Huntington National Bank 2007 Annual Report Download - page 49

Total net charge-offs during 2007 were $477.6 million, or an annualized 1.44% of average related balances. After adjusting for the
$308.5 million related to the Franklin restructuring, total net charge-offs during 2007 were $169.1 million, compared with $82.4
during 2006.
Investment Portfolio
(This section should be read in conjunction with Significant Item 1, 3, 4, 5, and 6.)
We routinely review our available-for-sale portfolio, and recognize impairment write-downs based primarily on fair market value,
issuer-specific factors and results, and our intent to hold such investments.
Available-for-sale portfolio
Our available-for-sale portfolio is evaluated in light of established asset/liability management objectives, and changing
market conditions which could affect the profitability of the portfolio, as well as the level of interest rate risk we are
exposed to.
Within our securities available-for-sale portfolio are asset-backed securities. At December 31, 2007, the securities in this portfolio
had a fair value that was $35 million less than their book value. We have performed a credit analysis of the asset-backed securities
that we hold. We do not believe that there has been an adverse change in the estimated cash flows that we expect to receive from
these securities and therefore believe the $35 million of impairment to be temporary. Table 23 details our asset-backed securities
exposure.
Table 23 — Asset-Backed Securities Exposure
Collateral Type
(in thousands of dollars) Book value Fair value
Average
Credit Rating Book value Fair value
Average
Credit Rating
December 31, 2007 December 31, 2006
Alt-A mortgage loans $560,654 $547,358 AAA $ 937,368 $ 942,751 AAA
Trust preferred securities 301,231 279,175 A 448,203 452,645 A
Commodities ——— 30,000 30,056 AAA
Other securities
(1)
7,769 7,956 BB⫺159,001 157,352 BBB
Total $869,654 $834,489 $1,574,572 $1,582,804
(1) Other securities represent certain investment securities backed by mortgage loans to borrowers with lower FICO scores.
Also within our securities available-for-sale portfolio are municipal securities. Of these securities, 80% have a rating of AAA,
mostly due to bond insurance. Of these insured bonds, 13% are guaranteed by American Municipal Bond Assurance Corp. and
12% are guaranteed by Financial Guaranty Insurance Co., both of which recently experienced ratings downgrades. We believe that,
if all municipal bonds were not covered by insurance, then 12% of the bonds would have other guarantors, 10% of the bonds
would be rated AAA, 56% of the bonds would be rated AA, 19% of the bonds would be rated A, and 3% of the bonds would be
rated below A.
Market Risk
Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal
course of business through exposures to market interest rates, foreign exchange rates, equity prices, credit spreads, and expected
lease residual values. We have identified two primary sources of market risk: interest rate risk and price risk. Interest rate risk is
our primary market risk.
INTEREST RATE RISK
Overview
Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing
differences in the repricings and maturities of interest bearing assets and liabilities (reprice risk), changes in the expected maturities
of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time
and depositors’ ability to terminate certificates of deposit before maturity (option risk), changes in the shape of the yield curve
whereby interest rates increase or decrease in a non-parallel fashion (yield curve risk), and changes in spread relationships between
different yield curves, such as U.S. Treasuries and LIBOR (basis risk.)
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MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED