financial instruments, principally interest rate swaps, are used in
asset and liability management activities to protect against market risk of adverse price or
interest rate movements on the value of certain assets and liabilities and on future cash flows.
These derivative financial instruments provide flexibility in adjusting the Companys sensitivity
to changes in interest rates without exposure to loss of principal and higher funding requirements.
By using derivatives to manage interest rate risk, the effect is a smaller, more efficient balance
sheet, with a lower wholesale funding requirement and a higher net interest margin. Derivatives are
sold to meet customers financing needs. All derivatives are reflected at fair value in the
consolidated balance sheet.
Market risk, which is the possibility that economic value of net assets or net interest income
will be adversely affected by changes in interest rates or other economic factors, is managed
through the use of derivatives. Like other financial instruments, derivatives contain an element of
credit risk, which is the possibility that Huntington will incur a loss because a counter-party
fails to meet its contractual obligations. Notional values of interest rate swaps and other
off-balance sheet financial instruments significantly exceed the credit risk associated with these
instruments and represent contractual balances on which calculations of amounts to be exchanged are
based. Credit exposure is limited to the sum of the aggregate fair value of positions that have
become favorable to Huntington, including any accrued interest receivable due from counterparties.
Potential credit losses are minimized through careful evaluation of counterparty credit standing,
selection of counterparties from a limited group of high quality institutions, collateral
agreements, and other contractual provisions.
Collateral agreements are regularly entered into as part of the underlying derivative
agreements with Huntingtons counterparties to mitigate the credit risk associated with both the
derivatives used for asset and liability management and used in trading activities. At June 30,
2006, December 31, 2005, and June 30, 2005, aggregate credit risk associated with these
derivatives, net of collateral that has been pledged by the counterparty, was $31.1 million, $26.2
million, and $26.5 million, respectively. The credit risk associated with interest rate swaps is
calculated after considering master netting agreements.
Asset and Liability Management
Derivatives that are used in asset and liability management are classified as fair value
hedges or cash flow hedges and are required to meet specific criteria. To qualify as a hedge, the
hedge relationship is designated and formally documented at inception, detailing the particular
risk management objective and strategy for the hedge. This includes identifying the item and risk
being hedged, the derivative being used, and how the effectiveness of the hedge is being assessed.
A derivative must be highly effective in accomplishing the objective of offsetting either changes
in fair value or cash flows for the risk being hedged. Correlation is evaluated on a retrospective
and prospective basis using quantitative measures. If a hedge relationship is found not to be
effective, the derivative no longer qualifies as a hedge and any excess gains or losses
attributable to ineffectiveness, as well as subsequent changes in its fair value, are recognized in
other income.
For fair value hedges, deposits, short-term borrowings, and long-term debt are effectively
converted to variable-rate obligations by entering into interest rate swap contracts whereby
fixed-rate interest is received in exchange for variable-rate interest without the exchange of the
contracts underlying notional amount. Forward contracts, used primarily in connection with
mortgage banking activities, can be settled in cash at a specified future date based on the
differential between agreed interest rates applied to a notional amount. The changes in fair value
of the hedged item and the hedging instrument are reflected in current earnings.
For cash flow hedges, the Company enters into interest rate swap contracts which require the
payment of fixed-rate interest in exchange for the receipt of variable-rate interest without the
exchange of the contracts underlying notional amount, which effectively converts a portion of its
floating-rate debt to fixed-rate. This reduces the potentially adverse
impact of increases in interest rates on future interest expense. To the extent these
derivatives are effective in offsetting the variability of the hedged cash flows, changes in the
derivatives fair value will not be included in current earnings, but are reported as a component
of accumulated other comprehensive income in shareholders equity. These changes in fair value
21
will
be included in earnings of future periods when earnings are also affected by the changes in the
hedged cash flows. To the extent these derivatives are not effective, changes in their fair values
are immediately included in earnings.
Derivatives used to manage interest rate risk at June 30, 2006, are shown in the table
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Weighted-Average
|
|
|
Notional
|
|
Maturity
|
|
Fair
|
|
Rate
|
(in thousands )
|
|
Value
|
|
(years)
|
|
Value
|
|
Receive
|
|
Pay
|
|
Liability conversion swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive fixed generic
|
|
$
|
925,250
|
|
|
|
8.9
|
|
|
$
|
(35,672
|
)
|
|
|
5.12
|
%
|
|
|
5.38
|
%
|
Receive fixed callable
|
|
|
665,000
|
|
|
|
6.7
|
|
|
|
(28,776
|
)
|
|
|
4.46
|
|
|
|
5.10
|
|
Pay fixed generic
|
|
|
490,000
|
|
|
|
3.3
|
|
|
|
6,468
|
|
|
|
5.18
|
|
|
|
5.04
|
|
|
Total liability conversion swaps
|
|
|
2,080,250
|
|
|
|
6.9
|
|
|
|
(57,980
|
)
|
|
|
4.92
|
%
|
|
|
5.21
|
%
|
|
Liability caps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay fixed forwards
|
|
|
300,000
|
|
|
|
N/A
|
|
|
|
3,165
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Total swap portfolio
|
|
$
|
2,380,250
|
|
|
|
6.9
|
|
|
$
|
(54,815
|
)
|
|
|
4.92
|
%
|
|
|
5.21
|
%
|
|
During the first quarter of 2006, Huntington terminated asset and liability conversion
interest rate swaps with a total notional value of $2.5 billion. The terminations generated gross
gains of $34.9 million and gross losses of $34.5 million, resulting in a net deferred gain of $0.4
million. The net gain is being amortized into interest income over the remainder of the original
terms of the terminated swaps as follows: 2006: ($2.2 million), 2007: $2.2 million, 2008: ($1.4
million), 2009: $0.2 million, and 2010: $1.6 million.
As is the case with cash securities, the fair value of interest rate swaps is largely a
function of financial market expectations regarding the future direction of interest rates.
Accordingly, current market values are not necessarily indicative of the future impact of the swaps
on net interest income. This will depend, in large part, on the shape of the yield curve as well as
interest rate levels. Management made no assumptions regarding future changes in interest rates
with respect to the variable-rate information presented in the table above.
The following table represents the gross notional value of derivatives used to manage interest
rate risk at June 30, 2006, identified by the underlying interest rate-sensitive instruments. The
notional amounts shown in the tables above and below should be viewed in the context of overall
interest rate risk management activities to assess the impact on the net interest margin.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Cash Flow
|
|
|
(in thousands )
|
|
Hedges
|
|
Hedges
|
|
Total
|
|
Instruments associated with:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
790,250
|
|
|
$
|
400,000
|
|
|
$
|
1,190,250
|
|
Federal Home Loan Bank advances
|
|
|
|
|
|
|
325,000
|
|
|
|
325,000
|
|
Subordinated notes
|
|
|
750,000
|
|
|
|
|
|
|
|
750,000
|
|
Other long-term debt
|
|
|
50,000
|
|
|
|
65,000
|
|
|
|
115,000
|
|
|
Total notional value at June 30, 2006
|
|
$
|
1,590,250
|
|
|
$
|
790,000
|
|
|
$
|
2,380,250
|
|
|
These derivative financial instruments were entered into for the purpose of mitigating the
interest rate risk embedded in assets and liabilities. Consequently, net amounts receivable or
payable on contracts hedging either interest earning assets or interest bearing liabilities were
accrued as an adjustment to either interest income or interest expense. The net amount resulted in
a (decrease) increase to net interest income of $(0.8) million and $6.9 million, for the three
months ended June 30, 2006 and 2005, respectively. For the six months ended June 30, 2006 and
2005, the impact to net interest income was a (decrease) increase of $(0.2) million and $14.5
million, respectively.
22
Derivatives Used in Mortgage Banking Activities
Huntington also uses derivatives, principally loan sale commitments, in the hedging of its
mortgage loan commitments and its mortgage loans held for sale. For derivatives that are used in
hedging mortgage loans held for sale, ineffective hedge gains and losses are reflected in mortgage
banking revenue in the income statement. Mortgage loan commitments and the related hedges are
carried at fair value on the consolidated balance sheet with changes in fair value reflected in
mortgage banking revenue. The following is a summary of the derivative assets and liabilities that
Huntington used in its mortgage banking activities as of June 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
At June 30,
|
|
(in thousands)
|
|
2006
|
|
|
2005
|
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
Interest rate lock agreements
|
|
$
|
232
|
|
|
$
|
1,333
|
|
Forward trades and options
|
|
|
3,029
|
|
|
|
243
|
|
|
Total derivative assets
|
|
|
3,261
|
|
|
|
1,576
|
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
Interest rate lock agreements
|
|
|
(1,222
|
)
|
|
|
(861
|
)
|
Forward trades and options
|
|
|
(35
|
)
|
|
|
(2,122
|
)
|
|
Total derivative liabilities
|
|
|
(1,257
|
)
|
|
|
(2,983
|
)
|
|
Net derivative asset (liability)
|
|
$
|
2,004
|
|
|
$
|
(1,407
|
)
|
|
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.
Supplying these derivatives to customers results in fee 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 $2.2 million and $2.0 million for the three months
ended June 30, 2006 and 2005, respectively. For the six months ended June 30, 2006 and 2005, total
trading revenue for customer accommodation was $5.2 million and $3.7 million, respectively. The
total notional value of derivative financial instruments used by Huntington on behalf of customers,
for which the related interest rate risk is offset by third parties, was $4.6 billion, $4.2
billion, and $4.5 billion at June 30, 2006, December 31, 2005, and June 30, 2005. Huntingtons
credit risk from interest rate swaps used for trading purposes was $64.4 million, $44.3 million,
and $49.7 million at the same dates.
In connection with securitization activities, Huntington purchased interest rate caps with a
notional value totaling $1.8 billion. These purchased caps were assigned to the securitization
trust for the benefit of the security holders. Interest rate caps were also sold totaling $1.8
billion outside the securitization structure. Both the purchased and sold caps are marked to market
through income.
23
Note 14 Shareholders Equity
Share Repurchase Program:
On October 18, 2005, the Company announced that the board of directors authorized a new
program for the repurchase of up to 15 million shares (the 2005 Repurchase Program). The
repurchase program authorized in 2004, with 3.1 million shares remaining, was cancelled and
replaced by the 2005 Repurchase Program.
On April 20, 2006, the Company announced that the 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 2005 Repurchase Program, with 5 million shares
remaining, was canceled and replaced by the 2006 Repurchase Program. The Company expects to
repurchase the shares from time to time in the open market or through privately negotiated
transactions depending on market conditions.
On May 24, 2006, Huntington repurchased 6.0 million shares of common stock from Bear Stearns
under an accelerated share repurchase program. The accelerated share repurchase program enabled
Huntington to purchase the shares immediately, while Bear Stearns may purchase shares in the market
over a period of up to four months (the Repurchase Term). In connection with the repurchase of
these shares, Huntington entered into a variable share forward sale agreement, which provides for a
settlement, reflecting a price differential based on the adjusted volume-weighted average price as
defined in the agreement with Bear Stearns. The variable share forward agreement may be settled in
shares or in cash, at Huntingtons discretion. Any settlement will be reflected as an adjustment
to treasury shares on Huntingtons balance sheet at the end of the Repurchase Term. Based on the
adjusted volume-weighted average prices through June 30, 2006, the settlement of the variable share
forward agreement is not expected to have a material impact to Huntington.
Listed below is the share repurchase activity under the 2006 Repurchase Program for the three
months ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares
|
|
Maximum Number of
|
|
|
Total Number
|
|
Average
|
|
Purchased as Part of
|
|
Shares that May Yet Be
|
|
|
of Shares
|
|
Price Paid
|
|
Publicly Announced Plans
|
|
Purchased Under the
|
Period
|
|
Purchased
|
|
Per Share
|
|
or Programs
(1)
|
|
Plans or Programs
(1)
|
|
April 1, 2006 to April 30, 2006
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
15,000,000
|
|
May 1, 2006 to May 31, 2006
|
|
|
8,100,000
|
|
|
|
23.53
|
|
|
|
8,100,000
|
|
|
|
6,900,000
|
|
June 1, 2006 to June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
8,100,000
|
|
|
|
6,900,000
|
|
|
Total
|
|
|
8,100,000
|
|
|
$
|
23.53
|
|
|
|
8,100,000
|
|
|
|
6,900,000
|
|
|
|
|
|
(1)
|
|
Information is as of the end of the period.
|
24
Note 15 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 370 branches, over 1,000 ATMs, plus on-line and telephone banking channels. 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 59% and 79% 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, North Carolina, Pennsylvania, South Carolina, and Tennessee. Dealer Sales
finances the purchase of automobiles by customers of the automotive dealerships, purchases
automobiles from dealers and simultaneously leases the automobiles to consumers under long-term
operating or direct finance leases, finances the dealerships floor plan inventories, real estate,
or 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 the Companys higher net worth customers. Revenue is derived through
the sale of trust, asset management, investment advisory, brokerage, insurance, and private banking
products and services. It also focuses on financial solutions for corporate and institutional
customers that include investment banking, sales and trading of securities, mezzanine capital
financing, and risk management products. To serve high net worth customers, a unique distribution
model is used that employs a single, unified sales force to deliver products and services mainly
through Regional Banking distribution channels.
Treasury / Other:
This segment includes revenue and expense related to assets, liabilities, and
equity that are not directly assigned or allocated to one of the other three business segments.
Assets in this segment include investment securities and bank owned life insurance.
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. Operating earnings represent
reported earnings adjusted to exclude the impact of the significant items listed in the
reconciliation table below. 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.
Listed below is certain financial results by line of business. For the three months and six
months ended June 30, 2006 and 2005, operating earnings were the same as reported earnings.
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
Income Statements
|
|
Regional
|
|
Dealer
|
|
|
|
|
|
Treasury/
|
|
Huntington
|
(in thousands of dollars)
|
|
Banking
|
|
Sales
|
|
PFCMG
|
|
Other
|
|
Consolidated
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
227,454
|
|
|
$
|
34,803
|
|
|
$
|
18,037
|
|
|
$
|
(18,099
|
)
|
|
$
|
262,195
|
|
Provision for credit losses
|
|
|
(14,844
|
)
|
|
|
949
|
|
|
|
(1,850
|
)
|
|
|
|
|
|
|
(15,745
|
)
|
Non-interest income
|
|
|
92,785
|
|
|
|
21,489
|
|
|
|
39,139
|
|
|
|
9,606
|
|
|
|
163,019
|
|
Non-interest expense
|
|
|
(175,524
|
)
|
|
|
(27,936
|
)
|
|
|
(37,464
|
)
|
|
|
(11,435
|
)
|
|
|
(252,359
|
)
|
Income taxes
|
|
|
(45,455
|
)
|
|
|
(10,257
|
)
|
|
|
(6,252
|
)
|
|
|
16,458
|
|
|
|
(45,506
|
)
|
|
Operating / reported net income
|
|
$
|
84,416
|
|
|
$
|
19,048
|
|
|
$
|
11,610
|
|
|
$
|
(3,470
|
)
|
|
$
|
111,604
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
193,741
|
|
|
$
|
36,890
|
|
|
$
|
19,555
|
|
|
$
|
(8,286
|
)
|
|
$
|
241,900
|
|
Provision for credit losses
|
|
|
(8,717
|
)
|
|
|
(4,468
|
)
|
|
|
290
|
|
|
|
|
|
|
|
(12,895
|
)
|
Non-interest income
|
|
|
76,321
|
|
|
|
46,052
|
|
|
|
33,077
|
|
|
|
720
|
|
|
|
156,170
|
|
Non-interest expense
|
|
|
(147,488
|
)
|
|
|
(47,905
|
)
|
|
|
(32,801
|
)
|
|
|
(19,942
|
)
|
|
|
(248,136
|
)
|
Income taxes
|
|
|
(39,850
|
)
|
|
|
(10,699
|
)
|
|
|
(7,042
|
)
|
|
|
26,977
|
|
|
|
(30,614
|
)
|
|
Operating / reported net income
|
|
$
|
74,007
|
|
|
$
|
19,870
|
|
|
$
|
13,079
|
|
|
$
|
(531
|
)
|
|
$
|
106,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
Income Statements
|
|
Regional
|
|
Dealer
|
|
|
|
|
|
Treasury/
|
|
Huntington
|
(in thousands of dollars)
|
|
Banking
|
|
Sales
|
|
PFCMG
|
|
Other
|
|
Consolidated
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
435,517
|
|
|
$
|
69,651
|
|
|
$
|
35,606
|
|
|
$
|
(34,899
|
)
|
|
$
|
505,875
|
|
Provision for credit losses
|
|
|
(25,234
|
)
|
|
|
(6,813
|
)
|
|
|
(3,238
|
)
|
|
|
|
|
|
|
(35,285
|
)
|
Non-Interest income
|
|
|
170,594
|
|
|
|
48,465
|
|
|
|
80,033
|
|
|
|
23,461
|
|
|
|
322,553
|
|
Non-Interest expense
|
|
|
(318,225
|
)
|
|
|
(59,294
|
)
|
|
|
(68,175
|
)
|
|
|
(45,080
|
)
|
|
|
(490,774
|
)
|
Income taxes
|
|
|
(91,928
|
)
|
|
|
(18,203
|
)
|
|
|
(15,479
|
)
|
|
|
39,301
|
|
|
|
(86,309
|
)
|
|
Operating / reported net income
|
|
$
|
170,724
|
|
|
$
|
33,806
|
|
|
$
|
28,747
|
|
|
$
|
(17,217
|
)
|
|
$
|
216,060
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
378,768
|
|
|
$
|
74,799
|
|
|
$
|
36,400
|
|
|
$
|
(12,869
|
)
|
|
$
|
477,098
|
|
Provision for credit losses
|
|
|
(21,035
|
)
|
|
|
(11,399
|
)
|
|
|
(335
|
)
|
|
|
|
|
|
|
(32,769
|
)
|
Non-Interest income
|
|
|
147,520
|
|
|
|
99,195
|
|
|
|
65,128
|
|
|
|
12,377
|
|
|
|
324,220
|
|
Non-Interest expense
|
|
|
(297,711
|
)
|
|
|
(104,582
|
)
|
|
|
(66,250
|
)
|
|
|
(37,870
|
)
|
|
|
(506,413
|
)
|
Income taxes
|
|
|
(72,640
|
)
|
|
|
(20,304
|
)
|
|
|
(12,230
|
)
|
|
|
45,982
|
|
|
|
(59,192
|
)
|
|
Operating / reported net income
|
|
$
|
134,902
|
|
|
$
|
37,709
|
|
|
$
|
22,713
|
|
|
$
|
7,620
|
|
|
$
|
202,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at
|
|
|
Deposits at
|
|
Balance Sheets
|
|
June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
(in millions of dollars)
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
|
|
|
|
Regional Banking
|
|
$
|
21,035
|
|
|
$
|
18,851
|
|
|
$
|
18,785
|
|
|
$
|
19,839
|
|
|
$
|
17,957
|
|
|
$
|
17,627
|
|
Dealer Sales
|
|
|
5,417
|
|
|
|
5,612
|
|
|
|
6,021
|
|
|
|
61
|
|
|
|
65
|
|
|
|
68
|
|
PFCMG
|
|
|
2,179
|
|
|
|
2,010
|
|
|
|
2,009
|
|
|
|
1,218
|
|
|
|
1,180
|
|
|
|
1,176
|
|
Treasury / Other
|
|
|
7,635
|
|
|
|
6,292
|
|
|
|
6,174
|
|
|
|
3,475
|
|
|
|
3,208
|
|
|
|
3,460
|
|
|
|
|
|
|
Total
|
|
$
|
36,266
|
|
|
$
|
32,765
|
|
|
$
|
32,989
|
|
|
$
|
24,593
|
|
|
$
|
22,410
|
|
|
$
|
22,331
|
|
|
|
|
|
|
26
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, and private mortgage insurance; reinsure credit life and disability insurance; and sell
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, and
Tennessee. 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 2005 Annual Report on Form 10-K, as
amended (2005 Form 10-K), as updated by the information contained in this report, should be read in
conjunction with this 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 Factors
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
Describes our lines of business, provides an
overview of financial performance for each line of business, and provides additional
discussion of trends underlying consolidated financial performance.
|
Forward-Looking Statements
This report, including MD&A, contains forward-looking statements. These include descriptions
of products or services, plans or objectives for future operations, 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, those set forth under
Risk Factors
of our 2005 Form 10-K, and other factors
described in this report and from time to time in our other filings with the SEC.
You should understand forward-looking statements to be strategic objectives and not absolute
forecasts of future performance. Forward-looking statements speak only as of the date they are
made. We assume no obligation to update forward-looking statements to reflect circumstances or
events that occur after the date the forward-looking statements were made or to reflect the
occurrence of unanticipated events.
27
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 2005 Form 10-K.)
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 2005 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.
Formal Regulatory Supervisory Agreements
On March 1, 2005, we announced that we had entered into a formal written agreement with the
Federal Reserve Bank of Cleveland (FRBC), and the Bank had entered into a formal written agreement
with the Office of the Comptroller of the Currency (OCC), providing for a comprehensive action plan
designed to enhance our corporate governance, internal audit, risk management, accounting policies
and procedures, and financial and regulatory reporting. The agreements called for independent
third-party reviews, as well as the submission of written plans and progress reports by Management
and would remain in effect until terminated by the banking regulators.
On October 6, 2005, we announced that the OCC had lifted its formal written agreement with the
Bank dated February 28, 2005, and that the FRBC written agreement remained in effect. We were
verbally advised that we were in full compliance with the financial holding company and financial
subsidiary requirements under the Gramm-Leach-Bliley Act (GLB Act). This notification reflected
that we, and the Bank, met both the well-capitalized and well-managed criteria under the GLB
Act.
On May 10, 2006, we announced that the FRBC notified our board of directors that we had
satisfied the provisions of the written agreement dated February 28, 2005, and that the FRBC, under
delegated authority of the Board of Governors of the Federal Reserve System, had terminated the
written agreement.
28
DISCUSSION OF RESULTS OF OPERATIONS
This section provides a review of financial performance from a consolidated perspective. It
also includes a Significant Factors 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.
Summary
Earnings comparisons of 2006 second quarter and first six-month performance with that of the
prior periods were impacted by a number of factors, some related to changes in the economic and
competitive environment, while others reflected corporate actions, specific strategies, or changes
in accounting practices. The most significant item impacting performance comparisons was the
Unizan merger, which closed March 1, 2006. Understanding the impact of this merger, as well as the
nature and implications of other significant 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 prior periods. The key factors impacting current
reporting period comparisons to prior periods are more fully described in the Significant Factors
Influencing Financial Performance Comparisons section, which follows this summary discussion of
results.
2006 Second Quarter versus 2005 Second Quarter
Net income for the second quarter of 2006 was $111.6 million, or $0.46 per common share, up 5%
and 2%, respectively, from $106.4 million, or $0.45 per common share, in the year-ago quarter.
This $5.2 million increase in net income primarily reflected the positive impacts of:
|
|
|
A $20.3 million, or 8%, increase in net interest income. This reflected the benefit of
$2.7 billion, or 9%, growth in average earning assets ($1.7 billion, or 7%, in average
total loans and leases), partially offset by a two basis point decline in the net interest
margin to 3.34% from 3.36% in the year-ago quarter. The Unizan merger added $17.4 million
to net interest income with the addition of $2.0 billion of earning assets ($1.7 billion in
loans and leases).
(See Net Interest Income discussion for details.)
|
|
|
|
|
A $6.8 million, or 4%, increase in total non-interest income. This reflected the
benefit of higher mortgage banking income, service charges on deposit accounts, trust
services income, and other service charges and fees, which was partially offset by declines
in operating lease income and other income. The Unizan merger contributed $7.2 million of
growth to non-interest income.
(See Non-interest Income discussion for details.)
|
Partially offset by:
|
|
|
$14.9 million increase in provision for income taxes as the effective tax rate increased
to 29.0% from 22.3%. The increase in tax provision reflected higher pre-tax income in 2006,
and the recognition of the benefit of a federal tax loss carryback in 2005.
(See Provision
for Income Taxes discussion for details.)
|
|
|
|
|
$4.2 million, or 2%, increase in total non-interest expense. This reflected higher
personnel, marketing, amortization of intangibles, equipment, and outside data processing
and other service expenses, partially offset by declines in operating lease expense and
professional services costs. The Unizan merger contributed $18.0 million to the increase
in total non-interest expense.
(See Non-interest Expense discussion for details.)
|
|
|
|
|
$2.9 million, or 22%, increase in provision for credit losses.
(See Provision for
Credit Losses and the Credit Risk discussions for details.)
|
The return on average assets (ROA) and return on average equity (ROE) in the 2006 second
quarter were 1.25% and 14.9%, respectively. Both were lower than in the year-ago quarter, where
the ROA was 1.31% and ROE was 16.3% (
see Table 1).
29
2006 Second Quarter versus 2006 First Quarter
Net income for the second quarter of 2006 was $111.6 million, or $0.46 per common share, up 7%
and 2%, respectively, from $104.5 million, or $0.45 per common share, in the prior quarter. This
$7.2 million increase in net income primarily reflected the positive impacts of:
|
|
|
An $18.5 million, or 8%, increase in net interest income. This reflected the benefit of
$1.8 billion, or 6%, growth in average earning assets ($1.3 billion, or 5%, in average
total loans and leases), and a two basis point increase in the net interest margin to 3.34%
from 3.32% in the prior quarter. The Unizan merger contributed $11.6 million to the
increase in net interest income ($17.4 million over three months during the second quarter
compared with $5.8 million over one month during the first quarter). Unizan added $1.3
billion to earning assets ($1.1 billion in total loans and leases) compared with the first
quarter.
(See Net Interest Income discussion for details.)
|
|
|
|
|
$3.8 million, or 19%, decrease in provision for credit losses.
(See Provision for
Credit Losses and the Credit Risk discussions for details.)
|
|
|
|
|
A $3.5 million, or 2%, increase in total non-interest income. This reflected the
benefit of higher service charges on deposit accounts, mortgage banking income, other
service charges and fees, and trust services income, which was partially offset by declines
in operating lease income and other income. The Unizan merger contributed $4.8 million of
growth to total non-interest income.
(See Non-interest Income discussion for details.)
|
Partially offset by:
|
|
|
$13.9 million, or 6%, increase in total non-interest expense. This reflected higher
personnel, marketing, amortization of intangibles, equipment, and professional services,
partially offset by a decline in operating lease expense. The Unizan merger contributed
$13.7 million to the increase in total non-interest expense.
(See Non-interest Expense
discussion for details.)
|
|
|
|
|
$4.7 million, or 12%, increase in provision for income taxes, reflecting primarily
higher pre-tax income as the effective tax rate increased only slightly to 29.0% from
28.1%.
(See Provision for Income Taxes discussion for details.)
|
The ROA and ROE in the 2006 second quarter were 1.25% and 14.9%, respectively. Both were
slightly lower than in the prior quarter, where the ROA was 1.26% and ROE was 15.5% (
see Table 1).
2006 First Six Months versus 2005 First Six Months
Net income for the 2006 first six-month period was $216.1 million, or $0.90 per common share,
up 6% and 5%, respectively, from $202.9 million, or $0.86 per common share, in the year-ago period.
This $13.1 million increase in net income primarily reflected the positive impacts of:
|
|
|
A $28.8 million, or 6%, increase in net interest income. This reflected the benefit of
$1.9 billion, or 7%, growth in average earning assets ($1.4 billion, or 6%, in average
total loans and leases), partially offset by a one basis point decline in the net interest
margin to 3.33% from 3.34% in the year-ago six-month period. The Unizan merger contributed
$23.2 million to the increase in net interest income and $1.3 billion to the growth of
average earning assets ($1.1 billion in average total loans and leases).
(See Net
Interest Income discussion for details.)
|
|
|
|
|
$15.6 million, or 3%, decline in total non-interest expense. This reflected significant
declines in operating lease expense and professional services costs, partially offset by
higher personnel, marketing, amortization of intangibles, equipment, and outside data
processing and other service expenses. The Unizan merger contributed $27.5 million to total
non-interest expense.
(See Non-interest Expense discussion for
details.)
|
Partially offset by:
|
|
|
$27.1 million, or 46%, increase in provision for income taxes as the effective tax rate
increased to 28.5% from 22.6%. The increase in tax provision reflected higher pre-tax
income in 2006, and the recognition of the benefit of a federal tax loss carryback in 2005.
(See Provision for Income Taxes discussion for details.)
|
|
|
|
|
$2.5 million, or 8%, increase in provision for credit losses.
(See Provision for Credit
Losses and the Credit Risk discussions for details.)
|
30
|
|
|
$1.7 million, or 1%, decline in total non-interest income. This reflected a significant
decline in operating lease income, partially offset by the benefit of higher mortgage
banking income, service charges on deposit accounts, trust services income, other service
charges and fees, and brokerage and insurance income. The Unizan merger contributed $9.6
million to total non-interest income.
(See Non-interest Income discussion for
details.)
|
The ROA and ROE in the 2006 first six-month period were 1.26% and 15.2%, respectively. While
the ROA was unchanged between periods, the ROE decline slightly from 15.9% in the year-ago
six-month period
(see Table 2).
31
INSERT Table 1 Selected Quarterly Income Statement Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
(in thousands, except per share amounts)
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
|
|
|
|
Interest income
|
|
$
|
521,903
|
|
|
$
|
464,787
|
|
|
$
|
442,476
|
|
|
$
|
420,858
|
|
|
$
|
402,326
|
|
Interest expense
|
|
|
259,708
|
|
|
|
221,107
|
|
|
|
198,800
|
|
|
|
179,221
|
|
|
|
160,426
|
|
|
|
|
|
|
Net interest income
|
|
|
262,195
|
|
|
|
243,680
|
|
|
|
243,676
|
|
|
|
241,637
|
|
|
|
241,900
|
|
Provision for credit losses
|
|
|
15,745
|
|
|
|
19,540
|
|
|
|
30,831
|
|
|
|
17,699
|
|
|
|
12,895
|
|
|
|
|
|
|
Net interest income after provision for credit losses
|
|
|
246,450
|
|
|
|
224,140
|
|
|
|
212,845
|
|
|
|
223,938
|
|
|
|
229,005
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
47,225
|
|
|
|
41,222
|
|
|
|
42,083
|
|
|
|
44,817
|
|
|
|
41,516
|
|
Trust services
|
|
|
22,676
|
|
|
|
21,278
|
|
|
|
20,425
|
|
|
|
19,671
|
|
|
|
19,113
|
|
Brokerage and insurance income
|
|
|
14,345
|
|
|
|
15,193
|
|
|
|
13,101
|
|
|
|
13,948
|
|
|
|
13,544
|
|
Bank owned life insurance income
|
|
|
10,604
|
|
|
|
10,242
|
|
|
|
10,389
|
|
|
|
10,104
|
|
|
|
10,139
|
|
Other service charges and fees
|
|
|
13,072
|
|
|
|
11,509
|
|
|
|
11,488
|
|
|
|
11,449
|
|
|
|
11,252
|
|
Mortgage banking income (loss)
|
|
|
20,355
|
|
|
|
17,832
|
|
|
|
10,909
|
|
|
|
21,116
|
|
|
|
(2,376
|
)
|
Securities gains (losses)
|
|
|
(35
|
)
|
|
|
(20
|
)
|
|
|
(8,770
|
)
|
|
|
101
|
|
|
|
(343
|
)
|
Gains on sales of automobile loans
|
|
|
532
|
|
|
|
448
|
|
|
|
455
|
|
|
|
502
|
|
|
|
254
|
|
Other income
|
|
|
19,394
|
|
|
|
22,440
|
|
|
|
22,900
|
|
|
|
9,770
|
|
|
|
24,974
|
|
|
|
|
|
|
Subtotal before operating lease income
|
|
|
148,168
|
|
|
|
140,144
|
|
|
|
122,980
|
|
|
|
131,478
|
|
|
|
118,073
|
|
Operating lease income
|
|
|
14,851
|
|
|
|
19,390
|
|
|
|
24,342
|
|
|
|
29,262
|
|
|
|
38,097
|
|
|
|
|
|
|
Total noninterest income
|
|
|
163,019
|
|
|
|
159,534
|
|
|
|
147,322
|
|
|
|
160,740
|
|
|
|
156,170
|
|
|
|
|
|
|
Personnel costs
|
|
|
137,904
|
|
|
|
131,557
|
|
|
|
116,111
|
|
|
|
117,476
|
|
|
|
124,090
|
|
Net occupancy
|
|
|
17,927
|
|
|
|
17,966
|
|
|
|
17,940
|
|
|
|
16,653
|
|
|
|
17,257
|
|
Outside data processing and other services
|
|
|
19,569
|
|
|
|
19,851
|
|
|
|
19,693
|
|
|
|
18,062
|
|
|
|
18,113
|
|
Equipment
|
|
|
18,009
|
|
|
|
16,503
|
|
|
|
16,093
|
|
|
|
15,531
|
|
|
|
15,637
|
|
Professional services
|
|
|
6,292
|
|
|
|
5,365
|
|
|
|
7,440
|
|
|
|
8,323
|
|
|
|
9,347
|
|
Marketing
|
|
|
10,374
|
|
|
|
7,301
|
|
|
|
7,145
|
|
|
|
6,364
|
|
|
|
6,934
|
|
Telecommunications
|
|
|
4,990
|
|
|
|
4,825
|
|
|
|
4,453
|
|
|
|
4,512
|
|
|
|
4,801
|
|
Printing and supplies
|
|
|
3,764
|
|
|
|
3,074
|
|
|
|
3,084
|
|
|
|
3,102
|
|
|
|
3,293
|
|
Amortization of intangibles
|
|
|
2,992
|
|
|
|
1,075
|
|
|
|
218
|
|
|
|
203
|
|
|
|
204
|
|
Other expense
|
|
|
19,734
|
|
|
|
16,291
|
|
|
|
19,452
|
|
|
|
20,003
|
|
|
|
19,581
|
|
|
|
|
|
|
Subtotal before operating lease expense
|
|
|
241,555
|
|
|
|
223,808
|
|
|
|
211,629
|
|
|
|
210,229
|
|
|
|
219,257
|
|
Operating lease expense
|
|
|
10,804
|
|
|
|
14,607
|
|
|
|
18,726
|
|
|
|
22,823
|
|
|
|
28,879
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
252,359
|
|
|
|
238,415
|
|
|
|
230,355
|
|
|
|
233,052
|
|
|
|
248,136
|
|
|
|
|
|
|
Income before income taxes
|
|
|
157,110
|
|
|
|
145,259
|
|
|
|
129,812
|
|
|
|
151,626
|
|
|
|
137,039
|
|
Provision for income taxes
|
|
|
45,506
|
|
|
|
40,803
|
|
|
|
29,239
|
|
|
|
43,052
|
|
|
|
30,614
|
|
|
|
|
|
|
Net income
|
|
$
|
111,604
|
|
|
$
|
104,456
|
|
|
$
|
100,573
|
|
|
$
|
108,574
|
|
|
$
|
106,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
common shares - diluted
|
|
|
244,538
|
|
|
|
234,363
|
|
|
|
229,718
|
|
|
|
233,456
|
|
|
|
235,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income diluted
|
|
$
|
0.46
|
|
|
$
|
0.45
|
|
|
$
|
0.44
|
|
|
$
|
0.47
|
|
|
$
|
0.45
|
|
Cash dividends declared
|
|
|
0.250
|
|
|
|
0.250
|
|
|
|
0.215
|
|
|
|
0.215
|
|
|
|
0.215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets
|
|
|
1.25
|
%
|
|
|
1.26
|
%
|
|
|
1.22
|
%
|
|
|
1.32
|
%
|
|
|
1.31
|
%
|
Return on average total shareholders equity
|
|
|
14.9
|
|
|
|
15.5
|
|
|
|
15.5
|
|
|
|
16.5
|
|
|
|
16.3
|
|
Net interest margin
(1)
|
|
|
3.34
|
|
|
|
3.32
|
|
|
|
3.34
|
|
|
|
3.31
|
|
|
|
3.36
|
|
Efficiency ratio
(2)
|
|
|
58.1
|
|
|
|
58.3
|
|
|
|
57.0
|
|
|
|
57.4
|
|
|
|
61.8
|
|
Effective tax rate
|
|
|
29.0
|
|
|
|
28.1
|
|
|
|
22.5
|
|
|
|
28.4
|
|
|
|
22.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
- fully taxable equivalent (FTE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
262,195
|
|
|
$
|
243,680
|
|
|
$
|
243,676
|
|
|
$
|
241,637
|
|
|
$
|
241,900
|
|
FTE adjustment
|
|
|
3,984
|
|
|
|
3,836
|
|
|
|
3,837
|
|
|
|
3,734
|
|
|
|
2,961
|
|
|
|
|
|
|
Net interest income
(1)
|
|
|
266,179
|
|
|
|
247,516
|
|
|
|
247,513
|
|
|
|
245,371
|
|
|
|
244,861
|
|
Non-interest income
|
|
|
163,019
|
|
|
|
159,534
|
|
|
|
147,322
|
|
|
|
160,740
|
|
|
|
156,170
|
|
|
|
|
|
|
Total revenue
(1)
|
|
$
|
429,198
|
|
|
$
|
407,050
|
|
|
$
|
394,835
|
|
|
$
|
406,111
|
|
|
$
|
401,031
|
|
|
|
|
|
|
|
|
|
(1)
|
|
On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.
|
|
(2)
|
|
Noninterest expense less amortization of intangibles divided by the sum of FTE net interest income and noninterest income excluding securities gains (losses).
|
32
INSERT Table 2 Selected Year to Date Income Statement Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
Change
|
|
(in thousands, except per share amounts)
|
|
2006
|
|
|
2005
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
Interest income
|
|
$
|
986,690
|
|
|
$
|
778,431
|
|
|
$
|
208,259
|
|
|
|
26.8
|
%
|
Interest expense
|
|
|
480,815
|
|
|
|
301,333
|
|
|
|
179,482
|
|
|
|
59.6
|
|
|
|
|
|
|
Net interest income
|
|
|
505,875
|
|
|
|
477,098
|
|
|
|
28,777
|
|
|
|
6.0
|
|
Provision for credit losses
|
|
|
35,285
|
|
|
|
32,769
|
|
|
|
2,516
|
|
|
|
7.7
|
|
|
|
|
|
|
Net interest income after provision for credit losses
|
|
|
470,590
|
|
|
|
444,329
|
|
|
|
26,261
|
|
|
|
5.9
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
88,447
|
|
|
|
80,934
|
|
|
|
7,513
|
|
|
|
9.3
|
|
Trust services
|
|
|
43,954
|
|
|
|
37,309
|
|
|
|
6,645
|
|
|
|
17.8
|
|
Brokerage and insurance income
|
|
|
29,538
|
|
|
|
26,570
|
|
|
|
2,968
|
|
|
|
11.2
|
|
Bank owned life insurance income
|
|
|
20,846
|
|
|
|
20,243
|
|
|
|
603
|
|
|
|
3.0
|
|
Other service charges and fees
|
|
|
24,581
|
|
|
|
21,411
|
|
|
|
3,170
|
|
|
|
14.8
|
|
Mortgage banking income
|
|
|
38,187
|
|
|
|
9,685
|
|
|
|
28,502
|
|
|
|
N.M.
|
|
Securities gains
|
|
|
(55
|
)
|
|
|
614
|
|
|
|
(669
|
)
|
|
|
N.M.
|
|
Gains on sales of automobile loans
|
|
|
980
|
|
|
|
254
|
|
|
|
726
|
|
|
|
N.M.
|
|
Other income
|
|
|
41,834
|
|
|
|
42,371
|
|
|
|
(537
|
)
|
|
|
(1.3
|
)
|
|
|
|
|
|
Subtotal before operating lease income
|
|
|
288,312
|
|
|
|
239,391
|
|
|
|
48,921
|
|
|
|
20.4
|
|
Operating lease income
|
|
|
34,241
|
|
|
|
84,829
|
|
|
|
(50,588
|
)
|
|
|
(59.6
|
)
|
|
|
|
|
|
Total non-interest income
|
|
|
322,553
|
|
|
|
324,220
|
|
|
|
(1,667
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
Personnel costs
|
|
|
269,461
|
|
|
|
248,071
|
|
|
|
21,390
|
|
|
|
8.6
|
|
Net occupancy
|
|
|
35,893
|
|
|
|
36,499
|
|
|
|
(606
|
)
|
|
|
(1.7
|
)
|
Outside data processing and other services
|
|
|
39,420
|
|
|
|
36,883
|
|
|
|
2,537
|
|
|
|
6.9
|
|
Equipment
|
|
|
34,512
|
|
|
|
31,500
|
|
|
|
3,012
|
|
|
|
9.6
|
|
Professional services
|
|
|
11,657
|
|
|
|
18,806
|
|
|
|
(7,149
|
)
|
|
|
(38.0
|
)
|
Marketing
|
|
|
17,675
|
|
|
|
12,770
|
|
|
|
4,905
|
|
|
|
38.4
|
|
Telecommunications
|
|
|
9,815
|
|
|
|
9,683
|
|
|
|
132
|
|
|
|
1.4
|
|
Printing and supplies
|
|
|
6,838
|
|
|
|
6,387
|
|
|
|
451
|
|
|
|
7.1
|
|
Amortization of intangibles
|
|
|
4,067
|
|
|
|
408
|
|
|
|
3,659
|
|
|
|
N.M.
|
|
Other expense
|
|
|
36,025
|
|
|
|
38,579
|
|
|
|
(2,554
|
)
|
|
|
(6.6
|
)
|
|
|
|
|
|
Subtotal before operating lease expense
|
|
|
465,363
|
|
|
|
439,586
|
|
|
|
25,777
|
|
|
|
5.9
|
|
Operating lease expense
|
|
|
25,411
|
|
|
|
66,827
|
|
|
|
(41,416
|
)
|
|
|
(62.0
|
)
|
|
|
|
|
|
Total non-interest expense
|
|
|
490,774
|
|
|
|
506,413
|
|
|
|
(15,639
|
)
|
|
|
(3.1
|
)
|
|
|
|
|
|
Income before income taxes
|
|
|
302,369
|
|
|
|
262,136
|
|
|
|
40,233
|
|
|
|
15.3
|
|
Provision for income taxes
|
|
|
86,309
|
|
|
|
59,192
|
|
|
|
27,117
|
|
|
|
45.8
|
|
|
|
|
|
|
Net income
|
|
$
|
216,060
|
|
|
$
|
202,944
|
|
|
$
|
13,116
|
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
common shares - diluted
|
|
|
239,451
|
|
|
|
235,362
|
|
|
|
4,089
|
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share diluted
|
|
$
|
0.90
|
|
|
$
|
0.86
|
|
|
$
|
0.04
|
|
|
|
4.7
|
%
|
Cash dividends declared
|
|
|
0.500
|
|
|
|
0.415
|
|
|
|
0.085
|
|
|
|
20.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets
|
|
|
1.26
|
%
|
|
|
1.26
|
%
|
|
|
|
%
|
|
|
|
%
|
Return on average total shareholders equity
|
|
|
15.2
|
|
|
|
15.9
|
|
|
|
(0.7
|
)
|
|
|
(4.4
|
)
|
Net interest margin
(1)
|
|
|
3.33
|
|
|
|
3.34
|
|
|
|
(0.01
|
)
|
|
|
(0.3
|
)
|
Efficiency ratio
(2)
|
|
|
58.2
|
|
|
|
62.7
|
|
|
|
(4.5
|
)
|
|
|
(7.2
|
)
|
Effective tax rate
|
|
|
28.5
|
|
|
|
22.6
|
|
|
|
5.9
|
|
|
|
26.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue - fully taxable equivalent (FTE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
505,875
|
|
|
$
|
477,098
|
|
|
$
|
28,777
|
|
|
|
6.0
|
%
|
FTE adjustment
(1)
|
|
|
7,820
|
|
|
|
5,822
|
|
|
|
1,998
|
|
|
|
34.3
|
|
|
|
|
|
|
Net interest income
|
|
|
513,695
|
|
|
|
482,920
|
|
|
|
30,775
|
|
|
|
6.4
|
|
Non-interest income
|
|
|
322,553
|
|
|
|
324,220
|
|
|
|
(1,667
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
Total revenue
|
|
$
|
836,248
|
|
|
$
|
807,140
|
|
|
$
|
29,108
|
|
|
|
3.6
|
%
|
|
|
|
|
|
N.M., not a meaningful value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
On a fully taxable
equivalent (FTE) basis
assuming a 35% tax rate.
|
|
(2)
|
|
Noninterest expense less amortization of intangibles divided by the sum of FTE net interest income and noninterest income excluding securities gains.
|
33
Significant Factors Influencing Financial Performance Comparisons
Earnings comparisons from the beginning of 2005 through the second quarter of 2006 were
impacted by a number of factors, reflecting corporate actions, specific strategies, or changes in
accounting practices. Those key factors are summarized below.
1.
|
|
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 $1.7
billion of loans, and core deposits of $1.5 billion. This impacted 2006 first and second
quarter, and year-to-date reported results compared with pre-merger reporting periods as
follows:
|
|
|
|
Increased certain reported period-end balance sheet and credit quality items (e.g., non-performing loans).
|
|
|
|
|
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 merger costs were $1.0 million in the 2006 first quarter and
$2.6 million in the 2006 second quarter, resulting in $3.6 million of merger costs,
year-to-date.
|
Given the impact of the merger on reported 2006 results, We believe that it is helpful
in better understanding certain underlying performance and trends to analyze them by quantifying
the impact of the merger. As such, the following two terms relating to the impact of the Unizan
merger on reported results are used in the Discussion of Results of Operations, and when
comparing post-merger period results to pre-merger periods:
|
|
|
Merger-related refers to amounts and percentage changes representing the impact attributable to the merger.
|
|
|
|
|
Merger costs represent expenses associated with merger integration activities.
|
Schedules, reflecting the impact of the Unizan merger on our reported average balance sheet
and income statement, can be found in Table 25 Estimated Impact of Unizan Merger.
2.
|
|
Mortgage servicing rights (MSRs) and related hedging.
Interest rate levels have generally
been rising throughout this period, which has impacted the valuation of MSRs.
|
|
|
|
Since the second quarter of 2002, we have generally retained the servicing on mortgage
loans we originate and sell. 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. Thus, as interest rates decline, less future income is expected and the value
of MSRs is reduced. Prior to 2006, we recognized impairment when the valuation was less
than the recorded book value. We recognized temporary impairment due to changes in interest
rates through a valuation reserve and recorded a direct write-down of the book value of
MSRs for other-than-temporary declines in valuation. Changes and fluctuations in interest
rate levels between quarters resulted in some quarters reporting an MSR temporary
impairment, with others reporting a recovery of previously recognized MSR temporary
impairment. Such swings in MSR valuations have significantly impacted quarterly mortgage
banking income trends throughout this period.
|
|
|
|
|
Beginning in 2006, we adopted Statement No. 156, which records MSRs at fair value. 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, which is reflected in non-interest income
in the consolidated statements of income. MSR assets are included in other assets.
(See
Tables 3, 7, and 8.)
|
|
|
|
|
We use trading account assets to offset MSR valuation changes. The valuations of trading
securities we used generally reacted to interest rate changes in an opposite direction
compared with changes in MSR valuations. As a result, changes in interest rate levels that
impacted MSR valuations also resulted in trading gains or losses. As such, in quarters
where an MSR impairment was recognized, changes to the fair market value of trading account
assets typically resulted in a recognition of trading income, and vice versa. Trading
gains or losses are a component of other non-interest income on the income statement.
|
34
3.
|
|
Automobile leases originated through April 2002 are accounted for as operating leases.
Automobile leases originated before May 2002 are accounted for using the operating lease
method of accounting because they do not qualify as direct financing leases. Operating leases
are carried in other assets with the related rental income, other revenue, and credit
recoveries reflected as operating lease income, a component of non-interest income. Under this
accounting method, depreciation expenses, as well as other costs and charge-offs, are
reflected as operating lease expense, a component of non-interest expense. With no new
automobile operating leases originated since April 2002, the operating lease assets have
declined rapidly. It is anticipated that the level of operating lease assets and related
operating lease income and expense will decline to a point of diminished materiality sometime
in 2006. However, until that point is reached, and since operating lease income and expense
represented a significant percentage of total non-interest income and expense, respectively,
throughout these reporting periods, their downward trend influenced total revenue, total
non-interest income, and total non-interest expense trends.
|
|
|
|
In contrast, automobile leases originated since April 2002 are accounted for as direct financing
leases, an interest earning asset included in total loans and leases with the related income
reflected as interest income and included in the calculation of the net interest margin. Credit
charge-offs and recoveries are reflected in the allowance for loan and lease losses (ALLL), with
related changes in the ALLL reflected in the provision for credit losses. To better understand
overall trends in automobile lease exposure, it is helpful to compare trends in the combined
total of direct financing leases plus automobile operating leases.
|
|
4.
|
|
Effective tax rate.
The effective tax rate was 28.5% for the six-month period, up 5.9% from
the same period in 2005. The effective tax rate in 2005 included the positive impact on net
income of a federal tax loss carry-back.
|
|
5.
|
|
Stock option expensing.
Beginning in the 2006 first quarter, we adopted Statement No. 123R,
Share-based Payment,
which resulted in recognizing the impact of stock-based compensation,
primarily in the form of stock option grants, as personnel expense in our income statement.
Adoption of stock option expensing added $4.3 million to personnel expense in the 2006 first
and second quarters, and totaled $8.5 million year-to-date.
(See Note 9 to the unaudited
condensed consolidated financial statements.)
|
|
6.
|
|
Other significant items influencing earnings performance comparisons.
Other significant
items influencing performance comparisons included:
|
2006
Second Quarter
|
|
|
$2.6 million pre-tax ($0.01 earnings per share) negative impact from current period
Unizan merger costs, which consisted primarily of retention bonuses and occupancy,
outside programming services, and marketing expenses.
|
|
|
|
|
$2.3 million pre-tax ($0.01 earnings per share) positive impact from equity
investment gains.
|
First Quarter
|
|
|
$2.4 million pre-tax ($0.01 earnings per share) negative impact, reflecting a
cumulative adjustment to defer annual fees related to home equity loans.
|
2005
Second Quarter
|
|
|
$3.6 million pre-tax ($0.01 earnings per share) of severance and other expenses
associated with the consolidation of certain operations functions, including the
closing of an item-processing center in Michigan. These expenses included $2.0 million
in severance-related personnel costs, $0.8 million in net occupancy, $0.5 million in
equipment expenses, and $0.3 million in other expenses.
|
|
|
|
|
$2.1 million pre-tax ($0.01 earnings per share) negative impact from the write-off
of an equity investment.
|
First Quarter
|
|
|
$6.4 million pre-tax ($0.02 earnings per share) negative impact from a single,
commercial credit charge-off. This resulted in an increase in net charge-offs and
provision expense in that quarter.
|
35
Table 3 reflects the earnings impact of certain significant items for periods affected by this
Discussion of Results of Operations:
Table 3 Significant Items Influencing Earnings Performance Comparison
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
June 30, 2006
|
|
March 31, 2006
|
|
June 30, 2005
|
(in millions)
|
|
After-tax
|
|
EPS
|
|
After-tax
|
|
EPS
|
|
After-tax
|
|
EPS
|
|
Net income reported earnings
|
|
$
|
111.6
|
|
|
|
|
|
|
$
|
104.5
|
|
|
|
|
|
|
$
|
106.4
|
|
|
|
|
|
Earnings per share, after tax
|
|
|
|
|
|
$
|
0.46
|
|
|
|
|
|
|
$
|
0.45
|
|
|
|
|
|
|
$
|
0.45
|
|
Change from prior quarter $
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
0.04
|
|
Change from prior quarter %
|
|
|
|
|
|
|
2.2
|
%
|
|
|
|
|
|
|
2.3
|
%
|
|
|
|
|
|
|
9.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from a year-ago $
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
$
|
0.04
|
|
|
|
|
|
|
$
|
(0.02
|
)
|
Change from a year-ago %
|
|
|
|
|
|
|
2.2
|
%
|
|
|
|
|
|
|
9.8
|
%
|
|
|
|
|
|
|
(4.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant items - favorable (unfavorable) impact:
|
|
Earnings
(2)
|
|
EPS
|
|
Earnings
(2)
|
|
EPS
|
|
Earnings
(2)
|
|
EPS
|
|
Unizan merger-related expenses
|
|
$
|
(2.6
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investment gains
|
|
|
2.3
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSR mark-to-market net of hedge-related trading activity
|
|
|
|
|
|
|
|
|
|
|
4.6
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
Adjustment to defer home equity annual fees
(3)
|
|
|
|
|
|
|
|
|
|
|
(2.4
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
Net impact of federal tax loss carry back
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.6
|
|
|
|
0.03
|
|
MSR recovery of temporary impairment net of
hedge-related trading activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.0
|
)
|
|
|
(0.01
|
)
|
Severance and consolidation expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.6
|
)
|
|
|
(0.01
|
)
|
Write-off of equity investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.1
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 30, 2006
|
|
June 30, 2005
|
(in millions)
|
|
After-tax
|
|
EPS
|
|
After-tax
|
|
EPS
|
|
Net income reported earnings
|
|
$
|
216.1
|
|
|
|
|
|
|
$
|
202.9
|
|
|
|
|
|
Earnings per share, after tax
|
|
|
|
|
|
$
|
0.90
|
|
|
|
|
|
|
$
|
0.86
|
|
Change from a year-ago $
|
|
|
|
|
|
|
0.04
|
|
|
|
|
|
|
|
(0.06
|
)
|
Change from a year-ago %
|
|
|
|
|
|
|
4.7
|
%
|
|
|
|
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant items - favorable (unfavorable) impact:
|
|
Earnings
(2)
|
|
EPS
|
|
Earnings
(2)
|
|
EPS
|
|
MSR mark-to-market net of hedge-related trading activity
|
|
$
|
6.1
|
|
|
$
|
0.02
|
|
|
$
|
|
|
|
$
|
|
|
Adjustment to defer home equity annual fees
|
|
|
(2.4
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
Unizan merger-related expenses
|
|
|
(3.6
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
Equity investment gains
(3)
|
|
|
3.7
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
Net impact of federal tax loss carry back
|
|
|
|
|
|
|
|
|
|
|
13.0
|
|
|
|
0.06
|
|
MSR recovery of temporary impairment net of
hedge-related trading activity
|
|
|
|
|
|
|
|
|
|
|
(4.0
|
)
|
|
|
(0.01
|
)
|
Severance and consolidation expenses
|
|
|
|
|
|
|
|
|
|
|
(3.6
|
)
|
|
|
(0.01
|
)
|
Write-off of equity investment
|
|
|
|
|
|
|
|
|
|
|
(2.1
|
)
|
|
|
(0.01
|
)
|
Single C&I charge-off impact, net of allocated reserves
|
|
|
|
|
|
|
|
|
|
|
(6.4
|
)
|
|
|
(0.02
|
)
|
SEC and regulatory-related expenses
|
|
|
|
|
|
|
|
|
|
|
(3.7
|
)
|
|
|
(0.01
|
)
|
|
|
|
(1)
|
|
See Significant Factors Influencing Financial Performance discussion.
|
|
(2)
|
|
Pre-tax unless otherwise noted.
|
|
(3)
|
|
After-tax.
|
|
|
|
|
36
Net Interest Income
(This section should be read in conjunction with Significant Factors 1, 3, and 6.)
2006 Second Quarter versus 2005 Second Quarter
Fully taxable equivalent net interest income increased $21.3 million, or 9% ($17.7 million
merger-related), from the year-ago quarter, reflecting the favorable impact of a $2.7 billion, or
9%, increase in average earning assets, as the fully taxable equivalent net interest margin
declined two basis points to 3.34%. Average total loans and leases increased $1.7 billion, or 7%,
nearly all of which was attributable to the Unizan merger. The remaining increase in average total
loans and leases was $0.1 billion, essentially unchanged from the year-ago quarter, which
primarily reflected growth in commercial loans, residential mortgages, and home equity loans,
mostly offset by a decline in total average automobile loans and leases as we continued a program
to sell a portion of that production.
Average total commercial loans increased $1.2 billion, or 12% ($0.8 billion merger-related).
The $1.2 billion growth reflected a $0.6 billion, or 11%, increase in average middle market C&I
loans, a $0.5 billion, or 13%, increase in average commercial real estate loans, and a $0.2
billion, or 10%, increase in average small business loans.
Average residential mortgages increased $0.5 billion, or 13% ($0.4 billion merger-related).
Average home equity loans increased $0.2 billion, or 5%, substantially all from the Unizan merger.
Compared with the year-ago quarter, average total automobile loans and leases decreased $0.4
billion, or 9%, with the Unizan merger having no significant impact. The decrease reflected the
combination of two factors: (1) the continuation of historically low production levels over this
period from low consumer demand and competitive pricing, and (2) the sale of automobile loans as we
continued a program of selling a portion of current loan production. Average operating lease
assets declined $0.3 billion, or 63%, as this portfolio continued to run off. Total automobile
loan and lease exposure at quarter end was 16%, down from 19% a year ago.
Average total investment securities increased $1.1 billion from the 2005 second quarter,
attributed, in part, to the securities purchased in the 2006 first quarter related to Unizan.
Average total core deposits in the 2006 second quarter increased $1.9 billion, or 11% ($1.5
billion merger-related), from the year-ago quarter. Most of the $1.9 billion increase reflected
higher average certificates of deposit less than $100,000, which increased $1.7 billion. The
Unizan merger added $0.6 billion of certificates of deposit less than $100,000, with the remaining
$1.1 billion of growth resulting from customer demand for higher, fixed rate deposit products.
Average savings and other domestic time deposits declined $0.1 billion. Outflows from these
accounts and into higher rate products, such as certificates of deposit less than $100,000, were
greater than the $0.5 billion of savings account balances acquired in the Unizan merger. Average
non-interest bearing and interest bearing demand deposits rose $0.2 billion and $0.1 billion,
respectively. The Unizan merger added $0.2 billion of non-interest bearing demand deposits and
$0.2 billion of interest bearing demand deposits.
2006 Second Quarter versus 2006 First Quarter
Compared with the 2006 first quarter, fully taxable equivalent net interest income increased
$18.7 million, or 8% ($11.8 million merger-related). This reflected a 6% increase in average total
earnings assets, the benefit of one additional day in the current quarter, as well as a two basis
point increase in the net interest margin to 3.34% from 3.32%. The prior quarters net interest
margin was negatively impacted by about 3 basis points related to an adjustment for annual home
equity loan fees.
Average total loans and leases increased $1.3 billion, or 5% ($1.1 billion merger-related),
from the 2006 first quarter.
Average total commercial loans increased $0.8 billion, or 7% ($0.5 billion merger-related),
from the 2006 first quarter. The $0.8 billion increase reflected a $0.3 billion, or 6%, increase
in average middle market C&I loans, a $0.3 billion, or 16%, increase in average small business
loans, and a $0.2 billion, or 4%, increase in average commercial real estate loans.
37
Average residential mortgages increased $0.3 billion, or 8%, and average home equity
loans increased $0.2 billion, or 4%. Substantially all of the growth in these two categories of
loans was merger-related. The growth rates in average residential mortgages and home equity loans
were negatively impacted by a planned decline in broker-originated production, as well as credit
underwriting and pricing discipline.
Compared with the 2006 first quarter, average total automobile loans and leases declined 2%,
with the Unizan merger having no significant impact. The decline reflected a combination of
factors including low demand for leases, as well as sales of a portion of automobile loan and lease
production. Average direct financing leases declined $0.1 billion, or 6%. Though direct financing
lease production increased 48% from the prior quarter, the absolute level of production over the
last several quarters has remained at historically low levels due to continued low consumer demand
and competitive pricing. In contrast, average automobile loans increased 3%. Automobile loan
production increased 12% from the prior quarter and represented the second highest level of
quarterly production in the last nine quarters. Average operating lease assets declined slightly
as this portfolio continued to run off.
Average investment securities increased $0.4 billion from the 2006 first quarter, primarily
merger-related.
Average total core deposits in the 2006 second quarter increased $1.0 billion, or 5%, from the
prior quarter, all of which was attributable to Unizan. Average certificates of deposit less than
$100,000 increased $0.6 billion, reflecting $0.4 billion merger-related and a shift of customer
preferences for certificates of deposit less than $100,000 and out of savings and other time
deposits. This shift reflected the same factors impacting comparisons to the year-ago quarter
noted above. Average interest bearing and non-interest bearing demand deposits each increased $0.2
billion, or 3% and 5%, respectively, primarily merger-related, but also from initiatives targeted
at growing these deposits.
38
Table 4 Consolidated Quarterly Average Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances
|
|
|
Change
|
Fully taxable equivalent basis
|
|
2006
|
|
|
2005
|
|
|
2Q06 vs 2Q05
|
(in millions)
|
|
Second
|
|
First
|
|
Fourth
|
|
Third
|
|
Second
|
|
|
Amount
|
|
Percent
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in banks
|
|
$
|
62
|
|
|
$
|
48
|
|
|
$
|
51
|
|
|
$
|
54
|
|
|
$
|
54
|
|
|
|
$
|
8
|
|
|
|
14.8
|
%
|
Trading account securities
|
|
|
100
|
|
|
|
66
|
|
|
|
119
|
|
|
|
274
|
|
|
|
236
|
|
|
|
|
(136
|
)
|
|
|
(57.6
|
)
|
Federal funds sold and securities purchased
under resale agreements
|
|
|
285
|
|
|
|
201
|
|
|
|
103
|
|
|
|
142
|
|
|
|
225
|
|
|
|
|
60
|
|
|
|
26.7
|
|
Loans held for sale
|
|
|
287
|
|
|
|
274
|
|
|
|
361
|
|
|
|
427
|
|
|
|
276
|
|
|
|
|
11
|
|
|
|
4.0
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
4,494
|
|
|
|
4,138
|
|
|
|
3,802
|
|
|
|
3,523
|
|
|
|
3,589
|
|
|
|
|
905
|
|
|
|
25.2
|
|
Tax-exempt
|
|
|
556
|
|
|
|
548
|
|
|
|
540
|
|
|
|
537
|
|
|
|
411
|
|
|
|
|
145
|
|
|
|
35.3
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
5,050
|
|
|
|
4,686
|
|
|
|
4,342
|
|
|
|
4,060
|
|
|
|
4,000
|
|
|
|
|
1,050
|
|
|
|
26.3
|
|
Loans and leases:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle market commercial and industrial
|
|
|
5,458
|
|
|
|
5,132
|
|
|
|
4,946
|
|
|
|
4,708
|
|
|
|
4,901
|
|
|
|
|
557
|
|
|
|
11.4
|
|
Middle market commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
1,243
|
|
|
|
1,454
|
|
|
|
1,675
|
|
|
|
1,720
|
|
|
|
1,678
|
|
|
|
|
(435
|
)
|
|
|
(25.9
|
)
|
Commercial
|
|
|
2,799
|
|
|
|
2,423
|
|
|
|
1,923
|
|
|
|
1,922
|
|
|
|
1,905
|
|
|
|
|
894
|
|
|
|
46.9
|
|
|
|
|
|
|
|
|
Middle market commercial real estate
|
|
|
4,042
|
|
|
|
3,877
|
|
|
|
3,598
|
|
|
|
3,642
|
|
|
|
3,583
|
|
|
|
|
459
|
|
|
|
12.8
|
|
Small business
|
|
|
2,456
|
|
|
|
2,121
|
|
|
|
2,230
|
|
|
|
2,251
|
|
|
|
2,230
|
|
|
|
|
226
|
|
|
|
10.1
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
11,956
|
|
|
|
11,130
|
|
|
|
10,774
|
|
|
|
10,601
|
|
|
|
10,714
|
|
|
|
|
1,242
|
|
|
|
11.6
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans
|
|
|
2,044
|
|
|
|
1,994
|
|
|
|
2,018
|
|
|
|
2,078
|
|
|
|
2,069
|
|
|
|
|
(25
|
)
|
|
|
(1.2
|
)
|
Automobile leases
|
|
|
2,095
|
|
|
|
2,221
|
|
|
|
2,337
|
|
|
|
2,424
|
|
|
|
2,468
|
|
|
|
|
(373
|
)
|
|
|
(15.1
|
)
|
|
|
|
|
|
|
|
Automobile loans and leases
|
|
|
4,139
|
|
|
|
4,215
|
|
|
|
4,355
|
|
|
|
4,502
|
|
|
|
4,537
|
|
|
|
|
(398
|
)
|
|
|
(8.8
|
)
|
Home equity
|
|
|
4,872
|
|
|
|
4,694
|
|
|
|
4,653
|
|
|
|
4,681
|
|
|
|
4,636
|
|
|
|
|
236
|
|
|
|
5.1
|
|
Residential mortgage
|
|
|
4,629
|
|
|
|
4,306
|
|
|
|
4,165
|
|
|
|
4,157
|
|
|
|
4,080
|
|
|
|
|
549
|
|
|
|
13.5
|
|
Other loans
|
|
|
605
|
|
|
|
586
|
|
|
|
521
|
|
|
|
507
|
|
|
|
491
|
|
|
|
|
114
|
|
|
|
23.2
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
14,245
|
|
|
|
13,801
|
|
|
|
13,694
|
|
|
|
13,847
|
|
|
|
13,744
|
|
|
|
|
501
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
Total loans and leases
|
|
|
26,201
|
|
|
|
24,931
|
|
|
|
24,468
|
|
|
|
24,448
|
|
|
|
24,458
|
|
|
|
|
1,743
|
|
|
|
7.1
|
|
Allowance for loan and lease losses
|
|
|
(293
|
)
|
|
|
(283
|
)
|
|
|
(262
|
)
|
|
|
(256
|
)
|
|
|
(270
|
)
|
|
|
|
(23
|
)
|
|
|
(8.5
|
)
|
|
|
|
|
|
|
|
Net loans and leases
|
|
|
25,908
|
|
|
|
24,648
|
|
|
|
24,206
|
|
|
|
24,192
|
|
|
|
24,188
|
|
|
|
|
1,720
|
|
|
|
7.1
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
31,985
|
|
|
|
30,206
|
|
|
|
29,444
|
|
|
|
29,405
|
|
|
|
29,249
|
|
|
|
|
2,736
|
|
|
|
9.4
|
|
|
|
|
|
|
|
|
Operating lease assets
|
|
|
152
|
|
|
|
200
|
|
|
|
245
|
|
|
|
309
|
|
|
|
409
|
|
|
|
|
(257
|
)
|
|
|
(62.8
|
)
|
Cash and due from banks
|
|
|
806
|
|
|
|
789
|
|
|
|
742
|
|
|
|
867
|
|
|
|
865
|
|
|
|
|
(59
|
)
|
|
|
(6.8
|
)
|
Intangible assets
|
|
|
638
|
|
|
|
362
|
|
|
|
218
|
|
|
|
217
|
|
|
|
218
|
|
|
|
|
420
|
|
|
|
N.M.
|
|
All other assets
|
|
|
2,402
|
|
|
|
2,215
|
|
|
|
2,227
|
|
|
|
2,197
|
|
|
|
2,149
|
|
|
|
|
253
|
|
|
|
11.8
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
35,690
|
|
|
$
|
33,489
|
|
|
$
|
32,614
|
|
|
$
|
32,739
|
|
|
$
|
32,620
|
|
|
|
$
|
3,070
|
|
|
|
9.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits non-interest bearing
|
|
$
|
3,594
|
|
|
$
|
3,436
|
|
|
$
|
3,444
|
|
|
$
|
3,406
|
|
|
$
|
3,352
|
|
|
|
$
|
242
|
|
|
|
7.2
|
%
|
Demand deposits interest bearing
|
|
|
7,778
|
|
|
|
7,562
|
|
|
|
7,496
|
|
|
|
7,539
|
|
|
|
7,677
|
|
|
|
|
101
|
|
|
|
1.3
|
|
Savings and other domestic time deposits
|
|
|
3,106
|
|
|
|
3,095
|
|
|
|
2,984
|
|
|
|
3,095
|
|
|
|
3,230
|
|
|
|
|
(124
|
)
|
|
|
(3.8
|
)
|
Certificates of deposit less than $100,000
|
|
|
4,430
|
|
|
|
3,849
|
|
|
|
3,421
|
|
|
|
3,157
|
|
|
|
2,720
|
|
|
|
|
1,710
|
|
|
|
62.9
|
|
|
|
|
|
|
|
|
Total core deposits
|
|
|
18,908
|
|
|
|
17,942
|
|
|
|
17,345
|
|
|
|
17,197
|
|
|
|
16,979
|
|
|
|
|
1,929
|
|
|
|
11.4
|
|
Domestic time deposits of $100,000 or more
|
|
|
1,739
|
|
|
|
1,478
|
|
|
|
1,397
|
|
|
|
1,271
|
|
|
|
1,248
|
|
|
|
|
491
|
|
|
|
39.3
|
|
Brokered deposits and negotiable CDs
|
|
|
3,263
|
|
|
|
3,143
|
|
|
|
3,210
|
|
|
|
3,286
|
|
|
|
3,249
|
|
|
|
|
14
|
|
|
|
0.4
|
|
Deposits in foreign offices
|
|
|
474
|
|
|
|
465
|
|
|
|
490
|
|
|
|
462
|
|
|
|
434
|
|
|
|
|
40
|
|
|
|
9.2
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
24,384
|
|
|
|
23,028
|
|
|
|
22,442
|
|
|
|
22,216
|
|
|
|
21,910
|
|
|
|
|
2,474
|
|
|
|
11.3
|
|
Short-term borrowings
|
|
|
2,042
|
|
|
|
1,669
|
|
|
|
1,472
|
|
|
|
1,559
|
|
|
|
1,301
|
|
|
|
|
741
|
|
|
|
57.0
|
|
Federal Home Loan Bank advances
|
|
|
1,557
|
|
|
|
1,453
|
|
|
|
1,156
|
|
|
|
935
|
|
|
|
1,136
|
|
|
|
|
421
|
|
|
|
37.1
|
|
Subordinated notes and other long-term debt
|
|
|
3,428
|
|
|
|
3,346
|
|
|
|
3,687
|
|
|
|
3,960
|
|
|
|
4,100
|
|
|
|
|
(672
|
)
|
|
|
(16.4
|
)
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
27,817
|
|
|
|
26,060
|
|
|
|
25,313
|
|
|
|
25,264
|
|
|
|
25,095
|
|
|
|
|
2,722
|
|
|
|
10.8
|
|
|
|
|
|
|
|
|
All other liabilities
|
|
|
1,284
|
|
|
|
1,264
|
|
|
|
1,283
|
|
|
|
1,458
|
|
|
|
1,554
|
|
|
|
|
(270
|
)
|
|
|
(17.4
|
)
|
Shareholders equity
|
|
|
2,995
|
|
|
|
2,729
|
|
|
|
2,574
|
|
|
|
2,611
|
|
|
|
2,619
|
|
|
|
|
376
|
|
|
|
14.4
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
35,690
|
|
|
$
|
33,489
|
|
|
$
|
32,614
|
|
|
$
|
32,739
|
|
|
$
|
32,620
|
|
|
|
$
|
3,070
|
|
|
|
9.4
|
%
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
For purposes of this analysis, non-accrual loans are reflected in the average balances of loans.
|
|
(2)
|
|
The middle market C&I and CRE loan balances in the first quarter of 2006 contain
Unizan loan balances that were subject to reclassification when these loans were converted to
Huntingtons loan systems.
|
39
Table 5 Consolidated Quarterly Net Interest Margin Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Rates
(2)
|
|
|
2006
|
|
2005
|
Fully taxable equivalent basis
(1)
|
|
Second
|
|
First
|
|
Fourth
|
|
Third
|
|
Second
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in banks
|
|
|
4.04
|
%
|
|
|
3.78
|
%
|
|
|
3.20
|
%
|
|
|
2.13
|
%
|
|
|
1.47
|
%
|
Trading account securities
|
|
|
5.56
|
|
|
|
4.49
|
|
|
|
4.53
|
|
|
|
3.95
|
|
|
|
3.94
|
|
Federal funds sold and securities purchased
under resale agreements
|
|
|
4.75
|
|
|
|
4.30
|
|
|
|
3.78
|
|
|
|
3.41
|
|
|
|
2.76
|
|
Loans held for sale
|
|
|
6.23
|
|
|
|
5.92
|
|
|
|
5.68
|
|
|
|
5.43
|
|
|
|
6.04
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
5.32
|
|
|
|
5.00
|
|
|
|
4.70
|
|
|
|
4.37
|
|
|
|
4.13
|
|
Tax-exempt
|
|
|
6.83
|
|
|
|
6.71
|
|
|
|
6.77
|
|
|
|
6.62
|
|
|
|
6.76
|
|
|
|
|
|
|
Total investment securities
|
|
|
5.49
|
|
|
|
5.20
|
|
|
|
4.96
|
|
|
|
4.67
|
|
|
|
4.40
|
|
Loans and leases:
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle market commercial and industrial
|
|
|
7.26
|
|
|
|
6.80
|
|
|
|
6.28
|
|
|
|
5.87
|
|
|
|
5.65
|
|
Middle market commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
8.01
|
|
|
|
7.55
|
|
|
|
7.27
|
|
|
|
6.58
|
|
|
|
6.04
|
|
Commercial
|
|
|
7.26
|
|
|
|
6.78
|
|
|
|
6.46
|
|
|
|
5.96
|
|
|
|
5.53
|
|
|
|
|
|
|
Middle market commercial real estate
|
|
|
7.49
|
|
|
|
7.07
|
|
|
|
6.84
|
|
|
|
6.25
|
|
|
|
5.77
|
|
Small business
|
|
|
7.10
|
|
|
|
6.67
|
|
|
|
6.43
|
|
|
|
6.18
|
|
|
|
6.01
|
|
|
|
|
|
|
Total commercial
|
|
|
7.30
|
|
|
|
6.87
|
|
|
|
6.50
|
|
|
|
6.07
|
|
|
|
5.76
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans
|
|
|
6.48
|
|
|
|
6.40
|
|
|
|
6.26
|
|
|
|
6.44
|
|
|
|
6.57
|
|
Automobile leases
|
|
|
5.01
|
|
|
|
4.97
|
|
|
|
4.98
|
|
|
|
4.94
|
|
|
|
4.91
|
|
|
|
|
|
|
Automobile loans and leases
|
|
|
5.74
|
|
|
|
5.65
|
|
|
|
5.57
|
|
|
|
5.63
|
|
|
|
5.67
|
|
Home equity
|
|
|
7.72
|
|
|
|
7.10
|
|
|
|
7.03
|
|
|
|
6.60
|
|
|
|
6.24
|
|
Residential mortgage
|
|
|
5.39
|
|
|
|
5.34
|
|
|
|
5.31
|
|
|
|
5.23
|
|
|
|
5.18
|
|
Other loans
|
|
|
6.83
|
|
|
|
6.39
|
|
|
|
5.98
|
|
|
|
5.92
|
|
|
|
6.22
|
|
|
|
|
|
|
Total consumer
|
|
|
6.35
|
|
|
|
6.08
|
|
|
|
6.00
|
|
|
|
5.85
|
|
|
|
5.74
|
|
|
|
|
|
|
Total loans and leases
|
|
|
6.79
|
|
|
|
6.43
|
|
|
|
6.22
|
|
|
|
5.94
|
|
|
|
5.75
|
|
|
|
|
|
|
Total earning assets
|
|
|
6.55
|
%
|
|
|
6.21
|
%
|
|
|
6.01
|
%
|
|
|
5.72
|
%
|
|
|
5.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits non-interest bearing
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
Demand deposits interest bearing
|
|
|
2.62
|
|
|
|
2.44
|
|
|
|
2.12
|
|
|
|
1.87
|
|
|
|
1.64
|
|
Savings and other domestic time deposits
|
|
|
1.59
|
|
|
|
1.49
|
|
|
|
1.44
|
|
|
|
1.39
|
|
|
|
1.34
|
|
Certificates of deposit less than $100,000
|
|
|
4.05
|
|
|
|
3.83
|
|
|
|
3.70
|
|
|
|
3.58
|
|
|
|
3.49
|
|
|
|
|
|
|
Total core deposits
|
|
|
2.83
|
|
|
|
2.61
|
|
|
|
2.36
|
|
|
|
2.15
|
|
|
|
1.94
|
|
Domestic time deposits of $100,000 or more
|
|
|
4.67
|
|
|
|
4.33
|
|
|
|
3.90
|
|
|
|
3.60
|
|
|
|
3.27
|
|
Brokered deposits and negotiable CDs
|
|
|
5.12
|
|
|
|
4.69
|
|
|
|
4.20
|
|
|
|
3.66
|
|
|
|
3.25
|
|
Deposits in foreign offices
|
|
|
2.68
|
|
|
|
2.62
|
|
|
|
2.66
|
|
|
|
2.28
|
|
|
|
1.95
|
|
|
|
|
|
|
Total deposits
|
|
|
3.34
|
|
|
|
3.07
|
|
|
|
2.79
|
|
|
|
2.52
|
|
|
|
2.26
|
|
Short-term borrowings
|
|
|
4.12
|
|
|
|
3.57
|
|
|
|
3.11
|
|
|
|
2.74
|
|
|
|
2.16
|
|
Federal Home Loan Bank advances
|
|
|
4.34
|
|
|
|
3.99
|
|
|
|
3.37
|
|
|
|
3.08
|
|
|
|
3.02
|
|
Subordinated notes and other long-term debt
|
|
|
5.67
|
|
|
|
5.22
|
|
|
|
4.72
|
|
|
|
4.20
|
|
|
|
3.91
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
3.74
|
%
|
|
|
3.43
|
%
|
|
|
3.12
|
%
|
|
|
2.82
|
%
|
|
|
2.56
|
%
|
|
|
|
|
|
Net interest rate spread
|
|
|
2.81
|
%
|
|
|
2.78
|
%
|
|
|
2.89
|
%
|
|
|
2.90
|
%
|
|
|
2.96
|
%
|
Impact of non-interest bearing funds on margin
|
|
|
0.53
|
|
|
|
0.54
|
|
|
|
0.45
|
|
|
|
0.41
|
|
|
|
0.40
|
|
|
|
|
|
|
Net interest margin
|
|
|
3.34
|
%
|
|
|
3.32
|
%
|
|
|
3.34
|
%
|
|
|
3.31
|
%
|
|
|
3.36
|
%
|
|
|
|
|
|
|
|
|
(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.
|
40
2006 First Six Months versus 2005 First Six Months
Fully taxable equivalent net interest income increased $30.8 million, or 6% ($23.6 million
merger-related), from the year-ago six-month period. Earning assets grew $1.9 billion, or 7%, and
the fully taxable equivalent net interest margin declined one basis points to 3.33%. Average total
loans and leases increased $1.4 billion, or 6% ($1.1 billion merger-related). This primarily
reflected growth in commercial loans, residential mortgages, and home equity loans, partly offset
by a decline in total average automobile loans and leases as we continued to sell a portion of that
production.
Average total commercial loans increased $1.0 billion, or 9% ($0.5 billion merger-related),
from the year-ago six-month period. The $1.0 billion growth reflected a $0.5 billion, or 10%,
increase in average middle market C&I loans, a $0.4 billion, or 11%, increase in average commercial
real estate loans, and a $0.1 billion, or 4%, increase in average small business loans.
Average residential mortgages increased $0.5 billion, or 12% ($0.3 billion merger-related).
Average home equity loans increased $0.2 billion, or 4%, ($0.1 billion merger-related).
Compared with the year-ago six-month period, average total automobile loans and leases
decreased $0.3 billion, or 7%, with Unizan having no material impact. The decrease reflected the
combination of two factors: (1) historically low production levels over this period due to low
consumer demand and competitive pricing, and (2) sales of automobile loans as we continued selling
a portion of current loan production. Average operating lease assets declined $0.3 billion, or
62%, as this portfolio continued to run off. Total automobile loan and lease exposure at quarter
end was 16% of total loans and leases and operating lease assets, down from 19% a year ago.
Average total investment securities increased $0.7 billion from the 2005 first six-month
period, attributed in part to the securities purchased in the 2006 first quarter related to Unizan.
Average total core deposits in the 2006 first six-month period increased $1.4 billion, or 8%
($1.0 billion merger-related), from the comparable year-ago period. Most of the $1.4 billion
increase in average core deposits reflected a $1.6 billion increase ($0.4 billion merger-related)
in average certificates of deposit less than $100,000, with the remaining $1.2 billion of growth
resulting from customer demand for higher, fixed rate deposit products. Average savings and other
domestic time deposits declined $0.2 billion, or 5%. Outflows from these accounts and into higher
rate products, such as certificates of deposit less than $100,000, were greater than the $0.3
billion impact from savings account balances acquired in the Unizan merger. Average non-interest
bearing demand deposits were up $0.2 billion, or 5%. Average interest-bearing demand deposits
declined $0.1 billion, or 2%, despite a $0.2 billion impact of average interest-bearing demand
deposits acquired in the Unizan merger.
41
Table 6 Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YTD Average Balances
|
|
YTD Average Rates
(2)
|
Fully taxable equivalent basis
(1)
|
|
Six Months Ending June 30,
|
|
Change
|
|
Six Months Ending June 30,
|
(in millions of dollars)
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
2006
|
|
2005
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in banks
|
|
$
|
55
|
|
|
$
|
54
|
|
|
$
|
1
|
|
|
|
1.9
|
%
|
|
|
3.93
|
%
|
|
|
1.67
|
%
|
Trading account securities
|
|
|
83
|
|
|
|
218
|
|
|
|
(135
|
)
|
|
|
(61.9
|
)
|
|
|
5.33
|
|
|
|
4.03
|
|
Federal funds sold and securities purchased
under resale agreements
|
|
|
243
|
|
|
|
349
|
|
|
|
(106
|
)
|
|
|
(30.4
|
)
|
|
|
4.56
|
|
|
|
2.49
|
|
Loans held for sale
|
|
|
281
|
|
|
|
240
|
|
|
|
41
|
|
|
|
17.1
|
|
|
|
6.08
|
|
|
|
5.83
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
4,317
|
|
|
|
3,759
|
|
|
|
558
|
|
|
|
14.8
|
|
|
|
5.17
|
|
|
|
3.99
|
|
Tax-exempt
|
|
|
552
|
|
|
|
410
|
|
|
|
142
|
|
|
|
34.6
|
|
|
|
6.77
|
|
|
|
6.75
|
|
|
|
|
|
|
Total investment securities
|
|
|
4,869
|
|
|
|
4,169
|
|
|
|
700
|
|
|
|
16.8
|
|
|
|
5.35
|
|
|
|
4.26
|
|
Loans and leases:
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle market commercial and industrial
|
|
|
5,300
|
|
|
|
4,806
|
|
|
|
494
|
|
|
|
10.3
|
|
|
|
7.03
|
|
|
|
5.34
|
|
Middle market commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
1,348
|
|
|
|
1,659
|
|
|
|
(311
|
)
|
|
|
(18.7
|
)
|
|
|
7.76
|
|
|
|
5.79
|
|
Commercial
|
|
|
2,612
|
|
|
|
1,894
|
|
|
|
718
|
|
|
|
37.9
|
|
|
|
7.04
|
|
|
|
5.38
|
|
|
|
|
|
|
Middle market commercial real estate
|
|
|
3,960
|
|
|
|
3,553
|
|
|
|
|
|
|
|
|
|
|
|
7.28
|
|
|
|
5.57
|
|
Small business
|
|
|
2,290
|
|
|
|
2,207
|
|
|
|
83
|
|
|
|
3.8
|
|
|
|
6.90
|
|
|
|
5.91
|
|
|
|
|
|
|
Total commercial
|
|
|
11,550
|
|
|
|
10,566
|
|
|
|
984
|
|
|
|
9.3
|
|
|
|
7.09
|
|
|
|
5.54
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans
|
|
|
2,019
|
|
|
|
2,038
|
|
|
|
(19
|
)
|
|
|
(0.9
|
)
|
|
|
6.44
|
|
|
|
6.70
|
|
Automobile leases
|
|
|
2,157
|
|
|
|
2,465
|
|
|
|
(308
|
)
|
|
|
(12.5
|
)
|
|
|
4.99
|
|
|
|
4.91
|
|
|
|
|
|
|
Automobile loans and leases
|
|
|
4,176
|
|
|
|
4,503
|
|
|
|
(327
|
)
|
|
|
(7.3
|
)
|
|
|
5.69
|
|
|
|
5.72
|
|
Home equity
|
|
|
4,784
|
|
|
|
4,603
|
|
|
|
181
|
|
|
|
3.9
|
|
|
|
7.41
|
|
|
|
6.01
|
|
Residential mortgage
|
|
|
4,468
|
|
|
|
4,000
|
|
|
|
468
|
|
|
|
11.7
|
|
|
|
5.37
|
|
|
|
5.16
|
|
Other loans
|
|
|
596
|
|
|
|
486
|
|
|
|
110
|
|
|
|
22.6
|
|
|
|
6.61
|
|
|
|
6.32
|
|
|
|
|
|
|
Total consumer
|
|
|
14,024
|
|
|
|
13,592
|
|
|
|
432
|
|
|
|
3.2
|
|
|
|
6.22
|
|
|
|
5.67
|
|
|
|
|
|
|
Total loans and leases
|
|
|
25,574
|
|
|
|
24,158
|
|
|
|
1,416
|
|
|
|
5.9
|
|
|
|
6.61
|
|
|
|
5.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses
|
|
|
(288
|
)
|
|
|
(276
|
)
|
|
|
(12
|
)
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans and leases
|
|
|
25,286
|
|
|
|
23,882
|
|
|
|
1,404
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
31,105
|
|
|
|
29,188
|
|
|
|
1,917
|
|
|
|
6.6
|
|
|
|
6.38
|
%
|
|
|
5.37
|
%
|
|
|
|
|
|
|
|
Operating lease assets
|
|
|
176
|
|
|
|
469
|
|
|
|
(293
|
)
|
|
|
(62.5
|
)
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
798
|
|
|
|
887
|
|
|
|
(89
|
)
|
|
|
(10.0
|
)
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
500
|
|
|
|
218
|
|
|
|
282
|
|
|
|
N.M.
|
|
|
|
|
|
|
|
|
|
All other assets
|
|
|
2,309
|
|
|
|
2,115
|
|
|
|
194
|
|
|
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
34,600
|
|
|
$
|
32,601
|
|
|
$
|
1,999
|
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits non-interest bearing
|
|
$
|
3,515
|
|
|
$
|
3,333
|
|
|
$
|
182
|
|
|
|
5.5
|
%
|
|
|
|
%
|
|
|
|
%
|
Demand deposits interest bearing
|
|
|
7,671
|
|
|
|
7,800
|
|
|
|
(129
|
)
|
|
|
(1.7
|
)
|
|
|
2.54
|
|
|
|
1.54
|
|
Savings and other domestic time deposits
|
|
|
3,101
|
|
|
|
3,274
|
|
|
|
(173
|
)
|
|
|
(5.3
|
)
|
|
|
1.54
|
|
|
|
1.30
|
|
Certificates of deposit less than $100,000
|
|
|
4,141
|
|
|
|
2,609
|
|
|
|
1,532
|
|
|
|
58.7
|
|
|
|
3.95
|
|
|
|
3.46
|
|
|
|
|
|
|
Total core deposits
|
|
|
18,428
|
|
|
|
17,016
|
|
|
|
1,412
|
|
|
|
8.3
|
|
|
|
2.72
|
|
|
|
1.85
|
|
Domestic time deposits of $100,000 or more
|
|
|
1,609
|
|
|
|
1,249
|
|
|
|
360
|
|
|
|
28.8
|
|
|
|
4.51
|
|
|
|
3.10
|
|
Brokered deposits and negotiable CDs
|
|
|
3,203
|
|
|
|
2,987
|
|
|
|
216
|
|
|
|
7.2
|
|
|
|
4.91
|
|
|
|
3.05
|
|
Deposits in foreign offices
|
|
|
469
|
|
|
|
438
|
|
|
|
31
|
|
|
|
7.1
|
|
|
|
2.65
|
|
|
|
1.69
|
|
|
|
|
|
|
Total deposits
|
|
|
23,709
|
|
|
|
21,690
|
|
|
|
2,019
|
|
|
|
9.3
|
|
|
|
3.21
|
|
|
|
2.13
|
|
Short-term borrowings
|
|
|
1,856
|
|
|
|
1,240
|
|
|
|
616
|
|
|
|
49.7
|
|
|
|
3.87
|
|
|
|
1.91
|
|
Federal Home Loan Bank advances
|
|
|
1,505
|
|
|
|
1,166
|
|
|
|
339
|
|
|
|
29.1
|
|
|
|
4.17
|
|
|
|
2.96
|
|
Subordinated notes and other long-term debt
|
|
|
3,392
|
|
|
|
4,308
|
|
|
|
(916
|
)
|
|
|
(21.3
|
)
|
|
|
5.44
|
|
|
|
3.64
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
26,947
|
|
|
|
25,071
|
|
|
|
1,876
|
|
|
|
7.5
|
|
|
|
3.59
|
|
|
|
2.42
|
|
|
|
|
|
|
All other liabilities
|
|
|
1,275
|
|
|
|
1,624
|
|
|
|
(349
|
)
|
|
|
(21.5
|
)
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
2,863
|
|
|
|
2,573
|
|
|
|
290
|
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
34,600
|
|
|
$
|
32,601
|
|
|
$
|
1,999
|
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.79
|
|
|
|
2.95
|
|
Impact of non-interest bearing funds on margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.54
|
|
|
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.33
|
%
|
|
|
3.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Fully taxable equivalent (FTE) yields are calculated assuming a 35% tax rate.
|
|
(2)
|
|
Loan and lease and deposit average rates include impact of applicable derivatives and
non-deferrable fees.
|
|
(3)
|
|
For purposes of this analysis, non-accrual loans are reflected in the average balances of loans.
|
42
Provision for Credit Losses
(This section should be read in conjunction with Significant Factors 1, 3, and 6, and the Credit
Risk section.)
The provision for credit losses is the expense necessary to maintain the ALLL and the
allowance for unfunded loan commitments and letters of credit (AULC) at levels adequate to absorb
our estimate of probable inherent credit losses in the loan and lease portfolio and the portfolio
of unfunded loan commitments.
The provision for credit losses in the 2006 second quarter was $15.7 million, up $2.8 million
from the year-ago quarter but down $3.8 million from the 2006 first quarter. For the first six
months of 2006, the provision for credit losses was $35.3 million, up $2.5 million from the
comparable year-ago period.
Non-Interest Income
(This section should be read in conjunction with Significant Factors 1, 2, 3, and 6.)
Table 7 reflects non-interest income detail for each of the past five quarters and for the
first six months of 2006 and 2005.
Table 7 Non-Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
2Q06 vs 2Q05
|
(in thousands)
|
|
Second
|
|
First
|
|
Fourth
|
|
Third
|
|
Second
|
|
|
Amount
|
|
Percent
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
$
|
47,225
|
|
|
$
|
41,222
|
|
|
$
|
42,083
|
|
|
$
|
44,817
|
|
|
$
|
41,516
|
|
|
|
$
|
5,709
|
|
|
|
13.8
|
%
|
Trust services
|
|
|
22,676
|
|
|
|
21,278
|
|
|
|
20,425
|
|
|
|
19,671
|
|
|
|
19,113
|
|
|
|
|
3,563
|
|
|
|
18.6
|
|
Brokerage and insurance income
|
|
|
14,345
|
|
|
|
15,193
|
|
|
|
13,101
|
|
|
|
13,948
|
|
|
|
13,544
|
|
|
|
|
801
|
|
|
|
5.9
|
|
Bank owned life insurance income
|
|
|
10,604
|
|
|
|
10,242
|
|
|
|
10,389
|
|
|
|
10,104
|
|
|
|
10,139
|
|
|
|
|
465
|
|
|
|
4.6
|
|
Other service charges and fees
|
|
|
13,072
|
|
|
|
11,509
|
|
|
|
11,488
|
|
|
|
11,449
|
|
|
|
11,252
|
|
|
|
|
1,820
|
|
|
|
16.2
|
|
Mortgage banking income (loss)
|
|
|
20,355
|
|
|
|
17,832
|
|
|
|
10,909
|
|
|
|
21,116
|
|
|
|
(2,376
|
)
|
|
|
|
22,731
|
|
|
|
N.M.
|
|
Securities gains (losses)
|
|
|
(35
|
)
|
|
|
(20
|
)
|
|
|
(8,770
|
)
|
|
|
101
|
|
|
|
(343
|
)
|
|
|
|
308
|
|
|
|
89.8
|
|
Gains on sales of automobile loans
|
|
|
532
|
|
|
|
448
|
|
|
|
455
|
|
|
|
502
|
|
|
|
254
|
|
|
|
|
278
|
|
|
|
N.M.
|
|
Other income
|
|
|
19,394
|
|
|
|
22,440
|
|
|
|
22,900
|
|
|
|
9,770
|
|
|
|
24,974
|
|
|
|
|
(5,580
|
)
|
|
|
(22.3
|
)
|
|
|
|
|
|
|
|
|
Sub-total before operating lease
income
|
|
|
148,168
|
|
|
|
140,144
|
|
|
|
122,980
|
|
|
|
131,478
|
|
|
|
118,073
|
|
|
|
|
30,095
|
|
|
|
25.5
|
|
Operating lease income
|
|
|
14,851
|
|
|
|
19,390
|
|
|
|
24,342
|
|
|
|
29,262
|
|
|
|
38,097
|
|
|
|
|
(23,246
|
)
|
|
|
(61.0
|
)
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
$
|
163,019
|
|
|
$
|
159,534
|
|
|
$
|
147,322
|
|
|
$
|
160,740
|
|
|
$
|
156,170
|
|
|
|
$
|
6,849
|
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
YTD 2006 vs 2005
|
(in thousands)
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
|
|
|
|
Service charges on deposit accounts
|
|
$
|
88,447
|
|
|
$
|
80,934
|
|
|
$
|
7,513
|
|
|
|
9.3
|
%
|
Trust services
|
|
|
43,954
|
|
|
|
37,309
|
|
|
|
6,645
|
|
|
|
17.8
|
|
Brokerage and insurance income
|
|
|
29,538
|
|
|
|
26,570
|
|
|
|
2,968
|
|
|
|
11.2
|
|
Bank owned life insurance income
|
|
|
20,846
|
|
|
|
20,243
|
|
|
|
603
|
|
|
|
3.0
|
|
Other service charges and fees
|
|
|
24,581
|
|
|
|
21,411
|
|
|
|
3,170
|
|
|
|
14.8
|
|
Mortgage banking income
|
|
|
38,187
|
|
|
|
9,685
|
|
|
|
28,502
|
|
|
|
N.M.
|
|
Securities gains (losses)
|
|
|
(55
|
)
|
|
|
614
|
|
|
|
(669
|
)
|
|
|
N.M.
|
|
Gains on sales of automobile loans
|
|
|
980
|
|
|
|
254
|
|
|
|
726
|
|
|
|
N.M.
|
|
Other income
|
|
|
41,834
|
|
|
|
42,371
|
|
|
|
(537
|
)
|
|
|
(1.3
|
)
|
|
|
|
|
|
Sub-total before operating lease
income
|
|
|
288,312
|
|
|
|
239,391
|
|
|
|
48,921
|
|
|
|
20.4
|
|
Operating lease income
|
|
|
34,241
|
|
|
|
84,829
|
|
|
|
(50,588
|
)
|
|
|
(59.6
|
)
|
|
|
|
|
|
Total non-interest income
|
|
$
|
322,553
|
|
|
$
|
324,220
|
|
|
$
|
(1,667
|
)
|
|
|
(0.5)
|
%
|
|
|
|
|
|
N.M., not a meaningful value.
Table 8 details mortgage banking income and the net impact of MSR hedging activity. We
record MSR valuation changes in mortgage banking income, whereas MSR hedge-related trading activity
was recorded in other non-interest income, as well as in net interest income. Striking a mortgage
banking income sub-total before MSR valuation adjustments
43
provides a clearer understanding of the
underlying trends in mortgage banking income associated with the primary business activities of
origination, sales, and servicing. The net impact of MSR hedging analysis shows all of the MSR
valuation changes and related hedging activity so that the net impact can be more easily seen,
especially since the components are recorded in different income statement line items.
Mortgage banking income and the net impact of MSR hedging activities for each of the past five
quarters and for the first six months of 2006 and 2005, was as follows:
44
Table 8 Mortgage Banking Income and Net Impact of MSR Hedging
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
2Q06 vs 2Q05
|
(in thousands)
|
|
Second
|
|
First
|
|
Fourth
|
|
Third
|
|
Second
|
|
|
Amount
|
|
Percent
|
|
|
|
|
|
|
|
|
Mortgage Banking Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination fees
|
|
$
|
2,177
|
|
|
$
|
1,977
|
|
|
$
|
1,979
|
|
|
$
|
3,037
|
|
|
$
|
3,066
|
|
|
|
$
|
(889
|
)
|
|
|
(29.0
|
)%
|
Secondary marketing
|
|
|
4,914
|
|
|
|
2,022
|
|
|
|
3,346
|
|
|
|
3,408
|
|
|
|
1,749
|
|
|
|
|
3,165
|
|
|
|
N.M.
|
|
Servicing fees
|
|
|
5,995
|
|
|
|
5,925
|
|
|
|
5,791
|
|
|
|
5,532
|
|
|
|
5,464
|
|
|
|
|
531
|
|
|
|
9.7
|
|
Amortization of capitalized servicing
(4)
|
|
|
(3,293
|
)
|
|
|
(3,532
|
)
|
|
|
(3,785
|
)
|
|
|
(4,626
|
)
|
|
|
(5,187
|
)
|
|
|
|
1,894
|
|
|
|
36.5
|
|
Other mortgage banking income
|
|
|
2,280
|
|
|
|
2,227
|
|
|
|
3,193
|
|
|
|
3,308
|
|
|
|
2,763
|
|
|
|
|
(483
|
)
|
|
|
(17.5
|
)
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
12,073
|
|
|
|
8,619
|
|
|
|
10,524
|
|
|
|
10,659
|
|
|
|
7,855
|
|
|
|
|
4,218
|
|
|
|
53.7
|
|
MSR valuation adjustment
(3) (4)
|
|
|
8,281
|
|
|
|
9,213
|
|
|
|
385
|
|
|
|
10,457
|
|
|
|
(10,231
|
)
|
|
|
|
18,512
|
|
|
|
N.M.
|
|
|
|
|
|
|
|
|
|
Total mortgage banking income (loss)
|
|
$
|
20,354
|
|
|
$
|
17,832
|
|
|
$
|
10,909
|
|
|
$
|
21,116
|
|
|
$
|
(2,376
|
)
|
|
|
$
|
22,730
|
|
|
|
N.M.
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized mortgage servicing rights
(1)
|
|
$
|
136,244
|
|
|
$
|
123,257
|
|
|
$
|
91,259
|
|
|
$
|
85,940
|
|
|
$
|
71,150
|
|
|
|
$
|
65,094
|
|
|
|
91.5
|
%
|
MSR allowance
(1)
|
|
|
|
|
|
|
|
|
|
|
(404
|
)
|
|
|
(789
|
)
|
|
|
(11,246
|
)
|
|
|
|
11,246
|
|
|
|
N.M.
|
|
Total mortgages serviced for others
(1) (3)
|
|
|
7,725,000
|
|
|
|
7,585,000
|
|
|
|
7,276,000
|
|
|
|
7,081,000
|
|
|
|
6,951,000
|
|
|
|
|
774,000
|
|
|
|
11.1
|
|
MSR % of investor servicing portfolio
|
|
|
1.76
|
%
|
|
|
1.63
|
%
|
|
|
1.25
|
%
|
|
|
1.21
|
%
|
|
|
1.02
|
%
|
|
|
|
0.74
|
%
|
|
|
72.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Impact of MSR Hedging
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSR valuation adjustment
(3)
|
|
$
|
8,281
|
|
|
$
|
9,213
|
|
|
$
|
385
|
|
|
$
|
10,457
|
|
|
$
|
(10,231
|
)
|
|
|
$
|
18,512
|
|
|
|
N.M.
|
%
|
Net trading gains (losses) related to MSR hedging
(2)
|
|
|
(6,739
|
)
|
|
|
(4,638
|
)
|
|
|
(2,091
|
)
|
|
|
(12,831
|
)
|
|
|
5,727
|
|
|
|
|
(12,466
|
)
|
|
|
N.M.
|
|
Net interest income related to MSR hedging
|
|
|
|
|
|
|
|
|
|
|
109
|
|
|
|
233
|
|
|
|
512
|
|
|
|
|
512
|
)
|
|
|
N.M.
|
|
|
|
|
|
|
|
|
|
Net impact of MSR hedging
|
|
$
|
1,542
|
|
|
$
|
4,575
|
|
|
$
|
(1,597
|
)
|
|
$
|
(2,141
|
)
|
|
$
|
(3,992
|
)
|
|
|
$
|
5,534
|
|
|
|
N.M.
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
YTD 2006 vs 2005
|
(in thousands)
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
|
|
|
|
Mortgage Banking Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination fees
|
|
$
|
4,154
|
|
|
$
|
5,765
|
|
|
$
|
(1,611
|
)
|
|
|
(27.9
|
)%
|
Secondary marketing
|
|
|
6,936
|
|
|
|
4,232
|
|
|
|
2,704
|
|
|
|
63.9
|
|
Servicing fees
|
|
|
11,920
|
|
|
|
10,858
|
|
|
|
1,062
|
|
|
|
9.8
|
|
Amortization of capitalized servicing
(4)
|
|
|
(6,825
|
)
|
|
|
(9,948
|
)
|
|
|
3,123
|
|
|
|
(31.4
|
)
|
Other mortgage banking income
|
|
|
4,507
|
|
|
|
5,249
|
|
|
|
(742
|
)
|
|
|
(14.1
|
)
|
|
|
|
|
|
Sub-total
|
|
|
20,692
|
|
|
|
16,156
|
|
|
|
4,536
|
|
|
|
28.1
|
|
MSR valuation adjustment
(3) (4)
|
|
|
17,494
|
|
|
|
(6,471
|
)
|
|
|
23,965
|
|
|
|
N.M.
|
|
|
|
|
|
|
Total mortgage banking income (loss)
|
|
$
|
38,186
|
|
|
$
|
9,685
|
|
|
$
|
28,501
|
|
|
|
N.M.
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized mortgage servicing rights
(1)
|
|
$
|
136,244
|
|
|
$
|
71,150
|
|
|
$
|
65,094
|
|
|
|
91.5
|
%
|
MSR allowance
(1)
|
|
|
|
|
|
|
(11,246
|
)
|
|
|
11,246
|
|
|
|
N.M.
|
|
Total mortgages serviced for others
(1) (3)
|
|
|
7,725,000
|
|
|
|
6,951,00
|
|
|
|
0 774,000
|
|
|
|
11.1
|
|
MSR % of investor servicing portfolio
|
|
|
1.76
|
%
|
|
|
1.02
|
%
|
|
|
0.74
|
%
|
|
|
72.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Impact of MSR Hedging
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSR valuation adjustment
(3)
|
|
$
|
17,494
|
|
|
$
|
(6,471
|
)
|
|
$
|
23,965
|
|
|
|
N.M.
|
%
|
Net trading gains (losses) related to MSR hedging
(2)
|
|
|
(11,377
|
)
|
|
|
1,545
|
|
|
|
(12,922
|
)
|
|
|
N.M.
|
|
Net interest income related to MSR hedging
|
|
|
|
|
|
|
1,346
|
|
|
|
(1,346
|
)
|
|
|
N.M.
|
|
|
|
|
|
|
Net impact of MSR hedging
|
|
$
|
6,117
|
|
|
$
|
(3,580
|
)
|
|
$
|
9,697
|
|
|
|
N.M.
|
%
|
|
|
|
|
|
N.M., not a meaningful value.
|
|
|
(1)
|
|
At period end.
|
|
(2)
|
|
Included in other non-interest income.
|
|
(3)
|
|
The first quarter of 2006 reflects the adoption of Statement No. 156, which records MSRs at fair value. Prior periods reflect temporary impairment or recovery, based on accounting for MSRs at the lower of cost or market.
|
|
(4)
|
|
The change in fair value for the period presented in footnote 5 included both the MSR valuation adjustment and amortization of capitalized servicing.
|
45
2006 Second Quarter versus 2005 Second Quarter
Non-interest income increased $6.8 million, or 4%, from the year-ago quarter, despite a $23.2
million decline in operating lease income. That portfolio continued to run off since no automobile
operating leases have been originated since April 2002. Non-interest income before operating lease
income increased $30.1 million, or 25%, of which $7.2 million was merger-related. The drivers of
the $30.1 million increase included:
|
|
|
$22.7 million increase ($0.3 million merger-related) in mortgage banking income,
reflecting an $18.5 million positive impact of MSR valuation adjustments as well as higher
secondary marketing income in the current quarter.
|
|
|
|
|
$5.7 million, or 14% ($1.6 million merger-related), increase in service charges on
deposit accounts, reflecting a $4.7 million, or 18%, increase in personal service charges,
primarily NSF/OD, and a $1.0 million, or 6%, increase in commercial service charge income.
|
|
|
|
|
$3.6 million, or 19% ($1.7 million merger-related), increase in trust services income,
reflecting (1) a $2.0 million increase in higher personal trust income, mostly
merger-related, as managed assets increased 19%, (2) a $0.9 million increase in Huntington
Fund fees reflecting 17% managed asset growth, and (3) a $0.6 million increase in
institutional trust income due to higher servicing fees with less than one-third of the
growth being merger-related.
|
|
|
|
|
$1.8 million, or 16% ($0.3 million merger-related) increase in other service charges and
fees, reflecting a $1.4 million, or 18%, increase in fees generated by higher debit card
volume.
|
|
|
|
|
$0.8 million, or 6% ($0.5 million merger-related), increase in brokerage and insurance
income, reflecting higher brokerage income including a $1.3 million, or 21%, increase in
annuity fee income as annuity sales volume increased 16%
.
|
Partially offset by:
|
|
|
$5.6 million, or 22%, decline in other income, reflecting a $12.5 million negative
impact in MSR hedge-related trading activities as the current quarter included a $6.7
million trading loss compared with a $5.7 million trading gain in the year-ago quarter.
This negative impact was partially offset by a $3.0 million positive impact from higher
equity investment gains, as well as a $2.1 million merger-related increase.
|
2006 Second Quarter versus 2006 First Quarter
Non-interest income increased $3.5 million, or 2%, from the 2006 first quarter. However,
excluding the impact of a $4.5 million decline in operating lease income as that portfolio
continued to run off, non-interest income before operating lease income increased $8.0 million, or
6% ($4.8 million merger-related). Contributing to the $8.0 million increase was:
|
|
|
$6.0 million, or 15% ($1.1 million merger-related), increase in service charges on
deposit accounts. This reflected a $4.7 million, or 18%, increase in personal service
charges, primarily NSF/OD, and a $1.3 million, or 8%, increase in commercial service
charges.
|
|
|
|
|
$2.5 million, or 14% ($0.2 million merger-related), increase in mortgage banking income,
reflecting a $2.9 million increase in secondary marketing income.
|
|
|
|
|
$1.6 million, or 14% ($0.2 million merger-related), increase in other service charges
and fees reflecting an increase in debit card fees.
|
|
|
|
|
$1.4 million, or 7% ($1.1 million merger-related), increase in trust services income,
reflecting (1) $0.8 million increase in personal trust income, all merger-related, (2) $0.3
million increase in Huntington Fund fees due to 3% growth in managed assets, and (3) $0.2
million increase in institutional trust servicing fees, primarily merger-related
.
|
Partially offset by:
|
|
|
$3.0 million, or 14%, decline in other income, primarily reflecting the negative impact
of a $2.1 million increase in MSR hedge-related trading losses, $1.5 million decline in
other capital market-related income, and losses from low income housing tax credit
investments in the current quarter, which were only partially offset by the benefit from a
$1.4 million merger-related increase.
|
46
|
|
|
$0.8 million, or 6%, decline in brokerage and insurance income despite a $0.3 million
positive merger-related impact, due primarily to lower insurance income, reflecting lower
sales of an automobile loan insurance product.
|
2006 First Six Months versus 2005 First Six Months
Non-interest income declined $1.7 million from the year-ago six-month period, reflecting a
$50.6 million decline in operating lease income. Non-interest income before operating lease
income increased $48.9 million, or 20% ($9.6 million merger-related). The drivers of the $48.9
million increase included:
|
|
|
$28.5 million increase ($0.3 million merger-related) in mortgage banking income,
reflecting a $17.5 million positive impact of MSR valuation adjustments for the first six
months of 2006, and a $6.5 million MSR temporary impairment in the year-ago period before
hedge-related trading activity, as well as the positive impact of lower amortization of
capitalized servicing and higher secondary marketing income.
|
|
|
|
|
$7.5 million, or 9% ($2.1 million merger-related), increase in service charges on
deposit accounts, reflecting a $7.1 million, or 14%, increase in personal service charges,
primarily NSF/OD and volume related.
|
|
|
|
|
$6.6 million, or 18% ($2.2 million merger-related), increase in trust services income,
reflecting (1) a $3.3 million increase in higher personal trust income, (2) a $1.9 million
increase in Huntington Fund fees, and (3) a $1.2 million increase in institutional trust
income.
|
|
|
|
|
$3.2 million, or 15% ($0.4 million merger-related), increase in other service charges
and fees, reflecting a $2.6 million, or 17%, increase in fees generated by higher debit
card volume.
|
|
|
|
|
$3.0 million, or 11% ($0.6 million merger-related), increase in brokerage and insurance
income, reflecting higher brokerage income including a $2.5 million, or 13%, increase in
annuity fee income
.
|
47
Non-Interest Expense
(This section should be read in conjunction with Significant Factors 1, 3, 5, and 6.)
Table 9 reflects non-interest expense detail for each of the last five quarters and for the
first six months of 2006 and 2005.
Table 9 Non-Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
2Q06 vs 2Q05
|
(in thousands)
|
|
Second
|
|
First
|
|
Fourth
|
|
Third
|
|
Second
|
|
|
Amount
|
|
Percent
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
107,249
|
|
|
$
|
101,458
|
|
|
$
|
91,858
|
|
|
$
|
93,209
|
|
|
$
|
98,283
|
|
|
|
$
|
8,96
|
|
|
|
6 9.1
|
%
|
Benefits
|
|
|
30,655
|
|
|
|
30,099
|
|
|
|
24,253
|
|
|
|
24,267
|
|
|
|
25,807
|
|
|
|
|
4,84
|
|
|
|
8 18.8
|
|
|
|
|
|
|
|
|
|
Personnel costs
|
|
|
137,904
|
|
|
|
131,557
|
|
|
|
116,111
|
|
|
|
117,476
|
|
|
|
124,090
|
|
|
|
|
13,814
|
|
|
|
11.1
|
%
|
Net occupancy
|
|
|
17,927
|
|
|
|
17,966
|
|
|
|
17,940
|
|
|
|
16,653
|
|
|
|
17,257
|
|
|
|
|
670
|
|
|
|
3.9
|
|
Outside data processing and other services
|
|
|
19,569
|
|
|
|
19,851
|
|
|
|
19,693
|
|
|
|
18,062
|
|
|
|
18,113
|
|
|
|
|
1,456
|
|
|
|
8.0
|
|
Equipment
|
|
|
18,009
|
|
|
|
16,503
|
|
|
|
16,093
|
|
|
|
15,531
|
|
|
|
15,637
|
|
|
|
|
2,372
|
|
|
|
15.2
|
|
Professional services
|
|
|
6,292
|
|
|
|
5,365
|
|
|
|
7,440
|
|
|
|
8,323
|
|
|
|
9,347
|
|
|
|
|
(3,055
|
)
|
|
|
(32.7
|
)
|
Marketing
|
|
|
10,374
|
|
|
|
7,301
|
|
|
|
7,145
|
|
|
|
6,364
|
|
|
|
6,934
|
|
|
|
|
3,440
|
|
|
|
49.6
|
|
Telecommunications
|
|
|
4,990
|
|
|
|
4,825
|
|
|
|
4,453
|
|
|
|
4,512
|
|
|
|
4,801
|
|
|
|
|
189
|
|
|
|
3.9
|
|
Printing and supplies
|
|
|
3,764
|
|
|
|
3,074
|
|
|
|
3,084
|
|
|
|
3,102
|
|
|
|
3,293
|
|
|
|
|
471
|
|
|
|
14.3
|
|
Amortization of intangibles
|
|
|
2,992
|
|
|
|
1,075
|
|
|
|
218
|
|
|
|
203
|
|
|
|
204
|
|
|
|
|
2,788
|
|
|
|
N.M.
|
|
Other expense
|
|
|
19,734
|
|
|
|
16,291
|
|
|
|
19,452
|
|
|
|
20,003
|
|
|
|
19,581
|
|
|
|
|
153
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
Sub-total before operating lease expense
|
|
|
241,555
|
|
|
|
223,808
|
|
|
|
211,629
|
|
|
|
210,229
|
|
|
|
219,257
|
|
|
|
|
22,298
|
|
|
|
10.2
|
|
Operating lease expense
|
|
|
10,804
|
|
|
|
14,607
|
|
|
|
18,726
|
|
|
|
22,823
|
|
|
|
28,879
|
|
|
|
|
(18,075
|
)
|
|
|
(62.6
|
)
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
$
|
252,359
|
|
|
$
|
238,415
|
|
|
$
|
230,355
|
|
|
$
|
233,052
|
|
|
$
|
248,136
|
|
|
|
$
|
4,223
|
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
YTD 2006 vs 2005
|
(in thousands)
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
|
|
|
|
Salaries
|
|
$
|
208,707
|
|
|
$
|
194,522
|
|
|
$
|
14,185
|
|
|
|
7.3
|
%
|
Benefits
|
|
|
60,754
|
|
|
|
53,549
|
|
|
|
7,205
|
|
|
|
13.5
|
|
|
|
|
|
|
Personnel costs
|
|
|
269,461
|
|
|
|
248,071
|
|
|
|
21,390
|
|
|
|
8.6
|
|
Net occupancy
|
|
|
35,893
|
|
|
|
36,499
|
|
|
|
(606
|
)
|
|
|
(1.7
|
)
|
Outside data processing and other services
|
|
|
39,420
|
|
|
|
36,883
|
|
|
|
2,537
|
|
|
|
6.9
|
|
Equipment
|
|
|
34,512
|
|
|
|
31,500
|
|
|
|
3,012
|
|
|
|
9.6
|
|
Professional services
|
|
|
11,657
|
|
|
|
18,806
|
|
|
|
(7,149
|
)
|
|
|
(38.0
|
)
|
Marketing
|
|
|
17,675
|
|
|
|
12,770
|
|
|
|
4,905
|
|
|
|
38.4
|
|
Telecommunications
|
|
|
9,815
|
|
|
|
9,683
|
|
|
|
132
|
|
|
|
1.4
|
|
Printing and supplies
|
|
|
6,838
|
|
|
|
6,387
|
|
|
|
451
|
|
|
|
7.1
|
|
Amortization of intangibles
|
|
|
4,067
|
|
|
|
408
|
|
|
|
3,659
|
|
|
|
N.M.
|
|
Other expense
|
|
|
36,025
|
|
|
|
38,579
|
|
|
|
(2,554
|
)
|
|
|
(6.6
|
)
|
|
|
|
|
|
Sub-total before operating lease expense
|
|
|
465,363
|
|
|
|
439,586
|
|
|
|
25,777
|
|
|
|
5.9
|
|
Operating lease expense
|
|
|
25,411
|
|
|
|
66,827
|
|
|
|
(41,416
|
)
|
|
|
(62.0
|
)
|
|
|
|
|
|
Total non-interest expense
|
|
|
490,774
|
|
|
|
506,413
|
|
|
$
|
(15,639
|
)
|
|
|
(3.1
|
)%
|
|
|
|
|
|
N.M., not a meaningful value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Second Quarter versus 2005 Second Quarter
Non-interest expense increased $4.2 million, or 2%, from the year-ago quarter, despite an
$18.1 million decline in operating lease expense as that portfolio continued to run off.
Non-interest expense before operating lease expense increased $22.3 million, or 10%, from the
year-ago quarter, with $20.6 million attributable to Unizan ($18.0 merger-related plus $2.6 million
of merger costs). The primary drivers of the $22.3 million increase were:
|
|
|
$13.8 million, or 11%, increase in personnel expense with Unizan contributing $8.4
million of the increase ($7.7
|
48
|
|
|
million merger-related plus $0.7 million of merger costs).
The remaining increase of $5.3 million reflected an increase of $4.3 million due to the
expensing of stock options, which began in 2006, and the annual merit increases for exempt
employees, partially offset by personnel expense synergies resulting from the Unizan
merger.
|
|
|
|
|
$3.4 million, or 50%, higher marketing expense with Unizan contributing $0.9 million of
the increase ($0.3 million merger-related plus $0.6 million of merger costs), due primarily
to television commercial advertising, including up-front development costs incurred during
the quarter.
|
|
|
|
|
$2.8 million increase in the amortization of intangibles, all merger-related.
|
|
|
|
|
$2.4 million, or 15%, increase in equipment expense with Unizan contributing $0.6
million of the increase, primarily merger-related, reflecting higher depreciation expense.
|
|
|
|
|
$1.5 million, or 8%, increase in outside data processing and other services with Unizan
contributing $1.2 million of the increase ($0.5 million merger-related plus $0.7 million of
merger costs), reflecting higher debit card processing expense.
|
Partially offset by:
|
|
|
$3.1 million, or 33%, decline in professional services. Though Unizan added $1.6
million to current period expense ($1.5 million merger-related plus $0.1 million of merger
costs), this was more than offset by lower consulting expense as the year-ago quarter
included SEC and regulatory-related expenses, as well as other consulting costs.
|
2006 Second Quarter versus 2006 First Quarter
Non-interest expense increased $13.9 million, or 6%, from the 2006 first quarter despite a
$3.8 million decline in operating lease expense as that portfolio continued to run off.
Non-interest expense before operating lease expense increased $17.7 million, or 8%, with $13.6
million attributable to Unizan ($12.0 million merger-related and $1.6 million of merger-costs).
The primary drivers of the $17.7 million increase included:
|
|
|
$6.3 million, or 5%, increase in personnel costs with Unizan contributing $5.7 million
of the increase ($5.2 million merger-related plus $0.5 million of merger costs). The
remaining increase of $0.6 million reflected an increase due to annual merit increases for
exempt employees effective March 1, partially offset by personnel expense synergies
resulting from the Unizan merger.
|
|
|
|
|
$3.4 million, or 21%, increase in other expense with Unizan contributing $2.1 million of
the increase, primarily merger-related.
|
|
|
|
|
$3.1 million, or 42%, higher marketing expense with Unizan contributing $0.6 million of
the increase ($0.2 million merger-related plus $0.4 million of merger costs), due to
television commercial costs.
|
|
|
|
|
$1.9 million increase in amortization of intangibles, all merger-related.
|
|
|
|
|
$1.5 million, or 9%, increase in equipment expense with Unizan contributing $0.4 million
of the increase, primarily merger-related, reflecting higher depreciation expense
associated with the upgrade of a number of operating and administrative systems.
|
2006 First Six Months versus 2005 First Six Months
Non-interest expense decreased $15.6 million, or 3%, from the year-ago six-month period,
reflecting a $41.4 million decline in operating lease expense as that portfolio continued to run
off. Non-interest expense before operating lease expense increased $25.8 million, or 6%, with
$27.5 million attributable to Unizan ($23.9 million merger-related plus $3.7 million of merger costs). The
primary drivers of the $25.8 million increase were:
|
|
|
$21.4 million, or 9%, increase in personnel expense with Unizan contributing $11.2
million of the increase ($10.3 million merger-related plus $0.9 million of merger costs). The remaining increase of
$10.2 million reflected an increase of $8.5 million due to the expensing of stock options,
which began in 2006, and the annual merit increases for exempt employees, partially offset
by personnel expense synergies resulting from the Unizan merger.
|
49
|
|
|
$4.9 million, or 38%, higher marketing expense with Unizan contributing $1.1 million of
the increase ($0.4 million merger-related plus $0.7 million of merger costs), due primarily
to 2006 second quarter television commercial advertising, including up-front development
costs incurred in the period.
|
|
|
|
|
$3.7 million increase in the amortization of intangibles, all merger-related.
|
|
|
|
|
$3.0 million, or 10%, increase in equipment expense with Unizan contributing $0.7
million of the increase, primarily merger-related, reflecting higher depreciation expense.
|
|
|
|
|
$2.5 million, or 7%, increase in outside data processing and other services with Unizan
contributing $2.0 million of the increase ($0.7 million merger-related plus $1.3 million of
merger costs), reflecting outside contract programming and debit card processing expense.
|
Partially offset by:
|
|
|
$7.1 million, or 38%, decline in professional services. Though Unizan added $2.1
million to 2006 six-month expense ($2.0 million merger-related plus $0.1 million of merger
costs), this was more than offset by lower consulting expense as the year-ago period
included $3.7 million of SEC and regulatory-related expenses, as well as a $3.6 million
decline in other consulting and collections costs.
|
|
|
|
$2.6 million, or 7%, decline in other expenses despite the addition of $4.1 million of merger-related expenses. Reductions in other expense were recorded in
lease residual value insurance (due to lower volumes), minority interest expense, OREO expenses, and franchise taxes.
|
Operating Lease Assets
(This section should be read in conjunction with Significant Factor 3 and Lease Residual Risk
section.)
Operating lease assets primarily represent automobile leases originated before May 2002. This
operating lease portfolio is running off over time since all automobile lease originations after
April 2002 have been recorded as direct financing leases and are reported in the automobile loan
and lease category in earning assets. As a result, the non-interest income and non-interest expense
associated with the operating lease portfolio has declined.
Operating lease assets performance for each of the last five quarters and for the first six
months of 2006 and 2005 was as follows:
50
Table 10 Operating Lease Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
2Q06 vs 2Q05
|
(in thousands)
|
|
Second
|
|
First
|
|
Fourth
|
|
Third
|
|
Second
|
|
|
Amount
|
|
Percent
|
|
|
|
|
|
|
Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average operating lease assets outstanding
|
|
$
|
151,527
|
|
|
$
|
199,998
|
|
|
$
|
245,346
|
|
|
$
|
308,952
|
|
|
$
|
408,798
|
|
|
|
$
|
(257,271
|
)
|
|
|
(62.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net rental income
|
|
$
|
13,386
|
|
|
$
|
17,515
|
|
|
$
|
21,674
|
|
|
$
|
26,729
|
|
|
$
|
34,562
|
|
|
|
$
|
(21,176
|
)
|
|
|
(61.3
|
)%
|
Fees
|
|
|
669
|
|
|
|
732
|
|
|
|
1,482
|
|
|
|
1,419
|
|
|
|
1,773
|
|
|
|
|
(1,104
|
)
|
|
|
(62.3
|
)
|
Recoveries early terminations
|
|
|
796
|
|
|
|
1,143
|
|
|
|
1,186
|
|
|
|
1,114
|
|
|
|
1,762
|
|
|
|
|
(966
|
)
|
|
|
(54.8
|
)
|
|
|
|
|
|
|
Total operating lease income
|
|
|
14,851
|
|
|
|
19,390
|
|
|
|
24,342
|
|
|
|
29,262
|
|
|
|
38,097
|
|
|
|
|
(23,246
|
)
|
|
|
(61.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and residual losses at termination
|
|
|
10,229
|
|
|
|
13,437
|
|
|
|
17,223
|
|
|
|
20,856
|
|
|
|
26,560
|
|
|
|
|
(16,331
|
)
|
|
|
(61.5
|
)
|
Losses early terminations
|
|
|
575
|
|
|
|
1,170
|
|
|
|
1,503
|
|
|
|
1,967
|
|
|
|
2,319
|
|
|
|
|
(1,744
|
)
|
|
|
(75.2
|
)
|
|
|
|
|
|
|
Total operating lease expense
|
|
|
10,804
|
|
|
|
14,607
|
|
|
|
18,726
|
|
|
|
22,823
|
|
|
|
28,879
|
|
|
|
|
(18,075
|
)
|
|
|
(62.6
|
)
|
|
|
|
|
|
|
Net earnings contribution
|
|
$
|
4,047
|
|
|
$
|
4,783
|
|
|
$
|
5,616
|
|
|
$
|
6,439
|
|
|
$
|
9,218
|
|
|
|
$
|
(5,171
|
)
|
|
|
(56.1
|
)%
|
|
|
|
|
|
|
Earnings ratios
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net rental income
|
|
|
35.3
|
%
|
|
|
35.0
|
%
|
|
|
35.3
|
%
|
|
|
34.6
|
%
|
|
|
33.8
|
%
|
|
|
|
1.5
|
%
|
|
|
4.4
|
%
|
Depreciation and residual losses at termination
|
|
|
27.0
|
|
|
|
26.9
|
|
|
|
28.1
|
|
|
|
27.0
|
|
|
|
26.0
|
|
|
|
|
1.0
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
YTD 2006 vs 2005
|
(in thousands)
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
|
|
Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average operating lease assets outstanding
|
|
$
|
175,629
|
|
|
$
|
468,688
|
|
|
$
|
(293,059
|
)
|
|
|
(62.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net rental income
|
|
$
|
30,901
|
|
|
$
|
78,116
|
|
|
$
|
(47,215
|
)
|
|
|
(60.4
|
)%
|
Fees
|
|
|
1,401
|
|
|
|
3,630
|
|
|
|
(2,229
|
)
|
|
|
(61.4
|
)
|
Recoveries early termin tions
|
|
|
1,939
|
|
|
|
3,083
|
|
|
|
(1,144
|
)
|
|
|
(37.1
|
)
|
|
|
|
Total operating lease income
|
|
|
34,241
|
|
|
|
84,829
|
|
|
|
(50,588
|
)
|
|
|
(59.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and residual losses at termination
|
|
|
23,666
|
|
|
|
61,263
|
|
|
|
(37,597
|
)
|
|
|
(61.4
|
)
|
Losses early terminations
|
|
|
1,745
|
|
|
|
5,564
|
|
|
|
(3,819
|
)
|
|
|
(68.6
|
)
|
|
|
|
Total operating lease expense
|
|
|
25,411
|
|
|
|
66,827
|
|
|
|
(41,416
|
)
|
|
|
(62.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings contribution
|
|
$
|
8,830
|
|
|
$
|
18,002
|
|
|
$
|
(9,172
|
)
|
|
|
(50.9
|
)%
|
|
|
|
Earnings ratios
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net rental income
|
|
|
35.2
|
%
|
|
|
33.3
|
%
|
|
|
1.9
|
%
|
|
|
5.7
|
%
|
Depreciation and residual losses at termination
|
|
|
26.9
|
|
|
|
26.1
|
|
|
|
0.8
|
|
|
|
3.1
|
|
|
|
|
(1)
|
|
As a percent of average operating lease assets, annualized.
|
51
2006 Second Quarter versus 2005 Second Quarter and 2006 First Quarter
Average operating lease assets in the 2006 second quarter were $0.2 billion, down $0.3
billion, or 63%, from the year-ago quarter and down 24% from the 2006 first quarter. This
reflected the continued run-off of this portfolio as no new automobile operating leases have been
originated since April 2002, and operating lease asset balances will continue to decline through
both depreciation and lease terminations.
(For a discussion of operating lease accounting,
residual value loss determination, and related residual value insurance, see Note 1, Significant
Accounting Policies and the Lease Residual Risk section of the Companys 2005
Form 10-K
.)
Reflecting the continued run-off of automobile operating lease assets, the net earnings
contribution from operating lease assets was $4.0 million in the 2006 second quarter, down $5.2
million, or 56%, from the year-ago quarter and down $0.7 million, or 15%, from the 2006 first
quarter.
Operating lease income, which totaled $14.9 million in the 2006 second quarter, represented 9%
of total non-interest income in the quarter. Operating lease income was down $23.2 million, or 61%,
from the year-ago quarter and $4.5 million, or 23%, from the 2006 first quarter, reflecting the
declines in average operating lease assets. Net rental income was down 61% and 24%, respectively,
from the year-ago and 2006 first quarters. Fees declined 62% from the year-ago quarter and 9% from
the prior quarter. Recoveries from early terminations decreased 55% from the year-ago quarter and
30% from the 2006 first quarter.
Operating lease expense totaled $10.8 million and represented 4% of total non-interest expense
in the current quarter. Operating lease expense was down $18.1 million, or 63%, from the year-ago
quarter and down $3.8 million, or 26%, from the 2006 first quarter. Losses on early terminations,
which are included in total operating lease expense, declined 75% from the year-ago quarter and 51%
from the prior quarter.
2006 First Six Months versus 2005 First Six Months
Average operating lease assets in the 2006 first six-month period were $0.2 billion, down $0.3
billion, or 62% from the comparable year-ago period as this portfolio continued to run-off.
Reflecting this decline in average operating lease assets, the net earnings contribution from
operating lease assets was $8.8 million in the 2006 first six-month period, down $9.2 million, or
51%, from the comparable year-ago period.
Operating lease income, which totaled $34.2 million for the 2006 first six-month period,
represented 11% of total non-interest income, and was down $50.6 million, or 60%, from the
comparable year-ago period. Net rental income was down $47.2 million, or 60%. Fees declined $2.2
million, or 61%, from the comparable year-ago period. Recoveries from early terminations were down
37% from the year-ago period. Operating lease expense totaled $25.4 million, down $41.4 million, or
62%, from the comparable year-ago six-month period.
Provision for Income Taxes
(This section should be read in conjunction with Significant Factor 4.)
The provision for income taxes in the 2006 second quarter was $45.5 million and represented an
effective tax rate on income before taxes of 29.0%. The provision for income taxes increased $14.9
million from the year-ago quarter, primarily due to an increase in pre-tax earnings and the
recognition of the effect of federal tax refunds on income tax expense in the 2005 second quarter.
The effective tax rate in the year-ago quarter was 22.3%, and included the after tax positive
impact on net income due to a federal tax loss carryback.
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 2002
and 2003 and the 2003 federal income tax return for Unizan. 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.
52
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 their financial obligations
under agreed upon terms. Market risk represents the risk of loss due to changes in the market value
of assets and liabilities due to changes in interest rates, exchange rates, residual values, 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.
We follow a formal policy to identify, measure, and document the key risks facing the company,
how those risks can be controlled or mitigated, and how we monitor the controls to ensure that they
are effective. Our chief risk officer is responsible for ensuring that appropriate systems of
controls are in place for managing and monitoring operational risk across the company. Potential
risk concerns are shared with the board of directors, as appropriate. Our internal audit department
performs ongoing independent reviews of the risk management process and ensures the adequacy of
documentation. The results of these reviews are reported regularly to the audit committee of the
board of directors.
Some of the more significant processes used to manage and control credit, market, liquidity,
and operational risks are described in the following paragraphs.
Credit Risk
Credit risk is the risk of loss due to 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 markets.
The checks and balances in the credit process and the independence of the credit
administration and risk management functions are designed to accurately assess the level of credit
risk being accepted, facilitate the early recognition of credit problems when they do occur, and
provide for effective problem asset management and resolution.
Credit Exposure Mix
(This section should be read in conjunction with Significant Factors 3 and 6.)
An overall corporate objective is to avoid undue portfolio concentrations. As shown in Table
11, at June 30, 2006, total credit exposure was $26.5 billion. Of this amount, $14.3 billion, or
54%, represented total consumer loans and leases, $12.0 billion, or 45%, represented total
commercial loans and leases, and $0.1 billion, or less than 1%, represented operating lease assets.
53
Table 11 Credit Exposure Composition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
(in thousands)
|
|
June 30,
|
|
March 31,
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
By Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle market commercial and industrial
|
|
$
|
5,595,454
|
|
|
|
21.1
|
%
|
|
$
|
5,288,710
|
|
|
|
20.1
|
%
|
|
$
|
5,084,244
|
|
|
|
20.6
|
%
|
|
$
|
4,856,608
|
|
|
|
19.6
|
%
|
|
$
|
4,947,640
|
|
|
|
19.9
|
%
|
Middle market commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
1,173,454
|
|
|
|
4.4
|
|
|
|
1,366,890
|
|
|
|
5.2
|
|
|
|
1,521,897
|
|
|
|
6.2
|
|
|
|
1,770,543
|
|
|
|
7.1
|
|
|
|
1,692,748
|
|
|
|
6.8
|
|
Commercial
|
|
|
2,731,684
|
|
|
|
10.3
|
|
|
|
3,046,368
|
|
|
|
11.6
|
|
|
|
2,015,498
|
|
|
|
8.2
|
|
|
|
1,933,610
|
|
|
|
7.8
|
|
|
|
1,948,195
|
|
|
|
7.8
|
|
|
|
|
|
|
Middle market commercial real estate
|
|
|
3,905,138
|
|
|
|
14.7
|
|
|
|
4,413,258
|
|
|
|
16.8
|
|
|
|
3,537,395
|
|
|
|
14.4
|
|
|
|
3,704,153
|
|
|
|
14.9
|
|
|
|
3,640,943
|
|
|
|
14.6
|
|
Small business
|
|
|
2,531,176
|
|
|
|
9.6
|
|
|
|
2,116,063
|
|
|
|
8.1
|
|
|
|
2,223,740
|
|
|
|
9.1
|
|
|
|
2,112,171
|
|
|
|
8.5
|
|
|
|
2,136,685
|
|
|
|
8.7
|
|
|
|
|
|
|
Total commercial
|
|
|
12,031,768
|
|
|
|
45.4
|
|
|
|
11,818,031
|
|
|
|
45.0
|
|
|
|
10,845,379
|
|
|
|
44.1
|
|
|
|
10,672,932
|
|
|
|
43.0
|
|
|
|
10,725,268
|
|
|
|
43.2
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans
|
|
|
2,059,836
|
|
|
|
7.8
|
|
|
|
2,053,777
|
|
|
|
7.8
|
|
|
|
1,985,304
|
|
|
|
8.0
|
|
|
|
2,063,285
|
|
|
|
8.3
|
|
|
|
2,045,771
|
|
|
|
8.2
|
|
Automobile leases
|
|
|
2,042,215
|
|
|
|
7.7
|
|
|
|
2,154,883
|
|
|
|
8.2
|
|
|
|
2,289,015
|
|
|
|
9.3
|
|
|
|
2,381,004
|
|
|
|
9.6
|
|
|
|
2,458,432
|
|
|
|
9.9
|
|
Home equity
|
|
|
4,888,958
|
|
|
|
18.5
|
|
|
|
4,816,196
|
|
|
|
18.3
|
|
|
|
4,638,841
|
|
|
|
18.8
|
|
|
|
4,684,904
|
|
|
|
18.9
|
|
|
|
4,683,577
|
|
|
|
18.8
|
|
Residential mortgage
|
|
|
4,739,814
|
|
|
|
17.9
|
|
|
|
4,604,705
|
|
|
|
17.5
|
|
|
|
4,193,139
|
|
|
|
17.0
|
|
|
|
4,180,350
|
|
|
|
16.9
|
|
|
|
4,152,203
|
|
|
|
16.7
|
|
Other loans
|
|
|
591,990
|
|
|
|
2.2
|
|
|
|
697,997
|
|
|
|
2.5
|
|
|
|
520,488
|
|
|
|
1.9
|
|
|
|
513,812
|
|
|
|
2.2
|
|
|
|
501,897
|
|
|
|
1.8
|
|
|
|
|
|
|
Total consumer
|
|
|
14,322,813
|
|
|
|
54.1
|
|
|
|
14,327,558
|
|
|
|
54.3
|
|
|
|
13,626,787
|
|
|
|
55.0
|
|
|
|
13,823,355
|
|
|
|
55.9
|
|
|
|
13,841,880
|
|
|
|
55.4
|
|
|
|
|
|
|
Total loans and direct financing leases
|
|
$
|
26,354,581
|
|
|
|
99.5
|
|
|
$
|
26,145,589
|
|
|
|
99.3
|
|
|
$
|
24,472,166
|
|
|
|
99.1
|
|
|
$
|
24,496,287
|
|
|
|
98.9
|
|
|
$
|
24,567,148
|
|
|
|
98.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease assets
|
|
|
131,943
|
|
|
|
0.5
|
|
|
|
174,839
|
|
|
|
0.7
|
|
|
|
229,077
|
|
|
|
0.9
|
|
|
|
274,190
|
|
|
|
1.1
|
|
|
|
353,678
|
|
|
|
1.4
|
|
|
|
|
|
|
Total credit exposure
|
|
$
|
26,486,524
|
|
|
|
100.0
|
%
|
|
$
|
26,320,428
|
|
|
|
100.0
|
%
|
|
$
|
24,701,243
|
|
|
|
100.0
|
%
|
|
$
|
24,770,477
|
|
|
|
100.0
|
%
|
|
$
|
24,920,826
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total automobile exposure
(1)
|
|
$
|
4,233,994
|
|
|
|
16.0
|
%
|
|
$
|
4,383,499
|
|
|
|
16.7
|
%
|
|
$
|
4,503,396
|
|
|
|
18.2
|
%
|
|
$
|
4,718,479
|
|
|
|
19.0
|
%
|
|
$
|
4,857,881
|
|
|
|
19.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Business Segment
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional Banking:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Ohio
|
|
$
|
3,598,342
|
|
|
|
13.6
|
%
|
|
$
|
3,360,201
|
|
|
|
12.8
|
%
|
|
$
|
3,150,394
|
|
|
|
12.8
|
%
|
|
$
|
3,233,382
|
|
|
|
13.1
|
%
|
|
$
|
3,154,443
|
|
|
|
12.7
|
%
|
Northern Ohio
|
|
|
2,660,450
|
|
|
|
10.0
|
|
|
|
2,552,570
|
|
|
|
9.7
|
|
|
|
2,522,854
|
|
|
|
10.2
|
|
|
|
2,580,925
|
|
|
|
10.4
|
|
|
|
2,533,670
|
|
|
|
10.2
|
|
Southern Ohio / Kentucky
|
|
|
2,195,013
|
|
|
|
8.3
|
|
|
|
2,121,870
|
|
|
|
8.1
|
|
|
|
2,037,190
|
|
|
|
8.2
|
|
|
|
2,059,649
|
|
|
|
8.3
|
|
|
|
2,100,446
|
|
|
|
8.4
|
|
Eastern Ohio
(4) (5)
|
|
|
1,416,505
|
|
|
|
5.3
|
|
|
|
1,825,985
|
|
|
|
6.9
|
|
|
|
369,870
|
|
|
|
1.5
|
|
|
|
372,124
|
|
|
|
1.5
|
|
|
|
383,366
|
|
|
|
1.5
|
|
West Michigan
|
|
|
2,397,525
|
|
|
|
9.1
|
|
|
|
2,372,563
|
|
|
|
9.0
|
|
|
|
2,363,162
|
|
|
|
9.6
|
|
|
|
2,369,800
|
|
|
|
9.6
|
|
|
|
2,386,311
|
|
|
|
9.6
|
|
East Michigan
|
|
|
1,597,741
|
|
|
|
6.0
|
|
|
|
1,536,284
|
|
|
|
5.8
|
|
|
|
1,573,413
|
|
|
|
6.4
|
|
|
|
1,530,081
|
|
|
|
6.2
|
|
|
|
1,495,277
|
|
|
|
6.0
|
|
West Virginia
|
|
|
1,053,464
|
|
|
|
4.0
|
|
|
|
968,333
|
|
|
|
3.7
|
|
|
|
970,953
|
|
|
|
3.9
|
|
|
|
948,847
|
|
|
|
3.8
|
|
|
|
918,612
|
|
|
|
3.7
|
|
Indiana
|
|
|
953,776
|
|
|
|
3.6
|
|
|
|
977,589
|
|
|
|
3.7
|
|
|
|
1,025,807
|
|
|
|
4.2
|
|
|
|
958,119
|
|
|
|
3.9
|
|
|
|
1,037,983
|
|
|
|
4.2
|
|
Mortgage and equipment leasing groups
|
|
|
3,637,546
|
|
|
|
13.8
|
|
|
|
3,525,564
|
|
|
|
13.4
|
|
|
|
3,533,535
|
|
|
|
14.2
|
|
|
|
3,504,796
|
|
|
|
14.1
|
|
|
|
3,447,249
|
|
|
|
13.8
|
|
|
|
|
|
|
Regional Banking
|
|
|
19,510,362
|
|
|
|
73.7
|
|
|
|
19,240,959
|
|
|
|
73.1
|
|
|
|
17,547,178
|
|
|
|
71.0
|
|
|
|
17,557,723
|
|
|
|
70.9
|
|
|
|
17,457,357
|
|
|
|
70.1
|
|
Dealer Sales
(3)
|
|
|
5,167,300
|
|
|
|
19.5
|
|
|
|
5,347,051
|
|
|
|
20.3
|
|
|
|
5,429,997
|
|
|
|
22.0
|
|
|
|
5,492,235
|
|
|
|
22.2
|
|
|
|
5,761,321
|
|
|
|
23.1
|
|
Private Financial and Capital Markets Group
|
|
|
1,808,862
|
|
|
|
6.8
|
|
|
|
1,732,418
|
|
|
|
6.6
|
|
|
|
1,724,068
|
|
|
|
7.0
|
|
|
|
1,720,519
|
|
|
|
6.9
|
|
|
|
1,702,148
|
|
|
|
6.8
|
|
|
|
|
|
|
Treasury / Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit exposure
|
|
$
|
26,486,524
|
|
|
|
100.0
|
%
|
|
$
|
26,320,428
|
|
|
|
100.0
|
%
|
|
$
|
24,701,243
|
|
|
|
100.0
|
%
|
|
$
|
24,770,477
|
|
|
|
100.0
|
%
|
|
$
|
24,920,826
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
(1)
|
|
Sum of automobile loans and leases and automobile operating lease assets.
|
|
(2)
|
|
Prior period amounts have been reclassified to conform to the current period business segment structure.
|
|
(3)
|
|
Includes operating lease inventory.
|
|
(4)
|
|
Periods prior to 2006 include certain banking offices previously reported in Northern Ohio.
|
|
(5)
|
|
The decline from the first quarter of 2006 is primarily the result of the Unizan system conversion and the classification of certain commercial loans.
|
54
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
has 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 to continually update default probabilities and
to estimate future losses.
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
credit bureau score, 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.
55
Home equity loans and lines consist of both first and second position collateral with
underwriting criteria based on minimum FICO credit scores, debt/income ratios, and loan-to-value
ratios. We offer closed-end, home equity loans with a fixed rate and level monthly payments and a
variable-rate, interest-only home equity line of credit. At June 30, 2006, we had $1.4 billion of
home equity loans and $3.5 billion of home equity lines of credit. The average loan-to-value ratio
of our home equity portfolio (both loans and lines) was 80% at June 30, 2006. We do not originate
home equity loans or lines that (a) allow negative amortization, (b) have a loan-to-value ratio at
origination greater than 100%, or (c) are option ARMs. Home equity loans are generally fixed-rate with periodic principal and interest
payments. We originated $179 million of home equity loans in the second quarter 2006 with a
weighted average loan-to-value ratio of 64% and a weighted average FICO score of 739. Home equity
lines of credit generally have variable-rates of interest and do not require payment of principal
during the 10-year revolving period of the line. During the second quarter of 2006, we originated
$437 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 742.
At June 30, 2006, we had $4.7 billion of residential real estate loans. Adjustable-rate
mortgages, 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, i.e., can be adjustable rate at the option of the customer. Interest-only
loans comprised $0.9 billion of residential real estate loans at June 30, 2006. 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 Factor 1.)
NPAs consist of loans and leases that are no longer accruing interest, loans and leases that
have been renegotiated to below market rates based upon financial difficulties of the borrower, and
real estate acquired through foreclosure. C&I, CRE, and small business loans are generally placed
on non-accrual status when collection of principal or interest is in doubt or when the loan is
90-days past due. When interest accruals are suspended, accrued interest income is reversed with
current year accruals charged to earnings and prior-year amounts generally charged-off as a credit
loss.
Consumer loans and leases, excluding residential mortgages and home equity lines and 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, while highly secured, 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.
56
Table 12 reflects period-end NPAs and past due loans and leases detail for each of the last
five quarters.
Table 12 Non-Performing Assets and Past Due Loans and Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
(in thousands)
|
|
June 30,
|
|
March 31,
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
Non-accrual loans and leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle market commercial and industrial
|
|
$
|
45,713
|
|
|
$
|
45,723
|
|
|
$
|
28,888
|
|
|
$
|
25,431
|
|
|
$
|
26,856
|
|
Middle market commercial real estate
|
|
|
24,970
|
|
|
|
18,243
|
|
|
|
15,763
|
|
|
|
13,073
|
|
|
|
15,331
|
|
Small business
|
|
|
27,328
|
|
|
|
28,389
|
|
|
|
28,931
|
|
|
|
26,098
|
|
|
|
19,788
|
|
Residential mortgage
|
|
|
22,786
|
|
|
|
29,376
|
|
|
|
17,613
|
|
|
|
16,402
|
|
|
|
14,137
|
|
Home equity
|
|
|
14,466
|
|
|
|
13,778
|
|
|
|
10,720
|
|
|
|
8,705
|
|
|
|
7,748
|
|
|
|
|
|
|
Total non-performing loans and leases
|
|
|
135,263
|
|
|
|
135,509
|
|
|
|
101,915
|
|
|
|
89,709
|
|
|
|
83,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
34,743
|
|
|
|
17,481
|
|
|
|
14,214
|
|
|
|
11,182
|
|
|
|
10,758
|
|
Commercial
|
|
|
1,062
|
|
|
|
1,903
|
|
|
|
1,026
|
|
|
|
909
|
|
|
|
2,800
|
|
|
|
|
|
|
Total other real estate, net
|
|
|
35,805
|
|
|
|
19,384
|
|
|
|
15,240
|
|
|
|
12,091
|
|
|
|
13,558
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
171,068
|
|
|
$
|
154,893
|
|
|
$
|
117,155
|
|
|
$
|
101,800
|
|
|
$
|
97,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans and leases guaranteed
by the U.S. government
(1)
|
|
$
|
30,710
|
|
|
$
|
18,256
|
|
|
$
|
7,324
|
|
|
$
|
6,812
|
|
|
$
|
5,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans and leases as a % of
total loans and leases
|
|
|
0.51
|
%
|
|
|
0.52
|
%
|
|
|
0.42
|
%
|
|
|
0.37
|
%
|
|
|
0.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets as a % of total loans
and leases and other real estate
|
|
|
0.65
|
|
|
|
0.59
|
|
|
|
0.48
|
|
|
|
0.42
|
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans and leases past due 90
days or more
(1)
|
|
$
|
48,829
|
|
|
$
|
52,297
|
|
|
$
|
56,138
|
|
|
$
|
50,780
|
|
|
$
|
53,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans and leases past due 90 days or
more as a percent of total loans and leases
|
|
|
0.19
|
%
|
|
|
0.20
|
%
|
|
|
0.23
|
%
|
|
|
0.21
|
%
|
|
|
0.22
|
%
|
|
|
|
(1)
|
|
Beginning in 2Q-2006, OREO includes balances for foreclosures on loans serviced for GNMA, that were reported in 90 day past due loans and leases in prior periods. These
balances are fully guaranteed by the US Government.
|
NPAs were $171.1 million at June 30, 2006, and represented 0.65% of related assets, up
$73.7 million from $97.4 million, or 0.40% of related assets, at the end of the year-ago quarter,
and up $16.2 million from $154.9 million, or 0.59% of related assets, at March 31, 2006. The
increase from March 31, 2006, reflected a $16.4 million increase in other real estate owned (OREO)
and included $12.6 million due to a reclassification of foreclosed mortgage loans fully guaranteed
by the U.S. government from over 90-day delinquent but still accruing loans. We service mortgage
loans for GNMA. When loans sold to GNMA meet delinquency parameters specified by GNMA, we may
repurchase them and begin foreclosure. In accordance with Financial Accounting Standards Board
Statement (FAS) No. 140, such loans that are eligible for repurchase are recorded as loans on the
balance sheet. When those loans are foreclosed, such loans are then recorded as OREO. This change
in the reporting for GNMA-guaranteed OREO also accounted for the $12.5 million increase in total
NPAs guaranteed by the U.S. government, from $18.3 million at the end of the 2006 first quarter to
$30.7 million.
NPLs, which exclude OREO, increased $51.4 million from the year-earlier period to $135.3
million at June 30, 2006, with $33.8 million representing NPLs acquired in the Unizan merger. NPLs declined
slightly from March 31, 2006. NPLs expressed as a percent of total loans and leases were 0.51% at
June 30, 2006, up from 0.34% a year earlier, but down slightly from 0.52% at March 31, 2006.
57
The over 90-day delinquent, but still accruing, ratio was 0.19% at June 30, 2006, down from
0.22% at the end of the year-ago quarter, and from 0.20% at March 31, 2006, with these declines
reflecting the reclassification of GNMA-guaranteed foreclosed OREO noted above. Over the last five
quarters, the 90-day delinquency ratio has been relatively stable and remained at a low relative
level compared with the last five-year period.
Non-performing asset activity for each of the past five quarters ended June 30, 2006, and for
the first six months of 2006 and 2005 was as follows:
Table 13 Non-Performing Assets Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
(in thousands)
|
|
Second
|
|
First
|
|
Fourth
|
|
Third
|
|
Second
|
Non-performing assets, beginning
of period
|
|
$
|
154,893
|
|
|
$
|
117,155
|
|
|
$
|
101,800
|
|
|
$
|
97,418
|
|
|
$
|
73,303
|
|
New non-performing assets
(1)
|
|
|
52,498
|
|
|
|
53,768
|
|
|
|
52,553
|
|
|
|
37,570
|
|
|
|
47,420
|
|
Acquired non-performing assets
|
|
|
|
|
|
|
33,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns to accruing status
|
|
|
(12,143
|
)
|
|
|
(14,310
|
)
|
|
|
(3,228
|
)
|
|
|
(231
|
)
|
|
|
(250
|
)
|
Loan and lease losses
|
|
|
(6,826
|
)
|
|
|
(13,314
|
)
|
|
|
(9,063
|
)
|
|
|
(5,897
|
)
|
|
|
(6,578
|
)
|
Payments
|
|
|
(12,892
|
)
|
|
|
(13,195
|
)
|
|
|
(21,329
|
)
|
|
|
(21,203
|
)
|
|
|
(11,925
|
)
|
Sales
|
|
|
(4,462
|
)
|
|
|
(9,054
|
)
|
|
|
(3,578
|
)
|
|
|
(5,857
|
)
|
|
|
(4,552
|
)
|
|
|
|
|
|
Non-performing assets, end of period
|
|
$
|
171,068
|
|
|
$
|
154,893
|
|
|
$
|
117,155
|
|
|
$
|
101,800
|
|
|
$
|
97,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
(in thousands)
|
|
2006
|
|
2005
|
|
Non-performing assets, beginning
of period
|
|
$
|
117,155
|
|
|
$
|
108,568
|
|
New non-performing assets
(1)
|
|
|
106,266
|
|
|
|
81,027
|
|
Acquired non-performing assets
|
|
|
33,843
|
|
|
|
|
|
Returns to accruing status
|
|
|
(26,453
|
)
|
|
|
(4,088
|
)
|
Loan and lease losses
|
|
|
(20,140
|
)
|
|
|
(23,859
|
)
|
Payments
|
|
|
(26,087
|
)
|
|
|
(22,329
|
)
|
Sales
|
|
|
(13,516
|
)
|
|
|
(41,901
|
)
|
|
Non-performing assets, end of period
|
|
$
|
171,068
|
|
|
$
|
97,418
|
|
|
|
|
|
(1)
|
|
Beginning in 2Q-2006, OREO includes balances for foreclosures on loans serviced for GNMA, that were reported in
90 day past due loans and leases in prior periods. These balances are fully guaranteed by the US Government.
|
Allowances for Credit Losses (ACL)
(This section should be read in conjunction with Significant Factors 1 and 6.)
We maintain two reserves, both of which are available to absorb probable 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 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. For determination purposes, the allowance is comprised of two
components: the transaction reserve and the economic reserve.
58
Transaction Reserve
The transaction reserve component of the ACL includes both (a) an estimate of
loss based on characteristics of each commercial and consumer loan or lease in the
portfolio 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 middle market C&I, middle market CRE, and small business loans, the estimate
of loss based on characteristics of each loan made through the use of a standardized
loan grading system that is applied on an individual loan level and updated on a
continuous basis. The reserve factors applied to these portfolios were developed
based on internal credit migration models that track historical movements of loans
between loan ratings over time and a combination of long-term average loss experience
of our own portfolio and external industry data.
In the case of more homogeneous portfolios, such as consumer loans and leases,
and residential mortgage loans, the determination of the transaction component is
conducted at an aggregate, or pooled, level. For such portfolios, the development of
the reserve factors includes the use of forecasting models to measure inherent loss in
these portfolios.
We analyze each middle market C&I, middle market CRE, or small business loan over
$500,000 for impairment when the loan is non-performing or has a grade of substandard
or lower. The impairment tests are done in accordance with applicable accounting
standards and regulations. For loans that are determined to be impaired, an estimate
of loss is made for the amount of the impairment.
Models and analyses are updated 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.
Economic Reserve
Changes in the economic environment are a significant judgmental factor we
consider in determining the appropriate level of the ACL. 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 a variety of economic factors that
are correlated to the historical performance of the loan portfolio. Because of this
more quantitative approach to recognizing risks in the general economy, the economic
reserve may fluctuate from period-to-period.
The methodology to determine the economic reserve is specifically tied to
economic indices that have a high correlation to our historic charge-off variability.
The indices currently in the model consist of the Real Consumer Spending, Consumer
Confidence, ISM Manufacturing Index, and Non-Agriculture Job Creation in our core
states of Ohio, Michigan, West Virginia, and Indiana. The indices and time frame may
be adjusted as actual portfolio performance changes over time. The indices were
changed during the first quarter of 2006. The changes did not have a material impact
in the calculation. We have the capability to judgmentally adjust the calculated
economic reserve amount by a maximum of +/ 20% to reflect, among other factors,
differences in local versus national economic conditions. This adjustment capability
is deemed necessary given the continuing uncertainty of forecasting economic
environment changes.
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.
The June 30, 2006, ALLL was $287.5 million, $32.7 million higher than $254.8 million a year
earlier, and $3.7 million higher than $283.8 million at March 31, 2006. Expressed as a percent of
period-end loans and leases, the ALLL ratio at June 30, 2006, was 1.09%, up from 1.04% a year ago,
but unchanged from March 31, 2006.
The ALLL as a percent of NPLs was 213% at June 30, 2006, down from 304% a year ago, but up
from 209% at
March 31, 2006. The ALLL as a percent of NPAs was 168% at June 30, 2006, down from 262% a
year ago, and from
59
183% at March 31, 2006. At June 30, 2006, the AULC was $38.9 million, up from
$37.5 million at the end of the year-ago quarter, but down slightly from March 31, 2006.
On a combined basis, the ACL as a percent of total loans and leases at June 30, 2006, was
1.24%, up from 1.19% a year ago, but unchanged from March 31, 2006. The ACL as a percent of NPAs
was 191% at June 30, 2006, down from 300% a year earlier and 209% at March 31, 2006.
Table 14 reflects activity in the ALLL and AULC for each of the last five quarters.
Table 14 Quarterly Credit Reserves Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
(in thousands)
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
Allowance for loan and lease losses,
beginning of period
|
|
$
|
283,839
|
|
|
$
|
268,347
|
|
|
$
|
253,943
|
|
|
$
|
254,784
|
|
|
$
|
264,390
|
|
Acquired allowance for loan and lease losses
(1)
|
|
|
1,498
|
|
|
|
22,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and lease losses
|
|
|
(24,325
|
)
|
|
|
(33,405
|
)
|
|
|
(27,072
|
)
|
|
|
(25,830
|
)
|
|
|
(25,733
|
)
|
Recoveries of loans previously charged off
|
|
|
10,373
|
|
|
|
9,189
|
|
|
|
9,504
|
|
|
|
7,877
|
|
|
|
9,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan and lease losses
|
|
|
(13,952
|
)
|
|
|
(24,216
|
)
|
|
|
(17,568
|
)
|
|
|
(17,953
|
)
|
|
|
(16,264
|
)
|
|
|
|
|
|
Provision for loan and lease losses
|
|
|
16,132
|
|
|
|
17,521
|
|
|
|
31,972
|
|
|
|
17,112
|
|
|
|
13,247
|
|
Economic reserve transfer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,253
|
)
|
Allowance of assets sold and securitized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(336
|
)
|
|
|
|
|
|
Allowance for loan and lease losses, end of period
|
|
$
|
287,517
|
|
|
$
|
283,839
|
|
|
$
|
268,347
|
|
|
$
|
253,943
|
|
|
$
|
254,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for unfunded loan commitments
and letters of credit, beginning of period
|
|
$
|
39,301
|
|
|
$
|
36,957
|
|
|
$
|
38,098
|
|
|
$
|
37,511
|
|
|
$
|
31,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired AULC
|
|
|
|
|
|
|
325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for unfunded loan commitments and
letters of credit losses
|
|
|
(387
|
)
|
|
|
2,019
|
|
|
|
(1,141
|
)
|
|
|
587
|
|
|
|
(352
|
)
|
Economic reserve transfer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,253
|
|
|
|
|
|
|
Allowance for unfunded loan commitments
and letters of credit, end of period
|
|
$
|
38,914
|
|
|
$
|
39,301
|
|
|
$
|
36,957
|
|
|
$
|
38,098
|
|
|
$
|
37,511
|
|
|
|
|
|
|
Total allowances for credit losses
|
|
$
|
326,431
|
|
|
$
|
323,140
|
|
|
$
|
305,304
|
|
|
$
|
292,041
|
|
|
$
|
292,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses (ALLL) as % of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction reserve
|
|
|
0.89
|
%
|
|
|
0.88
|
%
|
|
|
0.89
|
%
|
|
|
0.84
|
%
|
|
|
0.82
|
%
|
Economic reserve
|
|
|
0.20
|
|
|
|
0.21
|
|
|
|
0.21
|
|
|
|
0.20
|
|
|
|
0.22
|
|
|
|
|
|
|
Total loans and leases
|
|
|
1.09
|
%
|
|
|
1.09
|
%
|
|
|
1.10
|
%
|
|
|
1.04
|
%
|
|
|
1.04
|
%
|
|
|
|
|
|
Non-performing loans and leases (NPLs)
|
|
|
213
|
|
|
|
209
|
|
|
|
263
|
|
|
|
283
|
|
|
|
304
|
|
Non-performing assets (NPAs)
|
|
|
168
|
|
|
|
183
|
|
|
|
229
|
|
|
|
249
|
|
|
|
262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowances for credit losses (ACL) as % of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases
|
|
|
1.24
|
%
|
|
|
1.24
|
%
|
|
|
1.25
|
%
|
|
|
1.19
|
%
|
|
|
1.19
|
%
|
Non-performing loans and leases
|
|
|
241
|
|
|
|
238
|
|
|
|
300
|
|
|
|
326
|
|
|
|
349
|
|
Non-performing assets
|
|
|
191
|
|
|
|
209
|
|
|
|
261
|
|
|
|
287
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents an adjustment of the allowance and corresponding adjustment to loan balances, resulting from the Unizan merger.
|
60
Table 15 reflects activity in the ALLL and AULC for the first six months of 2006 and
2005.
Table 15 Year to Date Credit Reserves Analysis
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
(in thousands)
|
|
2006
|
|
2005
|
Allowance for loan and lease losses,
beginning of period
|
|
$
|
268,347
|
|
|
$
|
271,211
|
|
Acquired allowance for loan and lease losses
|
|
|
23,685
|
|
|
|
|
|
Loan and lease losses
|
|
|
(57,730
|
)
|
|
|
(62,946
|
)
|
Recoveries of loans previously charged off
|
|
|
19,562
|
|
|
|
18,410
|
|
|