SEC Company Response from HUNTINGTON BANCSHARES (HBAN) — May 1, 2006
HUNTINGTON BANCSHARES INC /MD/ (HBAN, HBANL, HBANM, HBANP, HBANZ) (CIK 0000049196)
Date: May 1, 2006 · CIK: 0000049196 · Accession: 0000950152-06-003710
AI Filing Summary & Sentiment
Reasoning
Letter
Via EDGAR Division of Corporation Finance Re: Huntington Bancshares Incorporated Form 10-K for the Fiscal Year Ended December 31, 2005 SEC File No. 0-2525
Dear Mr. Walker:
We are in receipt of the letter from the Staff of the Securities and Exchange Commission, dated April 13, 2006, regarding our annual report on Form 10-K for the fiscal year ended December 31, 2005 (the “Report”). For your convenience, we have included the Staff’s comments below and have keyed our responses accordingly.
In some of our responses, we have agreed to change or supplement the disclosures in our future filings. We are doing that in the spirit of cooperation with the Staff of the Securities and Exchange Commission, and not because we believe our prior filings are materially deficient or inaccurate.
Form 10-K, December 31, 2005
Part I, Item 1: Business, page 3
1.
You state on page 3 of Part I that you incorporate your lines of business from your Annual Report, but the front page of your Form 10-K omits inclusion of Part I as one of the sections of the Form 10-K that incorporates information by reference. Please revise and refer to the instructions of Form 10-K and Rule 12b-23 of the Exchange Act.
Management’s Response:
We will amend our Form 10-K to include, on the front page, Part I as one of the sections of the Form 10-K that incorporates information by reference.
Donald A Walker
May 1, 2006
Page 2
2.
While we note that you refer the investor to your Annual Report on page 3, the discussion of your lines of business in the section on Management’s Discussion and Analysis of Financial Condition and Results of Operation concentrates on the finances and does not provide a narrative description of your business. Please revise to conform with Item 101(c) of Regulation S-K.
Management’s Response:
We have reviewed Item 101(c) of Regulation S-K and believe that the disclosures in our MD&A on pages 71 through 90 of our annual report comply with the requirements. Please see, specifically, the narrative discussion of the objectives, strategies and priorities of our Regional Banking line of business on page 73; the narrative discussion of the objectives, strategies and priorities of our Dealer Sales line of business on page 78; and the narrative discussion of the objectives, strategies and priorities of our Private Financial and Capital Markets Group line of business on page 83. Each of these lines of business sections provides a narrative description of the principal products and services as well as the principal markets for, and methods of distribution of, the line of business’ products and services. In addition, where material, competitive conditions and methods of competition are identified. Tables 30, 31, and 32 provide financial information about each line of business, such as the amount of total revenue and revenue by product/service type contributed by each line of business for each of the last three years as required by Item 101(c) of Regulation S-K. The amount and percentage of year over year change is also indicated. These tables also set forth the performance metrics, credit quality information, number of employees, and supplemental data relevant to each line of business. The other information requested in Item 101(c) of Regulation S-K is either not applicable or not material to our lines of business.
3.
We note your discussion regarding the regulations to which you are subject and the various governmental authorities to which you report; however, this discussion does not provide a description of your business but rather the rules under which you operate. For example, you state on page 6 that “financial institutions are required to maintain a risk-based ratio of 8% with 4% being Tier 1 capital,” yet the disclosure omits whether or not you comply with this requirement. Please revise to disclose your performance or compliance with such rules.
Management’s Response:
The primary purpose for including the information set forth under the heading “Regulatory Matters” in Part I, Item 1 of our 2005 Form 10-K is to provide the reader with information about the various regulations to which we are subject and the governmental authorities to which we report. We believe this information is important to an understanding of our business taken as a whole. In an attempt to reduce repetition in an already lengthy document, we did not include certain company-related disclosures in Part I, Item 1 where such disclosures were contained in, or incorporated by reference to, other sections of the Form 10-K.
The “Regulatory Matters” section organizes the applicable regulations by subject matter subtitles. We list below those subtitles and identify where the company-related information, if material, can be found in our Form 10-K or, if incorporated by reference, in our 2005 Annual Report to Shareholders (page references are to pages in the Form 10-K unless otherwise indicated):
Donald A Walker
May 1, 2006
Page 3
Subtitle
Location of Company-specific Information
General
Company-specific information is included under this subtitle (page 4).
Holding Company Structure
Company-specific information about our structure and the applicability of the source of strength doctrine, subordination provisions, assessment provisions, and the new rating system is included under this subtitle (pages 4-5); company-specific information about affiliate transaction restrictions is contained in Note 23 of the Notes to Consolidated Financial Statements (page 131-132 of our Annual Report to Shareholders).
Dividend Restrictions
Company-specific information is included under this subtitle (page 5).
FDIC Insurance
Company-specific information is included under this subtitle (page 5-6).
Capital Requirements
Company-specific information about our capital ratios is included under the heading “Capital” and in Table 28 of the Company’s MD&A (page 70 of our Annual Report to Shareholders) and in Note 23 of the Notes to Consolidated Financial Statements (page 131-132 of our Annual Report to Shareholders).
Prompt Corrective Action
We disclose that we and the Bank are well capitalized under this subtitle (page 7); company-specific information about our brokered deposits is included under this subtitle (page 7); additional Company-specific information about our capital ratios is included under the heading “Capital” and in Table 28 of the Company’s MD&A (page 70 of our Annual Report to Shareholders) and in Note 23 of the Notes to Consolidated Financial Statements (page 131-132 of our Annual Report to Shareholders).
Financial Holding Company Status
We state that we qualify as a financial holding company under the “General” subtitle (page 4); the information under this subtitle is intended to describe what it means to so qualify.
USA Patriot Act
Company-specific information about the impact of this law on us is included in our risk factors under the heading “Non-compliance with USA Patriot Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.” (page 14).
Customer Privacy and Other Consumer Protections
Company-specific information is included under this subtitle (page 8).
Sarbanes-Oxley Act of 2002
Company-specific information is included in Item 9A (page 18) which also incorporates by reference information from other sections of our 2005 Annual Report to Shareholders.
Recent Regulatory Developments
To the extent known, the impact of the regulatory developments described under this subtitle is included under this subtitle (page 9).
We believe that all of the material information about the Company and the impact of the various regulations on us is included or incorporated by reference in the Form 10-K under headings such that an interested reader can easily find the information. However, we will enhance our disclosures in future filings either by including or expanding the company-specific information under the appropriate subtitle of the “Regulatory Matters” section or by more clearly cross-referencing the place where the information may be found.
Donald A Walker
May 1, 2006
Page 4
Available Information, Page 9
4.
Please revise to correctly state the new location of the SEC’s Public Reference Room.
Management’s Response:
We correctly stated the location of the SEC’s Public Reference Room on page 22 of our Form 10-K when referring to the list of exhibits required to be filed with the report and we also provided correct website addresses for both the SEC and Huntington so we believe that readers of the report will be able to obtain copies of documents we incorporated by reference if they desire. We will correct the location of the SEC’s Public Reference Room in the “Available Information” section of our Form 10-K in future filings.
Management’s Discussion and Analysis
Loan and Lease Portfolio, page 53
5.
We note your disclosure on page 116 that you have a significant amount of home equity loan products, some of which are interest only loans. Please tell us, and in future filings disclose the approximate amount and percentage of interest only loans as of the end of each reporting period.
Management’s Response:
The amount disclosed as home equity in our loan portfolio consisted of:
•
Home equity loans ($1.1 billion, or 4.6% of total loans, at 12/31/05 and $0.9 billion, or 3.8% of total loans, at 12/31/04) with fixed payments (principal and interest) and amortization schedules and
•
Home equity lines of credit ($3.5 billion, or 14.4% of total loans, at 12/31/05 and $3.7 billion, or 15.7% of total loans, at 12/31/04) that are interest only.
Additionally, we had approximately $0.8 billion of loans, or 3.3% of total loans in the residential mortgage portfolio that are interest only at 12/31/05 ($0.7 billion, or 2.7% of total loans at 12/31/04). We will enhance future filings to disclose the amount of home equity balances that are interest only.
6.
Based on your response to our comment above, if you determine that your interest only loans are material, please tell us, and in future filings disclose:
•
The significant terms of your interest only loan products, including underwriting standards, maximum loan to value ratios and how credit management monitors and analyzes key features, such as loan to value ratios and negative amortization;
•
The amount of loans that experienced negative amortization during the period and the amount of the increase in the loan balance resulting from the negative amortization; and
•
Your policy for placing loans on non-accrual status when the loan’s terms allow for a minimum monthly payment less than interest accrued on the loan and the impact of this policy on the nonperforming loan statistics disclosed.
Management’s Response:
Huntington’s interest only residential mortgage loans are underwritten to specific standards including minimum FICO scores, stressed debt/income ratios and extensive collateral evaluation. Huntington’s interest only home equity lines of credit are underwritten to specific criteria based on minimum FICO scores, debt/income ratios and loan-to-value ratios.
As discussed in footnote 6 on page 116 of our Annual Report to Shareholders, Huntington does not offer or purchase home equity loans where the loan to value ratios exceed 100% or that permit negative amortization. As disclosed on page 55 of our Annual Report to Shareholders under
Donald A Walker
May 1, 2006
Page 5
“Non-Performing Assets (NPAs),” residential mortgages and home equity lines and loans are placed on non-accrual status when the loans are 210 days or more past due as to interest, regardless of collateral.
In future filings, we will enhance our disclosures in the “Consumer Credit” portion of our “Credit Risk” section of our Management’s Discussion and Analysis. Please see our response to your comment 7, below, for our proposal of this enhanced disclosure.
7.
If material, please tell us, and in future filings expand your credit risk discussion to include risk mitigation activities used to reduce credit risk exposure related to your interest only home equity loans.
Management’s Response:
We will enhance our future filings to include a discussion of the credit underwriting for our interest only loans. We will also discuss our interest only loans providing the historical context to understand how these loans relate to, and affect the risk of the overall loan portfolio. The following is our proposed enhanced disclosure, with new narrative discussion underlined:
Consumer Credit
Consumer credit approvals are based on, among other factors, the financial strength of the borrower, type of exposure, and the transaction structure. Consumer credit decisions are generally made in a centralized environment utilizing decision models. There is also individual credit authority granted to certain individuals on a regional basis to preserve our local decision-making focus. Each credit extension is assigned a specific probability-of-default and loss-in-event-of-default. The probability-of-default is generally a function of the borrower’s credit bureau score, while the loss-in-event-of-default is related to the type of collateral and the loan-to-value ratio associated with the credit extension.
Home equity lines and loans consist of both first and second position collateral with underwriting criteria based on minimum FICO credit scores, debt/income ratios, and loan-to-value ratios. We offer a closed-end, home equity loan with a fixed rate and level monthly payments and a variable-rate, interest only home equity line of credit. At March 31, 2006, we had $1.1 billion of home equity loans and $3.5 billion of home equity lines of credit. The average loan-to-value ratio of our home equity portfolio (both loans and lines) was 80% at March 31, 2006. We do not originate home equity loans or lines that (a) allow negative amortization, (b) have a loan-to-value ratio at origination greater than 100%, or (c) which are “options ARMs,” that is, which can be adjustable rate at the option of the customer. Home equity lines of credit generally have variable rates of interest and do not require payment of principal during the 10 year revolving period of the line. Home equity loans are generally fixed rate with periodic principal and interest payments. During the first quarter of 2006, we originated $320 million of home equity lines. The lines of credit originated during the quarter had a weighted average loan-to-value ratio of 75% and a weighted average FICO score of 736. Similarly, we originated $148 million of home equity loans in the first quarter 2006 with a weighted average loan-to-value ratio of 58% and a weighted average FICO score of 726.
At March 31, 2006, we had $4.6 billion of residential real estate loans. Adjustable rate mortgages, primarily mortgages that have a fixed rate for the first 3 to 5 years and then adjust annually, comprised 65% of this portfolio. We do not originate residential mortgage loans that (a) allow negative amortization, (b) have a loan-to-value ratio at origination greater than 100%, or (c) which are “options ARMs,” that is, which can be adjustable rat
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Huntington Bancshares Incorporated
Huntington Center
41 South High Street
Columbus, Ohio 43287
Donald R. Kimble
Executive Vice President, Chief Financial Officer & Controller
614.480.5240
614.480.5284 Facsimile
May 1, 2006
Via EDGAR
Donald A. Walker
Senior Assistant Chief Accountant
Division of Corporation Finance
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
cc: Benjamin Phippen – Staff Accountant
cc: Tim Geisecker – Staff Attorney
Re:
Huntington Bancshares Incorporated
Form 10-K for the Fiscal Year Ended December 31, 2005
SEC File No. 0-2525
Dear Mr. Walker:
We are in receipt of the letter from the Staff of the Securities and Exchange Commission,
dated April 13, 2006, regarding our annual report on Form 10-K for the fiscal year ended December
31, 2005 (the “Report”). For your convenience, we have included the Staff’s comments below and have
keyed our responses accordingly.
In some of our responses, we have agreed to change or supplement the disclosures in our future
filings. We are doing that in the spirit of cooperation with the Staff of the Securities and
Exchange Commission, and not because we believe our prior filings are materially deficient or
inaccurate.
Form 10-K, December 31, 2005
Part I, Item 1: Business, page 3
1.
You state on page 3 of Part I that you incorporate your lines of business from your
Annual Report, but the front page of your Form 10-K omits inclusion of Part I as one of
the sections of the Form 10-K that incorporates information by reference. Please revise
and refer to the instructions of Form 10-K and Rule 12b-23 of the Exchange Act.
Management’s Response:
We will amend our Form 10-K to include, on the front page, Part I as one of the sections of
the Form 10-K that incorporates information by reference.
Donald A Walker
May 1, 2006
Page 2
2.
While we note that you refer the investor to your Annual Report on page 3, the discussion
of your lines of business in the section on Management’s Discussion and Analysis of
Financial Condition and Results of Operation concentrates on the finances and does not
provide a narrative description of your business. Please revise to conform with Item
101(c) of Regulation S-K.
Management’s Response:
We have reviewed Item 101(c) of Regulation S-K and believe that the disclosures in our MD&A
on pages 71 through 90 of our annual report comply with the requirements. Please see,
specifically, the narrative discussion of the objectives, strategies and priorities of our
Regional Banking line of business on page 73; the narrative discussion of the objectives,
strategies and priorities of our Dealer Sales line of business on page 78; and the
narrative discussion of the objectives, strategies and priorities of our Private Financial
and Capital Markets Group line of business on page 83. Each of these lines of business
sections provides a narrative description of the principal products and services as well as
the principal markets for, and methods of distribution of, the line of business’ products
and services. In addition, where material, competitive conditions and methods of
competition are identified. Tables 30, 31, and 32 provide financial information about each
line of business, such as the amount of total revenue and revenue by product/service type
contributed by each line of business for each of the last three years as required by Item
101(c) of Regulation S-K. The amount and percentage of year over year change is also
indicated. These tables also set forth the performance metrics, credit quality
information, number of employees, and supplemental data relevant to each line of business.
The other information requested in Item 101(c) of Regulation S-K is either not applicable
or not material to our lines of business.
3.
We note your discussion regarding the regulations to which you are subject and the
various governmental authorities to which you report; however, this discussion does not
provide a description of your business but rather the rules under which you operate. For
example, you state on page 6 that “financial institutions are required to maintain a
risk-based ratio of 8% with 4% being Tier 1 capital,” yet the disclosure omits whether or
not you comply with this requirement. Please revise to disclose your performance or
compliance with such rules.
Management’s Response:
The primary purpose for including the information set forth under the heading “Regulatory
Matters” in Part I, Item 1 of our 2005 Form 10-K is to provide the reader with information
about the various regulations to which we are subject and the governmental authorities to
which we report. We believe this information is important to an understanding of our
business taken as a whole. In an attempt to reduce repetition in an already lengthy
document, we did not include certain company-related disclosures in Part I, Item 1 where
such disclosures were contained in, or incorporated by reference to, other sections of the
Form 10-K.
The “Regulatory Matters” section organizes the applicable regulations by subject matter
subtitles. We list below those subtitles and identify where the company-related
information, if material, can be found in our Form 10-K or, if incorporated by reference,
in our 2005 Annual Report to Shareholders (page references are to pages in the Form 10-K
unless otherwise indicated):
Donald A Walker
May 1, 2006
Page 3
Subtitle
Location of Company-specific Information
General
Company-specific information is included
under this subtitle (page 4).
Holding Company Structure
Company-specific information about our
structure and the applicability of the
source of strength doctrine,
subordination provisions, assessment
provisions, and the new rating system is
included under this subtitle (pages
4-5); company-specific information about
affiliate transaction restrictions is
contained in Note 23 of the Notes to
Consolidated Financial Statements (page
131-132 of our Annual Report to
Shareholders).
Dividend Restrictions
Company-specific information is included
under this subtitle (page 5).
FDIC Insurance
Company-specific information is included
under this subtitle (page 5-6).
Capital Requirements
Company-specific information about our
capital ratios is included under the
heading “Capital” and in Table 28 of the
Company’s MD&A (page 70 of our Annual
Report to Shareholders) and in Note 23
of the Notes to Consolidated Financial
Statements (page 131-132 of our Annual
Report to Shareholders).
Prompt Corrective Action
We disclose that we and the Bank are
well capitalized under this subtitle
(page 7); company-specific information
about our brokered deposits is included
under this subtitle (page 7); additional
Company-specific information about our
capital ratios is included under the
heading “Capital” and in Table 28 of the
Company’s MD&A (page 70 of our Annual
Report to Shareholders) and in Note 23
of the Notes to Consolidated Financial
Statements (page 131-132 of our Annual
Report to Shareholders).
Financial Holding Company Status
We state that we qualify as a financial
holding company under the “General”
subtitle (page 4); the information under
this subtitle is intended to describe
what it means to so qualify.
USA Patriot Act
Company-specific information about the
impact of this law on us is included in
our risk factors under the heading
“Non-compliance with USA Patriot Act,
Bank Secrecy Act, or other laws and
regulations could result in fines or
sanctions.” (page 14).
Customer Privacy and Other
Consumer Protections
Company-specific information is included
under this subtitle (page 8).
Sarbanes-Oxley Act of 2002
Company-specific information is included
in Item 9A (page 18) which also
incorporates by reference information
from other sections of our 2005 Annual
Report to Shareholders.
Recent Regulatory Developments
To the extent known, the impact of the
regulatory developments described under
this subtitle is included under this
subtitle (page 9).
We believe that all of the material information about the Company and the impact of the
various regulations on us is included or incorporated by reference in the Form 10-K under
headings such that an interested reader can easily find the information. However, we will
enhance our disclosures in future filings either by including or expanding the
company-specific information under the appropriate subtitle of the “Regulatory Matters”
section or by more clearly cross-referencing the place where the information may be found.
Donald A Walker
May 1, 2006
Page 4
Available Information, Page 9
4.
Please revise to correctly state the new location of the SEC’s Public Reference Room.
Management’s Response:
We correctly stated the location of the SEC’s Public Reference Room on page 22 of our Form 10-K when referring to the list of exhibits required to be
filed with the report and we also provided correct website addresses for both the SEC and Huntington so we believe that readers of the report will be
able to obtain copies of documents we incorporated by reference if they desire. We will correct the location of the SEC’s Public Reference Room in the
“Available Information” section of our Form 10-K in future filings.
Management’s Discussion and Analysis
Loan and Lease Portfolio, page 53
5.
We note your disclosure on page 116 that you have a significant amount of home equity
loan products, some of which are interest only loans. Please tell us, and in future
filings disclose the approximate amount and percentage of interest only loans as of the
end of each reporting period.
Management’s Response:
The amount disclosed as home equity in our loan portfolio consisted of:
•
Home equity loans ($1.1 billion, or 4.6% of total loans, at 12/31/05 and $0.9
billion, or 3.8% of total loans, at 12/31/04) with fixed payments (principal and
interest) and amortization schedules and
•
Home equity lines of credit ($3.5 billion, or 14.4% of total loans, at 12/31/05
and $3.7 billion, or 15.7% of total loans, at 12/31/04) that are interest only.
Additionally, we had approximately $0.8 billion of loans, or 3.3% of total loans in the
residential mortgage portfolio that are interest only at 12/31/05 ($0.7 billion, or 2.7% of
total loans at 12/31/04). We will enhance future filings to disclose the amount of home
equity balances that are interest only.
6.
Based on your response to our comment above, if you determine that your interest only
loans are material, please tell us, and in future filings disclose:
•
The significant terms of your interest only loan products, including underwriting
standards, maximum loan to value ratios and how credit management monitors and
analyzes key features, such as loan to value ratios and negative amortization;
•
The amount of loans that experienced negative amortization during the period and
the amount of the increase in the loan balance resulting from the negative
amortization; and
•
Your policy for placing loans on non-accrual status when the loan’s terms allow for
a minimum monthly payment less than interest accrued on the loan and the impact of
this policy on the nonperforming loan statistics disclosed.
Management’s Response:
Huntington’s interest only residential mortgage loans are underwritten to specific
standards including minimum FICO scores, stressed debt/income ratios and extensive
collateral evaluation. Huntington’s interest only home equity lines of credit are
underwritten to specific criteria based on minimum FICO scores, debt/income ratios and
loan-to-value ratios.
As discussed in footnote 6 on page 116 of our Annual Report to Shareholders, Huntington
does not offer or purchase home equity loans where the loan to value ratios exceed 100% or
that permit negative amortization. As disclosed on page 55 of our Annual Report to
Shareholders under
Donald A Walker
May 1, 2006
Page 5
“Non-Performing Assets (NPAs),” residential mortgages and home equity lines and loans are
placed on non-accrual status when the loans are 210 days or more past due as to interest,
regardless of collateral.
In future filings, we will enhance our disclosures in the “Consumer Credit” portion of our
“Credit Risk” section of our Management’s Discussion and Analysis. Please see our response
to your comment 7, below, for our proposal of this enhanced disclosure.
7.
If material, please tell us, and in future filings expand your credit risk discussion
to include risk mitigation activities used to reduce credit risk exposure related to your
interest only home equity loans.
Management’s Response:
We will enhance our future filings to include a discussion of the credit underwriting for
our interest only loans. We will also discuss our interest only loans providing the
historical context to understand how these loans relate to, and affect the risk of the
overall loan portfolio. The following is our proposed enhanced disclosure, with new
narrative discussion underlined:
Consumer Credit
Consumer credit approvals are based on, among other factors, the financial strength of
the borrower, type of exposure, and the transaction structure. Consumer credit decisions
are generally made in a centralized environment utilizing decision models. There is also
individual credit authority granted to certain individuals on a regional basis to preserve
our local decision-making focus. Each credit extension is assigned a specific
probability-of-default and loss-in-event-of-default. The probability-of-default is
generally a function of the borrower’s credit bureau score, while the
loss-in-event-of-default is related to the type of collateral and the loan-to-value ratio
associated with the credit extension.
Home equity lines and loans consist of both first and second position collateral
with underwriting criteria based on minimum FICO credit scores, debt/income ratios, and
loan-to-value ratios. We offer a closed-end, home equity loan with a fixed rate and level
monthly payments and a variable-rate, interest only home equity line of credit. At March
31, 2006, we had $1.1 billion of home equity loans and $3.5 billion of home equity lines of
credit. The average loan-to-value ratio of our home equity portfolio (both loans and
lines) was 80% at March 31, 2006. We do not originate home equity loans or lines that (a)
allow negative amortization, (b) have a loan-to-value ratio at origination greater than
100%, or (c) which are “options ARMs,” that is, which can be adjustable rate at the option
of the customer. Home equity lines of credit generally have variable rates of interest and
do not require payment of principal during the 10 year revolving period of the line. Home
equity loans are generally fixed rate with periodic principal and interest payments.
During the first quarter of 2006, we originated $320 million of home equity lines. The
lines of credit originated during the quarter had a weighted average loan-to-value ratio of
75% and a weighted average FICO score of 736. Similarly, we originated $148 million of
home equity loans in the first quarter 2006 with a weighted average loan-to-value ratio of
58% and a weighted average FICO score of 726.
At March 31, 2006, we had $4.6 billion of residential real estate loans.
Adjustable rate mortgages, primarily mortgages that have a fixed rate for the first 3 to 5
years and then adjust annually, comprised 65% of this portfolio. We do not originate
residential mortgage loans that (a) allow negative amortization, (b) have a loan-to-value
ratio at origination greater than 100%, or (c) which are “options ARMs,” that is, which can
be adjustable rat