Huntington Bancshares Incorporated News
Huntington Bancshares Reports:
PERFORMANCE OVERVIEW Performance compared with the 2007 fourth quarter included: — Net income of $0.35 per common share, compared with a net loss of $0.65 per common share. - Current quarter earnings were positively impacted by $0.03 per common share reflecting the benefits of a gain from the Visa(R) IPO, the partial reversal of the 2007 fourth quarter Visa(R) indemnification charge, and a favorable tax benefit from the reduction of a previously established deferred tax valuation allowance, partially offset by net market-related losses, asset impairment, and merger costs. The 2007 fourth quarter net loss reflected the negative impact of $1.00 per common share consisting of costs associated with Franklin Credit Management Corporation (Franklin), net market-related losses, merger costs, a Visa(R) indemnification charge, and increases to litigation reserves on existing cases. — $88.7 million of provision for credit losses, down from $512.1 million in the 2007 fourth quarter. The current quarter included no Franklin-related provision for credit losses. In contrast, the 2007 fourth quarter total provision for credit losses of $512.1 million consisted of $405.8 million Franklin-related and $106.3 million non-Franklin related provision. Non-Franklin provision for credit losses decreased $17.7 million from $106.3 million to $88.7 million. This reflected the benefit of lower non-Franklin related commercial net charge-offs. — 3.23% net interest margin, down from 3.26% in the 2007 fourth quarter. This reduction primarily reflected the asset-sensitive nature of our balance sheet with a more rapid downward repricing of loans compared with funding costs, primarily deposits, as interest rates declined throughout the 2008 first quarter. — 6% annualized linked-quarter growth in average total commercial loans and a 1% annualized linked-quarter decline in average total consumer loans. — 2% annualized linked-quarter decline in average total core deposits, primarily reflecting a seasonal decline in average non-interest bearing demand deposits. — $65.2 million linked-quarter increase in total non-interest income, primarily reflecting the benefits of a decline in market related losses, the current quarter's gain from the Visa(R) IPO, growth in mortgage origination income, seasonal growth in insurance income, and an increase in automobile operating lease income, partially offset by current quarter seasonal declines in deposit and other service charges. — $69.1 million linked-quarter decline in total non-interest expense. Excluding from both periods merger-related costs, the Visa(R) indemnification impacts, and automobile operating lease expense, as well as asset impairment in the current quarter and the prior quarter's increase to litigation reserves on existing cases, total non-interest expense increased. This increase was due primarily to higher seasonal expenses for payroll taxes, as well as increases in OREO and collection expenses, which more than offset the realization of the remaining targeted $115 million annualized merger expense efficiencies. — $11.1 million 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(R) IPO. — $48.4 million of net charge-offs, or 0.48% of average loans and leases. The current quarter included no Franklin-related net charge-offs. These results compare with $377.9 million, or 3.77%, in the 2007 fourth quarter, which included $308.5 million of Franklin-related and $69.4 million, or 0.72%, non-Franklin related net charge-offs. — 1.53% period-end allowance for loan and lease losses (ALLL) ratio, up from 1.44% at the end of the fourth quarter. — 1% increase in non-performing assets (NPAs) to $1.678 billion from $1.660 billion at the end of the fourth quarter, primarily reflecting: - An 18% increase in non-accrual loans (NALs) to $377.4 million from $319.8 million at the end of the fourth quarter, with most of the increase in middle market commercial real estate (CRE) loans, specifically the single family home builder segment. Period-end NALs represented 0.92% of total loans and leases, up from 0.80% at December 31, 2007. - A 3% decline in the Franklin restructured loans, to $1.157 billion from $1.187 billion. While classified as NPAs, these loans are performing and continued to accrue interest. Importantly, first quarter cash flows substantially exceeded that required by terms of the 2007 fourth quarter restructuring. First quarter performance included no related provision for credit losses or net charge-offs. — 7.55% and 10.86% period-end Tier 1 and Total risk-based capital ratios, both increased from 7.51% and 10.85%, respectively at December 31, 2007, and well above the regulatory \"well capitalized\" minimums of 6.0% and 10.0%, respectively. The \"well capitalized\" level is the highest regulatory capital designation.
"Within the context of increasingly challenging market and economic conditions, we are generally pleased with this performance," said
"We were pleased that credit quality performance was consistent with previously announced expectations," he continued. "Our allowance for loan and lease losses (ALLL) increased 9 basis points, reflecting the impact of increased uncertainties of the current environment, and consistent with our expectation of building most of our ALLL increase in the first half of the year. We anticipate less reserve building in the second half of the year. Our net charge-off ratio was 48 basis points, well below our 2008 full-year net charge-off targeted range which remains at 60-65 basis points. Our expectation is that net charge-offs in coming quarters will be higher than in the first quarter. Building reserves in advance of net charge-offs is consistent with our quantitative ALLL methodology."
He continued, "We continue to monitor closely our lending relationship with Franklin Credit Management Corporation. First quarter cash flows from the Franklin loans substantially exceeded that required per terms of the 2007 fourth quarter restructuring agreement. The loans to Franklin at the end of the quarter were all performing and accruing interest."
"We are reducing our 2008 full-year earnings estimate to
Regarding the decision to reduce the cash dividend, Hoaglin said, "We understand clearly that reducing the dividend is painful for shareholders. Though we believe that our targeted 2008 earnings could continue to support our previous dividend level, the uncertainties of the current environment demand that we proceed cautiously and conservatively with capital. With the current state of markets, the issuance of non-dilutive capital has become cost prohibitive for many regional banks. We think that it is prudent and in the best long-term interests of
FIRST QUARTER PERFORMANCE DISCUSSION Significant Items Influencing Financial Performance Comparisons
Specific significant items impacting 2008 first quarter performance included (see Table 1 below):
— $37.5 million pre-tax ($0.07 per common share) aggregate positive impact related to the Visa(R) IPO, consisting of a $25.1 million gain and a $12.4 million partial reversal of an accrual for indemnification charges established in the 2007 fourth 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(R) IPO. — $20.0 million pre-tax ($0.04 per common share) negative impact of net market-related losses consisting of: - $18.8 million net negative impact of mortgage servicing rights (MSR) hedging consisting of a net impairment loss of $24.7 million included in non-interest income, partially offset by related net interest income benefit of $5.9 million - $3.1 million of impairment losses on certain investment securities, - $2.7 million of equity investment losses, and - $4.5 million of investment securities gains. — $11.0 million pre-tax ($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 discount airline that filed for bankruptcy on April 7, 2008. — $7.1 million pre-tax ($0.01 per common share) of Sky Financial merger-costs (see Estimating the Impact on Balance Sheet and Income Statement Results Due to Acquisitions discussion). Table 1 — Significant Items Impacting Earnings Performance Comparisons(1) Three Months Ended Impact(2) (in millions, except per share) Pre-tax EPS(3) March 31, 2008 — GAAP earnings (loss) $127.1(3) $0.35 — Aggregate impact of Visa(R) IPO 37.5 0.07 — Deferred tax valuation allowance benefit 11.1(3) 0.03 — Net market-related losses (20.0) (0.04) — Asset impairment (11.0) (0.02) — Merger costs (7.1) (0.01) December 31, 2007 — GAAP earnings (loss) $(239.3)(3) $(0.65) — Franklin relationship restructuring (423.6) (0.75) — Net market-related losses (63.5) (0.11) — Merger costs (44.4) (0.08) — Visa(R) indemnification charge (24.9) (0.04) — Increases to litigation reserves (8.9) (0.02) March 31, 2007 — GAAP earnings (loss) $95.7(3) $0.40 — Equity investment losses (8.5) (0.02) — MSR mark-to-market net of hedge-related trading activity (2.0) (0.01) — Litigation losses (1.9) (0.01) (1) Includes significant items with $0.01 EPS impact or greater (2) Favorable (unfavorable) impact on GAAP earnings; pre-tax unless otherwise noted (3) After-tax Net Interest Income, Net Interest Margin, and Average Balance Sheet 2008 First Quarter versus 2007 First Quarter
Fully taxable equivalent net interest income increased
Table 2 — Loans and Leases - 1Q08 vs. 1Q07 Non-merger First Quarter Change Merger Related (in billions) 2008 2007 Amount % Related Amount % (1) Average Loans and Leases Total commercial $22.6 $12.5 $10.2 82 % $8.7 $1.4 7 % Automobile loans and leases 4.4 3.9 0.5 12 0.4 0.1 1 Home equity 7.3 4.9 2.4 48 2.4 (0.0) (0) Residential mortgage 5.4 4.5 0.9 19 1.1 (0.3) (5) Other consumer 0.7 0.4 0.3 69 0.1 0.1 26 Total consumer 17.7 13.7 4.0 29 4.1 (0.1) (0) Total loans and leases $40.4 $26.2 $14.2 54 % $12.8 $1.3 3 % (1) = non-merger related / (prior period + merger-related)
The
— $1.4 billion, or 7%, increase in average total commercial loans, with growth reflected in all three commercial loan categories; i.e. middle market commercial and industrial (C&I) loans, middle market commercial real estate (CRE) loans, and small business loans. Partially offset by: — $0.1 billion decrease in average total consumer loans. This reflected a decline in residential mortgages due to loan sales in the first half of 2007, partially offset by modest growth in automobile loans and leases. Average home equity loans were little changed, reflecting the continued weakness in the housing sector and a softer economy.
Also contributing to the growth in average earning assets was a
The 3.23% fully taxable net interest margin in the current period was below our expectations. This primarily reflected the impact of the rapid reduction in interest rates, which were more quickly reflected in the downward repricing of loans and leases than in our funding costs. Funding costs, particularly as related to deposits, continued to reflect the competitive deposit pricing environment, as well as the low absolute rates in selected deposit accounts, which make it difficult to pass on interest rate reductions equivalent to that occurring in the overall interest rate environment.
Table 3 details the
Table 3 — Deposits - 1Q08 vs. 1Q07 First Quarter Change Merger Non-merger Related (in billions) 2008 2007 Amount % Related Amount % (1) Average Deposits Demand deposits - non- interest bearing $5.0 $3.5 $1.5 43 % $1.8 $(0.3) (6)% Demand deposits - interest bearing 3.9 2.3 1.6 67 1.5 0.1 3 Money market deposits 6.8 5.5 1.3 23 1.0 0.3 4 Savings and other domestic deposits 5.0 2.9 2.1 73 2.6 (0.5) (9) Core certificates of deposit 10.8 5.5 5.3 98 4.6 0.7 7 Total core deposits 31.5 19.7 11.8 60 11.5 0.3 1 Other deposits 6.4 4.7 1.7 36 1.3 0.3 6 Total deposits $37.9 $24.5 $13.5 55 % $12.9 $0.6 2 % (1) = non-merger related / (prior period + merger-related)
Most of the increase in average total deposits was merger-related. The
— $0.3 billion, or 1%, increase in average total core deposits. This reflected continued strong growth in core certificates of deposit, as well as growth in money market deposits and interest bearing demand deposits. Partially offsetting these increases was a decline in non-interest bearing demand deposits, as well as a decline in average savings and other domestic deposits, as customers continued to transfer funds from lower rate to higher rate accounts like certificates of deposits. — $0.3 billion, or 6%, growth in other deposits, primarily other domestic deposits over $100,000. 2008 First Quarter versus 2007 Fourth Quarter
Compared with the 2007 fourth quarter, fully taxable equivalent net interest income decreased
— 10 basis point negative impact representing the lower ongoing earnings from the Franklin loans due principally to the 2007 fourth quarter debt forgiveness. — 9 basis point negative impact of interest rate changes, reflecting an asset-sensitive balance sheet in a period of rapidly declining interest rates. — 1 basis point decline due to earning asset and funding mix changes. Partially offset by: — 15 basis point increase as the Franklin loans accrued interest for the entire 2008 first quarter compared with a partial quarter in the 2007 fourth quarter. — 2 basis points increase related to the fewer number of days in the quarter.
Table 4 details the
Table 4 — Loans and Leases - 1Q08 vs. 4Q07 First Fourth Quarter Quarter Change (in billions) 2008 2007 Amount % Average Loans and Leases Total commercial $22.6 $22.3 $0.3 1 % Automobile loans and leases 4.4 4.3 0.1 2 Home equity 7.3 7.3 (0.0) (0) Residential mortgage 5.4 5.4 (0.1) (2) Other consumer 0.7 0.7 (0.0) (2) Total consumer 17.7 17.8 (0.0) (0) Total loans and leases $40.4 $40.1 $0.3 1 %
The
Table 5 details the
Table 5 — Deposits - 1Q08 vs. 4Q07 First Fourth Quarter Quarter Change (in billions) 2008 2007 Amount % Average Deposits Demand deposits - non-interest bearing $5.0 $5.2 $(0.2) (4)% Demand deposits - interest bearing 3.9 3.9 0.0 0 Money market deposits 6.8 6.8 (0.1) (1) Savings and other domestic deposits 5.0 5.0 (0.0) (0) Core certificates of deposit 10.8 10.7 0.1 1 Total core deposits 31.5 31.7 (0.2) (0) Other deposits 6.4 6.0 0.4 7 Total deposits $37.9 $37.7 $0.3 1 %
Average total deposits were
— $0.4 billion, or 7%, increase in other deposits, reflecting an increase in wholesale deposits. Partially offset by: — $0.2 billion decline in average total core deposits. The primary driver of the change was a seasonal decline in non-interest bearing demand deposits. Within core deposit categories, transfers from lower cost to higher cost deposit accounts continued. Specifically, declines in money market deposits reflected customer transfers out of this lower rate account and into higher rate core certificates of deposit. Provision for Credit Losses
The provision for credit losses in the 2008 first quarter was
Non-Interest Income 2008 First Quarter versus 2007 First Quarter
Non-interest income increased
Table 6 — Non-interest Income - 1Q08 vs. 1Q07 First Quarter Change Merger Non-merger Related (in millions) 2008 2007 Amount % Related Amount % (1) Non-interest Income Service charges on deposit accounts $72.7 $44.8 $27.9 62 % $24.1 $3.8 5 % Trust services 34.1 25.9 8.2 32 7.0 1.2 4 Brokerage and insurance income 36.6 16.1 20.5 NM 17.1 3.4 10 Other service charges and fees 20.7 13.2 7.5 57 5.8 1.7 9 Bank owned life insurance income 13.8 10.9 2.9 27 1.8 1.1 9 Mortgage banking income (loss) (7.1) 9.4 (16.4) NM 6.3 (22.7) NM Securities gains (losses) 1.4 0.1 1.3 NM 0.3 1.0 NM Other income 63.5 24.9 38.6 NM 6.4 32.3 NM Total non-interest income $235.8 $145.2 $90.6 62 % $68.7 $21.9 10 % (1) = non-merger related / (prior period + merger-related) The $21.9 million, or 10%, non-merger-related increase reflected: — $32.3 million increase in other income, primarily reflecting the current quarter's $25.1 million impact related to the Visa(R) IPO, $8.6 million increase in derivative income, lower equity investment losses ($2.7 million in the current quarter vs. $8.5 million in the year-ago quarter), and higher automobile operating lease income ($5.8 million in the current quarter vs. $2.9 million in the year-ago quarter), partially offset by a $5.9 million venture capital loss on an investment in Skybus Airlines in the current quarter. — $3.8 million, or 5%, increase in service charges on deposit accounts, primarily reflecting strong growth in personal service charge income. — $3.4 million, or 10%, growth in brokerage and insurance income, reflecting higher annuity fees and insurance income, including that related to the 2007 fourth quarter acquisition of the Archer-Meek-Weiler agency. — $1.7 million, or 9%, increase in other service charges, reflecting higher debit card volume. — $1.2 million, or 4%, increase in trust services income, reflecting an increase in Huntington Fund fees due to asset growth. Partially offset by: — $22.7 million decline in mortgage banking income. This decline reflected the $24.7 million non-interest income portion of the current quarter's total $18.8 million net negative MSR valuation impact, compared with a $2.0 million net negative MSR valuation impact in the year-ago quarter. 2008 First Quarter versus 2007 Fourth Quarter Non-interest income increased $65.2 million from the 2007 fourth quarter. Table 7 — Non-interest Income - 1Q08 vs. 4Q07 First Fourth Quarter Quarter Change (in millions) 2008 2007 Amount % Non-interest Income Service charges on deposit accounts $72.7 $81.3 $(8.6) (11)% Trust services 34.1 35.2 (1.1) (3) Brokerage and insurance income 36.6 30.3 6.3 21 Other service charges and fees 20.7 21.9 (1.2) (5) Bank owned life insurance income 13.8 13.3 0.5 4 Mortgage banking income (loss) (7.1) 3.7 (10.8) NM Securities gains (losses) 1.4 (11.6) 13.0 NM Other income 63.5 (3.5) 67.0 NM Total non-interest income $235.8 $170.6 $65.2 38 % This $65.2 million, or 38%, increase reflected: — $67.0 million increase in other income. This reflected the comparison benefit of the prior quarter's $34.0 million loss on loans held for sale, the current quarter's $25.1 million impact related to the Visa(R) IPO, a $6.7 million decline in equity investment losses ($2.7 million in the current quarter vs. $9.4 million in the prior quarter), and a $3.2 million increase in automobile operating lease income. These comparative benefits were partially offset by a $5.9 million venture capital loss on an investment in Skybus Airlines in the current quarter. — $1.4 million of net securities gains consisting of $4.5 million of securities gains, partially offset by $3.1 million of securities impairment in the current quarter. This compared with $11.6 million of net securities losses in the prior quarter. — $6.3 million, or 21%, increase in brokerage and insurance income, reflecting higher seasonal insurance income, as well as higher annuity sales fees. Partially offset by: — $10.8 million decline in mortgage banking income. This reflected a $2.2 million, or 14%, increase in core mortgage banking activities, primarily origination and secondary marketing fees, reflecting a 26% increase in originations, more than offset by the current quarter's $24.7 million negative MSR valuation impact, compared with an $11.8 million net negative MSR valuation impact in the prior quarter. — $8.6 million, or 11%, decline in service charges on deposit accounts, primarily reflecting a seasonal decline in personal service charges. — $1.2 million, or 5%, decrease in other service charges and fees, reflecting a seasonal decline in debit card fees. — $1.1 million, or 3%, decline in trust services income, reflecting a decline in asset management fees mostly due to reduced market valuations of assets under management, and to a lesser degree seasonal decline in corporate trust annual renewal fees. Non-interest Expense 2008 First Quarter versus 2007 First Quarter
Non-interest expense increased
Table 8 — Non-interest Expense - 1Q08 vs. 1Q07 First Quarter Change (in millions) 2008 2007 Amount % Non-interest Expense Personnel costs $201.9 $134.6 $67.3 50 % Outside data processing and other services 34.4 21.8 12.5 58 Net occupancy 33.2 19.9 13.3 67 Equipment 23.8 18.2 5.6 31 Amortization of intangibles 18.9 2.5 16.4 NM Marketing 8.9 7.7 1.2 16 Professional services 9.1 6.5 2.6 40 Telecommunications 6.2 4.1 2.1 51 Printing and supplies 5.6 3.2 2.4 73 Other expense 28.3 23.4 4.9 21 Total non-interest expense $370.5 $242.1 $128.4 53 % Merger Merger Non-merger Related (in millions) Related Costs Amount % (1) Non-interest Expense Personnel costs $68.3 $2.7 $(3.6) (2)% Outside data processing and other services 12.3 2.8 (2.5) (7) Net occupancy 10.2 0.5 2.7 9 Equipment 4.8 0.1 0.7 3 Amortization of intangibles 16.5 - (0.1) (0) Marketing 4.4 0.0 (3.2) (26) Professional services 2.7 (0.4) 0.3 3 Telecommunications 2.2 0.6 (0.7) (10) Printing and supplies 1.4 0.0 1.0 21 Other expense 13.0 (0.1) (8.1) (22) Total non-interest expense $135.7 $6.3 $(13.5) (4)% (1) = non-merger related / (prior period + merger-related) The $13.5 million, or 4%, non-merger-related decline reflected: — $8.1 million, or 22%, decline in other expense. This decline primarily reflected the benefit of the current quarter's $12.4 million Visa(R) indemnification reversal, partially offset by $2.6 million of the current quarter's $11.0 million in asset impairment. — $3.6 million, or 2%, decline in personnel expense, reflecting the benefit of merger efficiencies, including the impact of a 429 reduction, or 4%, in full-time equivalent staff during the 2008 first quarter and a 387, or 3%, reduction during the 2007 fourth quarter. — $3.2 million, or 26%, decline in marketing expense. — $2.5 million, or 7%, decline in outside data processing and other services, reflecting merger-related expense efficiencies. Partially offset by: — $2.7 million, or 9%, increase in net occupancy expense, reflecting a $2.5 million write down of leasehold improvement in our Cleveland main office, which was part of the current quarter's $11.0 million asset impairment. 2008 First Quarter versus 2007 Fourth Quarter
Non-interest expense decreased
Table 9 — Non-interest Expense - 1Q08 vs. 4Q07 First Fourth Quarter Quarter Change Merger Non-merger Related (in millions) 2008 2007 Amount % Costs Amount % (1) Non-interest Expense Personnel costs $201.9 $214.9 $(12.9) (6)% $(20.1) $7.2 4 % Outside data processing and other services 34.4 39.1 (4.8) (12) (3.6) (1.2) (3) Net occupancy 33.2 26.7 6.5 24 (0.8) 7.3 28 Equipment 23.8 22.8 1.0 4 (0.1) 1.0 5 Amortization of intangibles 18.9 20.2 (1.2) (6) - (1.2) (6) Marketing 8.9 16.2 (7.3) (45) (6.8) (0.4) (5) Professional services 9.1 14.5 (5.4) (37) (3.8) (1.6) (15) Telecommunications 6.2 8.5 (2.3) (27) (0.4) (1.9) (23) Printing and supplies 5.6 6.6 (1.0) (15) (1.0) 0.0 0 Other expense 28.3 70.1 (41.8) (60) (0.9) (40.9) (59) Total non-interest expense $370.5 $439.6 $(69.1) (16)% $(37.3) $(31.7) (8)% (1) = non-merger related / (prior period + merger-related) The $31.7 million, or 8%, non-merger-related decrease reflected: — $40.9 million decrease in other expense, reflecting the current quarter's $12.4 million Visa(R) indemnification reversal compared with the $24.9 million Visa(R) indemnification charge in the prior quarter and an $8.9 million decrease in litigation expense, partially offset by $2.6 million of the current quarter's $11.0 million in asset impairment. Partially offset by: — $7.3 million increase in net occupancy expense, reflecting $3.0 million in seasonal snow removal expense and a $2.5 million write down of leasehold improvements in our Cleveland main office, which was part of the current quarter's $11.0 million asset impairment. — $7.2 million increase in personnel costs, reflecting a seasonal increase in employment taxes, including FICA. Income Taxes
The provision for income taxes in the 2008 first quarter was
Franklin Credit Management Relationship
At
Though the
Credit Quality
The Franklin 2007 fourth quarter restructuring materially impacted that quarter's credit quality metrics and, as such, impacts significantly comparative performance discussions. Therefore, and for analytical purposes as an aid to understanding credit quality performance trends, certain credit quality performance metrics in the following tables and discussion that follows detail the Franklin impact, as well as non-Franklin-related metrics and performance.
Credit quality performance in the 2008 first quarter was mixed, with positive overall net charge-off results, offset by increases in the absolute and relative level of reserves. The reserve increase reflected the impact of the continued economic weakness across our Midwest markets, most notably in portfolios related to the residential housing sector, both commercial and consumer. These economic factors influenced the performance of net charge-offs (NCOs), non-accrual loans (NALs), and non-performing assets (NPAs). To maintain the adequacy of our reserves, there was a commensurate significant increase in the provision for credit losses (see Provision for Credit Losses discussion) in order to increase the absolute and relative levels of our allowance for credit losses (ACL).
Net Charge-Offs
Total net charge-offs for the 2008 first quarter were
First quarter net charge-offs in the year-ago quarter were
Table 10 - Franklin Impact on Net Charge-offs (in millions) First Quarter 2008 Reported Franklin Non-Franklin Net charge-offs (recoveries) by loan and lease type: Middle-market C&I $3.1 $- $3.1 Total commercial 15.0 - 15.0 Total net charge-offs 48.4 - 48.4 Net charge-offs (recoveries) - annualized percentages: Middle-market C&I 0.12 % - % 0.13 % Total commercial 0.27 - 0.28 Total net charge-offs 0.48 % - % 0.49 % Average loans and leases Middle-market C&I $10,506 $1,172 $9,334 Total commercial 22,630 1,172 21,458 Total loans and leases 40,367 1,172 39,195 First Quarter (in millions) Fourth Quarter 2007 2007 Reported Franklin Non- Franklin Net charge-offs (recoveries) by loan and lease type: Middle-market C&I $318.5 $308.5 $10.0 $(0.0) Total commercial 344.6 308.5 36.1 2.5 Total net charge-offs 377.9 308.5 69.4 18.1 Net charge-offs (recoveries) - annualized percentages: Middle-market C&I 12.30 % 81.08 % 0.45 % - % Total commercial 6.18 81.08 0.70 0.08 Total net charge-offs 3.77 % 81.08 % 0.72 % 0.28 % Average loans and leases Middle-market C&I $10,445 $1,522 $8,923 $6,084 Total commercial 22,323 1,522 20,801 12,459 Total loans and leases 40,109 1,522 38,587 26,203
Total commercial net charge-offs for the 2008 first quarter of
Total consumer net charge-offs in the current quarter were
Automobile loan and lease net charge-offs were
Home equity net charge-offs in the 2008 first quarter were
Residential mortgage net charge-offs were
Non-accrual Loans and Non-performing Assets
Non-accrual loans (NALs) were
Non-performing assets (NPAs), which include NALs, were
— $57.6 million increase in NALs as discussed above. Partially offset by: — $30.0 million, or 3%, reduction in restructured Franklin loans. — $7.1 million, or 10%, reduction in impaired loans held for sale, reflecting payments. — $1.5 million decline in other NPAs, representing the further write down of certain investment securities backed by mortgage loans.
The over 90-day delinquent, but still accruing, ratio was 0.37% at
Allowances for Credit Losses (ACL)
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.
At
Table 11 shows the change in the ALLL ratio and each reserve component for the 2008 first quarter and for the 2007 fourth and first quarters.
Table 11 - Components of ALLL as Percent of Total Loans and Leases 1Q08 change from 1Q08 4Q07 1Q07 4Q07 1Q07 Transaction reserve (1) 1.34% 1.27% 0.89% 0.07% 0.45% Economic reserve 0.19 0.17 0.19 0.02 - - Total ALLL 1.53% 1.44% 1.08% 0.09% 0.45% (1) Includes specific reserve
The ALLL as a percent of NALs was 166% at
On a combined basis, the ACL as a percent of total loans and leases at
Capital
At
At
No shares were repurchased during the quarter. Though there are currently 3.9 million shares remaining available under the current authorization announced
2008 OUTLOOK
When earnings guidance is given, it is our practice to do so on a GAAP basis, unless otherwise noted. Such guidance includes the expected results of all significant forecasted activities. However, guidance typically excludes selected items where the timing and financial impact is uncertain until the impact can be reasonably forecasted, as well as potential unusual or one-time items.
Our expectation for 2008 is that the Midwest economic environment will continue to be negatively impacted by weaknesses in the residential real estate development markets and softness in certain manufacturing sectors. How much these factors will affect banking activities and overall credit quality trends is unknown. However, it is our expectation that the greatest impact will continue to be among our borrowers in eastern
The assumptions listed below form the basis for our 2008 full-year earnings outlook.
— Full-year net interest margin of around 3.20%, reflecting continued competitive market pricing, as well as the impact of a planned issuance of capital securities. — Full-year average total loan growth in the low-single digit range off the 2007 fourth quarter level, with commercial loans in the mid-single digit range and consumer loans being flat. — Full-year average core deposit growth in the low-single digit range off the 2007 fourth quarter level. — Full-year non-interest income growth in the low-single digit range from the annualized 2008 first quarter non-interest income level adjusted for seasonal performance and the significant items noted earlier (see Significant Items Influencing Financial Performance Comparisons discussion and Table 1). — Full-year non-interest expenses that are flat to down from the annualized 2008 first quarter non-interest expense level adjusted for seasonal performance and the significant items noted earlier (see Significant Items Influencing Financial Performance Comparisons discussion and Table 1). — Moderate increase in the ALLL ratio from the 1.53% level at the end of the 2008 first quarter through June 30, 2008, with modest increases thereafter through December 31, 2008. Full-year net charge-offs in the 60-65 basis point range. — No significant net market-related gains or losses. — A capital issuance in the second quarter. — No share repurchases. — The effective tax rate for full-year 2008 in a range of 24%-27%.
With the above assumptions, earnings for full year 2008 are targeted for
Conference Call / Webcast Information
Forward-looking Statement
This press release contains certain forward-looking statements, including certain plans, expectations, goals, projections, and statements, which are subject to numerous assumptions, risks, and uncertainties. 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
Basis of Presentation Use of Non-GAAP Financial Measures
This earnings release contains GAAP financial measures and non-GAAP financial measures where management believes it to be helpful in understanding
Significant Items
Certain components of the Income Statement are naturally subject to more volatility than others. As a result, analysts/investors may view such items differently in their assessment of performance compared with their expectations and/or any implications resulting from them on their assessment of future performance trends. It is a general practice of analysts/investors to try and determine their perception of what "underlying" or "core" earnings performance is in any given reporting period, as this typically forms the basis for their estimation of performance in future periods.
Therefore, Management believes the disclosure of certain "Significant Items" in current and prior period results aids analysts/investors in better understanding corporate performance so that they can ascertain for themselves what, if any, items they may wish to include/exclude from their analysis of performance; i.e., within the context of determining how that performance differed from their expectations, as well as how, if at all, to adjust their estimates of future performance accordingly.
To this end, Management has adopted a practice of listing as "Significant Items" in its external disclosure documents (e.g., earnings press releases, investor presentations, Forms 10-Q and 10-K) individual and/or particularly volatile items that impact the current period results by
Timing Differences
Part of the company's regular business activities are by their nature volatile; e.g. capital markets income, gains and losses on the sale of loans, etc. While such items may generally be expected to occur within a full-year reporting period, they may vary significantly from period to period. Such items are also typically a component of an Income Statement line item and not, therefore, readily discernable. By specifically disclosing such items, analysts/investors can better assess how, if at all, to adjust their estimates of future performance.
Other Items
From time to time, an event or transaction might significantly impact revenues, expenses, or taxes in a particular reporting period that are judged to be one-time, short-term in nature, and/or materially outside typically expected performance. Examples would be (1) merger costs as they typically impact expenses for only a few quarters during the period of transition; e.g., restructuring charges, asset valuation adjustments, etc.; (2) changes in an accounting principle; (3) one-time tax assessments/refunds; (4) a large gain/loss on the sale of an asset; (5) outsized commercial loan net charge- offs related to fraud; etc. In addition, for the periods covered by this release, 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, analysts/investors can better assess how, if at all, to adjust their estimates of future performance.
Provision for Credit Losses
While the provision for credit losses may vary significantly between periods, Management typically excludes it from the list of "Significant Items", unless in Management's view, there is a significant specific credit(s), which is causing distortion in the period.
Provision expense is always an assumption in analyst/investor expectations of earnings and there is apparent agreement among them that provision expense is included in their definition of "underlying" or "core" earnings unlike "timing differences" or "other items". In addition, provision expense is an individual Income Statement line item so its value is easily known and, except in very rare situations, the amount in any reporting period always exceeds
In addition, provision expense trends usually increase/decrease in a somewhat orderly pattern in conjunction with credit quality cycle changes; i.e., as credit quality improves provision expense generally declines and vice versa. While they may have differing views regarding magnitude and/or trends in provision expense, every analyst and most investors incorporate a provision expense estimate in their financial performance estimates.
Other Exclusions
"Significant Items" for any particular period are not intended to be a complete list of items that may significantly impact future periods. A number of factors, including those described in
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