Huntington National Bank 2008 Annual Report Download - page 78

Of the $49.5 million decline, $44.4 million represented Sky Financial merger/restructuring costs in the year-ago quarter with
$29.4 million from significant items (see “Significant Items” discussion located within the “Discussion of Results of Operations”
section). The remaining $24.4 million, or 6%, increase primarily reflected a $12.3 million, or 18%, increase in other expense due to
higher automobile lease residual losses, corporate insurance expense, and FDIC insurance premiums.
INCOME TAXES
The provision for income taxes in the 2008 fourth quarter was a benefit of $251.9 million, resulting in an effective tax rate benefit
of 37.6%. The effective tax rates in prior quarter and year-ago quarters were 18.5% and a benefit of 39.9% respectively.
CREDIT QUALITY
Credit quality performance in the 2008 fourth quarter was negatively impacted by the Franklin relationship actions (see “Franklin
Relationship” located within the “Credit Risk” section and “Significant Items” located within the “Discussion of Results of Operations”
section), as well as accelerated economic weakness in our Midwest markets. These economic factors influenced the performance of
NCOs and NALs, as well as an expected commensurate significant increase in the provision for credit losses (see “Provision for
Credit Losses” located within the “Discussion of Results of Operations” section) that significantly increased the absolute and relative
levels of our ACL.
Net Charge-offs
(This section should be read in conjunction with Significant Item 2.)
Total NCOs for the 2008 fourth quarter were $560.6 million, or an annualized 5.41% of average total loans and leases. This was up
significantly from total NCOs in the year-ago quarter of $377.9 million, or an annualized 3.77%. The 2008 fourth quarter, as well
as the year-ago quarter, included Franklin relationship-related NCOs of $423.3 million and $308.5 million, respectively.
Total commercial NCOs for the 2008 fourth quarter were $511.8 million, or an annualized 8.54% of related loans, up from the
year-ago quarter of $344.6 million, or an annualized 6.18%. Franklin relationship-related NCOs in the current and year-ago
quarter were $423.3 million and $308.5 million, respectively. Non-Franklin C&I NCOs in the 2008 fourth quarter were
$50.2 million, or an annualized 1.58%, of related loans. The current quarter’s non-Franklin C&I NCOs reflected the impact of two
relationships totaling $11.5 million, with the rest of the increase spread among smaller loans across the portfolio.
Current quarter CRE NCOs were $38.4 million, or an annualized 1.50%, up from $20.7 million, or an annualized 0.92% in the
prior quarter. The fourth quarter losses were centered in the single family home builder portfolio, spread across our regions.
Total consumer NCOs in the current quarter were $48.8 million, or an annualized 1.12% of related loans, up from $33.3 million,
or an annualized 0.75%, in the year-ago quarter.
Automobile loan and lease NCOs were $18.6 million, or an annualized 1.64% in the current quarter, up from 0.96% in the year-
ago period. NCOs for automobile loans were an annualized 1.53% in the current quarter, up from 0.96% in the year-ago quarter,
with NCOs for automobile leases also increasing to an annualized 2.31% from 0.96%. Both automobile loan and automobile lease
NCOs continued to be negatively impacted by declines in used car prices, with automobile lease NCO rates also being negatively
impacted by a portfolio that is in a run-off mode. Although we anticipate that automobile loan and lease NCOs will remain under
pressure due to continued economic weakness in our markets, we believe that our focus on prime borrowers over the last several
years will continue to result in better performance relative to other peer bank automobile portfolios.
Home equity NCOs in the 2008 fourth quarter were $19.2 million, or an annualized 1.02%, up from an annualized 0.67%, in the
year-ago quarter. This portfolio continued to be negatively impacted by the general economic and housing market slowdown. The
impact was evident across our footprint, particularly so in our Michigan markets. Given that we have no exposure to the very
volatile West Coast and minimal exposure to Florida markets, less than 10% of the portfolio was originated via the broker channel,
and our conservative assessment of the borrower’s ability to repay at the time of underwriting, we continue to believe our home
equity NCO experience will compare very favorably relative to the industry.
Residential mortgage NCOs were $7.3 million, or an annualized 0.62% of related average balances. This was up from an annualized
0.25% in the year-ago quarter. The residential portfolio is subject to the regional economic and housing related pressures, and we
expect to see additional stress in our markets in future periods. Our portfolio performance will continue to be positively impacted
by our origination strategy that specifically excluded the more exotic mortgage structures. In addition, loss mitigation strategies
have been in place for over a year and are helping to successfully address risks in our ARM portfolio.
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Management’s Discussion and Analysis Huntington Bancshares Incorporated