8. OTHER COMPREHENSIVE INCOME
The components of other comprehensive income for the three-month and nine-month periods ended September 30, 2011 and 2010, were as follows:
| | | Three Months Ended | |
| | | September 30, 2011 | |
| | | Tax (Expense) | |
| (dollar amounts in thousands) | | Pretax | | | Benefit | | | After-tax | |
| Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold | | $ | (4,362 | ) | | $ | 1,527 | | | $ | (2,835 | ) |
| Unrealized holding gains (losses) on available-for-sale debt securities arising during the period | | | 42,832 | | | | (15,180 | ) | | | 27,652 | |
| Less: Reclassification adjustment for net losses (gains) included in net income | | | 1,350 | | | | (473 | ) | | | 877 | |
| Net change in unrealized holding gains (losses) on available-for-sale debt securities | | | 39,820 | | | | (14,126 | ) | | | 25,694 | |
| | | | | | | | | | | | | |
| Net change in unrealized holding gains (losses) on available-for-sale equity securities | | | (197 | ) | | | 69 | | | | (128 | ) |
| | | | | | | | | | | | | |
| Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period | | | 21,494 | | | | (7,523 | ) | | | 13,971 | |
| | | | | | | | | | | | | |
| Change in pension and post-retirement benefit plan assets and liabilities | | | 4,003 | | | | (1,401 | ) | | | 2,602 | |
| Total other comprehensive income | | $ | 65,120 | | | $ | (22,981 | ) | | $ | 42,139 | |
| | | Three Months Ended | |
| | | September 30, 2010 | |
| | | Tax (Expense) | |
| (dollar amounts in thousands) | | Pretax | | | Benefit | | | After-tax | |
| Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold | | $ | 30,492 | | | $ | (10,672 | ) | | $ | 19,820 | |
| Unrealized holding gains (losses) on available-for-sale debt securities arising during the period | | | 28,767 | | | | (10,276 | ) | | | 18,491 | |
| Less: Reclassification adjustment for net losses (gains) included in net income | | | 296 | | | | (104 | ) | | | 192 | |
| Net change in unrealized holding gains (losses) on available-for-sale debt securities | | | 59,555 | | | | (21,052 | ) | | | 38,503 | |
| | | | | | | | | | | | | |
| Net change in unrealized holding gains (losses) on available-for-sale equity securities | | | (53 | ) | | | 19 | | | | (34 | ) |
| | | | | | | | | | | | | |
| Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period | | | 25,180 | | | | (8,813 | ) | | | 16,367 | |
| | | | | | | | | | | | | |
| Change in pension and post-retirement benefit plan assets and liabilities | | | 1,794 | | | | (628 | ) | | | 1,166 | |
| Total other comprehensive income | | $ | 86,476 | | | $ | (30,474 | ) | | $ | 56,002 | |
| | | Nine Months Ended | |
| | | September 30, 2011 | |
| | | Tax (expense) | |
| (dollar amounts in thousands) | | Pretax | | | Benefit | | | After-tax | |
| Non credit related impairment recoveries (losses) on debt securities not expected to be sold | | $ | 11,079 | | | $ | (3,878 | ) | | $ | 7,201 | |
| Unrealized holding gains (losses) on available-for-sale debt securities arising during the period | | | 132,575 | | | | (46,446 | ) | | | 86,129 | |
| Less: Reclassification adjustment for net losses (gains) included in net income | | | (197 | ) | | | 69 | | | | (128 | ) |
| Net change in unrealized holding gains (losses) on available-for-sale debt securities | | | 143,457 | | | | (50,255 | ) | | | 93,202 | |
| | | | | | | | | | | | | |
| Net change in unrealized holding gains (losses) on available-for-sale equity securities | | | (145 | ) | | | 50 | | | | (95 | ) |
| | | | | | | | | | | | | |
| Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period | | | 24,897 | | | | (8,714 | ) | | | 16,183 | |
| | | | | | | | | | | | | |
| Change in pension and post-retirement benefit plan assets and liabilities | | | 12,003 | | | | (4,201 | ) | | | 7,802 | |
| Total other comprehensive income | | $ | 180,212 | | | $ | (63,120 | ) | | $ | 117,092 | |
| | | Nine Months Ended | |
| | | September 30, 2010 | |
| | | Tax (expense) | |
| (dollar amounts in thousands) | | Pretax | | | Benefit | | | After-tax | |
| Cumulative effect of change in accounting principle for consolidation of variable interest entities | | $ | (6,365 | ) | | $ | 2,116 | | | $ | (4,249 | ) |
| | | | | | | | | | | | | |
| Non credit related impairment recoveries (losses) on debt securities not expected to be sold | | | 36,570 | | | | (12,799 | ) | | | 23,771 | |
| Unrealized holding gains (losses) on available-for-sale debt securities arising during the period | | | 137,051 | | | | (48,578 | ) | | | 88,473 | |
| Less: Reclassification adjustment for net losses (gains) included in net income | | | 171 | | | | (60 | ) | | | 111 | |
| Net change in unrealized holding gains (losses) on available-for-sale debt securities | | | 173,792 | | | | (61,437 | ) | | | 112,355 | |
| | | | | | | | | | | | | |
| Net change in unrealized holding gains (losses) on available-for-sale equity securities | | | (241 | ) | | | 85 | | | | (156 | ) |
| | | | | | | | | | | | | |
| Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period | | | 26,371 | | | | (9,230 | ) | | | 17,141 | |
| | | | | | | | | | | | | |
| Change in pension and post-retirement benefit plan assets and liabilities | | | 5,382 | | | | (1,884 | ) | | | 3,498 | |
| Total other comprehensive income | | $ | 198,939 | | | $ | (70,350 | ) | | $ | 128,589 | |
Activity in accumulated other comprehensive income, net of tax, for the nine-month periods ended September 30, 2011 and 2010, were as follows:
| (dollar amounts in thousands) | | Unrealized
gains and
(losses) on debt
securities (1) | | | Unrealized
gains and
(losses) on
equity securities | | | Unrealized
gains and
(losses) on
cash flow
hedging derivatives | | | Unrealized
gains (losses)
for pension and other post-retirement
obligations | | | Total | |
| Balance, December 31, 2009 | | $ | (103,060 | ) | | $ | (322 | ) | | $ | 58,865 | | | $ | (112,468 | ) | | $ | (156,985 | ) |
| Cumulative effect of change in accounting principle for consolidation of variable interest entities | | | (4,249 | ) | | | — | | | | — | | | | — | | | | (4,249 | ) |
| Period change | | | 112,355 | | | | (156 | ) | | | 17,141 | | | | 3,498 | | | | 132,838 | |
| Balance, September 30, 2010 | | $ | 5,046 | | | $ | (478 | ) | | $ | 76,006 | | | $ | (108,970 | ) | | $ | (28,396 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2010 | | $ | (101,290 | ) | | $ | (427 | ) | | $ | 35,710 | | | $ | (131,489 | ) | | $ | (197,496 | ) |
| Period change | | | 93,202 | | | | (95 | ) | | | 16,183 | | | | 7,802 | | | | 117,092 | |
| Balance, September 30, 2011 | | $ | (8,088 | ) | | $ | (522 | ) | | $ | 51,893 | | | $ | (123,687 | ) | | $ | (80,404 | ) |
(1) Amount at September 30, 2011 includes $0.4 million of net unrealized gains on securities transferred from the available-for-sale securities portfolio to the held-to-maturity securities portfolio. The net unrealized gains will be recognized in earnings over the remaining life of the security using the effective interest method.
9. SHAREHOLDERS’ EQUITY
Repurchase of Outstanding TARP Capital and Warrant to Repurchase Common Stock
In 2008, Huntington received $1.4 billion of equity capital by issuing to the Treasury 1.4 million shares of TARP Capital and a ten-year warrant to purchase up to 23.6 million shares of Huntington’s common stock, par value $0.01 per share, at an exercise price of $8.90 per share. As approved by the Federal Reserve Board, the Treasury, and our other banking regulators, on December 22, 2010, Huntington repurchased all 1.4 million shares of our TARP Capital held by the Treasury totaling $1.4 billion. Huntington used the net proceeds from the issuance of common stock and subordinated debt, as well as other funds, to redeem the TARP Capital. On January 19, 2011, Huntington repurchased the warrant originally issued to the Treasury for a purchase price of $49.1 million.
Share Repurchase Program
Huntington did not repurchase any shares for the three-month or nine-month periods ended September 30, 2011 and 2010.
Dividends on common stock
On October 20, 2011, Huntington announced that the board of directors had declared a quarterly common stock cash dividend of $0.04 per common share. The dividend is payable on January 3, 2012, to shareholders of record on December 20, 2011.
10. EARNINGS PER SHARE
Basic earnings per share is the amount of earnings (adjusted for dividends declared on preferred stock) available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issued for stock options, restricted stock units and awards, distributions from deferred compensation plans, and the conversion of Huntington’s convertible preferred stock. Potentially dilutive common shares are excluded from the computation of diluted earnings per share in periods in which the effect would be antidilutive. For diluted earnings per share, net income available to common shares can be affected by the conversion of Huntington’s convertible preferred stock. Where the effect of this conversion would be dilutive, net income available to common shareholders is adjusted by the associated preferred dividends and deemed dividend. The calculation of basic and diluted earnings per share for each of the three-month and nine-month periods ended September 30, 2011 and 2010, was as follows:
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30, | | | September 30, | |
| (dollar amounts in thousands, except per share amounts) | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Basic earnings per common share: | | | | | | | | | | | | |
| Net income | | $ | 143,391 | | | $ | 100,946 | | | $ | 415,755 | | | $ | 189,447 | |
| Preferred stock dividends, deemed dividend and accretion of discount | | | (7,703 | ) | | | (29,495 | ) | | | (23,110 | ) | | | (88,278 | ) |
| Net income available to common shareholders | | $ | 135,688 | | | $ | 71,451 | | | $ | 392,645 | | | $ | 101,169 | |
| Average common shares issued and outstanding | | | 863,911 | | | | 716,911 | | | | 863,542 | | | | 716,604 | |
| Basic earnings per common share | | $ | 0.16 | | | $ | 0.10 | | | $ | 0.45 | | | $ | 0.14 | |
| | | | | | | | | | | | | | | | | |
| Diluted earnings per common share | | | | | | | | | | | | | | | | |
| Net income available to common shareholders | | $ | 135,688 | | | $ | 71,451 | | | $ | 392,645 | | | $ | 101,169 | |
| Effect of assumed preferred stock conversion | | | — | | | | — | | | | — | | | | — | |
| Net income applicable to diluted earnings per share | | $ | 135,688 | | | $ | 71,451 | | | $ | 392,645 | | | $ | 101,169 | |
| Average common shares issued and outstanding | | | 863,911 | | | | 716,911 | | | | 863,542 | | | | 716,604 | |
| Dilutive potential common shares: | | | | | | | | | | | | | | | | |
| Stock options and restricted stock units and awards | | | 2,646 | | | | 1,764 | | | | 2,938 | | | | 1,711 | |
| Shares held in deferred compensation plans | | | 1,076 | | | | 892 | | | | 966 | | | | 867 | |
| Conversion of preferred stock | | | — | | | | — | | | | — | | | | — | |
| Dilutive potential common shares: | | | 3,722 | | | | 2,656 | | | | 3,904 | | | | 2,578 | |
| Total diluted average common shares issued and outstanding | | | 867,633 | | | | 719,567 | | | | 867,446 | | | | 719,182 | |
| Diluted earnings per common share | | $ | 0.16 | | | $ | 0.10 | | | $ | 0.45 | | | $ | 0.14 | |
Approximately 24.6 million and 19.2 million options to purchase shares of common stock outstanding at the end of September 30, 2011 and 2010, respectively, were not included in the computation of diluted earnings per share because the effect would be antidilutive. The weighted average exercise price for these options was $12.57 per share and $18.06 per share at the end of each respective period.
11. SHARE-BASED COMPENSATION
Huntington sponsors nonqualified and incentive share-based compensation plans. These plans provide for the granting of stock options and other awards to officers, directors, and other employees. Compensation costs are included in personnel costs on the Condensed Consolidated Statements of Income. Stock options are granted at the closing market price on the date of the grant. Options granted typically vest ratably over three years or when other conditions are met. Options granted prior to May 2004 have a term of ten years. All options granted after May 2004 have a term of seven years.
Huntington uses the Black-Scholes option pricing model to value share-based compensation expense. Forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense recognized. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. Expected volatility is based on the estimated volatility of Huntington’s stock over the expected term of the option. The expected dividend yield is based on the dividend rate and stock price at the date of the grant. The following table illustrates the weighted-average assumptions used in the option-pricing model for options granted in the three-month and nine-month periods ended September 30, 2011 and 2010.
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30, | | | September 30, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Assumptions | | | | | | | | | | | | | | | | |
| Risk-free interest rate | | | 1.97 | % | | | 2.14 | % | | | 1.97 | % | | | 2.31 | % |
| Expected dividend yield | | | 2.64 | | | | 0.63 | | | | 2.62 | | | | 0.67 | |
| Expected volatility of Huntington's common stock | | | 30.0 | | | | 32.5 | | | | 30.0 | | | | 38.6 | |
| Expected option term (years) | | | 6.0 | | | | 6.0 | | | | 6.0 | | | | 6.0 | |
| | | | | | | | | | | | | | | | | |
| Weighted-average grant date fair value per share | | $ | 1.40 | | | $ | 2.05 | | | $ | 1.41 | | | $ | 2.21 | |
The following table illustrates total share-based compensation expense and related tax benefit for the three-month and nine-month periods ended September 30, 2011 and 2010:
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30, | | | September 30, | |
| (dollar amounts in thousands) | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Share-based compensation expense | | $ | 6,463 | | | $ | 4,525 | | | $ | 13,986 | | | $ | 11,413 | |
| Tax benefit | | | 2,182 | | | | 1,584 | | | | 4,815 | | | | 3,995 | |
Huntington’s stock option activity and related information for the nine-month period ended September 30, 2011, was as follows:
| | | | | | | | | Weighted- | | | | |
| | | | | | Weighted- | | | Average | | | | |
| | | | | | Average | | | Remaining | | | Aggregate | |
| | | | | | Exercise | | | Contractual | | | Intrinsic | |
| (amounts in thousands, except years and per share amounts) | | Options | | | Price | | | Life (Years) | | | Value | |
| Outstanding at January 1, 2011 | | | 21,862 | | | $ | 15.96 | | | | | | | |
| Granted | | | 10,625 | | | | 6.03 | | | | | | | |
| Exercised | | | (99 | ) | | | 4.06 | | | | | | | |
| Forfeited/expired | | | (4,756 | ) | | | 19.02 | | | | | | | |
| | | | | | | | | | | | | | | |
| Outstanding at September 30, 2011 | | | 27,632 | | | $ | 11.65 | | | | 4.3 | | | $ | 1,614 | |
| | | | | | | | | | | | | | | | | |
| Vested and expected to vest at September 30, 2011 (1) | | | 26,327 | | | $ | 11.94 | | | | 4.2 | | | $ | 1,583 | |
| | | | | | | | | | | | | | | | | |
| Exercisable at September 30, 2011 | | | 14,160 | | | $ | 17.15 | | | | 2.3 | | | $ | 959 | |
(1) The number of options expected to vest includes an estimate of expected forfeitures.
The aggregate intrinsic value represents the amount by which the fair value of underlying stock exceeds the “in-the-money” option exercise price. For the nine-month period ended September 30, 2011 and September 30, 2010, cash received for the exercises of stock options was $0.4 million and $0.2 million, respectively. The tax benefit realized from stock option exercises was less than $0.1 million for each respective period.
Huntington also grants restricted stock units and awards. Restricted stock units and awards are issued at no cost to the recipient, and can be settled only in shares at the end of the vesting period. Restricted stock awards provide the holder with full voting rights and cash dividends during the vesting period. Restricted stock units do not provide the holder with voting rights or cash dividends during the vesting period, but do accrue a dividend equivalent that is paid upon vesting, and are subject to certain service restrictions. The fair value of the restricted stock units and awards is the closing market price of the Huntington’s common stock on the date of award.
The following table summarizes the status of Huntington's restricted stock units and restricted stock awards as of September 30, 2011, and activity for the nine-month period ended September 30, 2011:
| | | | | | Weighted- | | | | | | Weighted- | |
| | | | | | Average | | | | | | Average | |
| | | Restricted | | | Grant Date | | | Restricted | | | Grant Date | |
| | | Stock | | | Fair Value | | | Stock | | | Fair Value | |
| (amounts in thousands, except per share amounts) | | Units | | | Per Share | | | Awards (1) | | | Per Share | |
| Nonvested at January 1, 2011 | | | 5,511 | | | $ | 5.78 | | | | 466 | | | $ | 5.24 | |
| Granted | | | 3,775 | | | | 6.27 | | | | — | | | | — | |
| Vested | | | (963 | ) | | | 5.97 | | | | (428 | ) | | | 5.43 | |
| Forfeited | | | (258 | ) | | | 6.33 | | | | (13 | ) | | | 3.11 | |
| Nonvested at September 30, 2011 | | | 8,065 | | | $ | 5.97 | | | | 25 | | | $ | 3.11 | |
| (1) | Includes restricted stock awards granted under the Second Amended and Restated 2007 Stock and Long-Term Incentive Plan to certain executives as a portion of their annual base salary. These awards are 100% vested as of the grant date and are not subject to any requirement of future service. However, the shares are subject to restrictions regarding sale, transfer, pledge, or disposition until certain conditions are met. All awards vested in the 2011 second quarter. |
The weighted-average grant date fair value of nonvested shares granted for the nine-month periods ended September 30, 2011 and 2010, were $6.27 and $6.20, respectively. The total fair value of awards vested was $8.7 million and $2.8 million during the nine-month periods ended September 30, 2011, and 2010, respectively. As of September 30, 2011, the total unrecognized compensation cost related to nonvested awards was $32.2 million with a weighted-average expense recognition period of 2.0 years.
Of the remaining 38.8 million shares of common stock authorized for issuance at September 30, 2011, 35.7 million were outstanding and 3.1 million were available for future grants. Huntington issues shares to fulfill stock option exercises and restricted stock units from available authorized shares. At September 30, 2011, Management believes there are adequate authorized shares available to satisfy anticipated stock option exercises in 2011.
12. BENEFIT PLANS
Huntington sponsors the Plan, a non-contributory defined benefit pension plan covering substantially all employees hired or rehired prior to January 1, 2010. The Plan provides benefits based upon length of service and compensation levels. The funding policy of Huntington is to contribute an annual amount that is at least equal to the minimum funding requirements but not more than the amount deductible under the Internal Revenue Code. There is no required minimum contribution for 2011, although Huntington contributed $50.0 million to the Plan in March 2011.
In addition, Huntington has an unfunded defined benefit post-retirement plan that provides certain healthcare and life insurance benefits to retired employees who have attained the age of 55 and have at least 10 years of vesting service under this plan. For any employee retiring on or after January 1, 1993, post-retirement healthcare benefits are based upon the employee’s number of months of service and are limited to the actual cost of coverage. Life insurance benefits are a percentage of the employee’s base salary at the time of retirement, with a maximum of $50,000 of coverage. The employer paid portion of the post-retirement health and life insurance plan was eliminated for employees retiring on and after March 1, 2010. Eligible employees retiring on and after March 1, 2010, who elect retiree medical coverage, will pay the full cost of this coverage. Huntington will not provide any employer paid life insurance to employees retiring on and after March 1, 2010. Eligible employees will be able to convert or port their existing life insurance at their own expense under the same terms that are available to all terminated employees.
The following table shows the components of net periodic benefit expense of the Plan and the Post-Retirement Benefit Plan:
| | | Pension Benefits | | | Post Retirement Benefits | |
| | | Three Months Ended | | | Three Months Ended | |
| | | September 30, | | | September 30, | |
| (dollar amounts in thousands) | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Service cost | | $ | 5,412 | | | $ | 5,051 | | | $ | — | | | $ | — | |
| Interest cost | | | 7,518 | | | | 7,217 | | | | 404 | | | | 433 | |
| Expected return on plan assets | | | (10,822 | ) | | | (10,528 | ) | | | — | | | | — | |
| Amortization of transition asset | | | (1 | ) | | | 1 | | | | — | | | | — | |
| Amortization of prior service cost | | | (1,442 | ) | | | (1,442 | ) | | | (338 | ) | | | (339 | ) |
| Amortization of gains | | | 5,873 | | | | 3,748 | | | | (106 | ) | | | (174 | ) |
| Settlements | | | 1,750 | | | | 3,925 | | | | — | | | | — | |
| Benefit expense | | $ | 8,288 | | | $ | 7,972 | | | $ | (40 | ) | | $ | (80 | ) |
| | | Pension Benefits | | | Post Retirement Benefits | |
| | | Nine Months Ended | | | Nine Months Ended | |
| | | September 30, | | | September 30, | |
| (dollar amounts in thousands) | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Service cost | | $ | 16,238 | | | $ | 15,153 | | | $ | — | | | $ | — | |
| Interest cost | | | 22,554 | | | | 21,651 | | | | 1,214 | | | | 1,299 | |
| Expected return on plan assets | | | (32,468 | ) | | | (31,584 | ) | | | — | | | | — | |
| Amortization of transition asset | | | (3 | ) | | | 5 | | | | — | | | | — | |
| Amortization of prior service cost | | | (4,326 | ) | | | (4,326 | ) | | | (1,014 | ) | | | (1,014 | ) |
| Amortization of gains | | | 17,621 | | | | 11,242 | | | | (318 | ) | | | (525 | ) |
| Settlements | | | 5,250 | | | | 7,375 | | | | — | | | | — | |
| Benefit expense | | $ | 24,866 | | | $ | 19,516 | | | $ | (118 | ) | | $ | (240 | ) |
The Bank, as trustee, held all Plan assets at September 30, 2011, and December 31, 2010. The Plan assets consisted of investments in a variety of Huntington mutual funds and Huntington common stock as follows:
| | | Fair Value | |
| (dollar amounts in thousands) | | September 30, 2011 | | | December 31, 2010 | | | September 30, 2010 | |
| Cash | | $ | 36 | | | | — | % | | $ | — | | | | — | % | | $ | — | | | | — | % |
| Cash equivalents: | | | | | | | | | | | | | | | | | | | | | | | | |
| Huntington funds - money market | | | 55 | | | | — | | | | 25 | | | | — | | | | 204 | | | | — | |
| Fixed income: | | | | | | | | | | | | | | | | | | | | | | | | |
| Huntington funds - fixed income funds | | | 173,355 | | | | 37 | | | | 133,330 | | | | 28 | | | | 134,523 | | | | 30 | |
| Corporate obligations | | | — | | | | — | | | | — | | | | — | | | | 1,097 | | | | — | |
| U.S. Government Agencies | | | — | | | | — | | | | — | | | | — | | | | 506 | | | | — | |
| Equities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Huntington funds | | | 264,074 | | | | 56 | | | | 318,155 | | | | 66 | | | | 293,956 | | | | 64 | |
| Other - equity mutual funds | | | — | | | | — | | | | — | | | | — | | | | 4,029 | | | | 1 | |
| Huntington common stock | | | 35,380 | | | | 7 | | | | 26,969 | | | | 6 | | | | 22,344 | | | | 5 | |
| Fair value of plan assets | | $ | 472,900 | | | | 100 | % | | $ | 478,479 | | | | 100 | % | | $ | 456,659 | | | | 100 | % |
Investments of the Plan are accounted for at cost on the trade date and are reported at fair value. All of the Plan’s investments at September 30, 2011, are classified as Level 1 within the fair value hierarchy. In general, investments of the Plan are exposed to various risks, such as interest rate risk, credit risk, and overall market volatility. Due to the level of risk associated with certain investments, it is reasonably possible changes in the values of investments will occur in the near term and such changes could materially affect the amounts reported in the Plan assets.
The investment objective of the Plan is to maximize the return on Plan assets over a long time period, while meeting the Plan obligations. At September 30, 2011, Plan assets were invested 63% in equity investments and 37% in bonds, with an average duration of 3.6 years on bond investments. Although it may fluctuate with market conditions, Management has targeted a long-term allocation of Plan assets of 69% in equity investments and 31% in bond investments.
Huntington also sponsors other nonqualified retirement plans, the most significant being the SERP and the SRIP. The SERP provides certain former officers and directors, and the SRIP provides certain current officers and directors of Huntington and its subsidiaries with defined pension benefits in excess of limits imposed by federal tax law.
Huntington has a defined contribution plan that is available to eligible employees. In the 2009 first quarter, the Plan was amended to eliminate employer matching contributions effective on or after March 15, 2009. Prior to March 15, 2009, Huntington matched participant contributions, up to the first 3% of base pay contributed to the Plan. Half of the employee contribution was matched on the 4th and 5th percent of base pay contributed to the Plan. Effective May 1, 2010, Huntington reinstated the employer matching contribution to the defined contribution Plan.
The following table shows the costs of providing the SERP, SRIP, and defined contribution plans:
| | | | | | | |
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30, | | | September 30, | |
| (dollar amounts in millions) | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| SERP & SRIP | | $ | 0.7 | | | $ | 0.7 | | | $ | 2.1 | | | $ | 2.3 | |
| Defined contribution plan | | | 3.8 | | | | 3.3 | | | | 11.3 | | | | 5.4 | |
| Benefit cost | | $ | 4.5 | | | $ | 4.0 | | | $ | 13.4 | | | $ | 7.7 | |
13. FAIR VALUES OF ASSETS AND LIABILITIES
Huntington follows the fair value accounting guidance under ASC 820 and ASC 825.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A three-level valuation hierarchy was established for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Transfers in and out of Level 1, 2, or 3 are recorded at fair value at the beginning of the reporting period.
Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Mortgage loans held for sale
Huntington elected to apply the fair value option for mortgage loans originated with the intent to sell which are included in loans held for sale. Mortgage loans held for sale are classified as Level 2 and are estimated using security prices for similar product types.
Available-for-sale securities and trading account securities
Securities accounted for at fair value include both the available-for-sale and trading portfolios. Huntington uses prices obtained from third party pricing services and recent trades to determine the fair value of securities. AFS and trading securities are classified as Level 1 using quoted market prices (unadjusted) in active markets for identical securities that Huntington has the ability to access at the measurement date. 1% of the positions in these portfolios are Level 1, and consist of U.S. Treasury securities and money market mutual funds. When quoted market prices are not available, fair values are classified as Level 2 using quoted prices for similar assets in active markets, quoted prices of identical or similar assets in markets that are not active, and inputs that are observable for the asset, either directly or indirectly, for substantially the full term of the financial instrument. 95% of the positions in these portfolios are Level 2, and consist of U.S. Government and agency debt securities, agency mortgage backed securities, asset-backed securities, municipal securities and other securities. For both Level 1 and Level 2 securities, management uses various methods and techniques to corroborate prices obtained from the pricing service, including reference to dealer or other market quotes, and by reviewing valuations of comparable instruments. If relevant market prices are limited or unavailable, valuations may require significant management judgment or estimation to determine fair value, in which case the fair values are classified as Level 3. 4% of our positions are Level 3, and consist of non-agency ALT-A asset-backed securities, private-label CMO securities, pooled-trust-preferred CDO securities and municipal securities.
For non-agency ALT-A asset-backed securities, private-label CMO securities, and pooled-trust-preferred CDO securities the fair value methodology incorporates values obtained from proprietary discounted cash flow models provided by a third party. The modeling process for the ALT-A asset-backed securities and private-label CMO securities incorporates assumptions management believes market participants would use to value the security under current market conditions. The assumptions used include prepayment projections, credit loss assumptions, and discount rates, which include a risk premium due to liquidity and uncertainty that are based on both observable and unobservable inputs. Huntington validates the reasonableness of the assumptions by comparing the assumptions with market information. Huntington uses the discounted cash flow analysis, in conjunction with other relevant pricing information obtained from third party pricing services or broker quotes to establish the fair value that management believes is representative under current market conditions. For purposes of determining fair value at September 30, 2011, the discounted cash flow modeling was the predominant input. The modeling of the fair value of the pooled-trust-preferred CDO's utilizes a similar methodology, with the probability of default ("PD") of each issuer being the most critical input. Management evaluates the PD assumptions provided to the third party pricing service by comparing the current PD to the assumptions used the previous quarter, actual defaults and deferrals in the current period, and trend data on certain financial ratios of the issuers. Huntington also evaluates the assumptions related to discount rates and prepayments. Each quarter, the Company seeks to obtain information on actual trades of securities with similar characteristics to further support our fair value estimates and our underlying assumptions. For purposes of determining fair value at September 30, 2011, the discounted cash flow modeling was the predominant input.
Huntington utilizes the same processes to determine the fair value of investment securities classified as held-to-maturity for impairment evaluation purposes.
Automobile loans
Effective January 1, 2010, Huntington consolidated an automobile loan securitization that previously had been accounted for as an off-balance sheet transaction. As a result, Huntington elected to account for the automobile loan receivables and the associated notes payable at fair value per guidance supplied in ASC 825, “Financial Instruments”. The automobile loan receivables are classified as Level 3. The key assumptions used to determine the fair value of the automobile loan receivables included projections of expected losses and prepayment of the underlying loans in the portfolio and a market assumption of interest rate spreads. Certain interest rates are available from similarly traded securities while other interest rates are developed internally based on similar asset-backed security transactions in the market.
MSRs
MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. Huntington determines the fair value of MSRs using an income approach model based upon our month-end interest rate curve and prepayment assumptions. The model, which is operated and maintained by a third party, utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs, and changes in valuation inputs and assumptions. Servicing brokers and other sources of information (e.g. discussion with other mortgage servicers and industry surveys) are used to obtain information on market practice and assumptions. On at least a quarterly basis, third party marks are obtained from at least one service broker. Huntington reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. Any recommended change in assumptions and / or inputs are presented for review to the Mortgage Price Risk Subcommittee for final approval.
Derivatives
Derivatives classified as Level 1 consist of exchange traded options and forward commitments to deliver mortgage-backed securities which are valued using quoted prices. Asset and liability conversion swaps and options, and interest rate caps are classified as Level 2. These derivative positions are valued using a discounted cash flow method that incorporates current market interest rates. Derivatives classified as Level 3 consist primarily of interest rate lock agreements related to mortgage loan commitments. The determination of fair value includes assumptions related to the likelihood that a commitment will ultimately result in a closed loan, which is a significant unobservable assumption.
Securitization trust notes payable
Consists of certain securitization trust notes payable related to the automobile loan receivables measured at fair value. The notes payable are classified as Level 2 and are valued based on interest rates for similar financial instruments.
Assets and Liabilities measured at fair value on a recurring basis
Assets and liabilities measured at fair value on a recurring basis at September 30, 2011, December 31, 2010, and September 30, 2010 are summarized below:
| | | Fair Value Measurements at | | | | | | Balance at | |
| | | Reporting Date Using | | | Netting | | | September 30, | |
| (dollar amounts in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Adjustments (1) | | | 2011 | |
| Assets | | | | | | | | | | | | | | | |
| Mortgage loans held for sale | | $ | — | | | $ | 331,883 | | | $ | — | | | $ | — | | | $ | 331,883 | |
| | | | | | | | | | | | | | | | | | | | | |
| Trading account securities: | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury securities | | | — | | | | — | | | | — | | | | — | | | | — | |
| Federal agencies: Mortgage-backed | | | — | | | | 6,995 | | | | — | | | | — | | | | 6,995 | |
| Federal agencies: Other agencies | | | — | | | | — | | | | — | | | | — | | | | — | |
| Municipal securities | | | — | | | | 23,455 | | | | — | | | | — | | | | 23,455 | |
| Other securities | | | 54,753 | | | | 508 | | | | — | | | | — | | | | 55,261 | |
| | | | 54,753 | | | | 30,958 | | | | — | | | | — | | | | 85,711 | |
| | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale and other securities: | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury securities | | | 53,321 | | | | — | | | | — | | | | — | | | | 53,321 | |
| Federal agencies: Mortgage-backed (2) | | | — | | | | 4,435,246 | | | | — | | | | — | | | | 4,435,246 | |
| TLGP securities | | | — | | | | 105,537 | | | | — | | | | — | | | | 105,537 | |
| Federal agencies: Other agencies (2) | | | — | | | | 1,137,954 | | | | — | | | | — | | | | 1,137,954 | |
| Municipal securities | | | — | | | | 311,962 | | | | 101,427 | | | | — | | | | 413,389 | |
| Private-label CMO | | | — | | | | — | | | | 78,900 | | | | — | | | | 78,900 | |
| Asset-backed securities | | | — | | | | 803,039 | | | | 153,019 | | | | — | | | | 956,058 | |
| Covered bonds | | | — | | | | 703,630 | | | | — | | | | — | | | | 703,630 | |
| Corporate debt | | | — | | | | 454,852 | | | | — | | | | — | | | | 454,852 | |
| Other securities | | | 54,236 | | | | 10,127 | | | | — | | | | — | | | | 64,363 | |
| | | | 107,557 | | | | 7,962,347 | | | | 333,346 | | | | — | | | | 8,403,250 | |
| | | | | | | | | | | | | | | | | | | | | |
| Automobile loans | | | — | | | | — | | | | 344,529 | | | | — | | | | 344,529 | |
| | | | | | | | | | | | | | | | | | | | | |
| MSRs | | | — | | | | — | | | | 73,824 | | | | — | | | | 73,824 | |
| | | | | | | | | | | | | | | | | | | | | |
| Derivative assets | | | 20,581 | | | | 526,890 | | | | 8,963 | | | | (103,741 | ) | | | 452,693 | |
| | | | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | | | |
| Securitization trust notes payable | | | — | | | | 173,045 | | | | — | | | | — | | | | 173,045 | |
| | | | | | | | | | | | | | | | | | | | | |
| Derivative liabilities | | | 29,820 | | | | 265,023 | | | | 1,029 | | | | — | | | | 295,872 | |
| | | | | | | | | | | | | | | | | | | | | |
| Other liabilities | | | 2,010 | | | | — | | | | — | | | | — | | | | 2,010 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at | | | | | | Balance at | |
| | | Reporting Date Using | | | Netting | | | December 31, | |
| (dollar amounts in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Adjustments (1) | | | 2010 | |
| Assets | | | | | | | | | | | | | | | |
| Mortgage loans held for sale | | $ | — | | | $ | 754,117 | | | $ | — | | | $ | — | | | $ | 754,117 | |
| | | | | | | | | | | | | | | | | | | | | |
| Trading account securities: | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury securities | | | 47,430 | | | | — | | | | — | | | | — | | | | 47,430 | |
| Federal agencies: Mortgage-backed | | | — | | | | 10,860 | | | | — | | | | — | | | | 10,860 | |
| Federal agencies: Other agencies | | | — | | | | 24,853 | | | | — | | | | — | | | | 24,853 | |
| Municipal securities | | | — | | | | 30,205 | | | | — | | | | — | | | | 30,205 | |
| Other securities | | | 69,017 | | | | 3,039 | | | | — | | | | — | | | | 72,056 | |
| | | | 116,447 | | | | 68,957 | | | | — | | | | — | | | | 185,404 | |
| | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale and other securities: | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury securities | | | 51,781 | | | | — | | | | — | | | | — | | | | 51,781 | |
| Federal agencies: Mortgage-backed | | | — | | | | 4,754,404 | | | | — | | | | — | | | | 4,754,404 | |
| TLGP securities | | | — | | | | 183,467 | | | | — | | | | — | | | | 183,467 | |
| Federal agencies: Other agencies (3) | | | — | | | | 2,058,376 | | | | — | | | | — | | | | 2,058,376 | |
| Municipal securities | | | — | | | | 305,909 | | | | 149,806 | | | | — | | | | 455,715 | |
| Private-label CMO | | | — | | | | — | | | | 121,925 | | | | — | | | | 121,925 | |
| Asset-backed securities | | | — | | | | 1,044,438 | | | | 162,684 | | | | — | | | | 1,207,122 | |
| Covered bonds | | | — | | | | 367,209 | | | | — | | | | — | | | | 367,209 | |
| Corporate debt | | | — | | | | 323,389 | | | | — | | | | — | | | | 323,389 | |
| Other securities | | | 53,286 | | | | 9,848 | | | | — | | | | — | | | | 63,134 | |
| | | | 105,067 | | | | 9,047,040 | | | | 434,415 | | | | — | | | | 9,586,522 | |
| | | | | | | | | | | | | | | | | | | | | |
| Automobile loans | | | — | | | | — | | | | 522,717 | | | | — | | | | 522,717 | |
| | | | | | | | | | | | | | | | | | | | | |
| MSRs | | | — | | | | — | | | | 125,679 | | | | — | | | | 125,679 | |
| | | | | | | | | | | | | | | | | | | | | |
| Derivative assets | | | 23,514 | | | | 390,361 | | | | 2,817 | | | | (70,559 | ) | | | 346,133 | |
| | | | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | | | |
| Securitization trust notes payable | | | — | | | | 356,089 | | | | — | | | | — | | | | 356,089 | |
| | | | | | | | | | | | | | | | | | | | | |
| Derivative liabilities | | | 3,990 | | | | 233,399 | | | | 1,851 | | | | — | | | | 239,240 | |
| | | | | | | | | | | | | | | | | | | | | |
| Other liabilities | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at | | | | | | Balance at | |
| | | Reporting Date Using | | | Netting | | | September 30, | |
| (dollar amounts in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Adjustments (1) | | | 2010 | |
| Assets | | | | | | | | | | | | | | | |
| Mortgage loans held for sale | | $ | — | | | $ | 699,001 | | | $ | — | | | $ | — | | | $ | 699,001 | |
| | | | | | | | | | | | | | | | | | | | | |
| Trading account securities: | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury securities | | | — | | | | — | | | | — | | | | — | | | | — | |
| Federal agencies: Mortgage-backed | | | — | | | | 12,731 | | | | — | | | | — | | | | 12,731 | |
| Federal agencies: Other agencies | | | — | | | | 24,990 | | | | — | | | | — | | | | 24,990 | |
| Municipal securities | | | — | | | | 33,554 | | | | — | | | | — | | | | 33,554 | |
| Other securities | | | 63,105 | | | | 4,297 | | | | — | | | | — | | | | 67,402 | |
| | | | 63,105 | | | | 75,572 | | | | — | | | | — | | | | 138,677 | |
| | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale and other securities: | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury securities | | | 50,334 | | | | — | | | | — | | | | — | | | | 50,334 | |
| Federal agencies: Mortgage-backed | | | — | | | | 4,683,540 | | | | — | | | | — | | | | 4,683,540 | |
| TLGP securities | | | 580,914 | | | | — | | | | — | | | | — | | | | 580,914 | |
| Federal agencies: Other agencies | | | 2,001,730 | | | | 30,445 | | | | — | | | | — | | | | 2,032,175 | |
| Municipal securities | | | — | | | | 134,582 | | | | 233,290 | | | | — | | | | 367,872 | |
| Private-label CMO | | | — | | | | — | | | | 276,224 | | | | — | | | | 276,224 | |
| Asset-backed securities | | | — | | | | 979,666 | | | | 197,958 | | | | — | | | | 1,177,624 | |
| Covered bonds | | | — | | | | 151,310 | | | | — | | | | — | | | | 151,310 | |
| Corporate debt | | | — | | | | 30,154 | | | | — | | | | — | | | | 30,154 | |
| Other securities | | | 54,218 | | | | 9,051 | | | | — | | | | — | | | | 63,269 | |
| | | | 2,687,196 | | | | 6,018,748 | | | | 707,472 | | | | — | | | | 9,413,416 | |
| | | | | | | | | | | | | | | | | | | | | |
| Automobile loans | | | 401,148 | | | | — | | | | 189,075 | | | | — | | | | 590,223 | |
| | | | | | | | | | | | | | | | | | | | | |
| MSRs | | | — | | | | — | | | | 112,155 | | | | — | | | | 112,155 | |
| | | | | | | | | | | | | | | | | | | | | |
| Derivative assets | | | 980 | | | | 547,784 | | | | 11,745 | | | | (126,221 | ) | | | 434,288 | |
| | | | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | | | |
| Securitization trust notes payable | | | 422,294 | | | | — | | | | — | | | | — | | | | 422,294 | |
| | | | | | | | | | | | | | | | | | | | | |
| Derivative liabilities | | | 9,044 | | | | 293,741 | | | | 4,018 | | | | — | | | | 306,803 | |
| | | | | | | | | | | | | | | | | | | | | |
| Other liabilities | | | — | | | | — | | | | — | | | | — | | | | — | |
(1) Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions and cash collateral held or placed with the same counterparties.
(2) During the 2011 second quarter, Huntington transferred $469.1 million of federal agencies: mortgage-backed securities from the available-for-sale securities portfolio to the held-to-maturity securities portfolio. These securities are valued at amortized cost and no longer classified within the fair value hierarchy. All amounts were previously classified as Level 2 in the fair value hierarchy.
(3) Amounts were transferred from Level 1 to Level 2 in the 2010 fourth quarter due to lack of sufficient market activity for these securities.
The tables below present a rollforward of the balance sheet amounts for the three-month and nine-month periods ended September 30, 2011 and 2010, for financial instruments measured on a recurring basis and classified as Level 3. The classification of an item as Level 3 is based on the significance of the unobservable inputs to the overall fair value measurement. However, Level 3 measurements may also include observable components of value that can be validated externally. Accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.
| | | Level 3 Fair Value Measurements | |
| | | Three Months Ended September 30, 2011 | |
| | | | | | | | | Available-for-sale securities | | | | | | | |
| | | | | | | | | | | | | | | Asset- | | | | | | | |
| (dollar amounts in | | | | | Derivative | | | Municipal | | | Private- | | | backed | | | Automobile | | | Equity | |
| thousands) | | MSRs | | | instruments | | | securities | | | label CMO | | | securities | | | loans | | | investments | |
| Balance, beginning of period | | $ | 104,997 | | | $ | 418 | | | $ | 123,800 | | | $ | 88,770 | | | $ | 165,742 | | | $ | 400,935 | | | $ | — | |
| Total gains / losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Included in earnings | | | (31,173 | ) | | | 7,557 | | | | — | | | | (872 | ) | | | (354 | ) | | | (3,695 | ) | | | — | |
| Included in OCI | | | — | | | | — | | | | — | | | | (2,543 | ) | | | (9,874 | ) | | | — | | | | — | |
| Purchases | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Sales | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Repayments | | | — | | | | — | | | | — | | | | — | | | | — | | | | (52,711 | ) | | | — | |
| Issuances | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Settlements | | | — | | | | (41 | ) | | | (22,373 | ) | | | (6,455 | ) | | | (2,495 | ) | | | — | | | | — | |
| Transfers in / out of Level 3 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Balance, end of period | | $ | 73,824 | | | $ | 7,934 | | | $ | 101,427 | | | $ | 78,900 | | | $ | 153,019 | | | $ | 344,529 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The amount of total gains or losses for the period included in earnings (or OCI) attributable to the change in unrealized gains or losses relating to assets still held at reporting date | | $ | (31,173 | ) | | $ | 7,516 | | | $ | — | | | $ | (2,543 | ) | | $ | (9,874 | ) | | $ | (3,695 | ) | | $ | — | |
| | | Level 3 Fair Value Measurements | |
| | | Three Months Ended September 30, 2010 | |
| | | | | | | | | Available-for-sale securities | | | | | | | |
| | | | | | | | | | | | | | | Asset- | | | | | | | |
| (dollar amounts in | | | | | Derivative | | | Municipal | | | Private- | | | backed | | | Automobile | | | Equity | |
| thousands) | | MSRs | | | instruments | | | securities | | | label CMO | | | securities | | | loans | | | investments | |
| Balance, beginning of period | | $ | 132,405 | | | $ | 6,492 | | | $ | 262,128 | | | $ | 394,611 | | | $ | 218,940 | | | $ | 186,388 | | | $ | — | |
| Total gains / losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Included in earnings | | | (20,250 | ) | | | 3,872 | | | | — | | | | (1,598 | ) | | | (393 | ) | | | 4,887 | | | | — | |
| Included in OCI | | | — | | | | — | | | | — | | | | 12,674 | | | | (5,312 | ) | | | — | | | | — | |
| Purchases | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Sales | | | — | | | | — | | | | (28,838 | ) | | | (109,310 | ) | | | (11,977 | ) | | | — | | | | — | |
| Repayments | | | — | | | | — | | | | — | | | | — | | | | — | | | | (2,200 | ) | | | — | |
| Issuances | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Settlements | | | — | | | | (1,741 | ) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Transfers in / out of Level 3 | | | — | | | | (896 | ) | | | — | | | | (20,153 | ) | | | (3,300 | ) | | | — | | | | — | |
| Balance, end of period | | $ | 112,155 | | | $ | 7,727 | | | $ | 233,290 | | | $ | 276,224 | | | $ | 197,958 | | | $ | 189,075 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The amount of total gains or losses for the period included in earnings (or OCI) attributable to the change in unrealized gains or losses relating to assets still held at reporting date | | $ | (20,250 | ) | | $ | 2,976 | | | $ | — | | | $ | 3,727 | | | $ | (5,928 | ) | | $ | 2,687 | | | $ | — | |
| | | Level 3 Fair Value Measurements | |
| | | Nine Months Ended September 30, 2011 | |
| | | | | | | | | Available-for-sale securities | | | | | | | |
| | | | | | | | | | | | | | | Asset- | | | | | | | |
| (dollar amounts in | | | | | Derivative | | | Municipal | | | Private- | | | backed | | | Automobile | | | Equity | |
| thousands) | | MSRs | | | instruments | | | securities | | | label CMO | | | securities | | | loans | | | investments | |
| Balance, beginning of period | | $ | 125,679 | | | $ | 966 | | | $ | 149,806 | | | $ | 121,925 | | | $ | 162,684 | | | $ | 522,717 | | | $ | — | |
| Total gains / losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Included in earnings | | | (51,855 | ) | | | 7,264 | | | | — | | | | (1,255 | ) | | | (3,615 | ) | | | (5,079 | ) | | | — | |
| Included in OCI | | | — | | | | — | | | | — | | | | 1,074 | | | | 3,716 | | | | — | | | | — | |
| Purchases | | | — | | | | — | | | | 1,760 | | | | — | | | | — | | | | — | | | | — | |
| Sales | | | — | | | | — | | | | — | | | | (20,958 | ) | | | — | | | | — | | | | — | |
| Repayments | | | — | | | | — | | | | — | | | | — | | | | — | | | | (173,109 | ) | | | — | |
| Issuances | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Settlements | | | — | | | | (296 | ) | | | (50,139 | ) | | | (21,886 | ) | | | (9,766 | ) | | | — | | | | — | |
| Transfers in / out of Level 3 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Balance, end of period | | $ | 73,824 | | | $ | 7,934 | | | $ | 101,427 | | | $ | 78,900 | | | $ | 153,019 | | | $ | 344,529 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The amount of total gains or losses for the period included in earnings (or OCI) attributable to the change in unrealized gains or losses relating to assets still held at reporting date | | $ | (51,855 | ) | | $ | 6,968 | | | $ | — | | | $ | 769 | | | $ | 3,716 | | | $ | (5,079 | ) | | $ | — | |
| | | Level 3 Fair Value Measurements | |
| | | Nine Months Ended September 30, 2010 | |
| | | | | | | | | | | Available-for-sale securities | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Asset- | | | | | | | | | |
| (dollar amounts in | | | | | | Derivative | | | Municipal | | | Private- | | | backed | | | Automobile | | | Equity | |
| thousands) | | MSRs | | | instruments | | | securities | | | label CMO | | | securities | | | loans | | | investments | |
| Balance, beginning of period | | $ | 176,427 | | | $ | (4,236 | ) | | $ | 11,515 | | | $ | 477,319 | | | $ | 407,098 | | | $ | — | | | $ | 25,872 | |
| Total gains / losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Included in earnings | | | (64,272 | ) | | | 12,811 | | | | — | | | | (5,429 | ) | | | (4,888 | ) | | | 14,990 | | | | — | |
| Included in OCI | | | — | | | | — | | | | — | | | | 37,640 | | | | 3,263 | | | | — | | | | — | |
| Purchases | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Sales | | | — | | | | — | | | | (28,837 | ) | | | (166,704 | ) | | | (14,608 | ) | | | — | | | | — | |
| Repayments | | | — | | | | — | | | | — | | | | — | | | | — | | | | (5,934 | ) | | | — | |
| Issuances | | | — | | | | (1,741 | ) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Settlements | | | — | | | | 893 | | | | (73,025 | ) | | | (66,602 | ) | | | (8,834 | ) | | | — | | | | — | |
| Transfers in / out of Level 3 (1) | | | — | | | | — | | | | 323,637 | | | | — | | | | (184,073 | ) | | | 180,019 | | | | (25,872 | ) |
| Balance, end of period | | $ | 112,155 | | | $ | 7,727 | | | $ | 233,290 | | | $ | 276,224 | | | $ | 197,958 | | | $ | 189,075 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The amount of total gains or losses for the period included in earnings (or OCI) attributable to the change in unrealized gains or losses relating to assets still held at reporting date | | $ | (64,272 | ) | | $ | 11,708 | | | $ | — | | | $ | 18,613 | | | $ | 2,384 | | | $ | 9,056 | | | $ | — | |
(1) Transfers in / out of Level 3 include a transfer in of $323.6 million relating to municipal securities, due to lack of observable market data, a transfer out of $184.1 million of securities, and a transfer in of $180.0 million of loans both related to the consolidation of a 2009 automobile trust.
The table below summarizes the classification of gains and losses due to changes in fair value, recorded in earnings for Level 3 assets and liabilities for the three-month and nine-month periods ended September 30, 2011 and 2010:
| | | Level 3 Fair Value Measurements | |
| | | Three Months Ended September 30, 2011 | |
| | | | | | | | | Available-for-sale securities | | | | | | | |
| | | | | | | | | | | | | | | Asset- | | | | | | | |
| (dollar amounts in | | | | | Derivative | | | Municipal | | | Private- | | | backed | | | Automobile | | | Equity | |
| thousands) | | MSRs | | | instruments | | | securities | | | label CMO | | | securities | | | loans | | | investments | |
| Classification of gains and losses in earnings: | | | | | | | | | | | | |
| Mortgage banking income (loss) | | $ | (31,173 | ) | | $ | 7,101 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Securities gains (losses) | | | — | | | | — | | | | — | | | | (1,029 | ) | | | (335 | ) | | | — | | | | — | |
| Interest and fee income | | | — | | | | — | | | | — | | | | 157 | | | | (19 | ) | | | (3,627 | ) | | | — | |
| Noninterest income | | | — | | | | 456 | | | | — | | | | — | | | | — | | | | (68 | ) | | | — | |
| Total | | $ | (31,173 | ) | | $ | 7,557 | | | $ | — | | | $ | (872 | ) | | $ | (354 | ) | | $ | (3,695 | ) | | $ | — | |
| | | Level 3 Fair Value Measurements | |
| | | Three Months Ended September 30, 2010 | |
| | | | | | | | | Available-for-sale securities | | | | | | | |
| | | | | | | | | | | | | | | Asset- | | | | | | | |
| (dollar amounts in | | | | | Derivative | | | Municipal | | | Private- | | | backed | | | Automobile | | | Equity | |
| thousands) | | MSRs | | | instruments | | | securities | | | label CMO | | | securities | | | loans | | | investments | |
| Classification of gains and losses in earnings: | | | | | | | | | | | | |
| Mortgage banking income (loss) | | $ | (20,250 | ) | | $ | 3,872 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Securities gains (losses) | | | — | | | | — | | | | — | | | | (2,159 | ) | | | (558 | ) | | | — | | | | — | |
| Interest and fee income | | | — | | | | — | | | | — | | | | 561 | | | | 165 | | | | (3,533 | ) | | | — | |
| Noninterest income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 8,420 | | | | — | |
| Total | | $ | (20,250 | ) | | $ | 3,872 | | | $ | — | | | $ | (1,598 | ) | | $ | (393 | ) | | $ | 4,887 | | | $ | — | |
| | | Level 3 Fair Value Measurements | |
| | | Nine Months Ended September 30, 2011 | |
| | | | | | | | | Available-for-sale securities | | | | | | | |
| | | | | | | | | | | | | | | Asset- | | | | | | | |
| (dollar amounts in | | | | | Derivative | | | Municipal | | | Private- | | | backed | | | Automobile | | | Equity | |
| thousands) | | MSRs | | | instruments | | | securities | | | label CMO | | | securities | | | loans | | | investments | |
| Classification of gains and losses in earnings: | | | | | | | | | | | | |
| Mortgage banking income (loss) | | $ | (51,855 | ) | | $ | 7,763 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Securities gains (losses) | | | — | | | | — | | | | — | | | | (1,941 | ) | | | (3,771 | ) | | | — | | | | — | |
| Interest and fee income | | | — | | | | — | | | | — | | | | 686 | | | | 156 | | | | (8,852 | ) | | | — | |
| Noninterest income | | | — | | | | (499 | ) | | | — | | | | — | | | | — | | | | 3,773 | | | | — | |
| Total | | $ | (51,855 | ) | | $ | 7,264 | | | $ | — | | | $ | (1,255 | ) | | $ | (3,615 | ) | | $ | (5,079 | ) | | $ | — | |
| | | Level 3 Fair Value Measurements | |
| | | Nine Months Ended September 30, 2010 | |
| | | | | | | | | Available-for-sale securities | | | | | | | |
| | | | | | | | | | | | | | | Asset- | | | | | | | |
| (dollar amounts in | | | | | Derivative | | | Municipal | | | Private- | | | backed | | | Automobile | | | Equity | |
| thousands) | | MSRs | | | instruments | | | securities | | | label CMO | | | securities | | | loans | | | investments | |
| Classification of gains and losses in earnings: | | | | | | | | | | | |
| Mortgage banking income (loss) | | $ | (64,272 | ) | | $ | 12,811 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Securities gains (losses) | | | — | | | | — | | | | — | | | | (7,027 | ) | | | (4,975 | ) | | | — | | | | — | |
| Interest and fee income | | | — | | | | — | | | | — | | | | 1,598 | | | | 87 | | | | (7,933 | ) | | | — | |
| Noninterest income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 22,923 | | | | — | |
| Total | | $ | (64,272 | ) | | $ | 12,811 | | | $ | — | | | $ | (5,429 | ) | | $ | (4,888 | ) | | $ | 14,990 | | | $ | — | |
Assets and liabilities under the fair value option
Huntington has elected the fair value option for certain loans in the held for sale portfolio. The following table presents the fair value and aggregate principal balance of mortgage loans held for sale under the fair value option.
| | | September 30, | | | December 31, | | | September 30, | |
| (dollar amounts in thousands) | | 2011 | | | 2010 | | | 2010 | |
| Fair value | | $ | 331,883 | | | $ | 754,117 | | | $ | 699,001 | |
| Aggregate outstanding principal balance | | | 317,121 | | | | 749,982 | | | | 675,009 | |
The following tables present the net gains (losses) from fair value changes, including net gains (losses) associated with instrument specific credit risk for the three-month and nine-month periods ended September 30, 2011 and 2010.
| | | Net gains (losses) from fair value changes | |
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30, | | | September 30, | |
| (dollar amounts in thousands) | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Assets | | | | | | | | | | | | |
| Mortgage loans held for sale | | $ | 5,823 | | | $ | 2,201 | | | $ | 13,725 | | | $ | 13,475 | |
| Automobile loans | | | (3,695 | ) | | | (1,242 | ) | | | (5,079 | ) | | | 3,055 | |
| Liabilities | | | | | | | | | | | | | | | | |
| Securitization trust notes payable | | | (2,485 | ) | | | (3,929 | ) | | | (6,102 | ) | | | (6,142 | ) |
| | | Gains (losses) included in fair value changes | |
| | | associated with instrument specific credit risk | |
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30, | | | September 30, | |
| (dollar amounts in thousands) | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Assets | | | | | | | | | | | | | | | | |
| Automobile loans | | $ | 2,498 | | | $ | 403 | | | $ | 4,780 | | | $ | 995 | |
Assets and Liabilities measured at fair value on a nonrecurring basis
Certain assets and liabilities may be required to be measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition. These assets and liabilities are not measured at fair value on an on-going basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. At September 30, 2011, assets measured at fair value on a nonrecurring basis were as follows:
| | | | | Fair Value Measurements Using | | | |
| | | | | Quoted Prices | | | | | | Total | |
| | | | | In Active | | | | | | Gains/(Losses) | |
| | | | | Markets for | | | | | | For the Nine | |
| | | Fair Value at | | Identical | | | | | | Months Ended | |
| (dollar amounts in millions) | | September 30,
2011 | | Assets
(Level 1) | | | | Inputs
(Level 3) | | September 30,
2011 | |
| Impaired loans | | $ | 91.0 | | $ | — | | $ | — | | $ | 91.0 | | $ | 25.5 | |
| Accrued income and other assets | | | 38.0 | | | — | | | — | | | 38.0 | | $ | (1.8 | ) |
Periodically, Huntington records nonrecurring adjustments of collateral-dependent loans measured for impairment when establishing the ACL. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Appraisals are generally obtained to support the fair value of the collateral and incorporate measures such as recent sales prices for comparable properties and cost of construction. In cases where the carrying value exceeds the fair value of the collateral less cost to sell, an impairment charge is recognized. At September 30, 2011, Huntington identified $91.0 million of impaired loans for which the fair value is recorded based upon collateral value. For the nine-month period ended September 30, 2011, nonrecurring fair value impairment of $25.5 million were recorded within the provision for credit losses.
Other real estate owned properties are initially valued based on appraisals and third party price opinions, less estimated selling costs. At September 30, 2011, Huntington had $38.0 million of OREO assets. For the nine-month period ended September 30, 2011, fair value losses of $1.8 million were recorded within noninterest expense.
Fair values of financial instruments
The carrying amounts and estimated fair values of Huntington’s financial instruments at September 30, 2011, December 31, 2010, and September 30, 2010, are presented in the following table:
| | | September 30, 2011 | | | December 31, 2010 | | | September 30, 2010 | |
| | | Carrying | | | Fair | | | Carrying | | | Fair | | | Carrying | | | Fair | |
| (dollar amounts in thousands) | | Amount | | | Value | | | Amount | | | Value | | | Amount | | | Value | |
| Financial Assets: | | | | | | | | | | | | | | | | | | |
| Cash and short-term assets | | $ | 2,295,730 | | | $ | 2,295,730 | | | $ | 982,926 | | | $ | 982,926 | | | $ | 1,413,466 | | | $ | 1,413,466 | |
| Trading account securities | | | 85,711 | | | | 85,711 | | | | 185,404 | | | | 185,404 | | | | 138,677 | | | | 138,677 | |
| Loans held for sale | | | 334,606 | | | | 334,606 | | | | 793,285 | | | | 793,285 | | | | 744,439 | | | | 744,439 | |
| Available-for-sale and other securities | | | 8,713,530 | | | | 8,713,530 | | | | 9,895,244 | | | | 9,895,244 | | | | 9,723,558 | | | | 9,723,558 | |
| Held-to-maturity securities | | | 658,250 | | | | 682,897 | | | | — | | | | — | | | | — | | | | — | |
| Net loans and direct financing leases | | | 37,992,184 | | | | 36,655,676 | | | | 36,857,499 | | | | 35,403,910 | | | | 36,164,235 | | | | 34,894,220 | |
| Derivatives | | | 73,824 | | | | 73,824 | | | | 346,133 | | | | 346,133 | | | | 434,288 | | | | 434,288 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | (43,219,727 | ) | | | (43,368,155 | ) | | | (41,853,898 | ) | | | (41,993,567 | ) | | | (41,072,371 | ) | | | (41,323,675 | ) |
| Short-term borrowings | | | (2,224,986 | ) | | | (2,200,121 | ) | | | (2,040,732 | ) | | | (1,982,545 | ) | | | (1,859,134 | ) | | | (1,854,637 | ) |
| Federal Home Loan Bank advances | | | (14,157 | ) | | | (14,157 | ) | | | (172,519 | ) | | | (172,519 | ) | | | (23,643 | ) | | | (23,843 | ) |
| Other long-term debt | | | (1,421,518 | ) | | | (1,426,460 | ) | | | (2,144,092 | ) | | | (2,157,358 | ) | | | (2,393,071 | ) | | | (2,400,942 | ) |
| Subordinated notes | | | (1,537,293 | ) | | | (1,423,105 | ) | | | (1,497,216 | ) | | | (1,377,851 | ) | | | (1,202,568 | ) | | | (1,047,875 | ) |
| Derivatives | | | (295,872 | ) | | | (295,872 | ) | | | (239,240 | ) | | | (239,240 | ) | | | (306,803 | ) | | | (306,803 | ) |
The short-term nature of certain assets and liabilities result in their carrying value approximating fair value. These include trading account securities, customers’ acceptance liabilities, short-term borrowings, bank acceptances outstanding, FHLB advances, and cash and short-term assets, which include cash and due from banks, interest-bearing deposits in banks, and federal funds sold and securities purchased under resale agreements. Loan commitments and letters-of-credit generally have short-term, variable-rate features and contain clauses that limit Huntington’s exposure to changes in customer credit quality. Accordingly, their carrying values, which are immaterial at the respective balance sheet dates, are reasonable estimates of fair value. Not all the financial instruments listed in the table above are subject to the disclosure provisions of ASC Topic 820.
Certain assets, the most significant being operating lease assets, bank owned life insurance, and premises and equipment, do not meet the definition of a financial instrument and are excluded from this disclosure. Similarly, mortgage and nonmortgage servicing rights, deposit base, and other customer relationship intangibles are not considered financial instruments and are not included above. Accordingly, this fair value information is not intended to, and does not, represent Huntington’s underlying value. Many of the assets and liabilities subject to the disclosure requirements are not actively traded, requiring fair values to be estimated by Management. These estimations necessarily involve the use of judgment about a wide variety of factors, including but not limited to, relevancy of market prices of comparable instruments, expected future cash flows, and appropriate discount rates.
The following methods and assumptions were used by Huntington to estimate the fair value of the remaining classes of financial instruments:
Held-to-maturity securities
Fair values are determined by using models that are based on security-specific details, as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices, and interest rate spreads on relevant benchmark securities.
Loans and direct financing leases
Variable-rate loans that reprice frequently are based on carrying amounts, as adjusted for estimated credit losses. The fair values for other loans and leases are estimated using discounted cash flow analyses and employ interest rates currently being offered for loans and leases with similar terms. The rates take into account the position of the yield curve, as well as an adjustment for prepayment risk, operating costs, and profit. This value is also reduced by an estimate of probable losses and the credit risk associated in the loan and lease portfolio. The valuation of the loan portfolio reflected discounts that Huntington believed are consistent with transactions occurring in the marketplace.
Deposits
Demand deposits, savings accounts, and money market deposits are, by definition, equal to the amount payable on demand. The fair values of fixed-rate time deposits are estimated by discounting cash flows using interest rates currently being offered on certificates with similar maturities.
Debt
Fixed-rate, long-term debt is based upon quoted market prices, which are inclusive of Huntington’s credit risk. In the absence of quoted market prices, discounted cash flows using market rates for similar debt with the same maturities are used in the determination of fair value.
14. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are recorded in the Unaudited Condensed Consolidated Balance Sheet as either an asset or a liability (in accrued income and other assets or accrued expenses and other liabilities, respectively) and measured at fair value.
Derivatives used in Asset and Liability Management Activities
A variety of derivative financial instruments, principally interest rate swaps, caps, floors, and collars are used in asset and liability management activities to protect against the risk of adverse price or interest rate movements. These instruments provide flexibility in adjusting Huntington’s sensitivity to changes in interest rates without exposure to loss of principal and higher funding requirements. Huntington records derivatives at fair value, as further described in Note 13. Collateral agreements are regularly entered into as part of the underlying derivative agreements with Huntington’s counterparties to mitigate counterparty credit risk. At September 30, 2011, December 31, 2010, and September 30, 2010, aggregate credit risk associated with these derivatives, net of collateral that has been pledged by the counterparty, was $38.0 million, $39.9 million, and $45.2 million, respectively. The credit risk associated with interest rate swaps is calculated after considering master netting agreements.
At September 30, 2011, Huntington pledged $199.0 million of investment securities and cash collateral to counterparties, while other counterparties pledged $141.7 million of investment securities and cash collateral to Huntington to satisfy collateral netting agreements. In the event of credit downgrades, Huntington could be required to provide $3.4 million of additional collateral.
The following table presents the gross notional values of derivatives used in Huntington’s asset and liability management activities at September 30, 2011, identified by the underlying interest rate-sensitive instruments:
| | | Fair Value | | | Cash Flow | | | | |
| (dollar amounts in thousands ) | | Hedges | | | Hedges | | | Total | |
| Instruments associated with: | | | | | | | | | |
| Loans | | $ | — | | | $ | 7,045,000 | | | $ | 7,045,000 | |
| Investment securities | | | — | | | | 50,000 | | | | 50,000 | |
| Deposits | | | 988,912 | | | | — | | | | 988,912 | |
| Subordinated notes | | | 598,000 | | | | — | | | | 598,000 | |
| Other long-term debt | | | 35,000 | | | | — | | | | 35,000 | |
| Total notional value at September 30, 2011 | | $ | 1,621,912 | | | $ | 7,095,000 | | | $ | 8,716,912 | |
The following table presents additional information about the interest rate swaps used in Huntington’s asset and liability management activities at September 30, 2011:
| | | | | | Average | | | | | | Weighted-Average |
| | | Notional | | | Maturity | | | Fair | | | Rate |
| (dollar amounts in thousands ) | | Value | | | (years) | | | Value | | | Receive | | | Pay |
| Asset conversion swaps - receive fixed - generic | | $ | 7,095,000 | | | | 1.9 | | | $ | 80,447 | | | | 1.49 | % | | | 0.59 | % |
| Total asset conversion swaps | | | 7,095,000 | | | | 1.9 | | | | 80,447 | | | | 1.49 | | | | 0.59 | |
| Liability conversion swaps | | | | | | | | | | | | | | | | | | | | |
| Liability conversion swaps - receive fixed - generic | | | 1,591,912 | | | | 3.8 | | | | 115,090 | | | | 2.53 | | | | 0.36 | |
| Liability conversion swaps - receive fixed - callable | | | 30,000 | | | | 9.0 | | | | 425 | | | | 2.98 | | | | — | |
| Total liability conversion swaps | | | 1,621,912 | | | | 3.9 | | | | 115,515 | | | | 2.54 | | | | 0.36 | |
| Total swap portfolio | | $ | 8,716,912 | | | | 2.2 | | | $ | 195,962 | | | | 1.68 | % | | | 0.55 | % |
These derivative financial instruments were entered into for the purpose of managing the interest rate risk of assets and liabilities. Consequently, net amounts receivable or payable on contracts hedging either interest earning assets or interest bearing liabilities were accrued as an adjustment to either interest income or interest expense. The net amounts resulted in an increase to net interest income of $27.4 million and $43.9 million for the three-month periods ended September 30, 2011, and 2010, respectively. For the nine-month periods ended September 30, 2011 and 2010, the net amounts resulted in an increase to net interest income of $89.3 million and $150.3 million, respectively.
In connection with securitization activities, Huntington purchased interest rate caps with a notional value totaling $0.9 billion. These purchased caps were assigned to the securitization trust for the benefit of the security holders. Interest rate caps were also sold totaling $0.9 billion outside the securitization structure. Both the purchased and sold caps are marked to market through income.
In connection with the sale of Huntington's Class B Visaâ shares, Huntington entered into a swap agreement with the purchaser of the shares. The swap agreement adjusts for dilution in the conversion ratio of Class B shares resulting from the Visaâ litigation. At September 30, 2011, the fair value of the swap liability of $0.9 million is an estimate of the exposure liability based upon Huntington’s assessment of the probability-weighted potential Visaâ litigation losses and certain fixed payments required to be made through the term of the swap.
The following table presents the fair values at September 30, 2011, December 31, 2010, and September 30, 2010 of Huntington’s derivatives that are designated and not designated as hedging instruments. Amounts in the table below are presented gross without the impact of any net collateral arrangements.
Asset derivatives included in accrued income and other assets:
| | | September 30, | | | December 31, | | | September 30, | |
| (dollar amounts in thousands) | | 2011 | | | 2010 | | | 2010 | |
| Interest rate contracts designated as hedging instruments | | $ | 195,962 | | | $ | 127,346 | | | $ | 190,045 | |
| Interest rate contracts not designated as hedging instruments | | | 330,929 | | | | 263,015 | | | | 357,739 | |
| Foreign exchange contracts not designated as hedging instruments | | | 20,447 | | | | 2,845 | | | | — | |
| Total contracts | | $ | 547,338 | | | $ | 393,206 | | | $ | 547,784 | |
Liability derivatives included in accrued expenses and other liabilities
| | | September 30, | | | December 31, | | | September 30, | |
| (dollar amounts in thousands) | | 2011 | | | 2010 | | | 2010 | |
| Interest rate contracts designated as hedging instruments | | $ | — | | | $ | — | | | $ | — | |
| Interest rate contracts not designated as hedging instruments | | | 265,928 | | | | 233,805 | | | | 297,380 | |
| Foreign exchange contracts not designated as hedging instruments | | | 17,977 | | | | 3,107 | | | | 2,440 | |
| Total contracts | | $ | 283,905 | | | $ | 236,912 | | | $ | 299,820 | |
Fair value hedges are purchased to convert deposits and subordinated and other long-term debt from fixed-rate obligations to floating rate. The changes in fair value of the derivative are, to the extent that the hedging relationship is effective, recorded through earnings and offset against changes in the fair value of the hedged item.
The following table presents the change in fair value for derivatives designated as fair value hedges as well as the offsetting change in fair value on the hedged item for the three-month and nine-month periods ended September 30, 2011 and 2010:
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30, | | | September 30, | |
| (dollar amounts in thousands) | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Interest rate contracts | | | | | | | | | | | | |
| Change in fair value of interest rate swaps hedging deposits (1) | | $ | 2,922 | | | $ | 9,083 | | | $ | 3,831 | | | $ | 14,664 | |
| Change in fair value of hedged deposits (1) | | | (2,870 | ) | | | (9,958 | ) | | | (3,949 | ) | | | (14,970 | ) |
| Change in fair value of interest rate swaps hedging subordinated notes (2) | | | 41,170 | | | | 7,817 | | | | 46,407 | | | | 24,178 | |
| Change in fair value of hedged subordinated notes (2) | | | (41,170 | ) | | | (7,817 | ) | | | (46,407 | ) | | | (24,178 | ) |
| Change in fair value of interest rate swaps hedging other long-term debt (2) | | | 2,138 | | | | 1,267 | | | | 2,527 | | | | 3,820 | |
| Change in fair value of hedged other long-term debt (2) | | | (2,138 | ) | | | (1,267 | ) | | | (2,527 | ) | | | (3,820 | ) |
(1) Effective portion of the hedging relationship is recognized in Interest expense - deposits in the Unaudited Condensed Consolidated Statements of Income. Any resulting ineffective portion of the hedging relationship is recognized in noninterest income in the Unaudited Condensed Consolidated Statements of Income.
(2) Effective portion of the hedging relationship is recognized in Interest expense - subordinated notes and other long-term debt in the Unaudited Condensed Consolidated Statements of Income. Any resulting ineffective portion of the hedging relationship is recognized in noninterest income in the Unaudited Condensed Consolidated Statements of Income.
For cash flow hedges, interest rate swap contracts were entered into that pay fixed-rate interest in exchange for the receipt of variable-rate interest without the exchange of the contract’s underlying notional amount, which effectively converts a portion of its floating-rate debt to a fixed-rate debt. This reduces the potentially adverse impact of increases in interest rates on future interest expense. Other LIBOR-based commercial and industrial loans as well as investment securities were effectively converted to fixed-rate by entering into contracts that swap certain variable-rate interest payments for fixed-rate interest payments at designated times.
To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair value will not be included in current earnings but are reported as a component of OCI in the Unaudited Condensed Consolidated Statements of Shareholders’ Equity. These changes in fair value will be included in earnings of future periods when earnings are also affected by the changes in the hedged cash flows. To the extent these derivatives are not effective, changes in their fair values are immediately included in noninterest income.
The following table presents the gains and (losses) recognized in OCI and the location in the Unaudited Condensed Consolidated Statements of Income of gains and (losses) reclassified from OCI into earnings for the three-month and nine-month periods ended September 30, 2011 and 2010 for derivatives designated as effective cash flow hedges:
Derivatives in cash flow
hedging relationships | | Amount of gain or
(loss) recognized in
OCI on derivatives
(effective portion) | | Location of gain or (loss)
reclassified from
accumulated OCI into earnings (effective portion) | | Amount of (gain) or loss
reclassified from
accumulated OCI into
earnings (effective portion) | |
| | | Nine Months Ended | | | | Nine Months Ended | |
| | | September 30, | | | | September 30, | |
| (dollar amounts in thousands) | | 2011 | | | 2010 | | | | 2011 | | | 2010 | |
| Interest rate contracts | | | | | | | | | | | | | |
| Loans | | $ | 12,880 | | | $ | 81,517 | | Interest and fee income - loans and leases | | $ | 3,776 | | | $ | (100,623 | ) |
| Investment Securities | | | 847 | | | | — | | Interest and fee income - investment securities | | | — | | | | — | |
| FHLB Advances | | | — | | | | — | | Interest expense - subordinated notes and other long-term debt | | | — | | | | 2,580 | |
| Deposits | | | — | | | | — | | Interest expense - deposits | | | — | | | | — | |
| Subordinated notes | | | — | | | | — | | Interest expense - subordinated notes and other long-term debt | | | 20 | | | | (1,264 | ) |
| Other long term debt | | | — | | | | — | | Interest expense - subordinated notes and other long-term debt | | | — | | | | — | |
| Total | | $ | 13,727 | | | $ | 81,517 | | | | $ | 3,796 | | | $ | (99,307 | ) |
During the next twelve months, Huntington expects to reclassify to earnings $35.1 million of after-tax unrealized gains on cash flow hedging derivatives currently in OCI.
The following table details the gains and (losses) recognized in noninterest income on the ineffective portion on interest rate contracts for derivatives designated as cash flow hedges for the three-month and nine-month periods ended September 30, 2011 and 2010.
| | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
| (dollar amounts in thousands) | | 2011 | | | 2010 | | 2011 | 2010 |
| | | | | | | | | |
| Derivatives in cash flow hedging relationships | | | | | | | | |
| Interest rate contracts | | | | | | | | |
| Loans | | (261) | | | 89 | | (147) | 663 |
| FHLB Advances | | — | | | — | | — | — |
Derivatives used in trading activities
Various derivative financial instruments are offered to enable customers to meet their financing and investing objectives and for their risk management purposes. Derivative financial instruments used in trading activities consisted predominantly of interest rate swaps, but also included interest rate caps, floors, and futures, as well as foreign exchange options. Interest rate options grant the option holder the right to buy or sell an underlying financial instrument for a predetermined price before the contract expires. Interest rate futures are commitments to either purchase or sell a financial instrument at a future date for a specified price or yield and may be settled in cash or through delivery of the underlying financial instrument. Interest rate caps and floors are option-based contracts that entitle the buyer to receive cash payments based on the difference between a designated reference rate and a strike price, applied to a notional amount. Written options, primarily caps, expose Huntington to market risk but not credit risk. Purchased options contain both credit and market risk. The interest rate risk of these customer derivatives is mitigated by entering into similar derivatives having offsetting terms with other counterparties. The credit risk to these customers is evaluated and included in the calculation of fair value.
The net fair values of these derivative financial instruments, for which the gross amounts are included in accrued income and other assets or accrued expenses and other liabilities at September 30, 2011, December 31, 2010, and September 30, 2010, were $54.3 million, $46.3 million, and $38.8 million, respectively. The total notional values of derivative financial instruments used by Huntington on behalf of customers, including offsetting derivatives, were $10.7 billion, $9.8 billion, and $9.4 billion at September 30, 2011, December 31, 2010, and September 30, 2010, respectively. Huntington’s credit risks from interest rate swaps used for trading purposes were $330.9 million, $263.0 million, and $357.7 million at the same dates, respectively.
Derivatives used in mortgage banking activities
Huntington also uses certain derivative financial instruments to offset changes in value of its MSRs. These derivatives consist primarily of forward interest rate agreements and forward mortgage securities. The derivative instruments used are not designated as hedges. Accordingly, such derivatives are recorded at fair value with changes in fair value reflected in mortgage banking income. The following table summarizes the derivative assets and liabilities used in mortgage banking activities:
| | | September 30, | | | December 31, | | | September 30, | |
| (dollar amounts in thousands) | | 2011 | | | 2010 | | | 2010 | |
| | | | | | | | | | |
| Derivative assets: | | | | | | | | | |
| Interest rate lock agreements | | $ | 8,963 | | | $ | 2,817 | | | $ | 11,745 | |
| Forward trades and options | | | 134 | | | | 20,669 | | | | 980 | |
| Total derivative assets | | | 9,097 | | | | 23,486 | | | | 12,725 | |
| | | | | | | | | | | | | |
| Derivative liabilities: | | | | | | | | | | | | |
| Interest rate lock agreements | | | (124 | ) | | | (1,445 | ) | | | (379 | ) |
| Forward trades and options | | | (11,843 | ) | | | (883 | ) | | | (6,604 | ) |
| Total derivative liabilities | | | (11,967 | ) | | | (2,328 | ) | | | (6,983 | ) |
| Net derivative asset (liability) | | $ | (2,870 | ) | | $ | 21,158 | | | $ | 5,742 | |
The total notional value of these derivative financial instruments at September 30, 2011, December 31, 2010, and September 30, 2010, was $1.4 billion, $2.6 billion, and $2.8 billion, respectively. The total notional amount at September 30, 2011, corresponds to trading assets with a fair value of $13.2 million and trading liabilities with a fair value of $0.7 million. Total MSR hedging gains and (losses) for the three-month periods ended September 30, 2011 and 2010, were $30.3 million and $24.3 million, respectively, and $39.1 million and $82.5 million for the nine-month periods ended September 30, 2011 and September 30, 2010, respectively. Included in total MSR hedging gains and losses for the three-month periods ended September 30, 2011 and 2010 were gains and (losses) related to derivative instruments of $30.2 million and $24.2 million, respectively, and $39.2 million and $81.9 million for the nine-month periods ended September 30, 2011, and September 30, 2010, respectively. These amounts are included in mortgage banking income in the Unaudited Condensed Consolidated Statements of Income.
15. VIEs
Consolidated VIEs
Consolidated VIEs at September 30, 2011, consisted of the Franklin 2009 Trust and certain loan securitization trusts. Loan securitizations include automobile loan and lease securitization trusts formed in 2009, 2008, and 2006. Huntington has determined the trusts are VIEs. Huntington has concluded that it is the primary beneficiary of these trusts because it has the power to direct the activities of the entity that most significantly affect the entity's economic performance and it has either the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.
The carrying amount and classification of the trusts’ assets and liabilities that are included in the Unaudited Condensed Consolidated Balance Sheet are as follows:
| | | September 30, 2011 | |
| | | Franklin | | | | | | | | | | | | | |
| (dollar amounts in thousands) | | 2009 Trust | | | 2009 Trust | | | 2008 Trust | | | 2006 Trust | | | Total | |
| Assets: | | | | | | | | | | | | | | | |
| Cash | | $ | — | | | $ | 20,095 | | | $ | 14,551 | | | $ | 56,132 | | | $ | 90,778 | |
| Loans and leases | | | — | | | | 344,535 | | | | 164,095 | | | | 810,666 | | | | 1,319,296 | |
| Allowance for loan and lease losses | | | — | | | | — | | | | (1,444 | ) | | | (7,134 | ) | | | (8,578 | ) |
| Net loans and leases | | | — | | | | 344,535 | | | | 162,651 | | | | 803,532 | | | | 1,310,718 | |
| Accrued income and other assets | | | 1,753 | | | | 1,607 | | | | 667 | | | | 3,145 | | | | 7,172 | |
| Total assets | | $ | 1,753 | | | $ | 366,237 | | | $ | 177,869 | | | $ | 862,809 | | | $ | 1,408,668 | |
| | | | | | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | | | | | |
| Other long-term debt | | $ | — | | | $ | 173,000 | | | $ | 40,887 | | | $ | 450,365 | | | $ | 664,252 | |
| Accrued interest and other liabilities | | | 988 | | | | 388 | | | | 65 | | | | 102 | | | | 1,543 | |
| Total liabilities | | $ | 988 | | | $ | 173,388 | | | $ | 40,952 | | | $ | 450,467 | | | $ | 665,795 | |
Unconsolidated VIEs
At September 30, 2011, unconsolidated VIEs consisted of an automobile loan and lease securitization trust formed in 2011. Huntington has concluded that it is not the primary beneficiary of this trust because it has neither the obligation to absorb losses of the entity that could potentially be significant to the VIE nor the right to receive benefits from the entity that could potentially be significant to the VIE. Huntington is not required, and does not currently intend, to provide any additional financial support to this trust. Investors and creditors only have recourse to the assets held by the trust.
The carrying amount and classification of the trust’s assets and liabilities that are not included in the Unaudited Condensed Consolidated Balance Sheet were as follows:
| | | September 30,
2011 | |
| (dollar amounts in thousands) | | 2011 Trust | |
| Assets: | | | |
| Cash | | $ | 34,629 | |
| Loans and leases | | | 994,052 | |
| Allowance for loan and lease losses | | | — | |
| Net loans and leases | | | 994,052 | |
| Accrued income and other assets | | | 2,190 | |
| Total assets | | $ | 1,030,871 | |
| | | | | |
| Liabilities: | | | | |
| Other long-term debt | | $ | 1,000,000 | |
| Accrued interest and other liabilities | | | 792 | |
| Total liabilities | | $ | 1,000,792 | |
TRUST-PREFERRED SECURITIES
Huntington has certain wholly-owned trusts whose assets, liabilities, equity, income, and expenses are not included within Huntington’s Unaudited Condensed Consolidated Financial Statements. These trusts have been formed for the sole purpose of issuing trust-preferred securities, from which the proceeds are then invested in Huntington junior subordinated debentures, which are reflected in Huntington’s Unaudited Condensed Consolidated Balance Sheet as subordinated notes. The trust securities are the obligations of the trusts, and as such, are not consolidated within Huntington’s Unaudited Condensed Consolidated Financial Statements. A list of trust-preferred securities outstanding at September 30, 2011, follows:
| | | | | | | | Principal amount of | | | Investment in | |
| | | | | | | | subordinated note/ | | | unconsolidated | |
| (dollar amounts in thousands) | | Rate | | | | | debenture issued to trust (1) | | | subsidiary (2) | |
| Huntington Capital I | | | 0.95 | % | (3 | ) | | $ | 138,816 | | | $ | 6,186 | |
| Huntington Capital II | | | 0.97 | | (4 | ) | | | 55,093 | | | | 3,093 | |
| Huntington Capital III | | | 6.69 | | | | | | 114,094 | | | | 10 | |
| BancFirst Ohio Trust Preferred | | | 8.54 | | | | | | 23,206 | | | | 619 | |
| Sky Financial Capital Trust I | | | 8.56 | | | | | | 64,264 | | | | 1,856 | |
| Sky Financial Capital Trust II | | | 3.19 | | (5 | ) | | | 30,929 | | | | 929 | |
| Sky Financial Capital Trust III | | | 1.71 | | (6 | ) | | | 77,320 | | | | 2,320 | |
| Sky Financial Capital Trust IV | | | 1.64 | | (6 | ) | | | 77,320 | | | | 2,320 | |
| Prospect Trust I | | | 3.50 | | (7 | ) | | | 6,186 | | | | 186 | |
| Total | | | | | | | | $ | 587,228 | | | $ | 17,519 | |
| (1) | Represents the principal amount of debentures issued to each trust, including unamortized original issue discount. |
| (2) | Huntington’s investment in the unconsolidated trusts represents the only risk of loss. |
| (3) | Variable effective rate at September 30, 2011, based on three month LIBOR + 0.70. |
| (4) | Variable effective rate at September 30, 2011, based on three month LIBOR + 0.625. |
| (5) | Variable effective rate at September 30, 2011, based on three month LIBOR + 2.95. |
| (6) | Variable effective rate at September 30, 2011, based on three month LIBOR + 1.40. |
| (7) | Variable effective rate at September 30, 2011, based on three month LIBOR + 3.25. |
Each issue of the junior subordinated debentures has an interest rate equal to the corresponding trust securities distribution rate. Huntington has the right to defer payment of interest on the debentures at any time, or from time-to-time for a period not exceeding five years, provided that no extension period may extend beyond the stated maturity of the related debentures. During any such extension period, distributions to the trust securities will also be deferred and Huntington’s ability to pay dividends on its common stock will be restricted. Periodic cash payments and payments upon liquidation or redemption with respect to trust securities are guaranteed by Huntington to the extent of funds held by the trusts. The guarantee ranks subordinate and junior in right of payment to all indebtedness of the Company to the same extent as the junior subordinated debt. The guarantee does not place a limitation on the amount of additional indebtedness that may be incurred by Huntington.
LOW INCOME HOUSING TAX CREDIT PARTNERSHIPS
Huntington makes certain equity investments in various limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (LIHTC) pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital, to facilitate the sale of additional affordable housing product offerings, and to assist in achieving goals associated with the Community Reinvestment Act. The primary activities of the limited partnerships include the identification, development, and operation of multi family housing that is leased to qualifying residential tenants. Generally, these types of investments are funded through a combination of debt and equity.
Huntington does not have the power to direct the activities of these VIEs that most significantly affect their economic performance and is not the primary beneficiary. Huntington uses the equity method to account for the majority of its investments in these entities. These investments are included in accrued income and other assets. At September 30, 2011, December 31, 2010, and September 30, 2010, Huntington had commitments of $345.8 million, $316.0 million, and $269.4 million, respectively, of which $304.1 million, $260.1 million, and $238.9 million, respectively, were funded. The unfunded portion is included in accrued expenses and other liabilities.
16. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments to extend credit
In the ordinary course of business, Huntington makes various commitments to extend credit that are not reflected in the Unaudited Condensed Consolidated Financial Statements. The contractual amounts of these financial agreements at September 30, 2011, December 31, 2010, and September 30, 2010, were as follows:
| | | September 30, | | | December 31, | | | September 30, | |
| (dollar amounts in millions) | | 2011 | | | 2010 | | | 2010 | |
| | | | | | | | | | |
| Contract amount represents credit risk: | | | | | | | | | |
| Commitments to extend credit | | | | | | | | | |
| Commercial | | $ | 7,471 | | | $ | 5,933 | | | $ | 5,854 | |
| Consumer | | | 5,828 | | | | 5,406 | | | | 5,264 | |
| Commercial real estate | | | 535 | | | | 546 | | | | 644 | |
| Standby letters of credit | | | 548 | | | | 607 | | | | 477 | |
Commitments to extend credit generally have fixed expiration dates, are variable-rate, and contain clauses that permit Huntington to terminate or otherwise renegotiate the contracts in the event of a significant deterioration in the customer’s credit quality. These arrangements normally require the payment of a fee by the customer, the pricing of which is based on prevailing market conditions, credit quality, probability of funding, and other relevant factors. Since many of these commitments are expected to expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements. The interest rate risk arising from these financial instruments is insignificant as a result of their predominantly short-term, variable-rate nature.
Standby letters-of-credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most of these arrangements mature within two years. The carrying amount of deferred revenue associated with these guarantees was $1.5 million, $2.2 million, and $2.0 million at September 30, 2011, December 31, 2010, and September 30, 2010, respectively.
Through the Company’s credit process, Huntington monitors the credit risks of outstanding standby letters-of-credit. When it is probable that a standby letter-of-credit will be drawn and not repaid in full, losses are recognized in the provision for credit losses. At September 30, 2011, Huntington had $548 million of standby letters-of-credit outstanding, of which 80% were collateralized. Included in this $548 million total are letters-of-credit issued by the Bank that support securities that were issued by customers and remarketed by The Huntington Investment Company, the Company’s broker-dealer subsidiary.
Huntington uses an internal grading system to assess an estimate of loss on its loan and lease portfolio. This same grading system is used to monitor credit risk associated with standby letters-of-credit. Under this grading system as of September 30, 2011, approximately $84 million of the standby letters-of-credit were rated strong with sufficient asset quality, liquidity, and good debt capacity and coverage; approximately $396 million were rated average with acceptable asset quality, liquidity, and modest debt capacity; and approximately $68 million were rated substandard with negative financial trends, structural weaknesses, operating difficulties, and higher leverage.
Commercial letters-of-credit represent short-term, self-liquidating instruments that facilitate customer trade transactions and generally have maturities of no longer than 90 days. The goods or cargo being traded normally secures these instruments.
Commitments to sell loans
Huntington enters into forward contracts relating to its mortgage banking business to hedge the exposures from commitments to make new residential mortgage loans with existing customers and from mortgage loans classified as loans held for sale. At September 30, 2011, December 31, 2010, and September 30, 2010, Huntington had commitments to sell residential real estate loans of $673.5 million, $998.7 million, and $1,254.4 million, respectively. These contracts mature in less than one year.
Income Taxes
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state, city and foreign jurisdictions. Federal income tax audits have been completed through 2007. In the 2011 third quarter, the IRS began its examination of our 2008 and 2009 consolidated federal income tax returns. Various state and other jurisdictions remain open to examination for tax years 2005 and forward.
The IRS has proposed adjustments to the Company’s previously filed tax returns. Management believes the tax positions taken by the Company related to such proposed adjustments were correct and supported by applicable statutes, regulations, and judicial authority, and intends to vigorously defend them. It is possible 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 assurance can be given, Management believes the resolution of these examinations will not, individually or in the aggregate, have a material adverse impact on our consolidated financial position.
Huntington accounts for uncertainties in income taxes in accordance with ASC 740, Income Taxes. At September 30, 2011, Huntington had gross unrecognized tax benefits of $11.9 million in income tax liability related to tax positions. Total interest accrued on the unrecognized tax benefits amounted to $2.1 million as of September 30, 2011. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. However, any ultimate settlement is not expected to be material to the Unaudited Condensed Consolidated Financial Statements as a whole. Huntington recognizes interest and penalties on income tax assessments or income tax refunds in the financial statements as a component of its provision for income taxes. Huntington does not anticipate the total amount of unrecognized tax benefits to significantly change within the next 12 months.
Litigation
The nature of Huntington’s business ordinarily results in a certain amount of claims, litigation, investigations, and legal and administrative cases and proceedings, all of which are considered incidental to the normal conduct of business. When the Company determines it has meritorious defenses to the claims asserted, it vigorously defends itself. The Company will consider settlement of cases when, in Management’s judgment, it is in the best interests of both the Company and its shareholders to do so.
On at least a quarterly basis, Huntington assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. For matters where it is probable the Company will incur a loss and the amount can be reasonably estimated, Huntington establishes an accrual for the loss. Once established, the accrual is adjusted as appropriate to reflect any relevant developments. For matters where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established.
In certain cases, exposure to loss exists in excess of the accrual to the extent such loss is reasonably possible, but not probable. Management believes an estimate of the aggregate range of reasonably possible losses, in excess of amounts accrued, for current legal proceedings is from $0 to approximately $160.0 million at September 30, 2011. For certain other cases, Management cannot reasonably estimate the possible loss at this time. Any estimate involves significant judgment, given the varying stages of the proceedings (including the fact that many of them are currently in preliminary stages), the existence of multiple defendants in several of the current proceedings whose share of liability has yet to be determined, the numerous unresolved issues in many of the proceedings, and the inherent uncertainty of the various potential outcomes of such proceedings. Accordingly, Management’s estimate will change from time-to-time, and actual losses may be more or less than the current estimate.
While the final outcome of legal proceedings is inherently uncertain, based on information currently available, advice of counsel, and available insurance coverage, Management believes that the amount it has already accrued is adequate and any incremental liability arising from the Company’s legal proceedings will not have a material adverse effect on the Company's consolidated financial position as a whole. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the Company’s consolidated financial position in a particular period.
The following supplements the discussion of certain matters previously reported in Item 3 (Legal Proceedings) of the 2010 Form 10-K for events occurring during the first nine-month period of 2011:
The Bank is a defendant in three lawsuits, which collectively may be material, arising from its commercial lending, depository, and equipment leasing relationships with Cyberco Holdings, Inc. (Cyberco), based in Grand Rapids, Michigan. In November 2004, the Federal Bureau of Investigation and the IRS raided the Cyberco facilities and Cyberco's operations ceased. An equipment leasing fraud was uncovered, whereby Cyberco sought financing from equipment lessors and financial institutions, including the Bank, allegedly to purchase computer equipment from Teleservices Group, Inc. (Teleservices). Cyberco created fraudulent documentation to close the financing transactions while, in fact, no computer equipment was ever purchased or leased from Teleservices which proved to be a shell corporation.
On June 22, 2007, a complaint in the United States District Court for the Western District of Michigan (District Court) was filed by El Camino Resources, Ltd, ePlus Group, Inc., and Bank Midwest, N.A., all of whom had lending relationships with Teleservices, against Cyberco and the Bank, alleging that Cyberco defrauded plaintiffs and converted plaintiffs' property through various means in connection with the equipment leasing scheme and alleges that the Bank aided and abetted Cyberco in committing the alleged fraud and conversion. The complaint further alleges that the Bank's actions entitle one of the plaintiffs to recover $1.9 million from the Bank as a form of unjust enrichment. In addition, plaintiffs claimed direct damages of approximately $32.0 million and additional consequential damages in excess of $20.0 million. On July 1, 2010, the District Court issued an Opinion and Order adopting in full a federal magistrate's recommendation for summary judgment in favor of the Bank on all claims except the unjust enrichment claim, and a partial summary judgment was entered on July 1, 2010. The Bank has requested an opportunity to file a motion for summary judgment on the remaining unjust enrichment claim against it. A motion for reconsideration filed by the plaintiffs regarding the partial summary judgment was denied. Subsequently, at a pre-motion conference, the District Court, in lieu of allowing the Bank to file a summary judgment motion, ordered the case to be tried on January 17, 2012, in a one day bench trial, and entered a scheduling order governing all pretrial conduct.
The Bank is also involved with the Chapter 7 bankruptcy proceedings of both Cyberco, filed on December 9, 2004, and Teleservices, filed on January 21, 2005. The Cyberco bankruptcy trustee commenced an adversary proceeding against the Bank on December 8, 2006, seeking over $70.0 million he alleges was transferred to the Bank. The Bank responded with a motion to dismiss and all but the preference claims were dismissed on January 29, 2008. The Cyberco bankruptcy trustee alleges preferential transfers in the amount of $9.7 million. On August 11, 2011, the District Court ordered the case to be tried in April 2012, and entered a pretrial order governing all pretrial conduct. Subsequently, the Bank filed a motion for summary judgment based on the Cyberco trustee seeking recovery in connection with the same alleged transfers as the Teleservices trustee in the case described below. This motion is currently pending.
The Teleservices bankruptcy trustee filed an adversary proceeding against the Bank on January 19, 2007, seeking to avoid and recover alleged transfers that occurred in two ways: (1) checks made payable to the Bank to be applied to Cyberco's indebtedness to the Bank, and (2) deposits into Cyberco's bank accounts with the Bank. A trial was held as to only the Bank’s defenses in the 2010 fourth quarter. Subsequently, the trustee filed a summary judgment motion on her affirmative case, alleging the fraudulent transfers to the Bank totaled approximately $73.0 million and seeking judgment in that amount (which includes the $9.7 million alleged to be preferential transfers by the Cyberco bankruptcy trustee). On March 17, 2011, the Bankruptcy Court issued an Opinion determining the alleged transfers made to the Bank were not received in good faith from the time period of April 30, 2004, through November 2004, and that the Bank had failed to show a lack of knowledge of the avoidability of the alleged transfers from November 17, 2003, through April 30, 2004. The trustee then filed an amended motion for summary judgment on her affirmative case and a hearing was held on July 1, 2011. The motion in currently pending. In accordance with the District Court’s scheduling order, the Bank filed a motion for summary judgment on September 16, 2011, and a motion to add El Camino and the Cyberco trustee as necessary parties. These motions remain pending. If summary judgment does not enter for either party, the case is scheduled for trial in January 2012.
In the pending bankruptcy cases of Cyberco and Teleservices, the Bank moved to substantively consolidate the two bankruptcy estates, principally on the ground that Teleservices was the alter ego and a mere instrumentality of Cyberco at all times. On July 2, 2010, the Bankruptcy Court issued an Opinion denying the Bank's motions for substantive consolidation of the two bankruptcy estates. The Bank has appealed this ruling and the appeal is pending.
17. PARENT COMPANY FINANCIAL STATEMENTS
The parent company condensed financial statements, which include transactions with subsidiaries, are as follows.
| Balance Sheets | | September 30, | | | December 31, | | | September 30, | |
| (dollar amounts in thousands) | | 2011 | | | 2010 | | | 2010 | |
| Assets | | | | | | | | | |
| Cash and cash equivalents (1) | | $ | 697,247 | | | $ | 615,167 | | | $ | 858,965 | |
| Due from The Huntington National Bank | | | 953,074 | | | | 954,565 | | | | 953,074 | |
| Due from non-bank subsidiaries | | | 197,809 | | | | 225,560 | | | | 246,458 | |
| Investment in The Huntington National Bank | | | 4,031,232 | | | | 3,515,597 | | | | 3,524,432 | |
| Investment in non-bank subsidiaries | | | 795,518 | | | | 790,248 | | | | 813,788 | |
| Accrued interest receivable and other assets | | | 126,527 | | | | 110,181 | | | | 167,712 | |
| Total assets | | $ | 6,801,407 | | | $ | 6,211,318 | | | $ | 6,564,429 | |
| | | | | | | | | | | | | |
| Liabilities and Shareholders' Equity | | | | | | | | | | | | |
| Short-term borrowings | | $ | — | | | $ | 100 | | | $ | 687 | |
| Long-term borrowings | | | 932,434 | | | | 937,434 | | | | 637,434 | |
| Dividends payable, accrued expenses, and other liabilities | | | 468,494 | | | | 293,242 | | | | 358,905 | |
| Total liabilities | | | 1,400,928 | | | | 1,230,776 | | | | 997,026 | |
| Shareholders' equity (2) | | | 5,400,479 | | | | 4,980,542 | | | | 5,567,403 | |
| Total liabilities and shareholders' equity | | $ | 6,801,407 | | | $ | 6,211,318 | | | $ | 6,564,429 | |
(1) Includes restricted cash of $125,000.
(2) See Huntington’s Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity.
| | | Three Months Ended | | | Nine Months Ended | |
| Statements of Income | | September 30, | | | September 30, | |
| (dollar amounts in thousands) | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Income | | | | | | | | | | | | |
| Dividends from | | | | | | | | | | | | |
| The Huntington National Bank | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Non-bank subsidiaries | | | — | | | | 15,000 | | | | 31,000 | | | | 33,000 | |
| Interest from | | | | | | | | | | | | | | | | |
| The Huntington National Bank | | | 20,248 | | | | 20,611 | | | | 60,644 | | | | 62,351 | |
| Non-bank subsidiaries | | | 2,007 | | | | 2,873 | | | | 6,962 | | | | 9,322 | |
| Other | | | 489 | | | | 461 | | | | 1,529 | | | | 2,537 | |
| Total income | | | 22,744 | | | | 38,945 | | | | 100,135 | | | | 107,210 | |
| | | | | | | | | | | | | | | | | |
| Expense | | | | | | | | | | | | | | | | |
| Personnel costs | | | 10,251 | | | | 9,751 | | | | 24,581 | | | | 22,769 | |
| Interest on borrowings | | | 8,834 | | | | 6,028 | | | | 26,256 | | | | 17,303 | |
| Other | | | 14,692 | | | | 11,416 | | | | 34,722 | | | | 37,321 | |
| Total expense | | | 33,777 | | | | 27,195 | | | | 85,559 | | | | 77,393 | |
| | | | | | | | | | | | | | | | | |
Income (loss) before income taxes and equity in undistributed net income of subsidiaries | | | (11,033 | ) | | | 11,750 | | | | 14,576 | | | | 29,817 | |
| Provision (benefit) for income taxes | | | (8,783 | ) | | | (656 | ) | | | (9,798 | ) | | | 15,088 | |
| Income (loss) before equity in undistributed net income of subsidiaries | | | (2,250 | ) | | | 12,406 | | | | 24,374 | | | | 14,729 | |
| Increase (decrease) in undistributed net income of: | | | | | | | | | | | | | | | | |
| The Huntington National Bank | | | 143,140 | | | | 95,156 | | | | 402,040 | | | | 196,214 | |
| Non-bank subsidiaries | | | 2,501 | | | | (6,616 | ) | | | (10,659 | ) | | | (21,496 | ) |
| Net income | | $ | 143,391 | | | $ | 100,946 | | | $ | 415,755 | | | $ | 189,447 | |
| | | Nine Months Ended | |
| Statements of Cash Flows | | September 30, | |
| (dollar amounts in thousands) | | 2011 | | | 2010 | |
| | | | | | | |
| Operating activities | | | | | | |
| Net income | | $ | 415,755 | | | $ | 189,447 | |
| Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | |
| Equity in undistributed net income of subsidiaries | | | (434,018 | ) | | | (192,718 | ) |
| Depreciation and amortization | | | 549 | | | | 765 | |
| Other, net | | | 134,089 | | | | (76,881 | ) |
| Net cash provided by (used for) operating activities | | | 116,375 | | | | (79,387 | ) |
| | | | | | | | | |
| Investing activities | | | | | | | | |
| Repayments from subsidiaries | | | (28,415 | ) | | | (384,162 | ) |
| Advances to subsidiaries | | | 99,023 | | | | 43,572 | |
| Net cash provided by (used for) investing activities | | | 70,608 | | | | (340,590 | ) |
| | | | | | | | | |
| Financing activities | | | | | | | | |
| Payment of borrowings | | | (5,100 | ) | | | (604 | ) |
| Dividends paid on preferred stock | | | (23,110 | ) | | | (75,537 | ) |
| Dividends paid on common stock | | | (27,042 | ) | | | (21,437 | ) |
| Redemption of Warrant to the Treasury | | | (49,100 | ) | | | — | |
| Other, net | | | (551 | ) | | | (19 | ) |
| Net cash provided by (used for) financing activities | | | (104,903 | ) | | | (97,597 | ) |
| Change in cash and cash equivalents | | | 82,080 | | | | (517,574 | ) |
| Cash and cash equivalents at beginning of period | | | 615,167 | | | | 1,376,539 | |
| Cash and cash equivalents at end of period | | $ | 697,247 | | | $ | 858,965 | |
| | | | | | | | | |
| Supplemental disclosure: | | | | | | | | |
| Interest paid | | $ | 26,256 | | | $ | 17,303 | |
18. SEGMENT REPORTING
During the 2010 fourth quarter, Huntington reorganized our business segments to better align certain business unit reporting with segment executives to accelerate cross-sell results and provide greater focus on the execution of strategic plans. We have four major business segments: Retail and Business Banking, Regional and Commercial Banking, Automobile Finance and Commercial Real Estate, and Wealth Advisors, Government Finance, and Home Lending. A Treasury / Other function includes our insurance business and other unallocated assets, liabilities, revenue, and expense. All periods have been reclassified to conform to the current period classification.
Segment results are determined based upon the Company’s management reporting system, which assigns balance sheet and income statement items to each of the business segments. The process is designed around the Company’s organizational and management structure and, accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions. A description of each segment and table of financial results is presented below.
Retail and Business Banking: The Retail and Business Banking segment provides a wide array of financial products and services including but not limited to loans, deposits, investment, and treasury management services to our consumer and small business customers. Huntington serves customers primarily through our traditional banking network of over 600 branches as well as our convenience branches located in grocery stores and retirement centers in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. In addition to our extensive branch network, customers can access Huntington through online banking, mobile banking, 24-hour telephone banking, and over 1,300 ATMs.
Huntington has established a “Fair Play” banking philosophy and is building a reputation for meeting the banking needs of consumers in a manner which makes them feel supported and appreciated. In 2010, Huntington brought innovation to the checking account by providing consumers with a 24-hour grace period to correct a shortfall in an account and avoid the associated overdraft fees. Huntington believes customers are recognizing this and other efforts as key differentiators and it is earning us more customers and deeper relationships.
Business Banking is a dynamic and growing part of Huntington’s business and we are committed to being the bank of choice for small businesses in our markets. Business Banking is defined as companies with revenues less than $15 million and consists of approximately 130,000 businesses. Huntington continues to develop products and services that are designed specifically to meet the needs of small business. Huntington continues to look for ways to help companies find solutions to their capital needs, from our program helping businesses that had struggled in the economic downturn but are now showing several quarters of profitability, to our participation in the Small Business Administration programs. As of September 30, 2011, the SBA reported that Huntington ranked first in our footprint and third in the nation in the number of SBA loans originated during the SBA fiscal year.
Regional and Commercial Banking: This segment provides a variety of banking products and services to customers within our primary banking markets that generally have larger credit exposures and sales revenues compared with our Retail and Business Banking customers. Huntington products in this segment include commercial loans, international trade, treasury management, leasing, capital market services including interest rate risk protection products, and mezzanine investment capabilities. Regional and Commercial Banking also focuses on financial solutions for corporate and institutional customers including investment banking, sales and trading of securities, and retirement plan services. The Regional and Commercial Banking team has significantly expanded its equipment leasing capabilities, as well as focused on serving the commercial banking needs of key verticals including not-for-profit organizations, healthcare entities, and large corporations. Commercial bankers personally deliver these products and services directly and with cross-segment product partners. Huntington consistently strives to develop extensive relationships with clients creating defined relationship plans which identify needs and offer solutions.
The primary focus for Regional and Commercial Banking is our ability to gain a deeper relationship with our existing customers and to increase our market share through our unique customer solution strategy. This includes a comprehensive cross-sell approach to capture the untapped opportunities within our customer and prospect community. This strategy embodies a shift from credit-only focus, to a total customer solution approach with an increasing share-of-wallet.
The Regional and Commercial Banking business model includes eleven regional markets driven by local execution. These markets are supported by expertise in large corporate and middle market segments, by capabilities in treasury management and equipment finance, and by vertical strategies within the healthcare and not-for-profit industries.
The commercial portfolio includes a distribution across industries and segments which resembles the market demographics of our footprint. A strategic focus of Regional and Commercial Banking is to target underpenetrated markets within our footprint and capitalize on opportunities in industries such as not-for-profit and healthcare.
In addition, Regional and Commercial Banking expanded the leadership, investment, and capabilities for treasury management and equipment finance. With our investments in treasury management, Huntington differentiated itself through our implementation experience and the speed at which products and services are delivered to our customers. In equipment finance, Huntington distinguished itself through aggressive business development and local service delivery and by strategically aligning with our bank partners to drive market share. The increase in originations during the current period reflected the strategic decision to enter three new markets: business aircraft finance, rail industry finance, and lender finance.
Automobile Finance and Commercial Real Estate: This segment provides lending and other banking products and services to customers outside of our normal retail and commercial banking segments. Our products and services are delivered through highly specialized relationship-focused bankers and our cross segment product partners. Huntington creates well-defined relationship plans which identify needs where solutions are developed and customer commitments are obtained.
The Automotive Finance team services automobile dealerships, its owners, and consumers buying automobiles through these dealerships. Huntington has provided new and used automobile financing and dealer services throughout the Midwest since the early 1950s. This consistency in the market and our focus on working with strong dealerships, has allowed us to actively deepen relationships while building a strong reputation.
The Commercial Real Estate team serves professional real estate developers, and REITs. Huntington has a clear focus on experienced, well-managed, well-capitalized top tier real estate developers who are capable of operating in all economic phases of the real estate industry. Most of our customers are located within our footprint.
Wealth Advisors, Government Finance, and Home Lending: This segment consists of our wealth management, government banking, and home lending businesses. In wealth management, Huntington provides financial services to high net worth clients in our primary banking markets and Florida. Huntington Wealth Advisors delivers a comprehensive solution through a unified sales team providing private banking, investment, insurance, and trust services. Aligned with the eleven regional commercial banking markets, this coordinated service model delivers products and services directly and through the other segment product partners. A fundamental point of differentiation is our commitment to be in the market, working closely with clients and their other advisors to identify needs, offer solutions and provide ongoing advice in an optimal client experience.
The Government Finance Group provides financial products and services to government and other public sector entities in our primary banking markets. A locally based team of relationship managers works with clients to meet their public finance, brokerage, trust, lending, and treasury management needs.
Home Lending originates and services consumer loans and mortgages for customers who are generally located in our primary banking markets. Consumer and mortgage lending products are primarily distributed through the Retail and Business Banking segment, as well as through commissioned loan originators. Closely aligned, our Community Development group serves an important role as it focuses on delivering on our commitment to the communities Huntington serves.
The segment also includes the related businesses of investment management, investment servicing, custody, corporate trust and retirement plan services. Huntington Asset Advisors provides investment management services through a variety of internal and external channels, including advising the Huntington Funds, our proprietary family of funds. Huntington Asset Services offers administrative and operational support to fund complexes, including fund accounting, transfer agency, administration, and distribution services. Our retirement plan services business offers fully bundled and third party distribution of a variety of qualified and non-qualified plan solutions, and the national settlements business focuses on providing banking solutions to the litigation settlement market.
Listed below is certain operating basis financial information reconciled to Huntington’s September 30, 2011, December 31, 2010, and September 30, 2010, reported results by business segment:
| | | Three Months Ended September 30, | |
| | | Retail & | | | Regional & | | | | | | | | | | | | | |
| Income Statements | | Business | | | Commercial | | | | | | | | | Treasury/ | | | Huntington | |
| (dollar amounts in thousands ) | | Banking | | | Banking | | | AFCRE | | | WGH | | | Other | | | Consolidated | |
| | | | | | | | | | | | | | | | | | | |
| 2011 | | | | | | | | | | | | | | | | | | |
| Net interest income | | $ | 229,613 | | | | 61,320 | | | | 94,380 | | | | 49,381 | | | | (28,216 | ) | | $ | 406,478 | |
| Provision for credit losses | | | 36,467 | | | | 16,530 | | | | (19,979 | ) | | | 10,568 | | | | — | | | | 43,586 | |
| Noninterest income | | | 110,756 | | | | 34,030 | | | | 28,362 | | | | 54,565 | | | | 30,846 | | | | 258,559 | |
| Noninterest expense | | | 246,441 | | | | 50,329 | | | | 40,347 | | | | 92,416 | | | | 9,585 | | | | 439,118 | |
| Income taxes | | | 20,111 | | | | 9,972 | | | | 35,831 | | | | 337 | | | | (27,309 | ) | | | 38,942 | |
| Operating/reported net income | | $ | 37,350 | | | $ | 18,519 | | | $ | 66,543 | | | $ | 625 | | | $ | 20,354 | | | $ | 143,391 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 2010 | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | $ | 220,192 | | | $ | 53,970 | | | | 86,105 | | | | 43,626 | | | | 6,069 | | | $ | 409,962 | |
| Provision for credit losses | | | 59,316 | | | | 3,731 | | | | 37,132 | | | | 18,983 | | | | (2 | ) | | | 119,160 | |
| Noninterest income | | | 101,900 | | | | 27,000 | | | | 21,368 | | | | 89,303 | | | | 27,572 | | | | 267,143 | |
| Noninterest expense | | | 232,028 | | | | 40,711 | | | | 40,318 | | | | 88,623 | | | | 25,629 | | | | 427,309 | |
| Income taxes | | | 10,762 | | | | 12,785 | | | | 10,508 | | | | 8,863 | | | | (13,228 | ) | | | 29,690 | |
| Operating/reported net income | | $ | 19,986 | | | $ | 23,743 | | | $ | 19,515 | | | $ | 16,460 | | | $ | 21,242 | | | $ | 100,946 | |
| | | Nine Months Ended September 30, | |
| | | Retail & | | | Regional & | | | | | | | | | | | | | |
| Income Statements | | Business | | | Commercial | | | | | | | | | Treasury/ | | | Huntington | |
| (dollar amounts in thousands ) | | Banking | | | Banking | | | AFCRE | | | WGH | | | Other | | | Consolidated | |
| | | | | | | | | | | | | | | | | | | |
| 2011 | | | | | | | | | | | | | | | | | | |
| Net interest income | | $ | 702,666 | | | | 178,787 | | | | 271,510 | | | | 145,614 | | | | (84,432 | ) | | $ | 1,214,145 | |
| Provision for credit losses | | | 94,825 | | | | 23,957 | | | | (30,050 | ) | | | 40,036 | | | | — | | | | 128,768 | |
| Noninterest income | | | 311,598 | | | | 94,657 | | | | 57,886 | | | | 187,443 | | | | 99,687 | | | | 751,271 | |
| Noninterest expense | | | 705,216 | | | | 142,189 | | | | 125,649 | | | | 265,151 | | | | 60,021 | | | | 1,298,226 | |
| Income taxes | | | 74,978 | | | | 37,554 | | | | 81,829 | | | | 9,755 | | | | (81,449 | ) | | | 122,667 | |
| Operating/reported net income | | $ | 139,245 | | | $ | 69,744 | | | $ | 151,968 | | | $ | 18,115 | | | $ | 36,683 | | | $ | 415,755 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 2010 | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | $ | 637,863 | | | | 155,686 | | | | 247,319 | | | $ | 120,511 | | | $ | 42,132 | | | $ | 1,203,511 | |
| Provision for credit losses | | | 150,320 | | | | 57,607 | | | | 202,440 | | | | 45,700 | | | | 91,507 | | | | 547,574 | |
| Noninterest income | | | 300,444 | | | | 80,667 | | | | 58,625 | | | | 246,704 | | | | 91,198 | | | | 777,638 | |
| Noninterest expense | | | 670,458 | | | | 115,457 | | | | 114,366 | | | | 261,876 | | | | 77,056 | | | | 1,239,213 | |
| Income taxes | | | 41,136 | | | | 22,151 | | | | (3,802 | ) | | | 20,875 | | | | (75,445 | ) | | | 4,915 | |
| Operating/reported net income | | $ | 76,393 | | | $ | 41,138 | | | $ | (7,060 | ) | | $ | 38,764 | | | $ | 40,212 | | | $ | 189,447 | |
| | | Assets at | | Deposits at | |
| (dollar amounts in | | September 30, | | December 31, | | September 30, | | September 30, | | December 31, | | September 30, | |
| millions) | | 2011 | | 2010 | | 2010 | | 2011 | | 2010 | | 2010 | |
| | | | | | | | | | | | | | |
| Retail & Business Banking | | $ | 13,650 | | $ | 13,088 | | $ | 13,147 | | $ | 28,095 | | $ | 29,298 | | $ | 28,735 | |
| Regional & Commercial Banking | | | 9,757 | | | 8,720 | | | 8,286 | | | 4,173 | | | 3,538 | | | 3,217 | |
| AFCRE | | | 12,351 | | | 13,233 | | | 13,078 | | | 817 | | | 753 | | | 776 | |
| WGH | | | 7,132 | | | 6,971 | | | 6,756 | | | 9,013 | | | 7,449 | | | 7,247 | |
| Treasury / Other | | | 12,089 | | | 11,808 | | | 11,980 | | | 1,122 | | | 816 | | | 1,097 | |
| Total | | $ | 54,979 | | $ | 53,820 | | $ | 53,247 | | $ | 43,220 | | $ | 41,854 | | $ | 41,072 | |
