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| HBAN > SEC Filings for HBAN > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
• Discussion of Results of Operations - Reviews financial performance from a consolidated company perspective. It also includes a "Significant Items" section that summarizes key issues helpful for understanding performance trends. Key consolidated average balance sheet and income statement trends are also discussed in this section.
• Risk Management and Capital - Discusses credit, market, liquidity, and operational risks, including how these are managed, as well as performance trends. It also includes a discussion of liquidity policies, how we obtain funding, and related performance. In addition, there is a discussion of guarantees and/or commitments made for items such as standby letters of credit and commitments to sell loans, and a discussion that reviews the adequacy of capital, including regulatory capital requirements.
• Business Segment Discussion - Provides an overview of financial performance for each of our major business segments and provides additional discussion of trends underlying consolidated financial performance.
A reading of each section is important to understand fully the nature of our
financial performance and prospects.
Forward-Looking Statements
This report, including this MD&A, contains certain forward-looking statements,
including certain plans, expectations, goals, projections, and statements, which
are subject to numerous assumptions, risks, and uncertainties. Statements that
do not describe historical or current facts, including statements about beliefs
and expectations, are forward-looking statements. The forward-looking statements
are intended to be subject to the safe harbor provided by Section 27A of the
Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act.
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) changes in
economic conditions; (3) movements in interest rates; (4) competitive pressures
on product pricing and services; (5) success and timing of other business
strategies; (6) the nature, extent, and timing of governmental actions and
reforms, including existing and potential future restrictions and limitations
imposed in connection with the Troubled Asset Relief Program's (TARP) voluntary
Capital Purchase Plan or otherwise under the Emergency Economic Stabilization
Act of 2008; and (7) extended disruption of vital infrastructure.
Additional factors that could cause results to differ materially from those
described above can be found in our 2008 Form 10-K, and documents subsequently
filed by us with the Securities and Exchange Commission (SEC). All
forward-looking statements included in this filing are based on information
available at the time of the filing. We assume no obligation to update any
forward-looking statement.
Risk Factors
We, like other financial companies, are subject to a number of risks that may
adversely affect our financial condition or results of operation, many of which
are outside of our direct control, though efforts are made to manage those risks
while optimizing returns. Among the risks assumed are: (1) credit risk, which is
the risk of loss due to loan and lease customers or other counterparties not
being able to meet their financial obligations under agreed upon terms, (2)
market risk, which is the risk of loss due to changes in the market value of
assets and liabilities due to changes in market interest rates, foreign exchange
rates, equity prices, and credit spreads, (3) liquidity risk, which is the risk
of loss due to the possibility that funds may not be available to satisfy
current or future obligations resulting from external macro market issues,
investor and customer perception of financial strength, and events unrelated to
the company such as war, terrorism, or financial institution market specific
issues, and (4) operational risk, which is the risk of loss due to human error,
inadequate or failed internal systems and controls, violations of, or
noncompliance with, laws, rules, regulations, prescribed practices, or ethical
standards, and external influences such as market conditions, fraudulent
activities, disasters, and security risks.
More information on risk is set forth under the heading "Risk Factors" included
in Item 1A of our 2008 Form 10-K. Additional information regarding risk factors
can also be found in the "Risk Management and Capital" discussion.
Update to Risk Factors
All of our loan portfolios, particularly our construction and commercial real
estate (CRE) loans, may continue to be affected by the sustained economic
weakness of our Midwest markets and the impact of higher unemployment rates.
This may significantly adversely affect our business, financial condition,
liquidity, capital, and results of operation.
As described in the "Credit Risk" discussion, credit quality performance
continued to be under pressure during the first nine-month period of 2009, with
nonaccrual loans and leases (NALs) and nonperforming assets (NPAs) both
increasing at September 30, 2009, compared with December 31, 2008, and
September 30, 2008. The allowance for credit losses (ACL) of $1,082.1 million at
September 30, 2009, was 2.90% of period-end loans and leases and 50% of
period-end NALs.
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 mitigated through a combination of credit policies and processes,
market risk management activities, and portfolio diversification. However,
adverse changes in our borrowers' ability to meet their financial obligations
under agreed upon terms and, in some cases, to the value of the assets securing
our loans to them may increase our credit risk. Our commercial portfolio, as
well as our real estate-related portfolios, have continued to be negatively
affected by the ongoing reduction in real estate values and reduced levels of
sales and leasing activities. We regularly review the ACL for adequacy
considering changes in economic conditions and trends, as well as loan
collateral values. Our ACL reserving methodology uses individual loan portfolio
performance factors based on an analysis of historical charge-off experience and
migration patterns as part of the determination of ACL adequacy. Such factors
are subject to regular review and may change to reflect updated performance
trends and expectations, particularly in times of severe stress. There is no
certainty that the ACL will be adequate over time to cover credit losses in the
portfolio because of continued adverse changes in the economy, market
conditions, or events adversely affecting specific customers, industries or
markets. If the credit quality of the customer base materially decreases, if the
risk profile of a market, industry, or group of customers changes materially, or
if the ACL is determined to not be adequate, our business, financial condition,
liquidity, capital, and results of operations could be materially adversely
affected.
Bank regulators periodically review our ACL and may require us to increase our
provision for loan and lease losses or loan charge-offs. Any increase in our ACL
or loan charge-offs as required by these regulatory authorities could have a
material adverse effect on our results of operations and our financial
condition.
In particular, an increase in our ACL could result in a reduction in the amount
of our tangible common equity (TCE) and/or our Tier 1 common equity. Given the
focus on these measurements, we may be required to raise additional capital
through the issuance of common stock as a result of an increase in our ACL. The
issuance of additional common stock or other actions could have a dilutive
effect on the existing holders of our common stock, and adversely affect the
market price of our common stock.
Legislative and regulatory actions taken now or in the future to address the
current liquidity and credit crisis in the financial industry may significantly
affect our financial condition, results of operation, liquidity, or stock price.
Current economic conditions, particularly in the financial markets, have
resulted in government regulatory agencies and political bodies placing
increased focus on and scrutiny of the financial services industry. The U.S.
Government has intervened on an unprecedented scale, responding to what has been
commonly referred to as the financial crisis. In addition to the U.S. Treasury
Department's CPP under the TARP announced in the fall of 2008 and the new
Capital Assistance Program (CAP) announced in spring of 2009, the U.S.
Government has taken steps that include enhancing the liquidity support
available to financial institutions, establishing a commercial paper funding
facility, temporarily guaranteeing money market funds and certain types of debt
issuances, and increasing insurance on bank deposits. The U.S. Congress, through
the Emergency Economic Stabilization Act of 2008 and the American Recovery and
Reinvestment Act of 2009, has imposed a number of restrictions and limitations
on the operations of financial services firms participating in the federal
programs.
These programs subject us, and other financial institutions, that participate in
them to additional restrictions, oversight, and costs that may have an adverse
impact on our business, financial condition, results of operations, or the price
of our common stock. In addition, new proposals for legislation continue to be
introduced in the U.S. Congress that could further increase regulation of the
financial services industry and impose restrictions on the operations and
general ability of firms within the industry to conduct business consistent with
historical practices, including as related to compensation, interest rates, the
impact of bankruptcy proceedings on consumer real property mortgages, and
otherwise. Federal and state regulatory agencies also frequently adopt changes
to their regulations and/or change the manner in which existing regulations are
applied. We cannot predict the substance or impact of pending or future
legislation, regulation, or its application. Compliance with such current and
potential regulation and scrutiny may significantly increase our costs, impede
the efficiency of our internal business processes, negatively impact the
recoverability of certain of our recorded assets, require us to increase our
regulatory capital, and limit our ability to pursue business opportunities in an
efficient manner.
Recent legislative proposals in Congress and regulatory proposals at the Federal
Reserve could impact how we assess fees on deposit accounts for items and
transactions that either overdraw an account or that are returned for
nonsufficient funds. These proposals are in the discussion phase and remain
subject to significant modification and revision prior to becoming final, and it
is uncertain what changes, if any, will be adopted. As such, we cannot predict
the impact of these proposals to us, or whether they could have a material and
adverse effect on our results of operations.
If the Federal Deposit Insurance Corporation (FDIC) permits the Transaction
Account Guarantee Program (TAGP) to expire as scheduled on June 30, 2010, our
customers may choose to reduce their deposits with us. This could reduce our
retail and commercial deposits, our primary source of funding for the Bank.
We have elected to participate in the TAGP, a voluntary program provided by the
FDIC as part of its Temporary Liquidity Guarantee Program (TLGP), that is
currently scheduled to expire on June 30, 2010. Under the program, all
noninterest bearing transaction deposit accounts are fully guaranteed by the
FDIC for the entire amount in the account providing our customers with extra
deposit insurance coverage. The coverage under the TAGP is in addition to and
separate from the $250,000 coverage available under the FDIC's general deposit
insurance rules. If the FDIC permits the program to expire as scheduled, our
customers may choose to reduce their deposits with us in an effort to maintain
deposit insurance coverage. This could reduce our retail and commercial core
deposits, our primary source of funding for the Bank.
At September 30, 2009, noninterest bearing transaction account balances
exceeding $250,000 totaled $2.0 billion. This $2.0 billion represents the amount
of noninterest bearing transaction customer deposits that would not have been
FDIC insured without the additional coverage provided by the TAGP.
We may raise additional capital, which could have a dilutive effect on the
existing holders of our common stock and adversely affect the market price of
our common stock.
During the first nine-month period of 2009, we issued 346.8 million shares of
additional common stock through two common stock public offerings, three
discretionary equity issuance programs, and conversions of preferred stock into
common stock. The issuance of these additional shares of common stock resulted
in a 95% increase of outstanding shares of common stock at September 30, 2009,
compared with December 31, 2008, and those additional shares were significantly
dilutive to existing common shareholders. (See the "Capital" section located
within the "Risk Management and Capital" section for additional information). As
of September 30, 2009, we had 128.2 million of additional authorized common
shares available for issuance, and 4.7 million of additional authorized
preferred shares available for issuance.
We are not restricted from issuing additional authorized shares of common stock
or securities that are convertible into or exchangeable for, or that represent
the right to receive, common stock. We continually evaluate opportunities to
access capital markets taking into account our regulatory capital ratios,
financial condition, and other relevant considerations, and anticipate that,
subject to market conditions, we are likely to take further capital actions.
Such actions, with regulatory approval when required, may include
opportunistically retiring our outstanding securities, including our
subordinated debt, trust-preferred securities, and preferred shares, in open
market transactions, privately negotiated transactions, or public offers for
cash or common shares, as well as issuing additional shares of common stock in
public or private transactions in order to increase our capital levels above our
already "well-capitalized" levels, as defined by the federal bank regulatory
agencies, and other regulatory capital targets. On October 22, 2009, we
announced an offer to purchase certain subordinated notes issued previously by
the Bank. The offer established the cash prices that we would pay for each of
the subordinated note issuances, and established a maximum amount that we would
purchase of $400 million of principal outstanding (see "Bank Liquidity and Other
Sources of Liquidity" discussion located within the "Risk Management and
Capital" section).
Both Huntington and the Bank are highly regulated, and we, as well as our
regulators, continue to regularly perform a variety of capital analyses,
including the preparation of stress case scenarios. As a result of those
assessments, we could determine, or our regulators could require us, to raise
additional capital in the future. Any such capital raise could include, among
other things, the potential issuance of additional common equity to the public,
the potential issuance of common equity to the government under the CAP, or the
additional conversions of our existing Series B Preferred Stock to common
equity. There could also be market perceptions that we need to raise additional
capital, and regardless of the outcome of any stress test or other stress case
analysis, such perceptions could have an adverse effect on the price of our
common stock.
Furthermore, in order to improve our capital ratios above our already
"well-capitalized" levels, we can decrease the amount of our risk-weighted
assets, increase capital, or a combination of both. If it is determined that
additional capital is required in order to improve or maintain our capital
ratios, we may accomplish this through the issuance of additional common stock.
The issuance of any additional shares of common stock or securities convertible
into or exchangeable for common stock or that represent the right to receive
common stock, or the exercise of such securities, could be substantially
dilutive to existing common shareholders. Shareholders of our common stock have
no preemptive rights that entitle holders to purchase their pro rata share of
any offering of shares of any class or series and, therefore, such sales or
offerings could result in increased dilution to existing shareholders. The
market price of our common stock could decline as a result of sales of shares of
our common stock or securities convertible into or exchangeable for common stock
in anticipation of such sales.
We are subject to ongoing tax examinations in various jurisdictions. The
Internal Revenue Service and other taxing jurisdictions may propose various
adjustments to our previously filed tax returns. It is possible that the
ultimate resolution of such proposed adjustments, if unfavorable, may be
material to the results of operations in the period it occurs.
The calculation of our provision for federal and state and local income taxes is
complex and requires the use of estimates and judgments. We have two accruals
for income taxes: our federal income tax receivable represents the estimated
amount currently due from the federal government, net of any reserve for
potential audit issues, and is reported as a component of "accrued income and
other assets" and state and local tax reserves for potential audit issues are
reported as a component of "other liabilities" in our consolidated balance
sheet; our deferred federal and state and local income tax asset or liability
represents the estimated impact of temporary differences between how we
recognize our assets and liabilities under GAAP, and how such assets and
liabilities are recognized under federal and state and local tax law.
In the ordinary course of business, we operate in various taxing jurisdictions
and are subject to income and nonincome taxes. The effective tax rate is based
in part on our interpretation of the relevant current tax laws. We believe the
aggregate liabilities related to taxes are appropriately reflected in the
consolidated financial statements. We review the appropriate tax treatment of
all transactions taking into consideration statutory, judicial, and regulatory
guidance in the context of our tax positions. In addition, we rely on various
tax opinions, recent tax audits, and historical experience.
From time to time, we engage in business transactions that may have an effect on
our tax liabilities. Where appropriate, we have obtained opinions of outside
experts and have assessed the relative merits and risks of the appropriate tax
treatment of business transactions taking into account statutory, judicial, and
regulatory guidance in the context of the tax position. However, changes to our
estimates of accrued taxes can occur due to changes in tax rates, implementation
of new business strategies, resolution of issues with taxing authorities
regarding previously taken tax positions and newly enacted statutory, judicial,
and regulatory guidance. Such changes could affect the amount of our accrued
taxes and could be material to our financial position and/or results of
operations.
During the 2009 second quarter, the State of Ohio completed the audit of our
2001, 2002, and 2003 corporate franchise tax returns. During 2008, the Internal
Revenue Service (IRS) completed the audit of our consolidated federal income tax
returns for tax years 2004 and 2005. In addition, we are subject to ongoing tax
examinations in various other state and local jurisdictions. Both the IRS and
various state tax officials have proposed adjustments to our previously filed
tax returns. We believe that the tax positions taken by us related to such
proposed adjustments were correct and supported by applicable statutes,
regulations, and judicial authority, and intend to vigorously defend them. It is
possible that the ultimate resolution of the proposed adjustments, if
unfavorable, may be material to the results of operations in the period it
occurs. However, although no assurances can be given, we believe that the
resolution of these examinations will not, individually or in the aggregate,
have a material adverse impact on our consolidated financial position.
Furthermore, we still face risk relating to the Franklin Credit Management
Corporation (Franklin) relationship not withstanding the restructuring announced
on March 31, 2009. The Franklin restructuring resulted in a $159.9 million net
deferred tax asset equal to the amount of income and equity that was included in
our operating results for the 2009 first quarter. While we believe that our
position regarding the deferred tax asset and related income recognition is
correct, that position could be subject to challenge.
Recent Accounting Pronouncements and Developments
Note 3 to the Unaudited Condensed Consolidated Financial Statements discusses
new accounting pronouncements adopted during 2009 and the expected impact of
accounting pronouncements recently issued but not yet required to be adopted. To
the extent that we believe the adoption of new accounting standards will
materially affect our financial condition, results of operations, or liquidity,
the impacts or potential impacts are discussed in the applicable section of this
MD&A and the Notes to the Unaudited Condensed Consolidated Financial Statements.
Critical Accounting Policies and Use of Significant Estimates
Our financial statements are prepared in accordance with generally accepted
accounting principles 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 2008 Form 10-K as
supplemented by this report lists significant accounting policies we use in the
development and presentation of our financial statements. This MD&A, the
significant accounting policies, and other financial statement disclosures
identify and address key variables and other qualitative and quantitative
factors necessary to understand and evaluate 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.
Estimates are made under facts and circumstances at a point in time, and changes
in those facts and circumstances could produce results that differ from when
those estimates were made. The most significant accounting estimates and their
related application are discussed in our 2008 Form 10-K.
The following discussion provides updates of our accounting estimates related to
the fair value measurements with regard to our ACL, deferred tax assets,
investment securities portfolio, goodwill, Franklin loans, our commercial loan
portfolio, and other real estate owned (OREO).
Total Allowances for Credit Losses (ACL)
The ACL is the sum of the ALLL and the allowance for unfunded loan commitments
and letters of credit (AULC), and represents the estimate of the level of
reserves appropriate to absorb inherent credit losses. The amount of the ACL was
determined by judgments regarding the quality of each individual loan portfolio
and loan commitments. All known relevant internal and external factors that
affected loan collectibility were considered, including analysis of historical
charge-off experience, migration patterns, changes in economic conditions, and
changes in loan collateral values. Such factors are subject to regular review
and may change to reflect updated performance trends and expectations,
particularly in times of severe stress. We believe the process for determining
the ACL considers all of the potential factors that could result in credit
losses. However, the process includes judgmental and quantitative elements that
may be subject to significant change. There is no certainty that the ACL will be
adequate over time to cover credit losses in the portfolio because of continued
adverse changes in the economy, market conditions, or events adversely affecting
specific customers, industries or markets. To the extent actual outcomes differ
from our estimates, the credit quality of our customer base materially
decreases, the risk profile of a market, industry, or group of customers changes
materially, or if the ACL is determined to not be adequate, additional provision
for credit losses could be required, which could adversely affect our business,
financial condition, liquidity, capital, and results of operations in future
periods.
The ACL of $1,082.1 million at September 30, 2009, was 2.90% of period-end loans
and leases. To illustrate the potential effect on the financial statements of
our estimates of the ACL, a 10 basis point, or 3%, increase would have required
$37.0 million in additional reserves (funded by additional provision for credit
losses), which would have negatively impacted the net income of the first
nine-month period of 2009 by approximately $24.1 million, or $0.05 per common
share. The ACL of $1,082.1 million at September 30, 2009, represented a 15%
increase from $944.4 million at December 31, 2008.
Deferred Tax Assets
At September 30, 2009, we had a net deferred tax asset of $297.1 million. Based
. . .
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