UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED
March 31, 2008
Commission File Number
0-2525
Huntington Bancshares Incorporated
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Maryland
(State or other jurisdiction of
incorporation or organization)
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31-0724920
(I.R.S. Employer
Identification No.)
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41 South High Street, Columbus, Ohio 43287
Registrant’s 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 [x] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer [x]
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Accelerated filer [ ]
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Non-accelerated filer [ ]
(Do not check if a smaller reporting company)
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Smaller reporting company
[ ]
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). [ ] Yes [x] no
There were 366,209,451 shares of Registrant’s common stock ($0.01 par value) outstanding on April
30, 2008.
Huntington Bancshares Incorporated
INDEX
2
Part 1. Financial Information
Item 2. Management’s 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, including our bank subsidiary, The Huntington National Bank (the Bank), organized in
1866, we provide full-service commercial and consumer banking services, mortgage banking services,
automobile financing, equipment leasing, investment management, trust services, brokerage services,
reinsurance of private mortgage insurance, reinsurance of credit life and disability insurance,
retail and commercial insurance-agency services, and other financial products and services. Our
banking offices are located in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky.
Selected financial service activities are also conducted in other states including: Dealer Sales
offices in Arizona, Florida, Nevada, New Jersey, New York, Tennessee, and Texas; Private Financial
and Capital Markets Group offices in Florida; and Mortgage Banking offices in Maryland and New
Jersey. Huntington Insurance (formerly Sky Insurance) offers retail and commercial insurance agency
services in Ohio, Pennsylvania, and Indiana. International banking services are available through
the headquarters office in Columbus and a limited purpose office located in both the Cayman Islands
and Hong Kong.
The following Management’s Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) 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. This discussion and analysis provides updates to the MD&A appearing in our 2007
Annual Report on Form 10-K (2007 Form 10-K), and should be read in conjunction with this discussion
and analysis.
Our discussion is divided into key segments:
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Introduction
- Provides overview comments on important matters including risk factors,
acquisitions, and other items. These are essential for understanding our performance and
prospects.
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•
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Discussion of Results of Operations
- Reviews financial performance from a consolidated
company perspective. It also includes a “Significant Items Influencing Financial
Performance Comparisons” section that summarizes key issues helpful for understanding
performance trends, including our acquisition of Sky Financial Group, Inc. (Sky Financial)
and our relationship with Franklin Credit Management Corporation (Franklin). Key
consolidated balance sheet and income statement trends are also discussed in this section.
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•
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Risk Management and Capital
- Discusses credit, market, liquidity, and operational
risks, including how these are managed, as well as performance trends. It also includes a
discussion of liquidity policies, how we obtain funding, and related performance. In
addition, there is a discussion of guarantees and/or commitments made for items such as
standby letters of credit and commitments to sell loans, and a discussion that reviews the
adequacy of capital, including regulatory capital requirements.
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Lines of Business Discussion
- Provides an overview of financial performance for each of
our major lines of business and provides additional discussion of trends underlying
consolidated financial performance.
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A reading of each section is important to understand fully the nature of our financial
performance and prospects.
Forward-Looking Statements
This report, including MD&A, contains certain forward-looking statements, including certain
plans, expectations, goals, and projections, and including statements about the benefits of our
merger with Sky Financial, which are subject to numerous assumptions, risks, and uncertainties.
Statements that do not describe historical or current facts, including statements about beliefs and
expectations, are forward-looking statements. The forward-looking statements are intended to be
subject to the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934.
3
Actual results could differ materially from those contained or implied by such statements for
a variety of factors including: (1) deterioration in the loan portfolio could be worse than
expected due to a number of factors such as the underlying value of the collateral could prove less
valuable than otherwise assumed and assumed cash flows may be worse than expected; (2) merger
revenue synergies may not be fully realized and/or within the expected timeframes; (3) changes in
economic conditions; (4) movements in interest rates; (5) competitive pressures on product pricing
and services; (6) success and timing of other business strategies; (7) the nature, extent, and
timing of governmental actions and reforms; and (8) extended disruption of vital infrastructure.
Additional factors that could cause results to differ materially from those described above can be
found in Huntington’s 2007 Form 10-K, and documents subsequently filed by Huntington with the
Securities and Exchange Commission (SEC).
All forward-looking statements speak only as of the date they are made and are based on
information available at that time. We assume no obligation to update forward-looking statements to
reflect circumstances or events that occur after the date the forward-looking statements were made
or to reflect the occurrence of unanticipated events except as required by federal securities laws.
As forward-looking statements involve significant risks and uncertainties, readers of this
document are cautioned against placing undue reliance on such statements.
Risk Factors
We, like other financial companies, are subject to a number of risks, many of which are
outside of our direct control, though efforts are made to manage those risks while optimizing
returns. Among the risks assumed are: (1)
credit risk
, which is the risk that loan and
lease customers or other counter parties will be unable to perform their contractual obligations,
(2)
market risk
, which is the risk that changes in market rates and prices will adversely
affect our financial condition or results of operation, (3)
liquidity risk
, which is the
risk that we, or the Bank, will have insufficient cash or access to cash to meet operating needs,
and (4)
operational risk
, which is the risk of loss resulting from inadequate or failed
internal processes, people and systems, or from external events
.
Please refer to the “Risk
Management and Capital” section for additional information regarding risk factors. Additionally,
more information on risk is set forth under the heading “Risk Factors” included in Item 1A of our
2007 Annual Report on Form 10-K for the year ended December 31, 2007, and subsequent filings with
the SEC.
Critical Accounting Policies and Use of Significant Estimates
Our financial statements are prepared in accordance with accounting principles generally
accepted in the United States (GAAP). The preparation of financial statements in conformity with
GAAP requires us to establish critical accounting policies and make accounting estimates,
assumptions, and judgments that affect amounts recorded and reported in our financial statements.
Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements included in our 2007
Annual Report on 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.
Recent Accounting Pronouncements and Developments
Note 2 to the Unaudited Condensed Consolidated Financial Statements discusses new accounting
policies adopted during 2008 and the expected impact of accounting policies recently issued but not
yet required to be adopted. To the extent the adoption of new accounting standards materially
affect financial condition, results of operations, or liquidity, the impacts are discussed in the
applicable section of this MD&A and the Notes to the Unaudited Condensed Consolidated Financial
Statements.
4
Acquisition
of Sky Financial
The merger with Sky Financial was completed on July 1, 2007. At the time of acquisition, Sky
Financial had assets of $16.8 billion, including $13.3 billion of loans, and total deposits of
$12.9 billion. The impact of this acquisition has been included in our consolidated results since
July 1, 2007.
Given the significant impact of the merger on reported results, we believe that an
understanding of the impacts of the merger is necessary to understand better underlying performance
trends. When comparing post-merger period results to premerger periods, we use the following terms
when discussing financial performance:
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“Merger-related” refers to amounts and percentage changes representing the impact
attributable to the merger.
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“Merger costs” represent non-interest expenses primarily associated with merger
integration activities, including severance expense for key executive personnel.
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“Non-merger-related” refers to performance not attributable to the merger, and
includes “merger efficiencies”, which represent non-interest expense reductions
realized as a result of the merger.
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After completion of the merger, we combined Sky Financial’s operations with ours, and as such,
we could no longer separately monitor the subsequent individual results of Sky Financial. As a
result, the following methodologies were implemented to estimate the approximate effect of the Sky
Financial merger used to determine “merger-related” impacts.
Balance
Sheet Items
For average loans and leases, as well as average deposits, Sky Financial’s balances as of
June 30, 2007, adjusted for purchase accounting adjustments, and transfers of loans to loans
held-for-sale, were used in the comparison. To estimate the impact on 2008 first quarter
average balances, it was assumed that the June 30, 2007 balances, as adjusted, remained
constant over time.
Income
Statement Items
Sky Financial’s actual results for the first six months of 2007, adjusted for the impact of
unusual items and purchase accounting adjustments, were determined. This six-month adjusted
amount was divided by two to estimate a quarterly impact. This methodology does not adjust
for any market related changes, or seasonal factors in Sky Financial’s 2007 six-month
results. Nor does it consider any revenue or expense synergies realized since the merger
date. The one exception to this methodology of holding the estimated annual impact constant
relates to the amortization of intangibles expense where the amount is known and is
therefore used.
Certain tables and comments contained within our discussion and analysis provide detail of
changes to reported results to quantify the estimated impact of the Sky Financial merger using this
methodology.
As a result of this acquisition, we have a significant loan relationship with Franklin. This
relationship is discussed in greater detail in the “Significant Items” and “Commercial Credit”
sections of this report.
5
DISCUSSION OF RESULTS OF OPERATIONS
This section provides a review of financial performance from a consolidated perspective. It
also includes a “Significant Items Influencing Financial Performance Comparisons” section that
summarizes key issues important for a complete understanding of performance trends. Key
consolidated balance sheet and income statement trends are discussed in this section. All earnings
per share data are reported on a diluted basis. For additional insight on financial performance,
please read this section in conjunction with the “Lines of Business” discussion.
Summary
We reported 2008 first quarter net income of $127.1 million or earnings per common share of
$0.35. These results compared favorably with a net loss of $239.3 million, or $0.65 per common
share in the 2007 fourth quarter. Comparisons with the prior quarter were significantly impacted
by: (a) the prior quarter’s $423.6 million negative impact relating to the credit deterioration of
the Franklin relationship, and (b) the $37.5 million aggregate positive impact in the current
quarter relating to the
Visa
®
initial public offering (IPO), as well as the associated $11.1 million deferred tax
valuation allowance benefit (see “Significant Items”).
Our 2008 first quarter performance was negatively impacted by the significant and rapid
succession of interest rate reductions by the Federal Reserve. These interest rate reductions
compressed our fully taxable equivalent net interest margin, and contributed to a $6.0 million
decline in fully taxable equivalent net interest income despite good loan growth. The rate
reductions were more quickly reflected in the downward repricing of loans and leases than in our
funding costs, particularly deposits, reflecting the competitive deposit pricing environment.
Following the 2007 fourth quarter, the loan restructuring associated with our relationship
with Franklin performed consistent with our expectations during the 2008 first quarter. Cash flows
exceeded the required debt payments, the loans continue to perform with interest accruing, and
there were no net charge-offs or related provision for credit losses during the quarter.
Additionally, the total exposure to Franklin decreased $31 million, or 3%.
Credit quality was mixed in the quarter. Net charge-offs decreased and were below our
full-year expectations, particularly in our commercial and industrial (C&I) and commercial real
estate (CRE) portfolios, although we anticipate that net charge-offs in future quarters will be
higher than in the current quarter. The allowance for loan and lease losses (ALLL) increased 9
basis points, reflecting the impact of the continued economic weakness across our Midwest markets,
most notably in portfolios related to the single family home builder sector. Given the
uncertainties of the current economic environment, we believe the increase in the ALLL is
appropriate.
Other factors negatively impacting our 2008 first quarter performance included: (a) asset
impairment charges totaling $11.0 million, including a $5.9 million venture capital loss on an
investment in Skybus Airlines, a Columbus, Ohio-based airline, and (b) the volatility of the
financial markets resulting in $20.0 million of net market-related losses, particularly related to
mortgage servicing rights (MSRs) hedging (see “Significant Items”).
Non-interest income in the 2008 first quarter increased $65.2 million, or 38%, from the 2007
fourth quarter primarily reflecting the positive $59.8 million impact of significant items (see
“Significant Items”). Considering the impact of these items, fee income performance was mixed for
the current quarter. Brokerage and insurance income increased a strong 21%, reflecting seasonal
insurance income and higher annuity sales. Mortgage banking activities increased 14%, reflecting a
26% increase in mortgage originations due to significant refinance activity. These increases were
offset by an 11% decline in service charges on deposit accounts, primarily reflecting a seasonal
decline.
Non-interest expense in the 2008 first quarter decreased $69.1 million, or 16%, from the 2007
fourth quarter primarily reflecting the net positive impact of $78.5 million of significant items
(see “Significant Items”). Considering the impact of these items, non-interest expense increased,
reflecting seasonal increases in higher employment taxes, snow removal, and utilities expense.
Offsetting these increased seasonal expenses was the full realization of merger expense
efficiencies from the Sky Financial merger. We remain focused on expenses, and are still
identifying additional expense reduction opportunities.
Given the expectation for continued economic environment uncertainty, we believe the
conservation of capital to be important. To this end, we raised $569 million of capital in the
form of 8.50% Series A Non-Cumulative Perpetual
6
Convertible Preferred Stock in the 2008 second quarter. We also reduced our quarterly common
stock dividend to $0.1325 per common share, payable July 1, 2008, to shareholders of record on June
13, 2008. This represented a 50% reduction from the previous quarterly cash dividend of $0.265
per common share.
7
Table 1 — Selected
Quarterly Income Statement Data
(1),(2)
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2008
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2007
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(in thousands, except per share amounts)
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First
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Fourth
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Third
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Second
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First
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Interest income
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$
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753,411
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$
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814,398
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$
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851,155
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$
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542,461
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$
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534,949
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Interest expense
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376,587
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431,465
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441,522
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289,070
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279,394
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Net interest income
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376,824
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382,933
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409,633
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253,391
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255,555
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Provision for credit losses
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88,650
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512,082
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42,007
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60,133
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29,406
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Net interest income (loss) after provision for credit losses
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288,174
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(129,149
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)
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367,626
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193,258
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226,149
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Service charges on deposit accounts
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72,668
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81,276
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78,107
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50,017
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44,793
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Trust services
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34,128
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35,198
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33,562
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26,764
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25,894
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Brokerage and insurance income
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36,560
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30,288
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28,806
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17,199
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16,082
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Other service charges and fees
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20,741
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21,891
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21,045
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14,923
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13,208
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Bank owned life insurance income
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13,750
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13,253
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14,847
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10,904
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10,851
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Mortgage banking (loss) income
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(7,063
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)
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3,702
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9,629
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7,122
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9,351
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Securities gains (losses)
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1,429
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(11,551
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(13,152
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(5,139
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)
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104
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Other income (loss)
(3)
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63,539
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(3,500
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31,830
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34,403
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24,894
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Total non-interest income
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235,752
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170,557
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204,674
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156,193
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145,177
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Personnel costs
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201,943
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214,850
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202,148
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135,191
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134,639
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Outside data processing and other services
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34,361
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39,130
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40,600
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25,701
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21,814
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Net occupancy
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33,243
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26,714
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33,334
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19,417
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19,908
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Equipment
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23,794
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22,816
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23,290
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17,157
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18,219
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Amortization of intangibles
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18,917
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20,163
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19,949
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2,519
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2,520
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Marketing
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8,919
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16,175
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13,186
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8,986
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7,696
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Professional services
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9,090
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14,464
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11,273
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8,101
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6,482
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Telecommunications
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6,245
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8,513
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7,286
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4,577
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4,126
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Printing and supplies
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5,622
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6,594
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4,743
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3,672
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3,242
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Other expense
(3)
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28,347
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70,133
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29,754
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19,334
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23,426
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Total non-interest expense
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370,481
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439,552
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385,563
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244,655
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242,072
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Income (loss) before income taxes
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153,445
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(398,144
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)
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186,737
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104,796
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129,254
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Provision (benefit) for income taxes
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26,377
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(158,864
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)
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48,535
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24,275
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33,528
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Net income (loss)
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$
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127,068
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$
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(239,280
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)
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$
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138,202
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$
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80,521
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$
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95,726
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Average common shares — diluted
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367,208
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366,119
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368,280
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239,008
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238,754
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Per common share
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Net income (loss) — diluted
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$
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0.35
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$
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(0.65
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)
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$
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0.38
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$
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0.34
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$
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0.40
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Cash dividends declared
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0.265
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0.265
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0.265
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0.265
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0.265
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Return on average total assets
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0.93
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%
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(1.74
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)%
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1.02
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%
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0.92
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%
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1.11
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%
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Return on average total shareholders’ equity
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8.7
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(15.3
|
)
|
|
|
8.8
|
|
|
|
10.6
|
|
|
|
12.9
|
|
|
Return on average tangible shareholders’ equity
(4)
|
|
|
22.0
|
|
|
|
(30.7
|
)
|
|
|
19.7
|
|
|
|
13.5
|
|
|
|
16.4
|
|
|
Net interest margin
(5)
|
|
|
3.23
|
|
|
|
3.26
|
|
|
|
3.52
|
|
|
|
3.26
|
|
|
|
3.36
|
|
|
Efficiency ratio
(6)
|
|
|
57.0
|
|
|
|
73.5
|
|
|
|
57.7
|
|
|
|
57.8
|
|
|
|
59.2
|
|
|
Effective tax rate (benefit)
|
|
|
17.2
|
|
|
|
(39.9
|
)
|
|
|
26.0
|
|
|
|
23.2
|
|
|
|
25.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue — fully taxable equivalent (FTE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
376,824
|
|
|
$
|
382,933
|
|
|
$
|
409,633
|
|
|
$
|
253,391
|
|
|
$
|
255,555
|
|
|
FTE adjustment
|
|
|
5,502
|
|
|
|
5,363
|
|
|
|
5,712
|
|
|
|
4,127
|
|
|
|
4,047
|
|
|
|
|
|
|
Net interest income
(5)
|
|
|
382,326
|
|
|
|
388,296
|
|
|
|
415,345
|
|
|
|
257,518
|
|
|
|
259,602
|
|
|
Non-interest income
|
|
|
235,752
|
|
|
|
170,557
|
|
|
|
204,674
|
|
|
|
156,193
|
|
|
|
145,177
|
|
|
|
|
|
|
Total revenue
(5)
|
|
$
|
618,078
|
|
|
$
|
558,853
|
|
|
$
|
620,019
|
|
|
$
|
413,711
|
|
|
$
|
404,779
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Comparisons for presented periods are impacted by a number of factors. Refer to the “Significant Items Influencing Financial Performance Comparisons” for additional discussion regarding these
key factors.
|
|
|
|
(2)
|
|
On July 1, 2007, Huntington acquired Sky Financial Group, Inc. Accordingly, the balances presented include the impact of the acquisition from that date.
|
|
|
|
(3)
|
|
Automobile operating lease income and expense is included in “Other Income” and “Other Expense”, respectively.
|
|
|
|
(4)
|
|
Net income less expense for amortization of intangibles for the period divided by average tangible shareholders’ equity. Average tangible shareholders’ equity equals average total
stockholders’ equity less average intangible assets and goodwill. Expense for amortization of intangibles, as well as other intangible assets, are net of deferred tax liability, and
calculated assuming a 35% tax rate.
|
|
|
|
(5)
|
|
On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.
|
|
|
|
(6)
|
|
Non-interest expense less amortization of intangibles divided by the sum of FTE net interest income and non-interest income excluding securities gains (losses).
|
8
Significant Items
Definition of Significant Items
Certain components of the income statement are naturally subject to more volatility than
others. As a result, readers of this report may view such items differently in their assessment of
“underlying” or “core” earnings performance compared with their expectations and/or any
implications resulting from them on their assessment of future performance trends.
Therefore, we believe the disclosure of certain “Significant Items” affecting current and
prior period results aids readers of this report in better understanding corporate performance so
that they can ascertain for themselves what, if any, items they may wish to include or exclude from
their analysis of performance, within the context of determining how that performance differed from
their expectations, as well as how, if at all, to adjust their estimates of future performance
accordingly.
To this end, we have adopted a practice of listing as “Significant Items” in our external
disclosure documents, including earnings press releases, investor presentations, reports on Forms
10-Q and 10-K, individual and/or particularly volatile items that impact the current period results
by $0.01 per share or more. Such “Significant Items” generally fall within the categories
discussed below:
Timing Differences
Parts of our regular business activities are naturally volatile, including capital markets
income and sales of loans. While such items may generally be expected to occur within a full-year
reporting period, they may vary significantly from period to period. Such items are also typically
a component of an income statement line item and not, therefore, readily discernable. By
specifically disclosing such items, analysts/investors can better assess how, if at all, to adjust
their estimates of future performance.
Other Items
From time to time, an event or transaction might significantly impact revenues or expenses in
a particular reporting period that is judged to be one-time, short-term in nature, and/or
materially outside typically expected performance. Examples would be (1) merger costs as they
typically impact expenses for only a few quarters during the period of transition; e.g.,
restructuring charges, asset valuation adjustments, etc.; (2) changes in an accounting principle;
(3) one-time tax assessments/refunds; (4) a large gain/loss on the sale of an asset; (5) outsized
commercial loan net charge-offs related to fraud; etc. In addition, for the periods covered by
this report, the impact of the Franklin restructuring is deemed to be a significant item due to its
unusually large size and because it was acquired in the Sky Financial merger and thus it is not
representative of our typical underwriting criteria. By disclosing such items, readers of this
report can better assess how, if at all, to adjust their estimates of future performance.
Provision
for Credit Losses
While the provision for credit losses may vary significantly among periods, and often exceeds
$0.01 per share, we typically exclude it from the list of “Significant Items” unless, in our view,
there is a significant, specific credit (or multiple significant, specific credits) affecting
comparability among periods. In determining whether any portion of the provision for credit losses
should be included as a significant item, we consider, among other things, that the provision is a
major income statement caption rather than a component of another caption and, therefore, the
period-to-period variance can be readily determined. We also consider the additional historical
volatility of the provision for credit losses.
Other
Exclusions
“Significant Items” for any particular period are not intended to be a complete list of items
that may significantly impact future periods. A number of factors, including those described in
Huntington’s 2007 Annual Report on Form 10-K and other factors described from time to time in
Huntington’s other filings with the SEC, could also significantly impact future periods.
9
Significant Items Influencing Financial Performance Comparisons
Earnings comparisons from the beginning of 2007 through the 2008 first quarter were impacted
by a number of significant items summarized below.
|
|
1.
|
|
Sky Financial Acquisition.
The merger with Sky Financial was completed on July 1,
2007. The impacts of the quarterly reported results compared with premerger reporting
periods are as follows:
|
|
|
•
|
|
Increased the absolute level of reported average balance sheet, revenue, expense,
and credit quality results (e.g., net charge-offs).
|
|
|
|
|
•
|
|
Increased reported non-interest expense items as a result of costs incurred as part
of merger integration activities, most notably employee retention bonuses, outside
programming services related to systems conversions, and marketing expenses related to
customer retention initiatives. These net merger costs were $7.1 million in the 2008
first quarter, $44.4 million in the 2007 fourth quarter, $32.3 million in the 2007
third quarter, $7.6 million in the 2007 second quarter, and $0.8 million in the 2007
first quarter.
|
|
|
2.
|
|
Franklin Relationship Restructuring.
Performance for the 2007 fourth quarter included
a $423.6 million ($0.75 per common share based upon the quarterly average outstanding
diluted common shares) negative impact related to our Franklin relationship acquired in the
Sky Financial acquisition. On December 28, 2007, the loans associated with Franklin were
restructured, resulting in a $405.8 million provision for credit losses and a $17.9 million
reduction of net interest income. The net interest income reduction reflected the
placement of the Franklin loans on nonaccrual status from November 16, 2007, until December
28, 2007.
|
|
|
|
|
3.
|
|
Visa
â
Initial Public Offering (IPO).
Performance for the 2008 first quarter
included the positive impact of $37.5 million ($0.07 per common share) related to the
Visa
®
IPO occurring in March of 2008. This impact was comprised of two
components: (1) $25.1 million gain, recorded in other non-interest income, resulting from
the proceeds of the IPO, and (2) $12.4 million partial reversal of the 2007 fourth quarter
accrual of $24.9 million ($0.04 per common share) for indemnification charges against
Visa
®
, recorded in other non-interest expense.
|
|
|
|
|
4.
|
|
Mortgage Servicing Rights (MSRs) and Related Hedging.
Included in total net
market-related losses are net losses or gains from our MSRs and the related hedging.
Additional information regarding MSRs is located under the “Market Risk” heading of the
“Risk Management and Capital” section. Net income included the following net impact of MSR
hedging activity (see Table 9):
|
(in thousands, except per common share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Non-
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
interest
|
|
|
interest
|
|
|
Pretax
|
|
|
Net
|
|
|
common
|
|
|
Period
|
|
income
|
|
|
income
|
|
|
income
|
|
|
income
|
|
|
share
|
|
|
1Q‘07
|
|
$
|
—
|
|
|
$
|
(2,018
|
)
|
|
$
|
(2,018
|
)
|
|
$
|
(1,312
|
)
|
|
$
|
(0.01
|
)
|
|
2Q‘07
|
|
|
248
|
|
|
|
(4,998
|
)
|
|
|
(4,750
|
)
|
|
|
(3,088
|
)
|
|
|
(0.01
|
)
|
|
3Q‘07
|
|
|
2,357
|
|
|
|
(6,002
|
)
|
|
|
(3,645
|
)
|
|
|
(2,369
|
)
|
|
|
(0.01
|
)
|
|
4Q‘07
|
|
|
3,192
|
|
|
|
(11,766
|
)
|
|
|
(8,574
|
)
|
|
|
(5,573
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
5,797
|
|
|
$
|
(24,784
|
)
|
|
$
|
(18,987
|
)
|
|
$
|
(12,342
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q‘08
|
|
$
|
5,934
|
|
|
$
|
(24,706
|
)
|
|
$
|
(18,772
|
)
|
|
$
|
(12,202
|
)
|
|
$
|
(0.03
|
)
|
|
|
5.
|
|
Other Net Market-Related Gains or Losses.
Other net market-related gains or losses
include gains and losses related to the following market-driven activities: gains and
losses from public equity investing included in other non-interest income, net securities
gains and losses, net gains and losses from the sale of loans held-for-sale, and the impact
from the extinguishment of debt. Total net market-related losses also include the net
impact of MSRs and related hedging (see item 4 above). Net income included the following
impact from other net market-related losses:
|
10
(in thousands, except per common share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
Loss on
|
|
|
Debt
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
gains/
|
|
|
Public equity
|
|
|
loans
|
|
|
extinguish-
|
|
|
Pretax
|
|
|
Net
|
|
|
common
|
|
|
Period
|
|
(losses)
|
|
|
investments
|
|
|
held-for-sale
|
|
|
ment
|
|
|
income
|
|
|
income
|
|
|
share
|
|
|
1Q‘07
|
|
$
|
104
|
|
|
$
|
(8,530
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(8,426
|
)
|
|
$
|
(5,477
|
)
|
|
$
|
(0.02
|
)
|
|
2Q‘07
|
|
|
(5,139
|
)
|
|
|
2,301
|
|
|
|
—
|
|
|
|
4,090
|
|
|
|
1,252
|
|
|
|
814
|
|
|
|
—
|
|
|
3Q‘07
|
|
|
(13,900
|
)
|
|
|
(4,387
|
)
|
|
|
—
|
|
|
|
3,968
|
|
|
|
(14,319
|
)
|
|
|
(9,307
|
)
|
|
|
(0.03
|
)
|
|
4Q‘07
|
|
|
(11,551
|
)
|
|
|
(9,393
|
)
|
|
|
(34,003
|
)
|
|
|
—
|
|
|
|
(54,947
|
)
|
|
|
(35,716
|
)
|
|
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
(30,486
|
)
|
|
$
|
(20,009
|
)
|
|
$
|
(34,003
|
)
|
|
$
|
8,058
|
|
|
$
|
(76,440
|
)
|
|
$
|
(49,686
|
)
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q‘08
|
|
$
|
1,429
|
|
|
$
|
(2,680
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1,251
|
)
|
|
$
|
(813
|
)
|
|
$
|
—
|
|
|
|
6.
|
|
Other Significant Items Influencing Earnings Performance Comparisons.
In addition to
the items discussed separately in this section, a number of other items impacted financial
results. These included:
|
2008
– First Quarter
|
|
•
|
|
$11.1 million ($0.03 per common share) benefit to provision for income taxes,
representing a reduction to the previously established capital loss carry-forward
valuation allowance as a result of the 2008 first quarter Visa
®
IPO.
|
|
|
|
|
•
|
|
$11.0 million ($0.02 per common share) of asset impairment, including (a)$5.9
million venture capital loss on an investment in Skybus Airlines, a Columbus,
Ohio-based airline, (b) $2.6 million charge off of a receivable, and (c) $2.5 million
write-down of leasehold improvements in our Cleveland main office.
|
2007
– Fourth Quarter
|
|
•
|
|
$8.9 million ($5.8 million after-tax, or $0.02 per common share) negative impact
primarily due to increases to litigation reserves on existing cases.
|
2007 – First Quarter
|
|
•
|
|
$1.9 million ($1.2 million after-tax, or $0.01 per common share) negative impact
primarily due to increases to litigation reserves on existing cases.
|
Table 2 reflects the earnings impact of the above-mentioned significant items for periods affected
by this Results of Operations discussion:
11
Table 2 — Significant Items Influencing Earnings Performance Comparison
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2008
|
|
December 31, 2007
|
|
March 31, 2007
|
|
(in millions)
|
|
After-tax
|
|
EPS
|
|
After-tax
|
|
EPS
|
|
After-tax
|
|
EPS
|
|
|
|
Net income — reported earnings
|
|
$
|
127.1
|
|
|
|
|
|
|
$
|
(239.3
|
)
|
|
|
|
|
|
$
|
95.7
|
|
|
|
|
|
|
Earnings per share, after tax
|
|
|
|
|
|
$
|
0.35
|
|
|
|
|
|
|
$
|
(0.65
|
)
|
|
|
|
|
|
$
|
0.40
|
|
|
Change from prior quarter — $
|
|
|
|
|
|
|
1.00
|
|
|
|
|
|
|
|
(1.03
|
)
|
|
|
|
|
|
|
0.03
|
|
|
Change from prior quarter — %
|
|
|
|
|
|
|
N.M.
|
%
|
|
|
|
|
|
|
N.M.
|
%
|
|
|
|
|
|
|
8.1
|
%
|
|
|
|
Change from a year-ago — $
|
|
|
|
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
$
|
(1.02
|
)
|
|
|
|
|
|
$
|
(0.05
|
)
|
|
Change from a year-ago — %
|
|
|
|
|
|
|
(12.5
|
)%
|
|
|
|
|
|
|
N.M.
|
%
|
|
|
|
|
|
|
(11.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant items - favorable (unfavorable) impact:
|
|
Earnings
(2)
|
|
EPS
|
|
Earnings
(2)
|
|
EPS
|
|
Earnings
(2)
|
|
EPS
|
|
|
|
Aggregate impact of Visa
®
IPO
|
|
$
|
37.5
|
|
|
$
|
0.07
|
|
|
$
|
(24.9
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Deferred tax valuation allowance benefit
(3)
|
|
|
11.1
|
|
|
|
0.03
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net market-related losses
|
|
|
(20.0
|
)
|
|
|
(0.04
|
)
|
|
|
(63.5
|
)
|
|
|
(0.11
|
)
|
|
|
(10.4
|
)
|
|
|
(0.03
|
)
|
|
Asset impairment
|
|
|
(11.0
|
)
|
|
|
(0.02
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Merger costs
|
|
|
(7.1
|
)
|
|
|
(0.01
|
)
|
|
|
(44.4
|
)
|
|
|
(0.08
|
)
|
|
|
(0.8
|
)
|
|
|
—
|
|
|
Franklin relationship restructuring
|
|
|
—
|
|
|
|
—
|
|
|
|
(423.6
|
)
|
|
|
(0.75
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Increases to litigation reserves on existing cases
|
|
|
—
|
|
|
|
—
|
|
|
|
(8.9
|
)
|
|
|
(0.02
|
)
|
|
|
(1.9
|
)
|
|
|
(0.01
|
)
|
N.M., not a meaningful value.
|
|
|
|
|
(1)
|
|
Refer to the “Significant Items Influencing Financial Performance Comparisons” for additional discussion regarding these items.
|
|
|
|
(2)
|
|
Pre-tax unless otherwise noted.
|
|
|
|
(3)
|
|
After-tax.
|
12
Net Interest Income / Average Balance Sheet
(This section should be read in conjunction with Significant Items 1, 2, and 4.)
2008 First Quarter versus 2007 First Quarter
Fully taxable equivalent net interest income increased $122.7 million, or 47%, from the
year-ago quarter. This reflected the favorable impact of a $16.4 billion, or 52%, increase in
average earning assets, with $14.2 billion representing an increase in average loans and leases,
partially offset by the negative impact of a 13 basis point decline in the fully taxable equivalent
net interest margin to 3.23%. The increases in average earning assets, as well as loans and
leases, were primarily Sky Financial merger-related.
The following table details the estimated merger-related impacts on our reported loans and
deposits:
Table 3 — Average Loans/Leases and Deposits — Estimated Merger Related Impacts — 1Q’08 vs. 1Q’07