Huntington National Bank 2011 Annual Report Download - page 29

• $5.2 billion in residential real estate loans, representing 13% of total loans and leases.
• $4.4 billion of Federal Agency mortgage-backed securities, $0.1 billion of private label CMOs, and less
than $0.1 billion of Alt-A mortgage-backed securities that could be negatively affected by a decline in
home values.
• $0.3 billion of bank owned life insurance investments primarily in mortgage-backed securities.
Because of the decline in home values, some of our borrowers have mortgages that exceed the value of their
homes. The decline in home values, coupled with the weakened economy, has increased short sales and
foreclosures. The reduced levels of home sales have had a materially adverse effect on the prices achieved on the
sale of foreclosed properties. Continued decline in home values may escalate these problems resulting in higher
delinquencies, greater charge-offs, and increased losses on the sale of foreclosed real estate in future periods.
Market Risks:
1. Changes in interest rates could reduce our net interest income, reduce transactional income, and
negatively impact the value of our loans, securities, and other assets. This could have a material
adverse impact on our cash flows, financial condition, results of operations, and capital.
Our results of operations depend substantially on net interest income, which is the difference between
interest earned on interest earning assets (such as investments and loans) and interest paid on interest bearing
liabilities (such as deposits and borrowings). Interest rates are highly sensitive to many factors, including
governmental monetary policies and domestic and international economic and political conditions. Conditions
such as inflation, deflation, recession, unemployment, money supply, and other factors beyond our control may
also affect interest rates. If our interest earning assets mature or reprice faster than interest bearing liabilities in a
declining interest rate environment, net interest income could be materially adversely impacted. Likewise, if
interest bearing liabilities mature or reprice more quickly than interest earning assets in a rising interest rate
environment, net interest income could be adversely impacted.
At December 31, 2011, $2.8 billion, or 14%, of our commercial loan portfolio, and $2.6 billion, or 50%, of
our residential mortgage portfolio, as measured by the aggregate outstanding principal balances, was fixed-rate
loans and the remainder was adjustable-rate loans. As interest rates rise, the payment by the borrower on
adjustable-rate loans increases to the extent permitted by the terms of the loan, and the higher payment increases
the potential for default. At the same time, the marketability of the underlying property may be adversely
affected by higher interest rates. In a declining interest rate environment, there may be an increase in
prepayments on fixed-rate loans, as borrowers refinance their mortgages at lower interest rates.
Changes in interest rates also can affect the value of loans, securities, assets under management, and other
assets, including mortgage and nonmortgage servicing rights. An increase in interest rates that adversely affects
the ability of borrowers to pay the principal or interest on loans and leases may lead to an increase in NPAs and a
reduction of income recognized, which could have a material adverse effect on our results of operations and cash
flows. When we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which
decreases interest income. Subsequently, we continue to have a cost to fund the loan, which is reflected as
interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the
amount of NPAs would decrease net interest income. In addition, transactional income, including trust income,
brokerage income, and gain on sales of loans can vary significantly from quarter-to-quarter and year-to-year
based on a number of different factors, including the interest rate environment.
Rising interest rates reduces the value of our fixed-rate debt securities and cash flow hedging derivatives
portfolio. The unrealized losses resulting from holding such securities and financial instruments are recognized in
OCI and reduce total shareholders’ equity. Unrealized losses do not negatively impact our regulatory capital
ratios; however Tangible Common Equity and the associated ratios are reduced. If debt securities in an
unrealized loss position are sold, such losses become realized and reduce Tier I and Total Risk-based Capital
regulatory ratios. If cash flow hedging derivatives are terminated, the impact is reflected in earnings over the life
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