10-Q 1 d762649d10q.htm QUARTERLY REPORT Quarterly Report
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

QUARTERLY PERIOD ENDED June 30, 2014

Commission File Number 1-34073

 

 

Huntington Bancshares Incorporated

 

 

 

Maryland   31-0724920
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

41 South High Street, Columbus, Ohio 43287

Registrant’s telephone number (614) 480-8300

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

There were 817,002,296 shares of Registrant’s common stock ($0.01 par value) outstanding on June 30, 2014.

 

 

 


Table of Contents

HUNTINGTON BANCSHARES INCORPORATED

INDEX

 

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements (Unaudited)

  

Condensed Consolidated Balance Sheets at June 30, 2014 and December 31, 2013

     63   

Condensed Consolidated Statements of Income for the three months and six months ended June 30, 2014 and 2013

     64   

Condensed Consolidated Statements of Comprehensive Income for the three months and six months ended June 30, 2014 and 2013

     65   

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2014 and 2013

     66   

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013

     67   

Notes to Unaudited Condensed Consolidated Financial Statements

     68   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

Executive Overview

     7   

Discussion of Results of Operations

     9   

Risk Management and Capital:

  

Credit Risk

     23   

Market Risk

     37   

Liquidity Risk

     38   

Operational Risk

     42   

Compliance Risk

     44   

Capital

     44   

Fair Value

     47   

Business Segment Discussion

     48   

Additional Disclosures

     61   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     142   

Item 4. Controls and Procedures

     142   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     142   

Item 1A. Risk Factors

     142   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     142   

Item 5. Other Information

     143   

Item 6. Exhibits

     143   

Signatures

     145   

 

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Glossary of Acronyms and Terms

The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:

 

2013 Form 10-K    Annual Report on Form 10-K for the year ended December 31, 2013
ABL    Asset Based Lending
ACL    Allowance for Credit Losses
AFCRE    Automobile Finance and Commercial Real Estate
AFS    Available-for-Sale
ALCO    Asset-Liability Management Committee
ALLL    Allowance for Loan and Lease Losses
ARM    Adjustable Rate Mortgage
ASC    Accounting Standards Codification
ASU    Accounting Standards Update
ATM    Automated Teller Machine
AULC    Allowance for Unfunded Loan Commitments
AVM    Automated Valuation Methodology
Basel III    Refers to the final rule issued by the FRB and OCC and published in the Federal Register on October 11, 2013
BHC    Bank Holding Companies
C&I    Commercial and Industrial
Camco Financial    Camco Financial Corp.
CCAR    Comprehensive Capital Analysis and Review
CDO    Collateralized Debt Obligations
CDs    Certificate of Deposit
CFPB    Bureau of Consumer Financial Protection
CMO    Collateralized Mortgage Obligations
CRE    Commercial Real Estate
Dodd-Frank Act    Dodd-Frank Wall Street Reform and Consumer Protection Act
EPS    Earnings Per Share
ERISA    Employee Retirement Income Security Act
EVE    Economic Value of Equity
Fannie Mae    (see FNMA)
FASB    Financial Accounting Standards Board
FDIC    Federal Deposit Insurance Corporation
FDICIA    Federal Deposit Insurance Corporation Improvement Act of 1991
FHA    Federal Housing Administration
FHFA    Federal Housing Finance Agency
FHLB    Federal Home Loan Bank
FHLMC    Federal Home Loan Mortgage Corporation
FICA    Federal Insurance Contributions Act
FICO    Fair Isaac Corporation
FNMA    Federal National Mortgage Association
FRB    Federal Reserve Bank
Freddie Mac    (see FHLMC)
FTE    Fully-Taxable Equivalent
FTP    Funds Transfer Pricing
GAAP    Generally Accepted Accounting Principles in the United States of America

 

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HAMP    Home Affordable Modification Program
HARP    Home Affordable Refinance Program
HIP    Huntington Investment and Tax Savings Plan
HQLA    High Quality Liquid Asset
HTM    Held-to-Maturity
IRC    Internal Revenue Code of 1986, as amended
IRS    Internal Revenue Service
ISE    Interest Sensitive Earnings
LCR    Liquidity Coverage Ratio
LIBOR    London Interbank Offered Rate
LGD    Loss-Given-Default
LIHTC    Low Income Housing Tax Credit
LTV    Loan to Value
MD&A    Management’s Discussion and Analysis of Financial Condition and Results of Operations
MSA    Metropolitan Statistical Area
MSR    Mortgage Servicing Rights
NALs    Nonaccrual Loans
NAV    Net Asset Value
NCO    Net Charge-off
NIM    Net Interest Margin
NCUA    National Credit Union Administration
NPAs    Nonperforming Assets
NPR    Notice of Proposed Rulemaking
N.R.    Not relevant. Denominator of calculation is a gain in the current period compared with a loss in the prior period, or vice-versa
NSF / OD    Nonsufficient Funds and Overdraft
OCC    Office of the Comptroller of the Currency
OCI    Other Comprehensive Income (Loss)
OCR    Optimal Customer Relationship
OLEM    Other Loans Especially Mentioned
OREO    Other Real Estate Owned
OTTI    Other-Than-Temporary Impairment
PD    Probability-Of-Default
Plan    Huntington Bancshares Retirement Plan
Problem Loans    Includes nonaccrual loans and leases (Table 15), troubled debt restructured loans (Table 16), accruing loans and leases past due 90 days or more (aging analysis section of Footnote 3), and Criticized commercial loans (credit quality indicators section of Footnote 3).
REIT    Real Estate Investment Trust
Reg E    Regulation E, of the Electronic Fund Transfer Act
RBHPCG    Regional Banking and The Huntington Private Client Group
ROC    Risk Oversight Committee
SAD    Special Assets Division
SBA    Small Business Administration
SEC    Securities and Exchange Commission
SERP    Supplemental Executive Retirement Plan
Sky Financial    Sky Financial Group, Inc.
SRIP    Supplemental Retirement Income Plan

 

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TCE    Tangible Common Equity
TDR    Troubled Debt Restructured Loan
TLGP    Temporary Liquidity Guarantee Program
U.S. Treasury    U.S. Department of the Treasury
UCS    Uniform Classification System
UPB    Unpaid Principal Balance
USDA    U.S. Department of Agriculture
VA    U.S. Department of Veteran Affairs
VIE    Variable Interest Entity

 

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PART I. FINANCIAL INFORMATION

When we refer to “we,” “our,” and “us” in this report, we mean Huntington Bancshares Incorporated and our consolidated subsidiaries, unless the context indicates that we refer only to the parent company, Huntington Bancshares Incorporated. When we refer to the “Bank” in this report, we mean our only bank subsidiary, The Huntington National Bank, and its subsidiaries.

 

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

We are a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through the Bank, we have 148 years of servicing the financial needs of our customers. Through our subsidiaries, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, insurance service programs, and other financial products and services. Our 730 branches are located in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. Selected financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office in Columbus, Ohio and a limited purpose office located in the Cayman Islands and another limited purpose office located in Hong Kong. Our foreign banking activities, in total or with any individual country, are not significant.

This MD&A provides information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows. The MD&A included in our Form 8-K filed on May 28, 2014 should be read in conjunction with this MD&A as this discussion provides only material updates to the Form 8-K. This MD&A should also be read in conjunction with the financial statements, notes and other information contained in this report.

Our discussion is divided into key segments:

 

   

Executive Overview—Provides a summary of our current financial performance and business overview, including our thoughts on the impact of the economy, legislative and regulatory initiatives, and recent industry developments. This section also provides our outlook regarding our expectations for the next several quarters.

 

   

Discussion of Results of Operations—Reviews financial performance from a consolidated Company perspective. It also includes a Significant Items section that summarizes key issues helpful for understanding performance trends. Key consolidated average balance sheet and income statement trends are also discussed in this section.

 

   

Risk Management and Capital—Discusses credit, market, liquidity, operational, and compliance risks, including how these are managed, as well as performance trends. It also includes a discussion of liquidity policies, how we obtain funding, and related performance. In addition, there is a discussion of guarantees and / or commitments made for items such as standby letters of credit and commitments to sell loans, and a discussion that reviews the adequacy of capital, including regulatory capital requirements.

 

   

Business Segment Discussion—Provides an overview of financial performance for each of our major business segments and provides additional discussion of trends underlying consolidated financial performance.

 

   

Additional Disclosures—Provides comments on important matters including forward-looking statements, critical accounting policies and use of significant estimates, and recent accounting pronouncements and developments.

A reading of each section is important to understand fully the nature of our financial performance and prospects.

 

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EXECUTIVE OVERVIEW

Summary of 2014 Second Quarter Results

For the quarter, we reported net income of $164.6 million, or $0.19 per common share, compared with $151.0 million, or $0.17 per common share, in the year-ago quarter (see Table 1).

Fully-taxable equivalent net interest income was $466.7 million for the quarter, up $35.2 million, or 8%, from the year-ago quarter. The results reflected a $5.9 billion, or 12%, increase in average earning assets, including a $3.7 billion, or 9%, increase in average loans and leases, as well as a $2.6 billion, or 28%, increase in average securities. These balance increases were partially offset by a 10 basis point decrease in the net interest margin. The primary items affecting the net interest margin were a 15 basis point negative impact from the mix and yield of earning assets, partially offset by a 5 basis point reduction in funding costs. During the 2014 second quarter, the unexpected pay-off of an acquired commercial real estate loan improved net interest income and the net interest margin by $5.1 million and 4 basis points, respectively.

The provision for credit losses increased $4.7 million, or 19%, from the year-ago quarter. This reflected substantial loan growth during the current quarter combined with a slight improvement in asset quality. NCOs decreased $6.1 million, or 18%, to $28.6 million. The consumer loan portfolios drove the majority of the decline, continuing the positive trend exhibited over the past four quarters. NCOs were an annualized 0.25% of average loans and leases in the current quarter, compared to 0.34% in the year-ago quarter.

Noninterest income decreased $1.9 million, or less than 1%, from the year-ago quarter. The results included a $10.9 million, or 33%, decrease in mortgage banking income, reflecting a 49% reduction in origination and secondary marketing revenue, as originations decreased 23%, and gain-on-sale margins compressed. The decline was partially offset by a $7.1 million, or 25%, increase in other income primarily related to commercial loan fees and credit card revenue, as our new credit card products were launched last year. In addition, service charges on deposit accounts increased $4.6 million, or 7%, reflecting an 8% consumer household and 1% commercial relationship growth and changing customer usage patterns.

Noninterest expense increased $12.8 million, or 3%, from the year-ago quarter. The results included an $8.6 million, or 92%, increase in professional services, $4.8 million of which is one-time consulting expense related to strategic planning. Outside data processing and other services increased $4.4 million, or 9%, reflecting higher debit and credit card processing costs and other technology expense. Equipment expense increased $3.8 million, or 15%, reflecting technology investments and the near-complete rollout of enhanced ATMs. The increases were partially offset by a $3.3 million, or 1%, decrease in personnel costs, reflecting the curtailment of the pension plan at the end of 2013, partially offset by annual compensation increases.

The tangible common equity to tangible assets ratio was 8.38%, down 38 basis points from a year ago. Our Tier 1 common risk-based capital ratio was 10.26%, down 45 basis points from a year ago. The regulatory Tier 1 risk-based capital ratio was 11.56%, down 68 basis points from a year ago. All capital ratios were impacted by the repurchase of 28.7 million common shares over the last four quarters, 12.1 million of which were repurchased during the 2014 second quarter, as well as the issuance of 8.7 million common shares as part of the Camco acquisition. The decrease in the regulatory Tier 1 risk-based capital ratio reflected the redemption of $50 million of qualifying preferred securities on December 31, 2013 and an increase in risk-weighted assets caused by organic balance sheet growth, as well as assets acquired from Camco. These declines were partially offset by the increase in retained earnings.

Business Overview

General

Our general business objectives are: (1) grow net interest income and fee income, (2) increase cross-sell and share-of-wallet across all business segments, (3) improve efficiency ratio, (4) continue to strengthen risk management, including sustained improvement in credit metrics, and (5) maintain strong capital and liquidity positions.

We are very pleased with our second quarter performance. We have been able to grow both total revenue and net interest income year over year. Net interest income was particularly noteworthy, as average loan growth of 9% allowed us to overcome continued pressure on the net interest margin from the short-term, low, flat yield curve. We also completed $111 million of stock buybacks during the quarter, which demonstrates our belief in the future prospects of the company and our commitment to return capital to our shareholders.

 

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Average loans and leases increased $3.7 billion from the 2013 second quarter, driven by growth in commercial and auto lending, reflecting heightened consumer and business confidence in the economy. During the quarter, we announced and received approval from the OCC for the deposit purchase included with 24 branches in Michigan, which is targeted to close in September. Also during the second quarter, we were the number one SBA lender, by number of loans, in the country for the first nine months of the program’s fiscal year, even though we only lend in our six-state footprint. We also gave customers more convenience during the quarter with the rollout of the Quick Balance feature to our mobile banking—one of the first of its kind in the country.

Economy

We are optimistic about the continued growth in our local economies and the growing benefit from previous investments, which are driving our robust pipelines. In addition, our footprint state unemployment rates have dropped sharply during the recovery and job growth should benefit from rising aggregate demand in the manufacturing sector in the next year. Also, housing activity and prices will likely continue on a moderate upward trend in line with long-term historical growth. Nevertheless, we continue to face a challenging regulatory and competitive environment.

2014 Expectations

Net interest income is expected to increase modestly. We anticipate an increase in earning assets as total loans moderately grow and investment securities increase modestly. However, those benefits to net interest income are expected to be partially offset by continued downward pressure on NIM. We continue to maintain a disciplined approach to loan and deposit pricing; however, asset yields remain under pressure, and the opportunity to reduce funding costs further is diminishing.

Noninterest income, excluding the impact of any net MSR activity, is expected to remain near the current quarter’s level. In July, we will implement the previously announced change in our consumer service charges on deposits that is expected to have an approximate quarterly negative impact of $6 million. We expect that continued organic consumer household and business relationship growth coupled with the completion of the Michigan branch acquisitions will help offset this reduction.

Noninterest expense, excluding one-time items, is expected to remain near the current quarter’s reported level. We will continue to look for ways to reduce expenses, while not impacting our previously announced growth strategies and our high level of customer service.

Asset quality metrics are expected to trend favorably, although moderate quarterly volatility also is expected given the low level of problem assets and credit costs. NPAs are expected to show continued improvement. We anticipate NCOs will remain within or below our long-term normalized range of 35 to 55 basis points.

The effective tax rate for the remainder of 2014 is expected to be in the range of 25% to 28%, primarily reflecting the impacts of tax-exempt income, tax-advantaged investments, general business credits, and the change in accounting for investments in qualified affordable housing projects.

 

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DISCUSSION OF RESULTS OF OPERATIONS

This section provides a review of financial performance from a consolidated perspective. It also includes a “Significant Items” section that summarizes key issues important for a complete understanding of performance trends. Key Unaudited Condensed Consolidated Balance Sheet and Unaudited Condensed Statement of Income trends are discussed. All earnings per share data are reported on a diluted basis. For additional insight on financial performance, please read this section in conjunction with the “Business Segment Discussion.”

Table 1—Selected Quarterly Income Statement Data (1)

 

     2014     2013  

(dollar amounts in thousands, except per share amounts)

   Second     First     Fourth     Third     Second  

Interest income

   $ 495,322      $ 472,455     $ 469,824      $ 462,912      $ 462,582  

Interest expense

     35,274       34,949       39,175       38,060       37,645  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     460,048       437,506       430,649       424,852       424,937  

Provision for credit losses

     29,385       24,630       24,331       11,400       24,722  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     430,663       412,876       406,318       413,452       400,215  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     72,633       64,582       69,992       72,918       68,009  

Mortgage banking income

     22,717       23,089       24,327       23,621       33,659  

Trust services

     29,581       29,565       30,711       30,470       30,666  

Electronic banking

     26,491       23,642       24,251       24,282       23,345  

Insurance income

     15,996       16,496       15,556       17,269       17,187  

Brokerage income

     17,831       17,071       15,116       16,532       19,546  

Bank owned life insurance income

     13,865       13,307       13,816       13,740       15,421  

Capital markets fees

     10,500       9,194       12,332       12,825       12,229  

Gain on sale of loans

     3,914       3,570       7,144       5,063       3,348  

Securities gains (losses)

     490       16,970       1,239       98       (410

Other income

     36,049       30,999       35,407       36,950       28,919  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     250,067       248,485       249,891       253,768       251,919  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Personnel costs

     260,600       249,477       249,554       229,326       263,862  

Outside data processing and other services

     54,338       51,490       51,071       49,313       49,898  

Net occupancy

     28,673       33,433       31,983       35,591       27,656  

Equipment

     28,749       28,750       28,775       28,191       24,947  

Marketing

     14,832       10,686       13,704       12,271       14,239  

Deposit and other insurance expense

     10,599       13,718       10,056       11,155       13,460  

Amortization of intangibles

     9,520       9,291       10,320       10,362       10,362  

Professional services

     17,896       12,231       11,567       12,487       9,341  

Other expense

     33,429       51,045       38,979       34,640       32,100  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     458,636       460,121       446,009       423,336       445,865  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     222,094       201,240       210,200       243,884       206,269  

Provision for income taxes

     57,475       52,097       52,029       65,047       55,269  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 164,619      $ 149,143     $ 158,171      $ 178,837      $  151,000  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends on preferred shares

     7,963       7,964       7,965       7,967       7,967  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to common shares

   $ 156,656      $ 141,179     $ 150,206      $ 170,870      $ 143,033  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares—basic

     821,546       829,659       830,590       830,398       834,730  

Average common shares—diluted

     834,687       842,677       842,324       841,025       843,840  

Net income per common share—basic

   $ 0.19      $ 0.17     $ 0.18      $ 0.21      $ 0.17  

Net income per common share—diluted

     0.19       0.17       0.18       0.20       0.17  

Cash dividends declared per common share

     0.05       0.05       0.05       0.05       0.05  

Return on average total assets

     1.07     1.01     1.09     1.27     1.08

Return on average common shareholders’ equity

     10.8       9.9       10.5       12.3       10.4  

Return on average tangible common shareholders’ equity (2)

     12.4       11.3       12.1       14.2       12.1  

Net interest margin (3)

     3.28       3.27       3.28       3.34       3.38  

Efficiency ratio (4)

     62.7       66.4       63.4       60.3       63.7  

Effective tax rate

     25.9       25.9       24.8       26.7       26.8  

 

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Revenue—FTE

              

Net interest income

   $ 460,048      $ 437,506      $ 430,649      $ 424,852      $ 424,937  

FTE adjustment

     6,637        5,885        8,196        6,634        6,587  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income (3)

     466,685        443,391        438,845        431,486        431,524  

Noninterest income

     250,067        248,485        249,891        253,768        251,919  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue (3)

   $ 716,752      $ 691,876      $ 688,736      $ 685,254      $ 683,443  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Comparisons for presented periods are impacted by a number of factors. Refer to the “Significant Items” for additional discussion regarding these key factors.

(2) 

Net income excluding expense for amortization of intangibles for the period divided by average tangible common shareholders’ equity. Average tangible common shareholders’ equity equals average total common shareholders’ equity less average intangible assets and goodwill. Expense for amortization of intangibles and average intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate.

(3) 

On a fully-taxable equivalent (FTE) basis assuming a 35% tax rate.

(4) 

Noninterest expense less amortization of intangibles and goodwill impairment divided by the sum of FTE net interest income and noninterest income excluding securities gains.

 

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Table 2—Selected Year to Date Income Statement Data (1)

 

     Six Months Ended June 30,     Change  

(dollar amounts in thousands, except per share amounts)

   2014      2013     Amount     Percent  

Interest income

   $ 967,777      $ 927,901     $ 39,876       4

Interest expense

     70,223        78,794       (8,571     (11
  

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income

     897,554        849,107       48,447       6  

Provision for credit losses

     54,015        54,314       (299     (1
  

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     843,539        794,793       48,746       6  
  

 

 

    

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     137,215        128,892       8,323       6  

Mortgage banking income

     45,807        78,907       (33,100     (42

Trust services

     59,146        61,826       (2,680     (4

Electronic banking

     50,133        44,058       6,075       14  

Insurance income

     32,492        36,439       (3,947     (11

Brokerage income

     34,903        37,541       (2,638     (7

Bank owned life insurance income

     27,172        28,863       (1,691     (6

Capital markets fees

     19,694        20,063       (369     (2

Gain on sale of loans

     7,484        5,964       1,520       25  

Securities gains (losses)

     17,460        (919     18,379       N.R.  

Other income

     67,046        66,903       143       —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Total noninterest income

     498,552        508,537       (9,985     (2
  

 

 

    

 

 

   

 

 

   

 

 

 

Personnel costs

     510,077        522,757       (12,680     (2

Outside data processing and other services

     105,828        99,163       6,665       7  

Net occupancy

     62,106        57,770       4,336       8  

Equipment

     57,499        49,827       7,672       15  

Marketing

     25,518        25,210       308       1  

Deposit and other insurance expense

     24,317        28,950       (4,633     (16

Amortization of intangibles

     18,811        20,682       (1,871     (9

Professional services

     30,127        16,533       13,594       82  

Other expense

     84,474        67,766       16,708       25  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total noninterest expense

     918,757        888,658       30,099       3  
  

 

 

    

 

 

   

 

 

   

 

 

 

Income before income taxes

     423,334        414,672       8,662       2  

Provision for income taxes

     109,572        110,398       (826     (1
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 313,762      $ 304,274     $ 9,488       3
  

 

 

    

 

 

   

 

 

   

 

 

 

Dividends declared on preferred shares

     15,927        15,937       (10     —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income applicable to common shares

   $ 297,835      $ 288,337     $ 9,498       3
  

 

 

    

 

 

   

 

 

   

 

 

 

Average common shares—basic

     825,603        837,917       (12,314     (1 )% 

Average common shares—diluted

     838,546        846,274       (7,728     (1

Per common share

         

Net income per common share—basic

   $ 0.36      $ 0.34     $ 0.02       6

Net income per common share—diluted

     0.36        0.34       0.02       6  

Cash dividends declared

     0.10        0.09       0.01       11  

Revenue—FTE

            —     

Net interest income

   $ 897,554      $ 849,107     $ 48,447       6

FTE adjustment

     12,522        12,510       12       —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income (2)

     910,076        861,617       48,459       6  

Noninterest income

     498,552        508,537       (9,985     (2
  

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue (2)

   $ 1,408,628      $ 1,370,154     $ 38,474       3
  

 

 

    

 

 

   

 

 

   

 

 

 

N.R.—Not relevant, as denominator of calculation is a loss in prior period compared with income in current period.

(1) 

Comparisons for presented periods are impacted by a number of factors. Refer to the “Significant Items” for additional discussion regarding these key factors.

(2) 

On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.

 

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Significant Items

Definition of Significant Items

From time-to-time, revenue, expenses, or taxes are impacted by items judged by us to be outside of ordinary banking activities and / or by items that, while they may be associated with ordinary banking activities, are so unusually large that their outsized impact is believed by us at that time to be infrequent or short-term in nature. We refer to such items as Significant Items. Most often, these Significant Items result from factors originating outside the company; e.g., regulatory actions / assessments, windfall gains, changes in accounting principles, one-time tax assessments / refunds, litigation actions, etc. In other cases, they may result from our decisions associated with significant corporate actions outside of the ordinary course of business; e.g., merger / restructuring charges, recapitalization actions, goodwill impairment, etc.

Even though certain revenue and expense items are naturally subject to more volatility than others due to changes in market and economic environment conditions, as a general rule volatility alone does not define a Significant Item. For example, changes in the provision for credit losses, gains / losses from investment activities, asset valuation writedowns, etc., reflect ordinary banking activities and are, therefore, typically excluded from consideration as a Significant Item.

We believe the disclosure of Significant Items provides a better understanding of our performance and trends to ascertain which of such items, if any, to include or exclude from an analysis of our performance; i.e., within the context of determining how that performance differed from expectations, as well as how, if at all, to adjust estimates of future performance accordingly. To this end, we adopted a practice of listing Significant Items in our external disclosure documents; e.g., earnings press releases, investor presentations, Forms 10-Q and 10-K.

Significant Items for any particular period are not intended to be a complete list of items that may materially impact current or future period performance.

Significant Items Influencing Financial Performance Comparisons

Earnings comparisons were impacted by the Significant Items summarized below:

 

1. Camco Financial Acquisition. During the 2014 first quarter, $11.8 million of net one-time merger related costs were recorded related to the acquisition of Camco Financial. This resulted in a negative impact of $0.01 per common share.

 

2. Litigation Reserve. During the 2014 first quarter, $9.0 million of additions to litigation reserves were recorded as other noninterest expense. This resulted in a negative impact of $0.01 per common share.

The following table reflects the earnings impact of the above-mentioned Significant Items for periods affected by this Results of Operations discussion:

Table 3—Significant Items Influencing Earnings Performance Comparison

 

     Three Months Ended  
     June 30, 2014      March 31, 2014     June 30, 2013  

(dollar amounts in thousands, except per share amounts)

   After-tax      EPS (2)(3)      After-tax     EPS (2)(3)     After-tax      EPS (2)(3)  

Net income

   $ 164,619         $ 149,143       $ 151,000     

Earnings per share, after-tax

      $ 0.19        $ 0.17        $ 0.17  

Significant Items—favorable (unfavorable) impact:

   Earnings (1)      EPS (2)(3)      Earnings (1)     EPS (2)(3)     Earnings (1)      EPS (2)(3)  

Camco Financial Acquisition

     —           —           (11,823     (0.01     —           —     

Additions to Litigation Reserve

     —           —           (9,000     (0.01     —           —     

 

(1) 

Pretax.

(2) 

Based on average outstanding diluted common shares

(3) 

After-tax

 

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     Six Months Ended  
     June 30, 2014     June 30, 2013  

(dollar amounts in thousands)

   After-tax     EPS (2)(3)     After-tax      EPS (2)(3)  

Net income

   $ 313,762        $ 304,274      

Earnings per share, after-tax

     $ 0.36        $ 0.34  

Significant Items—favorable (unfavorable) impact:

   Earnings (1)     EPS (2)(3)     Earnings (1)      EPS (2)(3)  

Camco Financial Acquisition

   $ (11,823   $ (0.01   $ —         $ —     

Additions to Litigation Reserve

     (9,000     (0.01     —           —     

 

(1) 

Pretax unless otherwise noted.

(2) 

Based on average outstanding diluted common shares

(3) 

After-tax

Net Interest Income / Average Balance Sheet

The following tables detail the change in our average balance sheet and the net interest margin:

Table 4—Consolidated Quarterly Average Balance Sheets

 

     Average Balances     Change  
     2014     2013     2Q14 vs. 2Q13  

(dollar amounts in millions)

   Second     First     Fourth     Third     Second     Amount     Percent  

Assets:

              

Interest-bearing deposits in banks

   $ 91     $ 83     $ 71     $ 54     $ 84     $ 7       8

Loans held for sale

     288       279       322       379       678       (390     (58

Securities:

              

Available-for-sale and other securities:

              

Taxable

     6,662       6,240       5,818       6,040       6,728       (66     (1

Tax-exempt

     1,290       1,115       548       565       591       699       118  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     7,952       7,355       6,366       6,605       7,319       633       9  

Trading account securities

     45       38       76       76       84       (39     (46

Held-to-maturity securities—taxable

     3,677       3,783       3,038       2,139       1,711       1,966       115  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     11,674       11,176       9,480       8,820       9,114       2,560       28  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (1)

              

Commercial:

              

Commercial and industrial

     18,262       17,631       17,671       17,032       17,033       1,229       7  

Commercial real estate:

              

Construction

     702       612       573       565       586       116       20  

Commercial

     4,345       4,289       4,331       4,345       4,429       (84     (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     5,047       4,901       4,904       4,910       5,015       32       1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     23,309       22,532       22,575       21,942       22,048       1,261       6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

              

Automobile

     7,349       6,786       6,502       6,075       5,283       2,066       39  

Home equity

     8,376       8,340       8,346       8,341       8,263       113       1  

Residential mortgage

     5,608       5,379       5,331       5,256       5,225       383       7  

Other consumer

     382       386       385       380       461       (79     (17
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     21,715       20,891       20,564       20,052       19,232       2,483       13  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     45,024       43,423       43,139       41,994       41,280       3,744       9  

Allowance for loan and lease losses

     (642     (649     (668     (717     (746     104       (14
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans and leases

     44,382       42,774       42,471       41,277       40,534       3,848       9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     57,077       54,961       53,012       51,247       51,156       5,921       12  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and due from banks

     872       904       846       944       940       (68     (7

Intangible assets

     591       535       542       552       563       28       5  

All other assets

     3,932       3,941       3,917       3,889       3,976       (44     (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 61,830     $ 59,692     $ 57,649     $ 55,915     $ 55,889     $ 5,941       11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Liabilities and Shareholders’ Equity:

                   

Deposits:

                   

Demand deposits—noninterest-bearing

   $ 13,466      $ 13,192      $ 13,337      $ 13,088      $ 12,879      $ 587       5

Demand deposits—interest-bearing

     5,945        5,775        5,755      $ 5,763      $ 5,927        18       —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total demand deposits

     19,411        18,967        19,092        18,851        18,806        605       3  

Money market deposits

     17,680        17,648        16,827        15,739        15,069        2,611       17  

Savings and other domestic deposits

     5,086        4,967        4,912        5,007        5,115        (29     (1

Core certificates of deposit

     3,434        3,613        3,916        4,176        4,778        (1,344     (28
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total core deposits

     45,611        45,195        44,747        43,773        43,768        1,843       4  

Other domestic time deposits of $250,000 or more

     262        284        275        268        324        (62     (19

Brokered deposits and negotiable CDs

     2,070        1,782        1,398        1,553        1,779        291       16  

Deposits in foreign offices

     315        328        354        376        316        (1     —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total deposits

     48,258        47,589        46,774        45,970        46,187        2,071       4  

Short-term borrowings

     939        883        629        710        701        238       34  

Federal Home Loan Bank advances

     1,977        1,499        851        549        757        1,220       161  

Subordinated notes and other long-term debt

     3,395        2,503        2,244        1,753        1,292        2,103       163  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest-bearing liabilities

     41,103        39,282        37,161        35,894        36,058        5,045       14  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

All other liabilities

     1,033        1,035        1,095        1,054        1,064        (31     (3

Shareholders’ equity

     6,228        6,183        6,056        5,879        5,888        340       6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 61,830      $ 59,692      $ 57,649      $ 55,915      $ 55,889      $ 5,941       11
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) For purposes of this analysis, NALs are reflected in the average balances of loans.

 

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Table 5—Consolidated Quarterly Net Interest Margin Analysis

 

     Average Rates (2)  
     2014     2013  

Fully-taxable equivalent basis (1)

   Second     First     Fourth     Third     Second  

Assets

          

Interest-bearing deposits in banks

     0.04     0.03     0.04     0.07     0.27

Loans held for sale

     4.27       3.74       4.46       3.89       3.39  

Securities:

          

Available-for-sale and other securities:

          

Taxable

     2.52       2.47       2.38       2.34       2.29  

Tax-exempt

     3.15       3.03       6.34       4.04       3.94  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     2.63       2.55       2.72       2.48       2.42  

Trading account securities

     0.70       1.12       0.42       0.23       0.60  

Held-to-maturity securities—taxable

     2.46       2.47       2.42       2.29       2.29  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     2.57       2.52       2.60       2.41       2.38  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (3)

          

Commercial:

          

Commercial and industrial

     3.49       3.56       3.54       3.68       3.75  

Commercial real estate:

          

Construction

     4.29       3.99       4.04       3.91       3.93  

Commercial

     4.16       3.84       3.97       4.10       4.13  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     4.17       3.86       3.98       4.08       4.09  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     3.64       3.63       3.63       3.77       3.83  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

          

Automobile

     3.47       3.54       3.67       3.80       3.96  

Home equity

     4.12       4.12       4.11       4.10       4.16  

Residential mortgage

     3.77       3.78       3.77       3.81       3.82  

Other consumer

     7.34       6.84       6.64       6.98       6.66  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     3.87       3.89       3.93       3.99       4.07  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     3.75       3.75       3.77       3.87       3.95  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     3.53     3.53     3.58     3.64     3.68
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

          

Deposits:

          

Demand deposits—noninterest-bearing

     —       —       —       —       —  

Demand deposits—interest-bearing

     0.04       0.04       0.04       0.04       0.04  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     0.01       0.01       0.01       0.01       0.01  

Money market deposits

     0.24       0.25       0.27       0.26       0.24  

Savings and other domestic deposits

     0.17       0.20       0.24       0.25       0.27  

Core certificates of deposit

     0.81       0.94       1.05       1.05       1.13  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     0.25       0.28       0.32       0.32       0.34  

Other domestic time deposits of $250,000 or more

     0.43       0.41       0.39       0.44       0.50  

Brokered deposits and negotiable CDs

     0.24       0.28       0.39       0.55       0.62  

Deposits in foreign offices

     0.13       0.13       0.14       0.14       0.14  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     0.25       0.28       0.32       0.33       0.36  

Short-term borrowings

     0.12       0.07       0.08       0.09       0.10  

Federal Home Loan Bank advances

     0.12       0.12       0.14       0.14       0.14  

Subordinated notes and other long-term debt

     1.48       1.66       2.10       2.29       2.35  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     0.34     0.36     0.42     0.42     0.42
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest rate spread

     3.19     3.17     3.15     3.20     3.26

Impact of noninterest-bearing funds on margin

     0.09       0.10       0.13       0.14       0.12  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin

     3.28 %     3.27 %     3.28 %     3.34 %     3.38 %
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

FTE yields are calculated assuming a 35% tax rate.

(2) 

Loan and lease and deposit average rates include impact of applicable derivatives, non-deferrable fees, and amortized deferred fees.

(3) 

For purposes of this analysis, NALs are reflected in the average balances of loans.

 

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2014 Second Quarter versus 2013 Second Quarter

Fully-taxable equivalent net interest income increased $35.2 million, or 8%, from the 2013 second quarter. This reflected the benefit from the $3.7 billion, or 9%, of average loan growth and a $2.6 billion, or 28%, increase in securities. This was partially offset by the 10 basis point decrease in the FTE net interest margin to 3.28%. The 15 basis point negative impact on NIM from the mix and yield of earning assets was partially offset by the 5 basis point reduction in funding costs. During the 2014 second quarter, net interest income and the NIM benefitted by $5.1 million and 4 basis points, respectively, from the unexpected pay-off of an acquired commercial real estate loan.

Average loans and leases increased $3.7 billion, or 9%, from the prior year, driven by:

 

   

$2.1 billion, or 39%, increase in average automobile loans, as originations remained strong and we continued to portfolio all of the production.

 

   

$1.2 billion, or 7%, increase in average C&I loans and leases. This reflected growth in the international and other specialty lending verticals, automobile dealer floorplan lending, and business banking.

 

   

$0.4 billion, or 7%, increase in average residential mortgage loans as a result of increased customer demand for adjustable rate mortgages.

Average total core deposits increased $1.9 billion, or 4%, from the year-ago quarter. Average interest-bearing liabilities increased $5.0 billion, or 14%, from the 2013 second quarter, reflecting:

 

   

$3.6 billion, or 130%, increase in short- and long-term borrowings, which were used to efficiently finance balance sheet growth while continuing to manage the overall cost of funds. Included in the increase are $2.1 billion of bank-level debt and $0.4 billion of parent-level debt issued over the past year.

 

   

$2.6 billion, or 17%, increase in money market deposits, primarily reflecting the strategic focus on customer growth and increased share-of-wallet among both consumer and commercial customers.

 

   

$0.6 billion, or 5%, increase in noninterest bearing deposits.

Partially offset by:

 

   

$1.3 billion, or 28%, decrease in average core certificates of deposit due to the strategic focus on changing the funding sources to no-cost demand deposits and lower cost money market deposits.

2014 Second Quarter versus 2014 First Quarter

Compared to the 2014 first quarter, fully-taxable equivalent net interest income increased $23.3 million, or 5%, reflecting a $2.1 billion, or 4% increase in average earnings assets, and a 1 basis point increase in NIM.

 

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Table 6—Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis

 

     YTD Average Balances     YTD Average Rates (2)  

Fully-taxable equivalent basis (1)

   Six Months Ended June 30,     Change     Six Months Ended June 30,  

(dollar amounts in millions)

   2014     2013     Amount     Percent     2014     2013  

Assets:

            

Interest-bearing deposits in banks

   $ 87     $ 78     $ 9       12     0.03     0.22

Loans held for sale

     283       694       (411     (59     4.01       3.35  

Securities:

            

Available-for-sale and other securities:

            

Taxable

     6,452       6,845       (393     (6     2.49       2.30  

Tax-exempt

     1,203       570       633       111       3.09       3.95  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     7,655       7,415       240       3       2.59       2.43  

Trading account securities

     42       85       (43     (51     0.89       0.55  

Held-to-maturity securities—taxable

     3,730       1,714       2,016       118       2.46       2.29  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     11,427       9,214       2,213       24       2.54       2.38  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (3)

            

Commercial:

            

Commercial and industrial

     17,948       16,994       954       6       3.53       3.79  

Commercial real estate:

            

Construction

     657       592       65       11       4.15       3.99  

Commercial

     4,317       4,561       (244     (5     4.00       4.06  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     4,974       5,153       (179     (3     4.02       4.06  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     22,922       22,147       775       3       3.63       3.85  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

            

Automobile

     7,069       5,058       2,011       40       3.50       4.11  

Home equity

     8,358       8,277       81       1       4.12       4.17  

Residential mortgage

     5,494       5,102       392       8       3.78       3.89  

Other consumer

     384       488       (104     (21     7.09       6.76  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     21,305       18,925       2,380       13       3.88       4.15  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     44,227       41,072       3,155       8       3.75       3.99  
          

 

 

   

 

 

 

Allowance for loan and lease losses

     (645     (758     113       (15    
  

 

 

   

 

 

   

 

 

   

 

 

     

Net loans and leases

     43,582       40,314       3,268       8      
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     56,024       51,058       4,966       10       3.53     3.71
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and due from banks

     888       922       (34     (4    

Intangible assets

     563       567       (4     (1    

All other assets

     3,937       4,020       (83     (2    
  

 

 

   

 

 

   

 

 

   

 

 

     

Total assets

   $ 60,767     $ 55,809     $ 4,958       9    
  

 

 

   

 

 

   

 

 

   

 

 

     

Liabilities and Shareholders’ Equity:

            

Deposits:

            

Demand deposits—noninterest-bearing

   $ 13,330     $ 12,524     $ 806       6     —       —  

Demand deposits—interest-bearing

     5,860       5,952       (92     (2     0.04       0.04  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     19,190       18,476       714       4       0.01       0.01  

Money market deposits

     17,664       15,057       2,607       17       0.25       0.23  

Savings and other domestic deposits

     5,027       5,099       (72     (1     0.19       0.29  

Core certificates of deposit

     3,523       5,060       (1,537     (30     0.88       1.16  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     45,404       43,692       1,712       4       0.27       0.36  

Other domestic time deposits of $250,000 or more

     273       342       (69     (20     0.42       0.51  

Brokered deposits and negotiable CDs

     1,927       1,738       189       11       0.26       0.65  

Deposits in foreign offices

     322       328       (6     (2     0.13       0.15  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     47,926       46,100       1,826       4       0.27       0.37  

Short-term borrowings

     911       732       179       24       0.09       0.11  

Federal Home Loan Bank advances

     1,740       722       1,018       141       0.12       0.16  

Subordinated notes and other long-term debt

     2,951       1,320       1,631       124       1.55       2.45  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     40,198       36,350       3,848       11       0.35       0.44  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

All other liabilities

     1,034       1,074       (40     (4    

Shareholders’ equity

     6,205       5,861       344       6      
  

 

 

   

 

 

   

 

 

   

 

 

     

Total liabilities and shareholders’ equity

   $ 60,767     $ 55,809     $ 4,958       9    
  

 

 

   

 

 

   

 

 

   

 

 

     

Net interest rate spread

             3.18       3.28  

Impact of noninterest-bearing funds on margin

             0.10       0.12  
          

 

 

   

 

 

 

Net interest margin

             3.28     3.40
          

 

 

   

 

 

 

 

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Table of Contents
(1) 

FTE yields are calculated assuming a 35% tax rate.

(2) 

Loan, lease, and deposit average rates include the impact of applicable derivatives, non-deferrable fees, and amortized deferred fees.

(3) 

For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans.

2014 First Six Months versus 2013 First Six Months

Fully-taxable equivalent net interest income for the first six-month period of 2014 increased $48.5 million, or 6% reflecting the benefit of a $5.0 billion, or 10%, increase in average total earning assets. The fully-taxable equivalent net interest margin decreased to 3.28% from 3.40%. The increase in average earning assets reflected:

 

   

$3.2 billion, or 8%, increase in average total loans and leases.

 

   

$2.2 billion, or 24%, increase in securities that meet the requirement for HQLA as proposed in the LCR rules issued by the regulators in October 2013.

Partially offset by:

 

   

$0.4 billion, or 59%, decrease in loans held for sale.

The $3.2 billion, or 8%, increase in average total loans and leases primarily reflected:

 

   

$2.0 billion, or 40%, increase in the average automobile portfolio as originations remained strong and we continued to portfolio all of the production. Investments in our automobile lending business throughout the Northeast and upper Midwest continue to grow as planned.

 

   

$1.0 billion, or 6%, increase in the average C&I portfolio, primarily reflecting growth in the international and other specialty lending verticals, automobile dealer floorplan lending, and business banking.

The $1.8 billion, or 4%, increase in average total deposits reflected:

 

   

$2.6 billion, or 17%, increase in money market deposits, reflecting the strategic focus on customer growth and increased share-of-wallet among both consumer and commercial customers.

 

   

$0.7 billion, or 4%, increase in total demand deposits, reflecting our focus on changing our product mix to reduce the overall cost of deposits.

Partially offset by:

 

   

$1.5 billion, or 30%, decline in core certificates of deposit due to the strategic focus on changing the funding sources to no-cost demand deposits and lower cost money market deposits.

In addition, short- and long-term borrowings increased $2.8 billion, or 102%, which were used to efficiently finance balance sheet growth while continuing to manage the overall cost of funds. Included in the increase are $2.1 billion of bank-level debt and $0.4 billion of parent-level debt.

Provision for Credit Losses

(This section should be read in conjunction with the Credit Risk section.)

The provision for credit losses is the expense necessary to maintain the ALLL and the AULC at levels appropriate to absorb our estimate of credit losses in the loan and lease portfolio and the portfolio of unfunded loan commitments and letters-of-credit.

The provision expense for the quarter was significantly impacted by the substantial loan growth in the quarter, combined with the slight improvement in overall asset quality metrics. The provision for credit losses for the 2014 second quarter was $29.4 million and increased $4.8 million, or 19%, from the prior quarter and increased $4.7 million, or 19%, from the year-ago quarter. The current quarter’s provision for credit losses was $0.7 million more than total NCOs for the same period. On a year-to-date basis, provision for credit losses for the first six-month period of 2014 declined $0.3 million, or 1%, compared to year-ago period. The provision for credit losses for the first six-month period of 2014 was $17.6 million less than total NCOs. (See Credit Quality discussion). Given the low level of the provision for credit losses and the uncertain and uneven nature of the economic recovery, some degree of volatility on a quarter-to-quarter basis is expected.

 

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Noninterest Income

The following table reflects noninterest income for each of the past five quarters:

Table 7—Noninterest Income

 

     2014      2013     2Q14 vs 2Q13     2Q14 vs 1Q14  

(dollar amounts in thousands)

   Second      First      Fourth      Third      Second     Amount     Percent     Amount     Percent  

Service charges on deposit accounts

   $ 72,633      $ 64,582      $ 69,992      $ 72,918      $ 68,009     $ 4,624       7 %   $ 8,051       12 %

Mortgage banking income

     22,717        23,089        24,327        23,621        33,659       (10,942     (33     (372     (2

Trust services

     29,581        29,565        30,711        30,470        30,666       (1,085     (4     16       0   

Electronic banking

     26,491        23,642        24,251        24,282        23,345       3,146       13        2,849       12   

Insurance income

     15,996        16,496        15,556        17,269        17,187       (1,191     (7     (500     (3

Brokerage income

     17,831        17,071        15,116        16,532        19,546       (1,715     (9     760       4   

Bank owned life insurance income

     13,865        13,307        13,816        13,740        15,421       (1,556     (10     558       4   

Capital markets fees

     10,500        9,194        12,332        12,825        12,229       (1,729     (14     1,306       14   

Gain on sale of loans

     3,914        3,570        7,144        5,063        3,348       566       17        344       10   

Securities gains (losses)

     490        16,970        1,239        98        (410     900       N.R.        (16,480     (97

Other income

     36,049        30,999        35,407        36,950        28,919       7,130       25        5,050       16   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 250,067      $ 248,485      $ 249,891      $ 253,768      $ 251,919     $ (1,852     (1 )%   $ 1,582       1 %
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

N.R. - Not relevant, as denominator of calculation is a loss in prior period compared with income in current period.

2014 Second Quarter versus 2013 Second Quarter

In the 2014 second quarter, noninterest income decreased $1.9 million, or 1%, from the year-ago quarter, primarily reflecting:

 

   

$10.9 million, or 33%, decrease in mortgage banking income, reflecting a 49% reduction in origination and secondary marketing revenue as originations decreased 23% and gain-on-sale margins compressed.

Partially offset by:

 

   

$7.1 million, or 25%, increase in other income primarily related to commercial loan fees and credit card revenue, as our new credit card products were launched last year.

 

   

$4.6 million, or 7%, increase in service charges on deposit accounts reflecting 8% consumer household and 1% commercial relationship growth and changing customer usage patterns.

2014 Second Quarter versus 2014 First Quarter

Compared to the 2014 first quarter, noninterest income increased $1.6 million, or 1%. This increase reflected typical seasonality within service charges on deposit accounts, which increased $8.1 million, or 12%, and a $2.8 million, or 12%, increase in electronic banking. These were mostly offset by a $16.5 million, or 97%, decrease in securities gains.

 

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Table of Contents

2014 First Six Months versus 2013 First Six Months

Noninterest income for the first six-month period of 2014 decreased $10.0 million, or 2%, from the comparable year-ago period.

Table 8—Noninterest Income—2014 First Six Months vs. 2013 First Six Months

 

     Six Months Ended June 30,     Change  

(dollar amounts in thousands)

   2014      2013     Amount     Percent  

Service charges on deposit accounts

   $ 137,215      $ 128,892     $ 8,323       6 %

Mortgage banking income

     45,807        78,907       (33,100     (42

Trust services

     59,146        61,826       (2,680     (4

Electronic banking

     50,133        44,058       6,075       14   

Insurance income

     32,492        36,439       (3,947     (11

Brokerage income

     34,903        37,541       (2,638     (7

Bank owned life insurance income

     27,172        28,863       (1,691     (6

Capital markets fees

     19,694        20,063       (369     (2

Gain on sale of loans

     7,484        5,964       1,520       25   

Securities gains (losses)

     17,460        (919     18,379       N.M.   

Other income

     67,046        66,903       143       —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 498,552      $ 508,537     $ (9,985     (2 )%
  

 

 

    

 

 

   

 

 

   

 

 

 

N.M. - Not relevant, as numerator of calculation is a loss in current period compared with gain in prior period.

The $10.0 million, or 2%, decrease in total noninterest income reflected:

 

   

$33.1 million, or 42%, decrease in mortgage banking income. This primarily reflected a $26.4 million, or 48%, decrease in origination and secondary marketing income as originations decreased 32%, gain-on-sale margin compression, and a higher percentage of originations were held on the balance sheet.

Partially offset by:

 

   

$18.4 million increase in securities gains, as we adjusted the mix of our securities portfolio to prepare for the LCR.

 

   

$8.3 million, or 6%, increase in service charges on deposit accounts, reflecting consumer household and commercial relationship growth and changing customer usage patterns.

 

   

$6.1 million, or 14%, increase in electronic banking income, primarily due to continued consumer household growth.

 

20


Table of Contents

Noninterest Expense

(This section should be read in conjunction with Significant Item 1 and 2.)

The following table reflects noninterest expense for each of the past five quarters:

Table 9—Noninterest Expense

 

    2014     2013     2Q14 vs 2Q13     2Q14 vs 1Q14  

(dollar amounts in thousands)

  Second     First     Fourth     Third     Second     Amount     Percent     Amount     Percent  

Personnel costs

  $ 260,600     $ 249,477     $ 249,554     $ 229,326     $ 263,862     $ (3,262     (1 )%    $ 11,123       4 %

Outside data processing and other services

    54,338       51,490       51,071       49,313       49,898       4,440       9       2,848       6   

Net occupancy

    28,673       33,433       31,983       35,591       27,656       1,017       4       (4,760     (14

Equipment

    28,749       28,750       28,775       28,191       24,947       3,802       15       (1     (0

Marketing

    14,832       10,686       13,704       12,271       14,239       593       4       4,146       39   

Deposit and other insurance expense

    10,599       13,718       10,056       11,155       13,460       (2,861     (21     (3,119     (23

Amortization of intangibles

    9,520       9,291       10,320       10,362       10,362       (842     (8     229       2   

Professional services

    17,896       12,231       11,567       12,487       9,341       8,555       92       5,665       46   

Other expense

    33,429       51,045       38,979       34,640       32,100       1,329       4       (17,616     (35
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

  $ 458,636     $ 460,121     $ 446,009     $ 423,336     $ 445,865     $ 12,771         $ (1,485     (0 )%
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Number of employees (average full-time equivalent)

    12,000       11,848       11,765       12,080       12,063       (63     (1     152       1   

2014 Second Quarter versus 2013 Second Quarter

In the 2014 first quarter, noninterest expense increased $12.8 million, or 3%, from the year-ago quarter, reflecting:

 

   

$8.6 million, or 92%, increase in professional services, $4.8 million of which is one-time consulting expense related to strategic planning.

 

   

$4.4 million, or 9%, increase in outside data processing and other services, reflecting higher debit and credit card processing costs and other technology expense.

 

   

$3.8 million, or 15%, increase in equipment expense, reflecting technology investments and the near-complete rollout of enhanced ATMs.

Partially offset by:

 

   

$3.3 million, or 1%, decrease in personnel costs, reflecting the curtailment of the pension plan at the end of 2013 partially offset by annual compensation increases.

2014 Second Quarter versus 2014 First Quarter

Noninterest expense decreased $1.5 million, or less than 1%, from the 2014 first quarter. When adjusting for the $21.6 million of Significant Items in the 2014 first quarter, noninterest expense increased $20.1 million. Personnel costs increased $11.1 million, or 4%, primarily reflecting compensation and benefits increases. Marketing increased $4.1 million, or 39%, due to the seasonal increase in campaigns and promotions. Net occupancy expense decreased $4.8 million, or 14%, primarily related to the prior quarter’s snow removal expenses as well as $1.7 million of one-time expenses related to the Camco acquisition and conversion. Other expense decreased $17.6 million, or 35%, as the 2014 first quarter included the $9.0 million addition to litigation reserves and a $3.0 million goodwill impairment.

 

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Table of Contents

2014 First Six Months versus 2013 First Six Months

Noninterest expense for the first six-month period of 2014 increased $30.1 million, or 3%, from the comparable year-ago period.

Table 10—Noninterest Expense—2014 First Six Months vs. 2013 First Six Months

 

     Six Months Ended June 30,      Change  

(dollar amounts in thousands)

   2014      2013      Amount     Percent  

Personnel costs

   $ 510,077      $ 522,757      $ (12,680     (2 )%

Outside data processing and other services

     105,828        99,163        6,665       7   

Net occupancy

     62,106        57,770        4,336       8   

Equipment

     57,499        49,827        7,672       15   

Marketing

     25,518        25,210        308       1   

Deposit and other insurance expense

     24,317        28,950        (4,633     (16

Amortization of intangibles

     18,811        20,682        (1,871     (9

Professional services

     30,127        16,533        13,594       82   

Other expense

     84,474        67,766        16,708       25   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total noninterest expense

   $ 918,757      $ 888,658      $ 30,099       3 %
  

 

 

    

 

 

    

 

 

   

 

 

 

The $30.1 million, or 3%, increase in total noninterest expense reflected:

 

   

$16.7 million, or 25%, increase in other expense, as the 2014 first quarter included the $9.0 million addition to litigation reserves and $3.0 million goodwill impairment.

 

   

$13.6 million, or 82%, increase in professional services, of which $6.2 million is one-time consulting expenses related to strategic planning, and $2.2 million of Camco acquisition related costs.

 

   

$7.7 million, or 15%, increase in equipment, primarily due to technology investments and the near-complete rollout of enhanced ATMs.

 

   

$6.7 million, or 7%, increase in outside data processing and other services, reflecting $4.3 million of one-time merger related expenses, higher debit and credit card processing costs, and other technology expenses.

 

   

$4.3 million, or 8%, increase in net occupancy, reflecting $1.7 million of one-time merger related expenses and abnormally high snow removal expenses in the 2014 first quarter.

Partially offset by:

 

   

$12.7 million, or 2%, decrease in personnel costs, primarily reflecting the curtailment of the pension plan at the end of 2013 that was partially offset by $2.3 million of one-time Camco merger related expenses and annual compensation increases.

 

   

$4.6 million, or 16%, decrease in deposit and other insurance.

Provision for Income Taxes

The provision for income taxes in the 2014 second quarter was $57.5 million and $55.3 million in the 2013 second quarter. The provision for income taxes for the six month periods ended June 30, 2014 and June 30, 2013 was $109.6 million and $110.4 million, respectively. Both quarters included the benefits from tax-exempt income, tax-advantaged investments, general business credits, and the change in accounting for investments in qualified affordable housing projects. At June 30, 2014, we had a net federal deferred tax asset of $82.0 million and a net state deferred tax asset of $47.3 million. For regulatory capital purposes, there was no disallowed net deferred tax asset at June 30, 2014.

 

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We file income tax returns with the IRS and various state, city, and foreign jurisdictions. Federal income tax audits have been completed for tax years through 2009. In the first quarter of 2013, the IRS began an examination of our 2010 and 2011 consolidated federal income tax returns. We have appealed certain proposed adjustments resulting from the IRS examination of our 2006, 2007, 2008, 2009, and 2010 tax returns. We believe the tax positions taken related to such proposed adjustments are correct and supported by applicable statutes, regulations, and judicial authority, and intend 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. Nevertheless, although no assurances can be given, we believe the resolution of these examinations will not, individually or in the aggregate, have a material adverse impact on our consolidated financial position. Various state and other jurisdictions remain open to examination, including Kentucky, Indiana, Michigan, Pennsylvania, West Virginia, and Illinois.

On September 13, 2013, the IRS released final tangible property regulations under Sections 162(a) and 263(a) of the IRC and proposed regulations under Section 168 of the IRC. These regulations generally apply to taxable years beginning on or after January 1, 2014 and will affect all taxpayers that acquire, produce, or improve tangible property. Based upon preliminary analysis, we do not expect that the adoption of these regulations will have a material impact on the Company’s Condensed Consolidated Financial Statements.

RISK MANAGEMENT AND CAPITAL

Risk awareness, identification and assessment, reporting, and active management are key elements in overall risk management. We manage risk to an aggregate moderate-to-low risk profile through a control framework and by monitoring and responding to identified potential risks. Controls include, among others, effective segregation of duties, access, authorization and reconciliation procedures, as well as staff education and a disciplined assessment process.

We identify primary risks, and the sources of those risks, within each business unit. We utilize Risk and Control Self-Assessments (RCSA) to identify exposure risks. Through this RCSA process, we continually assess the effectiveness of controls associated with the identified risks, regularly monitor risk profiles and material exposure to losses, and identify stress events and scenarios to which we may be exposed. Our chief risk officer is responsible for ensuring that appropriate systems of controls are in place for managing and monitoring risk across the Company. Potential risk concerns are shared with the Risk Management Committee, Risk Oversight Committee, and the board of directors, as appropriate. Our internal audit department performs on-going independent reviews of the risk management process and ensures the adequacy of documentation. The results of these reviews are regularly reported to the audit committee and board of directors.

We believe that our primary risk exposures are credit, market, liquidity, operational, and compliance oriented. More information on risk can be found in the Risk Factors section included in Item 1A of our 2013 Form 10-K and subsequent filings with the SEC. The MD&A included in our Form 8-K filed on May 28, 2014 should be read in conjunction with this MD&A as this discussion provides only material updates to the Form 8-K. This MD&A should also be read in conjunction with the financial statements, notes and other information contained in this report. Our definition, philosophy, and approach to risk management have not materially changed from the discussion presented in this report.

Credit Risk

Credit risk is the risk of financial loss if a counterparty is not able to meet the agreed upon terms of the financial obligation. The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. We also have significant credit risk associated with our AFS and HTM securities portfolios (see Note 4 and Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements). We engage with other financial counterparties for a variety of purposes including investing, asset and liability management, mortgage banking, and trading activities. While there is credit risk associated with derivative activity, we believe this exposure is minimal.

We continue to focus on the identification, monitoring, and managing of our credit risk. In addition to the traditional credit risk mitigation strategies of credit policies and processes, market risk management activities, and portfolio diversification, we use additional quantitative measurement capabilities utilizing external data sources, enhanced use of modeling technology, and internal stress testing processes. Our portfolio management resources demonstrate our commitment to maintaining an aggregate moderate-to-low risk profile. In our efforts to continue to identify risk mitigation techniques, we have focused on product design features, origination policies, and treatment strategies for delinquent or stressed borrowers.

 

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Loan and Lease Credit Exposure Mix

At June 30, 2014, loans and leases totaled $46.1 billion, representing a $3.0 billion, or 7%, increase compared to $43.1 billion at December 31, 2013, primarily reflecting growth in the C&I and automobile portfolio. The growth included $559 million in loans from our acquisition of Camco Financial during the 2014 first quarter. The Camco Financial portfolio composition was centered in CRE, home equity and residential mortgage.

At June 30, 2014, commercial loans and leases totaled $23.9 billion and represented 52% of our total loans and leases. The increase compared to December 31, 2013 primarily reflects growth in the international and other specialty lending verticals, automobile dealer floorplan lending, and business banking. Our commercial portfolio is diversified along product type, customer size, and geography across our footprint, and is comprised of the following loan types (see Commercial Credit discussion).

C&I – C&I loans and leases are made to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or other projects. The majority of these borrowers are customers doing business within our geographic regions. C&I loans and leases are generally underwritten individually and secured with the assets of the company and/or the personal guarantee of the business owners. The financing of owner occupied facilities is considered a C&I loan even though there is improved real estate as collateral. This treatment is a result of the credit decision process, which focuses on cash flow from operations of the business to repay the debt. The operation, sale, rental, or refinancing of the real estate is not considered the primary repayment source for these types of loans. As we have expanded our C&I portfolio, we have developed a series of “verticals” to ensure that new products or lending types are embedded within a structured, centralized Commercial Lending area with designated experienced credit officers.

CRE – CRE loans consist of loans to developers and REITs supporting income-producing or for-sale commercial real estate properties. We mitigate our risk on these loans by requiring collateral values that exceed the loan amount and underwriting the loan with projected cash flow in excess of the debt service requirement. These loans are made to finance properties such as apartment buildings, office and industrial buildings, and retail shopping centers, and are repaid through cash flows related to the operation, sale, or refinance of the property.

Construction CRE – Construction CRE loans are loans to developers, companies, or individuals used for the construction of a commercial or residential property for which repayment will be generated by the sale or permanent financing of the property. Our construction CRE portfolio primarily consists of retail, multi family, office, and warehouse project types. Generally, these loans are for construction projects that have been presold or preleased, or have secured permanent financing, as well as loans to real estate companies with significant equity invested in each project. These loans are underwritten and managed by a specialized real estate lending group that actively monitors the construction phase and manages the loan disbursements according to the predetermined construction schedule.

Total consumer loans and leases were $22.2 billion at June 30, 2014, and represented 48% of our total loan and leases. The consumer portfolio is comprised primarily of automobile, home equity loans and lines-of-credit, and residential mortgages (see Consumer Credit discussion). The increase from December 31, 2013 primarily relates to strong consumer demand for automobile originations and adjustable rate residential mortgages (ARMs).

Automobile – Automobile loans are comprised primarily of loans made through automotive dealerships and include exposure in selected states outside of our primary banking markets. The exposure outside of our primary banking markets represents 19% of the total exposure, with no individual state representing more than 5%. Applications are underwritten utilizing an automated underwriting system that applies consistent policies and processes across the portfolio.

Home equity – Home equity lending includes both home equity loans and lines-of-credit. This type of lending, which is secured by a first-lien or junior-lien on the borrower’s residence, allows customers to borrow against the equity in their home or refinance existing mortgage debt. Products include closed-end loans which are generally fixed-rate with principal and interest payments, and variable-rate, interest-only lines-of-credit which do not require payment of principal during the 10-year revolving period. The home equity line of credit may convert to a 20-year amortizing structure at the end of the revolving period. Applications are underwritten centrally in conjunction with an automated underwriting system. The home equity underwriting criteria is based on minimum credit scores, debt-to-income ratios, and LTV ratios, with current collateral valuations.

 

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Residential mortgage – Residential mortgage loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15-year to 30-year term, and in most cases, are extended to borrowers to finance their primary residence. Applications are underwritten centrally using consistent credit policies and processes. All residential mortgage loan decisions utilize a full appraisal for collateral valuation. Huntington has not originated or acquired residential mortgages that allow negative amortization or allow the borrower multiple payment options.

Other consumer – Primarily consists of consumer loans not secured by real estate, including personal unsecured loans, overdraft balances, and credit cards. We introduced a consumer credit card product during 2013, utilizing a centralized underwriting system and focusing on existing Huntington customers.

The table below provides the composition of our total loan and lease portfolio:

Table 11—Loan and Lease Portfolio Composition

 

     2014     2013  

(dollar amounts in millions)

   June 30,     March 31,     December 31,     September 30,     June 30,  

Commercial:(1)

                         

Commercial and industrial

   $ 18,899        41 %   $ 18,046        41 %   $ 17,594        41 %   $ 17,335        41 %   $ 17,113        41 %

Commercial real estate:

                         

Construction

     757        2        692        2        557        1        544        1        607        1   

Commercial

     4,233        9        4,339        10        4,293        10        4,328        10        4,286        10   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial real estate

     4,990        11        5,031        12        4,850        11        4,872        11        4,893        11   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial

     23,889        52        23,077        53        22,444        52        22,207        52        22,006        52   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Consumer:

                         

Automobile

     7,686        17        6,999        16        6,639        15        6,317        15        5,810        14   

Home equity

     8,405        18        8,373        19        8,336        18        8,347        20        8,369        20   

Residential mortgage

     5,707        12        5,542        12        5,321        12        5,307        12        5,168        12   

Other consumer

     393        1        363        —          380        2        378        1        387        2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer

     22,191        48        21,277        47        20,676        48        20,349        48        19,734        48   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans and leases

   $ 46,080        100 %   $ 44,354        100 %   $ 43,120        100 %   $ 42,556        100 %   $ 41,740        100 %
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) As defined by regulatory guidance, there were no commercial loans outstanding that would be considered a concentration of lending to a particular industry or group of industries.

As shown in the table above, our loan portfolio is diversified by consumer and commercial credit. At the corporate level, we manage the credit exposure via a credit concentration policy. The policy designates specific loan types, collateral types, and loan structures to be formally tracked and assigned limits as a percentage of capital. C&I lending by segment, specific limits for CRE primary project types, loans secured by residential real estate, shared national credit exposure, unsecured lending, and designated high risk loan definitions represent examples of specifically tracked components of our concentration management process. Our concentration management process is approved by our board level Risk Oversight Committee and is one of the strategies utilized to ensure a high quality, well diversified portfolio that is consistent with our overall objective of maintaining an aggregate moderate-to-low risk profile.

The table below provides our total loan and lease portfolio segregated by the type of collateral securing the loan or lease: The changes in the collateral composition are consistent with the portfolio growth metrics, with increases noted in the residential and vehicle categories. The increase in the unsecured exposure is centered in high quality commercial credit customers.

 

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Table 12—Loan and Lease Portfolio by Collateral Type

 

    2014     2013  

(dollar amounts in millions)

  June 30,     March 31,     December 31,     September 30,     June 30,  

Secured loans:

                   

Real estate—commercial

  $ 8,617       19 %   $ 8,612       19 %   $ 8,622       20 %   $ 8,769       21 %   $ 8,749       21 %

Real estate—consumer

    14,113       31        13,916       31        13,657       32        13,654       32        13,537       32   

Vehicles

    9,782       21        9,270       21        8,989       21        8,275       19        7,763       19   

Receivables/Inventory

    5,932       13        5,717       13        5,534       13        5,367       13        5,260       13   

Machinery/Equipment

    3,267       7        2,930       7        2,738       6        2,778       7        2,831       7   

Securities/Deposits

    1,349       3        1,064       2        786       2        905       2        924       2   

Other

    940       2        870       3        1,016       2        948       2        1,020       2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total secured loans and leases

    44,000       96        42,379       96        41,342       96        40,696       96        40,084       96   

Unsecured loans and leases

    2,080       4        1,975       4        1,778       4        1,860       4        1,656       4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

  $ 46,080       100 %   $ 44,354       100 %   $ 43,120       100 %   $ 42,556       100 %   $ 41,740       100 %
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial Credit

Refer to the “Commercial Credit” section of our Form 8-K filed on May 28, 2014 for our commercial credit underwriting and on-going credit management processes.

C&I PORTFOLIO

The C&I portfolio continues to have strong origination activity as evidenced by the growth over the past 12 months. The credit quality of the portfolio remains strong as we maintain a focus on high quality originations. Problem loans have trended downward, reflecting a combination of proactive risk identification and effective workout strategies implemented by the SAD. We continue to maintain a proactive approach to identifying borrowers that may be facing financial difficulty in order to maximize the potential solutions.

CRE PORTFOLIO

We manage the risks inherent in this portfolio specific to CRE lending, focusing on the quality of the developer and the specifics associated with each project. Generally, we: (1) limit our loans to 80% of the appraised value of the commercial real estate at origination, (2) require net operating cash flows to be 125% of required interest and principal payments, and (3) if the commercial real estate is nonowner occupied, require that at least 50% of the space of the project be preleased. We actively monitor both geographic and project-type concentrations and performance metrics of all CRE loan types, with a focus on loans identified as higher risk based on the risk rating methodology. Both macro-level and loan-level stress-test scenarios based on existing and forecast market conditions are part of the on-going portfolio management process for the CRE portfolio.

Dedicated real estate professionals originated the majority of the portfolio, with the remainder obtained from prior bank acquisitions. Appraisals are obtained from approved vendors, and are reviewed by an internal appraisal review group comprised of certified appraisers to ensure the quality of the valuation used in the underwriting process. The portfolio is diversified by project type and loan size, and this diversification represents a significant portion of the credit risk management strategies employed for this portfolio. Subsequent to the origination of the loan, the Credit Review group provides an independent review and assessment of the quality of the underwriting and/or risk of new loan originations.

Appraisal values are obtained in conjunction with all originations and renewals, and on an as needed basis, in compliance with regulatory requirements. We continue to perform on-going portfolio level reviews within the CRE portfolio. These reviews generate action plans based on occupancy levels or sales volume associated with the projects being reviewed. Property values are updated using appraisals on a regular basis to ensure appropriate decisions regarding the on-going management of the portfolio reflect the changing market conditions. This highly individualized process requires working closely with all of our borrowers, as well as an in-depth knowledge of CRE project lending and the market environment.

 

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Consumer Credit

Refer to the “Consumer Credit” section of our Form 8-K filed on May 28, 2014 for our consumer credit underwriting and on-going credit management processes.

AUTOMOBILE PORTFOLIO

Our strategy in the automobile portfolio continues to focus on high quality borrowers as measured by both FICO and internal custom scores, combined with appropriate LTVs, terms, and profitability. Our strategy and operational capabilities allow us to appropriately manage the origination quality across the entire portfolio, including our newer markets. Although increased origination volume and entering new markets can be associated with increased risk levels, we believe our disciplined strategy and operational processes significantly mitigate these risks.

We have continued to consistently execute our value proposition and take advantage of available market opportunities. Importantly, we have maintained our high credit quality standards while expanding the portfolio.

RESIDENTIAL REAL ESTATE SECURED PORTFOLIOS

The properties securing our residential mortgage and home equity portfolios are primarily located within our geographic footprint. Huntington continues to support our local markets with consistent underwriting across all residential secured products. The residential-secured portfolio originations continue to be of high quality, with the majority of the negative credit impact coming from loans originated in 2006 and earlier. Our portfolio management strategies associated with our Home Savers group allows us to focus on effectively helping our customers with appropriate solutions for their specific circumstances.

Table 13—Selected Home Equity and Residential Mortgage Portfolio Data

(dollar amounts in millions)

 

     Home Equity     Residential Mortgage  
     Secured by first-lien     Secured by junior-lien        
     06/30/14     12/31/13     06/30/14     12/31/13     06/30/14     12/31/13  

Ending balance

   $ 4,953     $ 4,842     $ 3,452     $ 3,494     $ 5,707     $ 5,321  

Portfolio weighted average LTV ratio(1)