10-Q 1 d798015d10q.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 September 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 814,453,953 shares of Registrant’s common stock ($0.01 par value) outstanding on September 30, 2014.

 

 

 


Table of Contents

HUNTINGTON BANCSHARES INCORPORATED

INDEX

 

 
PART I. FINANCIAL INFORMATION   

Item 1. Financial Statements (Unaudited)

  
  

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

     61   
  

Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2014 and 2013

     62   
  

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

     63   
  

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

     64   
  

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013

     65   
  

Notes to Unaudited Condensed Consolidated Financial Statements

     66   

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

     24   
  

Market Risk

     37   
  

Liquidity Risk

     38   
  

Operational Risk

     42   
  

Compliance Risk

     43   
  

Capital

     43   
  

Fair Value

     46   
  

Business Segment Discussion

     47   
  

Additional Disclosures

     59   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     146   

Item 4. Controls and Procedures

     146   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     146   

Item 1A. Risk Factors

     146   

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

     146   

Item 5. Other Information

  

Item 6. Exhibits

     147   

Signatures

     149   

 

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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
NAICS    North American Industry Classification System
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 753 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 Third Quarter Results

For the quarter, we reported net income of $155.0 million, or $0.18 per common share, compared with $178.8 million, or $0.20 per common share, in the year-ago quarter (see Table 1).

Fully-taxable equivalent net interest income was $473.8 million for the quarter, up $42.4 million, or 10%, from the year-ago quarter. The results reflected a $7.5 billion, or 15%, increase in average earning assets, including a $4.1 billion, or 10%, increase in average loans and leases, as well as a $3.3 billion, or 38%, increase in average securities. The impact of these balance increases was partially offset by a 14 basis point decrease in net interest margin. The primary items affecting the net interest margin were a 20 basis point negative impact from the mix and yield of earning assets and a 3 basis point reduction in the benefit from the impact of noninterest-bearing funds, partially offset by a 9 basis point reduction in funding costs.

The provision for credit losses was $5.5 million less than total NCOs for the same period, reflecting continued credit quality improvement. Provision expense increased $13.1 million, or 115%, from the year-ago quarter. This reflected the implementation of enhancements to our ALLL model in the year-ago quarter. Consistent with our expectations, NCOs decreased $25.7 million, or 46%, to $30.0 million. The consumer loan portfolios drove the majority of the decline, continuing the positive trend exhibited over the past three quarters. NCOs were an annualized 0.26% of average loans and leases in the current quarter, compared to 0.53% in the year-ago quarter.

Noninterest income decreased $6.4 million, or 3%, from the year-ago quarter. The results included a $6.4 million, or 17%, decrease in other income, primarily related to commercial loan fees and a decline in income from early lease terminations. In addition, service charges on deposit accounts decreased $3.8 million, or 5%, reflecting the late July 2014 implementation of changes in consumer products that were partially offset by an 11% increase in consumer households and changing customer usage patterns. Capital markets fees decreased $2.6 million, or 20%, due to lower interest rate derivative sales. These declines were partially offset by a $3.1 million, or 62%, increase in gain on sale of loans related to strong SBA production and relatively higher premiums and $3.0 million, or 12%, increase in electronic banking due to higher card related income and underlying customer growth.

Noninterest expense in the current and year-ago quarter included several Significant Items, which are further described in the “Discussion of Results of Operations” section. Reported noninterest expense increased $57.0 million, or 13%, from the year-ago quarter. The results included a $46.1 million, or 20%, increase in personnel costs (excluding the impact of Significant Items, personnel costs increased $3.4 million, or 1%), a $4.8 million, or 14%, increase in other expense (excluding the impact of Significant Items, other expenses increased $3.7 million, or 11%, primarily reflecting higher OREO and loss expense), and a $3.8 million, or 8%, increase in outside data processing and other services as we continue to invest in technology supporting our products, services, and our Continuous Improvement initiatives.

The tangible common equity to tangible assets ratio was 8.35%, down 65 basis points from a year ago. Our Tier 1 common risk-based capital ratio was 10.31%, down 54 basis points from a year ago. The regulatory Tier 1 risk-based capital ratio was 11.61%, down 75 basis points from a year ago. All capital ratios were impacted by balance sheet growth and share repurchases that were partially offset by increased retained earnings and the stock issued in the Camco acquisition. The decrease in the regulatory Tier 1 risk-based capital ratio also reflected the redemption of $50 million of qualifying preferred securities on December 31, 2013.

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 continued to deliver solid year-over-year revenue growth through the third quarter, while maintaining a disciplined balance sheet. Performance highlights include ongoing strength in commercial and auto lending. We are also pleased with deposit growth, which is in part supported by our improved distribution network, as evidenced by 50 in-store locations attaining break-even or better status during the 2014 third quarter, and also the successful conversion of 24 acquired Michigan branches, furthering our presence in markets in our service area. Furthermore, our decision during the 2014 third quarter to consolidate 26 branches by year-end demonstrates the ongoing optimization of our distribution channels.

 

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Among other key highlights, we also are pleased with our number one ranking in the country for total number of Small Business Administration 7(a) loans for the fiscal year that concluded in September 2014. We continue to prioritize SBA lending as an integral component of our overall business lending strategy and are gratified to attain a top national ranking, particularly since we only make SBA loans within our core six-state footprint.

Economy

Michigan, Ohio, and Indiana, which had the strongest manufacturing growth of our footprint states, also tended to have the strongest overall economic growth as exemplified by the Philadelphia FRB Economic Activity indexes. Housing activity and prices will likely continue on a moderate upward trend in line with long-term historical growth. Home purchase prices have been rising overall in our footprint states. Price gains were especially strong in the first half of 2014 in Michigan, Ohio, and Kentucky. In addition, industrial vacancy rates in our largest footprint Metropolitan Statistical Areas have been at or below the national average reflecting generally healthy industrial real estate markets.

Expectations – Fourth Quarter 2014

We continue to be pleased with our healthy lending pipeline and the strength of the economies within our footprint. We are looking forward to a solid finish for 2014, as we remain on track to deliver another year with positive operating leverage. We are not expecting a near-term improvement in the interest rate environment. However, we are committing to delivering positive operating leverage again in 2015 as we will continue to prudently manage expenses in alignment with our revenue growth outlook.

Net interest income is expected to increase slightly in the 2014 fourth quarter. 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.

Noninterest income, excluding the impact of any net MSR activity, is expected to remain near the current quarter’s level.

Noninterest expense, excluding Significant Items, is expected to remain near the 2014 third quarter adjusted level. The 2014 fourth quarter is expected to include approximately $10 million of Significant Items related to the already announced franchise repositioning activities. 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.

Overall, asset quality metrics are expected to remain near current levels, although moderate quarterly volatility also is expected, given the absolute low level of problem assets and credit costs. 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)

   Third     Second     First     Fourth     Third  

Interest income

   $ 501,060      $ 495,322      $ 472,455      $ 469,824      $ 462,912   

Interest expense

     34,725        35,274        34,949        39,175        38,060   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     466,335        460,048        437,506        430,649        424,852   

Provision for credit losses

     24,480        29,385        24,630        24,331        11,400   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     441,855        430,663        412,876        406,318        413,452   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     69,118        72,633        64,582        69,992        72,918   

Mortgage banking income

     25,051        22,717        23,089        24,327        23,621   

Trust services

     28,045        29,581        29,565        30,711        30,470   

Electronic banking

     27,275        26,491        23,642        24,251        24,282   

Insurance income

     16,729        15,996        16,496        15,556        17,269   

Brokerage income

     17,155        17,905        17,167        15,151        16,636   

Bank owned life insurance income

     14,888        13,865        13,307        13,816        13,740   

Capital markets fees

     10,246        10,500        9,194        12,332        12,825   

Gain on sale of loans

     8,199        3,914        3,570        7,144        5,063   

Securities gains (losses)

     198        490        16,970        1,239        98   

Other income

     30,445        35,975        30,903        35,373        36,845   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     247,349        250,067        248,485        249,892        253,767   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Personnel costs

     275,409        260,600        249,477        249,554        229,326   

Outside data processing and other services

     53,073        54,338        51,490        51,071        49,313   

Net occupancy

     34,405        28,673        33,433        31,983        35,591   

Equipment

     30,183        28,749        28,750        28,775        28,191   

Marketing

     12,576        14,832        10,686        13,704        12,271   

Deposit and other insurance expense

     11,628        10,599        13,718        10,056        11,155   

Amortization of intangibles

     9,813        9,520        9,291        10,320        10,362   

Professional services

     13,763        17,896        12,231        11,567        12,487   

Other expense

     39,468        33,429        51,045        38,979        34,640   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     480,318        458,636        460,121        446,009        423,336   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     208,886        222,094        201,240        210,201        243,883   

Provision for income taxes

     53,870        57,475        52,097        52,029        65,047   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 155,016      $ 164,619      $ 149,143      $ 158,172      $ 178,836   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends on preferred shares

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to common shares

   $ 147,052      $ 156,656      $ 141,179      $ 150,207      $ 170,869   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares—basic

     816,497        821,546        829,659        830,590        830,398   

Average common shares—diluted

     829,623        834,687        842,677        842,324        841,025   

Net income per common share—basic

   $ 0.18      $ 0.19      $ 0.17      $ 0.18      $ 0.21   

Net income per common share—diluted

     0.18        0.19        0.17        0.18        0.20   

Cash dividends declared per common share

     0.05        0.05        0.05        0.05        0.05   

Return on average total assets

     0.97     1.07     1.01     1.09     1.27

Return on average common shareholders’ equity

     9.9        10.8        9.9        10.5        12.3   

Return on average tangible common shareholders’ equity (2)

     11.4        12.4        11.4        12.1        14.2   

Net interest margin (3)

     3.20        3.28        3.27        3.28        3.34   

Efficiency ratio (4)

     65.3        62.7        66.4        63.4        60.3   

Effective tax rate

     25.8        25.9        25.9        24.8        26.7   

Revenue—FTE

          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   $ 466,335      $ 460,048      $ 437,506      $ 430,649      $ 424,852   

FTE adjustment

     7,506        6,637        5,885        8,196        6,634   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (3)

     473,841        466,685        443,391        438,845        431,486   

Noninterest income

     247,349        250,067        248,485        249,892        253,767   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue (3)

   $ 721,190      $ 716,752      $ 691,876      $ 688,737      $ 685,253   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(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)

 

     Nine Months Ended September 30,     Change  

(dollar amounts in thousands, except per share amounts)

   2014      2013     Amount     Percent  

Interest income

   $ 1,468,837       $ 1,390,813      $ 78,024        6

Interest expense

     104,948         116,854        (11,906     (10
  

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income

     1,363,889         1,273,959        89,930        7   

Provision for credit losses

     78,495         65,714        12,781        19   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     1,285,394         1,208,245        77,149        6   
  

 

 

    

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     206,333         201,810        4,523        2   

Mortgage banking income

     70,857         102,528        (31,671     (31

Trust services

     87,191         92,296        (5,105     (6

Electronic banking

     77,408         68,340        9,068        13   

Insurance income

     49,221         53,708        (4,487     (8

Brokerage income

     52,227         54,473        (2,246     (4

Bank owned life insurance income

     42,060         42,603        (543     (1

Capital markets fees

     29,940         32,888        (2,948     (9

Gain on sale of loans

     15,683         11,027        4,656        42   

Securities gains (losses)

     17,658         (821     18,479        N.R.   

Other income

     97,323         103,452        (6,129     (6
  

 

 

    

 

 

   

 

 

   

 

 

 

Total noninterest income

     745,901         762,304        (16,403     (2
  

 

 

    

 

 

   

 

 

   

 

 

 

Personnel costs

     785,486         752,083        33,403        4   

Outside data processing and other services

     158,901         148,476        10,425        7   

Net occupancy

     96,511         93,361        3,150        3   

Equipment

     87,682         78,018        9,664        12   

Marketing

     38,094         37,481        613        2   

Deposit and other insurance expense

     35,945         40,105        (4,160     (10

Amortization of intangibles

     28,624         31,044        (2,420     (8

Professional services

     43,890         29,020        14,870        51   

Other expense

     123,942         102,406        21,536        21   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total noninterest expense

     1,399,075         1,311,994        87,081        7   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income before income taxes

     632,220         658,555        (26,335     (4

Provision for income taxes

     163,442         175,445        (12,003     (7
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 468,778       $ 483,110      $ (14,332     (3 )% 
  

 

 

    

 

 

   

 

 

   

 

 

 

Dividends declared on preferred shares

     23,891         23,904        (13     —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income applicable to common shares

   $ 444,887       $ 459,206      $ (14,319     (3 )% 
  

 

 

    

 

 

   

 

 

   

 

 

 

Average common shares—basic

     820,884         835,410        (14,526     (2 )% 

Average common shares—diluted

     833,927         844,524        (10,597     (1

Per common share

         

Net income per common share—basic

   $ 0.54       $ 0.55      $ (0.01     (2 )% 

Net income per common share—diluted

     0.53         0.54        (0.01     (2

Cash dividends declared

     0.15         0.14        0.01        7   

Revenue—FTE

         

Net interest income

   $ 1,363,889       $ 1,273,959      $ 89,930        7

FTE adjustment

     20,028         19,144        884        5   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income (2)

     1,383,917         1,293,103        90,814        7   

Noninterest income

     745,901         762,304        (16,403     (2
  

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue (2)

   $ 2,129,818       $ 2,055,407      $ 74,411        4
  

 

 

    

 

 

   

 

 

   

 

 

 

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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Table of Contents

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. Franchise Repositioning Related Expense. Significant events relating to franchise repositioning related expense, and the impacts of those events on our reported results, were as follows:

 

   

During the 2014 third quarter, $19.3 million of franchise repositioning related expense was recorded for the consolidation of 26 branches and organizational actions. This resulted in a negative impact of $0.02 per common share.

 

   

During the 2013 third quarter, $16.6 million of franchise repositioning related expense was recorded. This resulted in a negative impact of $0.01 per common share.

 

2. Merger and Acquisition. Significant events relating to mergers and acquisitions, and the impacts of those events on our reported results, were as follows:

 

   

During the 2014 third quarter, $3.5 million of net noninterest expense was recorded related to the acquisition of 24 Bank of America branches and Camco Financial.

 

   

During the 2014 second quarter, $0.8 million of merger related costs were recorded related to the acquisition of Bank of America branches.

 

   

During the 2014 first quarter, $11.8 million of net noninterest expense was recorded related to the acquisition of Camco Financial. This resulted in a negative impact of $0.01 per common share.

 

3. 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.

 

4. Pension Curtailment Gain. During the 2013 third quarter, a $33.9 million pension curtailment gain was recorded in personnel costs. This resulted in a positive impact of $0.03 per common share.

 

12


Table of Contents

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  
     September 30, 2014     June 30, 2014      September 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

   $ 155,016        $ 164,619         $ 178,836     

Earnings per share, after-tax

     $ 0.18        $ 0.19         $ 0.20   

Significant Items—favorable (unfavorable) impact:

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

Pension curtailment gain

   $ —        $ —        $ —        $ —         $ 33,926      $ 0.03   

Franchise repositioning related expense

     (19,333     (0.02     —          —           (16,552     (0.01

Merger and acquisition

     (3,490     —          (775     —           —          —     

 

(1) 

Pretax.

(2) 

Based on average outstanding diluted common shares.

(3) 

After-tax.

 

     Nine Months Ended  
     September 30, 2014     September 30, 2013  

(dollar amounts in thousands)

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

Net income

   $ 468,778        $ 483,110     

Earnings per share, after-tax

     $ 0.53        $ 0.54   

Significant Items—favorable (unfavorable) impact:

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

Pension curtailment gain

   $ —        $ —        $ 33,926      $ 0.03   

Franchise repositioning related expense

     (19,333     (0.02     (16,552     (0.01

Merger and acquisition, net

     (16,088     (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.

 

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Table of Contents

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     3Q14 vs. 3Q13  

(dollar amounts in millions)

   Third     Second     First     Fourth     Third     Amount     Percent  

Assets:

              

Interest-bearing deposits in banks

   $ 82      $ 91      $ 83      $ 71      $ 54      $ 28        52

Loans held for sale

     351        288        279        322        379        (28     (7

Securities:

              

Available-for-sale and other securities:

              

Taxable

     6,935        6,662        6,240        5,818        6,040        895        15   

Tax-exempt

     1,620        1,290        1,115        548        565        1,055        187   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     8,555        7,952        7,355        6,366        6,605        1,950        30   

Trading account securities

     50        45        38        76        76        (26     (34

Held-to-maturity securities—taxable

     3,556        3,677        3,783        3,038        2,139        1,417        66   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     12,161        11,674        11,176        9,480        8,820        3,341        38   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (1)

              

Commercial:

              

Commercial and industrial

     18,581        18,262        17,631        17,671        17,032        1,549        9   

Commercial real estate:

              

Construction

     775        702        612        573        565        210        37   

Commercial

     4,188        4,345        4,289        4,331        4,345        (157     (4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     4,963        5,047        4,901        4,904        4,910        53        1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     23,544        23,309        22,532        22,575        21,942        1,602        7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

              

Automobile

     8,012        7,349        6,786        6,502        6,075        1,937        32   

Home equity

     8,412        8,376        8,340        8,346        8,341        71        1   

Residential mortgage

     5,747        5,608        5,379        5,331        5,256        491        9   

Other consumer

     398        382        386        385        380        18        5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     22,569        21,715        20,891        20,564        20,052        2,517        13   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     46,113        45,024        43,423        43,139        41,994        4,119        10   

Allowance for loan and lease losses

     (633     (642     (649     (668     (717     84        (12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans and leases

     45,480        44,382        42,774        42,471        41,277        4,203        10   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     58,707        57,077        54,961        53,012        51,247        7,460        15   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and due from banks

     887        872        904        846        944        (57     (6

Intangible assets

     583        591        535        542        552        31        6   

All other assets

     3,929        3,932        3,941        3,917        3,889        40        1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 63,473      $ 61,830      $ 59,692      $ 57,649      $ 55,915      $ 7,558        14
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Shareholders’ Equity:

              

Deposits:

              

Demand deposits—noninterest-bearing

   $ 14,090      $ 13,466      $ 13,192      $ 13,337      $ 13,088      $ 1,002        8

Demand deposits—interest-bearing

     5,913        5,945        5,775        5,755        5,763        150        3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     20,003        19,411        18,967        19,092        18,851        1,152        6   

Money market deposits

     17,929        17,680        17,648        16,827        15,739        2,190        14   

Savings and other domestic deposits

     5,020        5,086        4,967        4,912        5,007        13        —     

Core certificates of deposit

     3,167        3,434        3,613        3,916        4,176        (1,009     (24
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     46,119        45,611        45,195        44,747        43,773        2,346        5   

Other domestic time deposits of $250,000 or more

     223        262        284        275        268        (45     (17

Brokered deposits and negotiable CDs

     2,262        2,070        1,782        1,398        1,553        709        46   

Deposits in foreign offices

     374        315        328        354        376        (2     (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     48,978        48,258        47,589        46,774        45,970        3,008        7   

Short-term borrowings

     1,092        939        883        629        710        382        54   

Federal Home Loan Bank advances

     2,489        1,977        1,499        851        549        1,940        353   

Subordinated notes and other long-term debt

     3,579        3,395        2,503        2,244        1,753        1,826        104   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     42,048        41,103        39,282        37,161        35,894        6,154        17   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

All other liabilities

     1,043        1,033        1,035        1,095        1,054        (11     (1

Shareholders’ equity

     6,292        6,228        6,183        6,056        5,879        413        7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 63,473      $ 61,830      $ 59,692      $ 57,649      $ 55,915      $ 7,558        14
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

 

14


Table of Contents

Table 5—Consolidated Quarterly Net Interest Margin Analysis

 

     Average Rates (2)  
     2014     2013  

Fully-taxable equivalent basis (1)

   Third     Second     First     Fourth     Third  

Assets:

          

Interest-bearing deposits in banks

     0.19     0.04     0.03     0.04     0.07

Loans held for sale

     3.98        4.27        3.74        4.46        3.89   

Securities:

          

Available-for-sale and other securities:

          

Taxable

     2.48        2.52        2.47        2.38        2.34   

Tax-exempt

     3.02        3.15        3.03        6.34        4.04   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     2.59        2.63        2.55        2.72        2.48   

Trading account securities

     0.85        0.70        1.12        0.42        0.23   

Held-to-maturity securities—taxable

     2.45        2.46        2.47        2.42        2.29   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     2.54        2.57        2.52        2.60        2.41   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (3)

          

Commercial:

          

Commercial and industrial

     3.45        3.49        3.56        3.54        3.68   

Commercial real estate:

          

Construction

     4.38        4.29        3.99        4.04        3.91   

Commercial

     3.60        4.16        3.84        3.97        4.10   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     3.72        4.17        3.86        3.98        4.08   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     3.51        3.64        3.63        3.63        3.77   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

          

Automobile

     3.41        3.47        3.54        3.67        3.80   

Home equity

     4.07        4.12        4.12        4.11        4.10   

Residential mortgage

     3.78        3.77        3.78        3.77        3.81   

Other consumer

     7.31        7.34        6.82        6.64        6.98   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     3.82        3.87        3.89        3.93        3.99   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     3.66        3.75        3.75        3.77        3.87   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     3.44     3.53     3.53     3.58     3.64
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     0.23        0.24        0.25        0.27        0.26   

Savings and other domestic deposits

     0.16        0.17        0.20        0.24        0.25   

Core certificates of deposit

     0.74        0.81        0.94        1.05        1.05   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     0.23        0.25        0.28        0.32        0.32   

Other domestic time deposits of $250,000 or more

     0.44        0.43        0.41        0.39        0.44   

Brokered deposits and negotiable CDs

     0.20        0.24        0.28        0.39        0.55   

Deposits in foreign offices

     0.13        0.13        0.13        0.14        0.14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     0.23        0.25        0.28        0.32        0.33   

Short-term borrowings

     0.11        0.12        0.07        0.08        0.09   

Federal Home Loan Bank advances

     0.15        0.12        0.12        0.14        0.14   

Subordinated notes and other long-term debt

     1.45        1.48        1.66        2.10        2.29   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     0.33     0.34     0.36     0.42     0.42
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest rate spread

     3.11     3.19     3.17     3.16     3.22

Impact of noninterest-bearing funds on margin

     0.09        0.09        0.10        0.12        0.12   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin

     3.20     3.28     3.27     3.28     3.34
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 Third Quarter versus 2013 Third Quarter

Fully-taxable equivalent net interest income increased $42.4 million, or 10%, from the 2013 third quarter. This reflected the benefit from the $4.1 billion, or 10%, of average loan growth and a $3.3 billion, or 38%, increase in average securities. This was partially offset by the 14 basis point decrease in the FTE net interest margin to 3.20%. The NIM contraction reflected a 20 basis point decrease related to the mix and yield of earning assets and 3 basis point reduction in benefit from the impact of noninterest-bearing funds, partially offset by the 9 basis point reduction in funding costs.

Average earning assets increased $7.5 billion, or 15%, from the year-ago quarter, driven by:

 

   

$3.3 billion, or 38%, increase in average securities, reflecting $2.7 billion of Liquidity Coverage Ratio (LCR) Level 1 qualified securities and $1.2 billion of direct purchase municipal instruments, which in the year-ago quarter were classified as C&I loans.

 

   

$1.9 billion, or 32%, increase in average Automobile loans, as originations remained strong and we continued to portfolio all of the production.

 

   

$1.5 billion, or 9%, increase in average C&I loans and leases, reflecting growth in trade finance in support of our middle market and corporate customers, business banking, and automobile dealer floorplan lending.

 

   

$0.5 billion, or 9%, increase in average Residential mortgage loans as a result of a decrease in the rate of payoffs due to lower levels of refinancing and the Camco acquisition.

Average total core deposits increased $2.3 billion, or 5%, from the year-ago quarter, including a $1.0 billion, or 8%, increase in noninterest bearing deposits. Average interest-bearing liabilities increased $6.2 billion, or 17%, from the year-ago quarter, reflecting:

 

   

$4.1 billion, or 138%, 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. While no additional long-term debt was issued in the 2014 third quarter, this increase included $2.1 billion of bank-level debt and $0.4 billion of parent-level debt issued during the prior four quarters.

 

   

$2.2 billion, or 14%, 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 46%, increase in brokered deposits and negotiated CDs, which are a cost-effective method of funding incremental LCR-related securities growth.

Partially offset by:

 

   

$1.0 billion, or 24%, 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 Third Quarter versus 2014 Second Quarter

Compared to the 2014 second quarter, FTE net interest income increased $7.2 million, or 6% annualized. While the NIM decreased 8 basis points, earning assets increased $1.6 billion, or 11% annualized. 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.

 

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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)

   Nine Months Ended September 30,     Change     Nine Months Ended September 30,  

(dollar amounts in millions)

   2014     2013     Amount     Percent     2014     2013  

Assets:

            

Interest-bearing deposits in banks

   $ 85      $ 70      $ 15        21     0.08     0.18

Loans held for sale

     306        588        (282     (48     3.99        3.47   

Securities:

            

Available-for-sale and other securities:

            

Taxable

     6,615        6,574        41        1        2.49        2.31   

Tax-exempt

     1,344        568        776        137        3.06        3.98   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     7,959        7,142        817        11        2.59        2.45   

Trading account securities

     45        82        (37     (45     0.87        0.45   

Held-to-maturity securities—taxable

     3,671        1,857        1,814        98        2.46        2.29   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     11,675        9,081        2,594        29        2.54        2.39   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (3)

            

Commercial:

            

Commercial and industrial

     18,161        17,007        1,154        7        3.50        3.75   

Commercial real estate:

            

Construction

     697        583        114        20        4.24        3.96   

Commercial

     4,274        4,488        (214     (5     3.87        4.08   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     4,971        5,071        (100     (2     3.92        4.06   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     23,132        22,078        1,054        5        3.59        3.82   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

            

Automobile

     7,387        5,402        1,985        37        3.47        3.99   

Home equity

     8,376        8,299        77        1        4.10        4.15   

Residential mortgage

     5,579        5,154        425        8        3.78        3.86   

Other consumer

     389        451        (62     (14     7.16        6.82   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     21,731        19,306        2,425        13        3.86        4.09   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     44,863        41,384        3,479        8        3.72        3.95   
          

 

 

   

 

 

 

Allowance for loan and lease losses

     (641     (745     104        (14    
  

 

 

   

 

 

   

 

 

   

 

 

     

Net loans and leases

     44,222        40,639        3,583        9       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     56,929        51,123        5,806        11        3.50     3.69
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and due from banks

     888        930        (42     (5    

Intangible assets

     570        562        8        1       

All other assets

     3,934        3,974        (40     (1    
  

 

 

   

 

 

   

 

 

   

 

 

     

Total assets

   $ 61,680      $ 55,844      $ 5,836        10    
  

 

 

   

 

 

   

 

 

   

 

 

     

Liabilities and Shareholders’ Equity:

            

Deposits:

            

Demand deposits—noninterest-bearing

   $ 13,586      $ 12,714      $ 872        7     —       —  

Demand deposits—interest-bearing

     5,878        5,888        (10     —          0.04        0.04   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     19,464        18,602        862        5        0.01        0.01   

Money market deposits

     17,753        15,287        2,466        16        0.24        0.24   

Savings and other domestic deposits

     5,025        5,068        (43     (1     0.18        0.27   

Core certificates of deposit

     3,403        4,761        (1,358     (29     0.83        1.13   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     45,645        43,718        1,927        4        0.26        0.35   

Other domestic time deposits of $250,000 or more

     256        317        (61     (19     0.43        0.49   

Brokered deposits and negotiable CDs

     2,040        1,676        364        22        0.24        0.62   

Deposits in foreign offices

     339        344        (5     (1     0.13        0.15   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     48,280        46,055        2,225        5        0.26        0.36   

Short-term borrowings

     972        724        248        34        0.10        0.11   

Federal Home Loan Bank advances

     1,992        663        1,329        200        0.14        0.15   

Subordinated notes and other long-term debt

     3,163        1,467        1,696        116        1.51        2.39   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     40,821        36,195        4,626        13        0.34        0.43   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

All other liabilities

     1,038        1,068        (30     (3    

Shareholders’ equity

     6,235        5,867        368        6       
  

 

 

   

 

 

   

 

 

   

 

 

     

Total liabilities and shareholders’ equity

   $ 61,680      $ 55,844      $ 5,836        10    
  

 

 

   

 

 

   

 

 

   

 

 

     

Net interest rate spread

             3.15        3.26   

Impact of noninterest-bearing funds on margin

             0.10        0.12   
          

 

 

   

 

 

 

Net interest margin

             3.25     3.38
          

 

 

   

 

 

 

 

(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.

 

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Table of Contents

2014 First Nine Months versus 2013 First Nine Months

Fully-taxable equivalent net interest income for the first nine-month period of 2014 increased $90.8 million, or 7% reflecting the benefit of a $5.8 billion, or 11%, increase in average total earning assets. The fully-taxable equivalent net interest margin decreased to 3.25% from 3.38%. The increase in average earning assets reflected:

 

   

$3.5 billion, or 8%, increase in average total loans and leases.

 

   

$2.6 billion, or 29%, 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:

 

   

$0.3 billion, or 48%, decrease in loans held for sale.

The $3.5 billion, or 8%, increase in average total loans and leases reflected:

 

   

$2.0 billion, or 37%, 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.

 

   

$1.2 billion, or 7%, 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 $2.2 billion, or 5%, increase in average total deposits reflected:

 

   

$2.5 billion, or 16%, increase in money market deposits, reflecting the strategic focus on customer growth and increased share-of-wallet among both consumer and commercial customers.

 

   

$0.9 billion, or 5%, increase in total demand deposits, reflecting our focus on changing our product mix to reduce the overall cost of deposits.

Partially offset by:

 

   

$1.4 billion, or 29%, 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, FHLB advances increased $1.3 billion, or 200%, along with an increase in short- and long-term borrowings of $1.9 billion, or 89%, 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 for credit losses for the 2014 third quarter was $24.5 million and was $5.5 million less than total NCOs for the same period reflecting continued credit quality improvement. Provision expense increased $13.1 million, or 115%, compared to the year-ago quarter, reflecting the prior year’s implementation of enhancements to our allowance for loan and lease losses (ALLL) model and decreased $4.9 million, or 17%, from the prior quarter. On a year-to-date basis, provision for credit losses for the first nine-month period of 2014 increased $12.8 million, or 19%, compared to year-ago period. The provision for credit losses for the first nine-month period of 2014 was $23.2 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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Table of Contents

Noninterest Income

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

Table 7—Noninterest Income

 

     2014      2013      3Q14 vs 3Q13     3Q14 vs 2Q14  

(dollar amounts in thousands)

   Third      Second      First      Fourth      Third      Amount     Percent     Amount     Percent  

Service charges on deposit accounts

   $ 69,118       $ 72,633       $ 64,582       $ 69,992       $ 72,918       $ (3,800     (5 )%    $ (3,515     (5 )% 

Mortgage banking income

     25,051         22,717         23,089         24,327         23,621         1,430        6        2,334        10   

Trust services

     28,045         29,581         29,565         30,711         30,470         (2,425     (8     (1,536     (5

Electronic banking

     27,275         26,491         23,642         24,251         24,282         2,993        12        784        3   

Insurance income

     16,729         15,996         16,496         15,556         17,269         (540     (3     733        5   

Brokerage income

     17,155         17,905         17,167         15,151         16,636         519        3        (750     (4

Bank owned life insurance income

     14,888         13,865         13,307         13,816         13,740         1,148        8        1,023        7   

Capital markets fees

     10,246         10,500         9,194         12,332         12,825         (2,579     (20     (254     (2

Gain on sale of loans

     8,199         3,914         3,570         7,144         5,063         3,136        62        4,285        109   

Securities gains (losses)

     198         490         16,970         1,239         98         100        102        (292     (60

Other income

     30,445         35,975         30,903         35,373         36,845         (6,400     (17     (5,530     (15
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 247,349       $ 250,067       $ 248,485       $ 249,892       $ 253,767       $ (6,418     (3 )%    $ (2,718     (1 )% 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

2014 Third Quarter versus 2013 Third Quarter

Noninterest income decreased $6.4 million, or 3%, from the year-ago quarter, primarily reflecting:

 

   

$6.4 million, or 17%, decrease in other income, primarily related to commercial loan fees and early lease terminations.

 

   

$3.8 million, or 5%, decrease in service charges on deposit accounts, reflecting the late July 2014 implementation of changes in consumer products that were partially offset by an 11% increase in consumer households and changing customer usage patterns.

 

   

$2.6 million, or 20%, decrease in capital markets fees related to lower interest rate derivative sales.

Partially offset by:

 

   

$3.1 million, or 62%, increase in gain on sale of loans related to strong SBA production and relatively higher premiums.

 

   

$3.0 million, or 12%, increase in electronic banking due to higher card related income and underlying customer growth.

2014 Third Quarter versus 2014 Second Quarter

In the 2014 third quarter, noninterest income decreased $2.7 million, or 1%, from the 2014 second quarter, primarily reflecting:

 

   

$5.5 million, or 15%, decrease in other income, reflecting a mezzanine lending gain in the 2014 second quarter.

 

   

$3.5 million, or 5%, decrease in service charges on deposit accounts, reflecting a seasonal increase during the 2014 second quarter and the late July 2014 implementation of changes in consumer products.

Partially offset by:

 

   

$4.3 million, or 109%, increase in gain on sale of loans from SBA and other loan sales.

 

   

$2.3 million, or 10%, increase in mortgage banking income, reflecting a $1.3 million, or 9%, increase in origination and secondary marketing income and a positive net impact of MSR hedging.

 

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Table of Contents

2014 First Nine Months versus 2013 First Nine Months

Noninterest income for the first nine-month period of 2014 decreased $16.4 million, or 2%, from the comparable year-ago period.

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

 

     Nine Months Ended September 30,     Change  

(dollar amounts in thousands)

   2014      2013     Amount     Percent  

Service charges on deposit accounts

   $ 206,333       $ 201,810      $ 4,523        2

Mortgage banking income

     70,857         102,528        (31,671     (31

Trust services

     87,191         92,296        (5,105     (6

Electronic banking

     77,408         68,340        9,068        13   

Insurance income

     49,221         53,708        (4,487     (8

Brokerage income

     52,227         54,473        (2,246     (4

Bank owned life insurance income

     42,060         42,603        (543     (1

Capital markets fees

     29,940         32,888        (2,948     (9

Gain on sale of loans

     15,683         11,027        4,656        42   

Securities gains (losses)

     17,658         (821     18,479        N.R.   

Other income

     97,323         103,452        (6,129     (6
  

 

 

    

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 745,901       $ 762,304      $ (16,403     (2 )% 
  

 

 

    

 

 

   

 

 

   

 

 

 

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

The $16.4 million, or 2%, decrease in total noninterest income reflected:

 

   

$31.7 million, or 31%, decrease in mortgage banking income. This primarily reflected a $26.5 million, or 37%, decrease in origination and secondary marketing income as originations decreased 26%, gain-on-sale margin compressed, and the percentage of originations held on the balance sheet was higher.

 

   

$6.1 million, or 6%, decrease in other income, primarily due to a gain on the sale of LIHTC investments in the 2013 first quarter.

 

   

$5.1 million, or 6%, decrease in trust services, primarily related to the institutional trust business.

Partially offset by:

 

   

$18.5 million increase in securities gains, as we adjusted the mix of our securities portfolio to prepare for the LCR requirements.

 

   

$9.1 million, or 13%, 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, 2, 3 and 4.)

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

Table 9—Noninterest Expense

 

    2014      2013      3Q14 vs 3Q13     3Q14 vs 2Q14  

(dollar amounts in thousands)

  Third     Second     First      Fourth      Third      Amount     Percent     Amount     Percent  

Personnel costs

  $ 275,409      $ 260,600      $ 249,477       $ 249,554       $ 229,326       $ 46,083        20   $ 14,809        6

Outside data processing and other services

    53,073        54,338        51,490         51,071         49,313         3,760        8        (1,265     (2

Net occupancy

    34,405        28,673        33,433         31,983         35,591         (1,186     (3     5,732        20   

Equipment

    30,183        28,749        28,750         28,775         28,191         1,992        7        1,434        5   

Marketing

    12,576        14,832        10,686         13,704         12,271         305        2        (2,256     (15

Deposit and other insurance expense

    11,628        10,599        13,718         10,056         11,155         473        4        1,029        10   

Amortization of intangibles

    9,813        9,520        9,291         10,320         10,362         (549     (5     293        3   

Professional services

    13,763        17,896        12,231         11,567         12,487         1,276        10        (4,133     (23

Other expense

    39,468        33,429        51,045         38,979         34,640         4,828        14        6,039        18   
 

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

  $ 480,318      $ 458,636      $ 460,121       $ 446,009       $ 423,336       $ 56,982        13   $ 21,682        5
 

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Number of employees (average full-time equivalent)

    11,946        12,000        11,848         11,765         12,080         (134     (1     (54     —     

Impacts of Significant Items:

 

     2014      2013  

(dollar amounts in thousands)

   Third      Second      Third  

Personnel costs

   $ 15,344       $ 1       $ (27,301

Outside data processing and other services

     292         618         470   

Net occupancy

     5,202         60         7,939   

Equipment

     110         —           1,518   

Marketing

     783         29         —     

Professional services

     6         50         —     

Other expense

     1,086         17         —     
  

 

 

    

 

 

    

 

 

 

Total noninterest expense adjustments

   $ 22,823       $ 775       $ (17,374
  

 

 

    

 

 

    

 

 

 

Adjusted Noninterest Expense (Non-GAAP):

 

     2014      2013      3Q14 vs 3Q13     3Q14 vs 2Q14  

(dollar amounts in thousands)

   Third      Second      Third      Amount     Percent     Amount     Percent  

Personnel costs

   $ 260,065       $ 260,599       $ 256,627       $ 3,438        1   $ (534     —  

Outside data processing and other services

     52,781         53,720         48,843         3,938        8        (939     (2

Net occupancy

     29,203         28,613         27,652         1,551        6        590        2   

Equipment

     30,073         28,749         26,673         3,400        13        1,324        5   

Marketing

     11,793         14,803         12,271         (478     (4     (3,010     (20

Deposit and other insurance expense

     11,628         10,599         11,155         473        4        1,029        10   

Amortization of intangibles

     9,813         9,520         10,362         (549     (5     293        3   

Professional services

     13,757         17,846         12,487         1,270        10        (4,089     (23

Other expense

     38,382         33,412         34,640         3,742        11        4,970        15   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total adjusted noninterest expense

   $ 457,495       $ 457,861       $ 440,710       $ 16,785        4   $ (366     —  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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2014 Third Quarter versus 2013 Third Quarter

Reported noninterest expense increased $57.0 million, or 13%, from the year-ago quarter, reflecting:

 

   

$46.1 million, or 20%, increase in personnel costs. Excluding the impact of Significant Items, personnel costs increased $3.4 million, or 1%, related to annual compensation increases.

 

   

$4.8 million, or 14%, increase in other expense. Excluding the impact of Significant Items, other expenses increased $3.7 million, or 11%, primarily reflecting higher OREO and litigation expense.

 

   

$3.8 million, or 8%, increase in outside data processing and other services as we continue to invest in technology supporting our products, services, and our Continuous Improvement initiatives.

2014 Third Quarter versus 2014 Second Quarter

Noninterest expense increased $21.7 million, or 5%, from the 2014 second quarter. When adjusting for the $22.8 million of Significant Items in the 2014 third quarter, noninterest expense decreased $0.4 million. Personnel costs increased $14.8 million, or 6%, reflecting the franchise repositioning actions. Other expense increased $6.0 million, or 18%, reflecting higher OREO and litigation and settlement expense. Net occupancy expense increased $5.7 million, or 20%, primarily related to $5.2 million of franchise repositioning actions. Partially offsetting these increases was a $4.1 million, or 23%, decrease in professional services primarily related to reduced consulting expense.

2014 First Nine Months versus 2013 First Nine Months

Noninterest expense for the first nine-month period of 2014 increased $87.1 million, or 7%, from the comparable year-ago period.

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

 

     Nine Months Ended September 30,      Change  

(dollar amounts in thousands)

   2014      2013      Amount     Percent  

Personnel costs

   $ 785,486       $ 752,083       $ 33,403        4

Outside data processing and other services

     158,901         148,476         10,425        7   

Net occupancy

     96,511         93,361         3,150        3   

Equipment

     87,682         78,018         9,664        12   

Marketing

     38,094         37,481         613        2   

Deposit and other insurance expense

     35,945         40,105         (4,160     (10

Amortization of intangibles

     28,624         31,044         (2,420     (8

Professional services

     43,890         29,020         14,870        51   

Other expense

     123,942         102,406         21,536        21   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total noninterest expense

   $ 1,399,075       $ 1,311,994       $ 87,081        7
  

 

 

    

 

 

    

 

 

   

 

 

 

Impacts of Significant Items:

 

     Nine Months Ended September 30,  

(dollar amounts in thousands)

   2014      2013  

Personnel costs

   $ 17,685       $ (27,301

Outside data processing and other services

     5,201         470   

Net occupancy

     7,003         7,939   

Equipment

     245         1,518   

Marketing

     1,343         —     

Professional services

     2,228         —     

Other expense

     11,496         —     
  

 

 

    

 

 

 

Total noninterest expense adjustments

   $ 45,201       $ (17,374
  

 

 

    

 

 

 

 

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Adjusted Noninterest Expense (Non-GAAP):

 

     Nine Months Ended September 30,      Change  

(dollar amounts in thousands)

   2014      2013      Amount     Percent  

Personnel costs

   $ 767,801       $ 779,384       $ (11,583     (1 )% 

Outside data processing and other services

     153,700         148,006         5,694        4   

Net occupancy

     89,508         85,422         4,086        5   

Equipment

     87,437         76,500         10,937        14   

Marketing

     36,751         37,481         (730     (2

Deposit and other insurance expense

     35,945         40,105         (4,160     (10

Amortization of intangibles

     28,624         31,044         (2,420     (8

Professional services

     41,662         29,020         12,642        44   

Other expense

     112,446         102,406         10,040        10   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total noninterest expense adjustments

   $ 1,353,874       $ 1,329,368       $ 24,506        2
  

 

 

    

 

 

    

 

 

   

 

 

 

The $87.1 million, or 7%, increase in total noninterest expense reflected:

 

   

$33.4 million, or 4%, increase in personnel costs. Excluding the impact of significant items, personnel expense decreased $11.6 million, or 1%, primarily related to a reduction in benefit costs, partially offset by an increase in technology salary expense.

 

   

$21.5 million, or 21%, increase in other expense. Excluding the impact of significant items, other expense increased $10.0 million, or 10%, primarily related to an increase in franchise taxes, protective advances, and litigation expense.

 

   

$14.9 million, or 51%, increase in professional services, of which $9.0 million is consulting expenses related to strategic planning.

 

   

$10.4 million, or 7%, increase in outside data processing and other services, reflecting higher debit and credit card processing costs and other technology expenses.

 

   

$9.7 million, or 12%, increase in equipment, primarily due to technology investments and the near-complete rollout of enhanced ATMs.

Provision for Income Taxes

The provision for income taxes in the 2014 third quarter was $53.9 million and $65.0 million in the 2013 third quarter. The provision for income taxes for the nine month periods ended September 30, 2014 and September 30, 2013 was $163.4 million and $175.4 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 September 30, 2014, we had a net federal deferred tax asset of $70.9 million and a net state deferred tax asset of $48.0 million. For regulatory capital purposes, there was no disallowed net deferred tax asset at September 30, 2014.

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 Ohio, Kentucky, Indiana, Michigan, Pennsylvania, West Virginia, and Illinois.

 

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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.

Loan and Lease Credit Exposure Mix

At September 30, 2014, loans and leases totaled $46.7 billion, representing a $3.6 billion, or 8%, increase compared to $43.1 billion at December 31, 2013, primarily reflecting growth in the automobile and C&I portfolios. 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 September 30, 2014, commercial loans and leases totaled $23.8 billion and represented 51% 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).

 

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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 “vertical specialties” to ensure that new products or lending types are embedded within a structured, centralized Commercial Lending area with designated experienced credit officers. These specialties comprise of either targeted industries (for example, Healthcare, Food & Agribusiness, Energy, etc) and/or lending disciplines (Rail, Aircraft, ABL, etc), all of which requires a high degree of expertise and oversight to effectively mitigate and monitor risk. As such, we have dedicated colleagues and teams focused on bringing value added expertise to these specialty clients.

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 $22.9 billion at September 30, 2014, and represented 49% 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). ARMs primarily consist of a fixed-rate of interest for the first 3 to 5 years, and then adjust annually.

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 20% of the total exposure, with no individual state representing more than 6%. 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.

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.

 

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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)

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

Commercial:

                         

Commercial and industrial

   $ 18,791         40   $ 18,899         41   $ 18,046         41   $ 17,594         41   $ 17,335         41

Commercial real estate:

                         

Construction

     850         2        757         2        692         2        557         1        544         1   

Commercial

     4,141         9        4,233         9        4,339         10        4,293         10        4,328         10   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial real estate

     4,991         11        4,990         11        5,031         12        4,850         11        4,872         11   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial

     23,782         51        23,889         52        23,077         53        22,444         52        22,207         52   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Consumer:

                         

Automobile

     8,322         18        7,686         17        6,999         16        6,639         15        6,317         15   

Home equity

     8,436         18        8,405         18        8,373         19        8,336         18        8,347         20   

Residential mortgage

     5,788         12        5,707         12        5,542         12        5,321         12        5,307         12   

Other consumer

     395         1        393         1        363         —          380         2        378         1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer

     22,941         49        22,191         48        21,277         47        20,676         48        20,349         48   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans and leases

   $ 46,723         100   $ 46,080         100   $ 44,354         100   $ 43,120         100   $ 42,556         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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 in part 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 NAICS categories, specific limits for CRE primary project types, loans secured by residential real estate, shared national credit exposure, and designated high risk loan definitions represent examples of specifically tracked components of our concentration management process. Currently there are no identified concentrations that exceed the established limit. 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.

Table 12—Loan and Lease Portfolio by Collateral Type

 

     2014     2013  

(dollar amounts in millions)

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

Secured loans:

                         

Real estate—commercial

   $ 8,628         18   $ 8,617         19   $ 8,612         19   $ 8,622         20   $ 8,769         21

Real estate—consumer

     14,224         30        14,113         31        13,916         31        13,657         32        13,654         32   

Vehicles

     10,268         22        9,782         21        9,270         21        8,989         21        8,275         19   

Receivables/Inventory

     6,023         13        5,932         13        5,717         13        5,534         13        5,367         13   

Machinery/Equipment

     3,305         7        3,267         7        2,930         7        2,738         6        2,778         7   

Securities/Deposits

     1,232         3        1,349         3        1,064         2        786         2        905         2   

Other

     918         2        940         2        870         3        1,016         2        948         2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total secured loans and leases

     44,598         95        44,000         96        42,379         96        41,342         96        40,696         96   

Unsecured loans and leases

     2,125         5        2,080         4        1,975         4        1,778         4        1,860         4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans and leases

   $ 46,723         100   $ 46,080         100   $ 44,354         100   $ 43,120         100   $ 42,556         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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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 originate and manage the majority of the portfolio, with the remainder sourced from prior bank acquisitions. 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. 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. 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.

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.

 

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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 allow 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        
     09/30/14     12/31/13     09/30/14     12/31/13     09/30/14     12/31/13  

Ending balance

   $ 5,028      $ 4,842      $ 3,408      $ 3,494      $ 5,788      $ 5,321   

Portfolio weighted average LTV ratio(1)

     71     71     81     81     74     74

Portfolio weighted average FICO score(2)

     758        758        751        741        751        743   
     Home Equity     Residential Mortgage (3)  
     Secured by first-lien     Secured by junior-lien        
     Nine Months Ended September 30,  
     2014     2013     2014     2013     2014     2013  

Originations

   $ 1,139      $ 1,342      $ 654      $ 346      $ 906      $ 1,336   

Origination weighted average LTV ratio(1)

     74     67     83     81     84     78

Origination weighted average FICO score(2)

     756        775        746        755        754        758   

 

(1) The LTV ratios for home equity loans and home equity lines-of-credit are cumulative and reflect the balance of any senior loans. LTV ratios reflect collateral values at the time of loan origination.
(2) Portfolio weighted average FICO scores reflect currently updated customer credit scores whereas origination weighted average FICO scores reflect the customer credit scores at the time of loan origination.
(3) Represents only owned-portfolio originations.

Home Equity Portfolio

Within the home equity portfolio, the standard product is a 10-year interest-only draw period with a 20-year fully amortizing term at the end of the draw period. Prior to 2007, the standard product was a 10-year draw period with a balloon payment. In either case, after the 10-year draw period, the borrower must reapply to continue with the interest only revolving structure or begin repaying the debt in a term structure.

The principal and interest payment associated with the term structure will be higher than the interest-only payment, resulting in maturity risk. Our maturity risk can be segregated into two distinct segments: (1) home equity lines-of-credit underwritten with a balloon payment at maturity and (2) home equity lines-of-credit with an automatic conversion to a 20-year amortizing loan. We manage this risk based on both the actual maturity date of the line-of-credit structure and at the end of the 10-year draw period. This maturity risk is embedded in the portfolio which we address with proactive contact strategies beginning one year prior to maturity. In certain circumstances, our Home Saver group is able to provide payment and structure relief to borrowers experiencing significant financial hardship associated with the payment adjustment. Our existing HELOC maturity strategy is consistent with the recent regulatory guidance.

 

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The table below summarizes our home equity line-of-credit portfolio by maturity date:

Table 14—Maturity Schedule of Home Equity Line-of-Credit Portfolio

 

     September 30, 2014  

(dollar amounts in millions)

   1 year or less      1 to 2 years      2 to 3 years      3 to 4 years      More than
4 years
     Total  

Secured by first-lien

   $ 44       $ 3       $ 2       $ 2       $ 2,741       $ 2,792   

Secured by junior-lien

     236         118         129         25         2,487         2,995   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity line-of-credit

   $ 280       $ 121       $ 131       $ 27       $ 5,228       $ 5,787   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The amounts in the above table maturing in four years or less primarily consist of balloon payment structures and represent the most significant maturity risk. The amounts maturing in more than four years primarily consist of exposure with a 20-year amortization period after the 10-year draw period.

Historically, less than 30% of our home equity lines-of-credit that are one year or less from maturity actually reach the maturity date.

Residential Mortgages Portfolio

Huntington underwrites all applications centrally, with a focus on higher quality borrowers. We do not originate residential mortgages that allow negative amortization or allow the borrower multiple payment options and have incorporated regulatory requirements and guidance into our underwriting process. All residential mortgages are originated based on a completed full appraisal during the credit underwriting process. We update values in compliance with applicable regulations to facilitate our portfolio management, as well as our workout and loss mitigation functions.

Several government programs continued to impact the residential mortgage portfolio, including various refinance programs such as HARP and HAMP, which positively affected the availability of credit for the industry. During the nine-month period ended September 30, 2014, we closed $209 million in HARP residential mortgages and $1.7 million in HAMP residential mortgages. The HARP and HAMP residential mortgage loans are part of our residential mortgage portfolio or serviced for others.

We are subject to repurchase risk associated with residential mortgage loans sold in the secondary market. An appropriate level of reserve for representations and warranties related to residential mortgage loans sold has been established to address this repurchase risk inherent in the portfolio (see Operational Risk discussion).

Credit Quality

(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)

We believe the most meaningful way to assess overall credit quality performance is through an analysis of credit quality performance ratios. This approach forms the basis of most of the discussion in the sections immediately following: NPAs and NALs, TDRs, ACL, and NCOs. In addition, we utilize delinquency rates, risk distribution and migration patterns, and product segmentation in the analysis of our credit quality performance.

Credit quality performance in the 2014 third quarter reflected continued overall improvement. Total NPA’s were $364.5 million at September 30, 2014. While the overall level was essentially flat with prior quarter, the C&I portfolio showed an increase, with offsetting declines in CRE and residential. NCOs increased by $1.4 million or 5% from the prior quarter, as a result of increases in other consumer and residential portfolios, partially offset by recoveries in the CRE portfolio. Total criticized loans continued to decline, across both the commercial and consumer segments. The ACL to total loans ratio declined by 3 basis points to 1.47%, and our coverage ratios as demonstrated by the ACL to NAL ratio of 211% also remained strong.

NPAs, NALs, AND TDRs

(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)

NPAs and NALs

NPAs consist of (1) NALs, which represent loans and leases no longer accruing interest, (2) impaired loans held for sale, (3) OREO properties, and (4) other NPAs. Any loan in our portfolio may be placed on nonaccrual status prior to the policies described below when collection of principal or interest is in doubt. Also, when a borrower with discharged non-reaffirmed debt in a Chapter 7 bankruptcy is identified and the loan is determined to be collateral dependent, the loan is placed on nonaccrual status.

 

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C&I and CRE loans are placed on nonaccrual status at 90-days past due, or earlier if repayment of principal and interest is in doubt.

Of the $150.1 million of CRE and C&I-related NALs at September 30, 2014, $84.1 million, or 56%, represented loans that were less than 30-days past due, demonstrating our continued commitment to proactive credit risk management. With the exception of residential mortgage loans guaranteed by government organizations which continue to accrue interest, first-lien loans secured by residential mortgage collateral are placed on nonaccrual status at 150-days past due. Junior-lien home equity loans are placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien loan has been identified as nonaccrual. Automobile and other consumer loans are generally charged-off prior to the loan reaching 120-days past due.

When loans are placed on nonaccrual, accrued interest income is reversed with current year accruals charged to earnings and prior year amounts generally charged-off as a credit loss. When, in our judgment, the borrower’s ability to make required interest and principal payments has resumed and collectability is no longer in doubt, the loan or lease could be returned to accrual status.

The following table reflects period-end NALs and NPAs detail for each of the last five quarters:

Table 15—Nonaccrual Loans and Leases and Nonperforming Assets

 

     2014     2013  

(dollar amounts in thousands)

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

Nonaccrual loans and leases:

          

Commercial and industrial

   $ 90,265      $ 75,274      $ 57,053      $ 56,615      $ 68,034   

Commercial real estate

     59,812        65,398        71,344        73,417        80,295   

Automobile

     4,834        4,384        6,218        6,303        5,972   

Residential mortgage

     98,139        110,635        121,681        119,532        116,260   

Home equity

     72,715        69,266        70,862        66,189        62,545   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonaccrual loans and leases

     325,765        324,957        327,158        322,056        333,106   

Other real estate owned, net

          

Residential

     30,661        31,761        30,581        23,447        16,610   

Commercial

     5,609        2,934        5,110        4,217        12,544   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other real estate owned, net

     36,270        34,695        35,691        27,664        29,154   

Other nonperforming assets(1)

     2,440        2,440        2,440        2,440        12,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 364,475      $ 362,092      $ 365,289      $ 352,160      $ 374,260   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nonaccrual loans as a % of total loans and leases

     0.70     0.71     0.74     0.75     0.78

Nonperforming assets ratio(2)

     0.78        0.79        0.82        0.82        0.88   

(NPA+90days)/(Loan+OREO)(3)

     1.08        1.08        1.17        1.20        1.29   

 

(1) Other nonperforming assets includes certain impaired investment securities.
(2) This ratio is calculated as nonperforming assets divided by the sum of loans and leases, other nonperforming assets, and net other real estate owned.
(3) This ratio is calculated as the sum of nonperforming assets and total accruing loans and leases past due 90 days or more divided by the sum of loans and leases and net other real estate owned.

2014 Third Quarter versus 2014 Second Quarter

The $2.4 million, or 1%, increase in NPAs compared with June 30, 2014, represents the net impact of increases in the commercial portfolio offset by decreases across the consumer portfolios:

 

   

$15.0 million, or 20%, increase in C&I NALs, primarily reflecting the impact of a specific credit relationship.

Partially offset by:

 

   

$12.5 million, or 11%, decrease in residential mortgage NALs, reflecting resolutions of foreclosures and improved delinquency results.

 

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2014 Third Quarter versus 2013 Fourth Quarter

Compared with December 31, 2013, NPAs increased $12.3 million, or 4%, primarily reflecting:

 

   

$33.7 million, or 59%, increase in C&I NALs, primarily due to two credit relationships.

 

   

$8.6 million, or 31%, increase in net OREO properties primarily related to consumer OREO, reflecting the impact from Camco Financial, and a single CRE property.

Partially offset by:

 

   

$21.4 million, or 18%, decline in residential mortgage NALs, reflecting resolution of foreclosure processes and improved delinquency trends.

 

   

$13.6 million, or 19%, decline in CRE NALs, reflecting both NCO activity and problem credit resolutions, including borrower payments and payoffs partially resulting from successful workout strategies implemented by our SAD group.

TDR Loans

(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)

TDRs are loans to which a financial concession is provided to a borrower experiencing financial difficulties. TDRs can be classified as either accrual or nonaccrual loans. Nonaccrual TDRs are included in NALs whereas accruing TDRs are excluded from NALs, as it is probable that all contractual principal and interest due under the restructured terms will be collected. TDRs primarily reflect our loss mitigation efforts to proactively work with borrowers in financial difficulty.

The table below presents our accruing and nonaccruing TDRs at period-end for each of the past five quarters:

Table 16—Accruing and Nonaccruing Troubled Debt Restructured Loans

 

     2014      2013  

(dollar amounts in thousands)

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

Troubled debt restructured loans—accruing:

              

Commercial and industrial

   $ 89,783       $ 90,604       $ 102,970       $ 83,857       $ 85,687   

Commercial real estate

     186,542         212,736         210,876         204,668         204,597   

Automobile

     31,480         31,833         27,393         30,781         30,981   

Home equity

     229,500         221,539         202,044         188,266         153,591   

Residential mortgage

     271,762         289,239         284,194         305,059         300,809   

Other consumer

     3,313         3,496         1,727         1,041         959   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructured loans—accruing

     812,380         849,447         829,204         813,672         776,624   

Troubled debt restructured loans—nonaccruing:

              

Commercial and industrial

     19,110         6,677         7,197         7,291         8,643   

Commercial real estate

     28,618         24,396         27,972         23,981         22,695   

Automobile

     4,817         4,287         5,676         6,303         5,972   

Home equity

     25,149         22,264         20,992         20,715         11,434   

Residential mortgage

     72,729         81,546         84,441         82,879         77,525   

Other consumer

     74         120         120         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructured loans—nonaccruing

     150,497         139,290         146,398         141,169         126,269   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructured loans

   $ 962,877       $ 988,737       $ 975,602       $ 954,841       $ 902,893   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The decline in the accruing TDRs was associated with payoffs and paydowns in both the CRE and residential portfolios. Our strategy is to structure TDRs in a manner that avoids new concessions subsequent to the initial TDR terms. However, there are times when subsequent modifications are required, such as when the modified loan matures. Often the loans are performing in accordance with the TDR terms, and a new note is originated with similar modified terms. These loans are subjected to the normal underwriting standards and processes for other similar credit extensions, both new and existing. If the loan is not performing in accordance with the existing TDR terms, typically an individualized approach to repayment is established. In accordance with ASC 310-20-35, the refinanced note is evaluated to determine if it is considered a new loan or a continuation of the prior loan. A new loan is considered for removal of the TDR designation. A continuation of the prior note requires the continuation of the TDR designation, and because the refinanced note constitutes a new or amended debt instrument, it is included in our TDR activity table (below) as a new TDR and a restructured TDR removal during the period. The types of concessions granted are consistent with those granted on new TDRs and include interest rate reductions, amortization or maturity date changes beyond what the collateral supports, and principal forgiveness based on the borrower’s specific needs at a point in time. Our policy does not limit the number of times a loan may be modified. A loan may be modified multiple times if it is considered to be in the best interest of both the borrower and Huntington.

Commercial loans are not automatically considered to be accruing TDRs upon the granting of a new concession. If the loan is in accruing status and no loss is expected based on the modified terms, the modified TDR remains in accruing status. For loans that are on nonaccrual status before the modification, collection of both principal and interest must not be in doubt, and the borrower must be able to exhibit sufficient cash flows for a six-month period of time to service the debt in order to return to accruing status. This six-month period could extend before or after the restructure date.

TDRs in the home equity and residential mortgage portfolio may continue to increase in the near term as we continue to appropriately manage the portfolio and work with our borrowers. Any granted change in terms or conditions that are not readily available in the market for that borrower, requires the designation as a TDR. There are no provisions for the removal of the TDR designation based on payment activity for consumer loans.

The following table reflects TDR activity for each of the past five quarters:

Table 17—Troubled Debt Restructured Loan Activity

 

     2014     2013  

(dollar amounts in thousands)

   Third     Second     First     Fourth     Third  

TDRs, beginning of period

   $ 988,737      $ 975,602      $ 954,841      $ 902,893      $ 883,990   

New TDRs

     126,238        184,024        219,656        169,383        161,812   

Payments

     (78,717     (66,530     (55,130     (46,974     (60,392

Charge-offs

     (10,631     (5,134     (10,774     (5,980     (10,439

Sales

     (1,951     (4,001     (14,169     (613     (2,999

Transfer to OREO

     (3,554     (3,539     (2,597     (2,609     (2,056

Restructured TDRs—accruing(1)

     (47,277     (83,586     (86,012     (51,709     (58,499

Restructured TDRs—nonaccruing(1)

     (2,212     (4,146     (23,038     (7,415     (6,163

Other

     (7,756     (3,953     (7,175     (2,135     (2,361
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TDRs, end of period

   $ 962,877      $ 988,737      $ 975,602      $ 954,841      $ 902,893   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents existing TDRs that were re-underwritten with new terms providing a concession. A corresponding amount is included in the New TDRs amount above.

ACL

(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)

Our total credit reserve is comprised of two different components, both of which in our judgment are appropriate to absorb credit losses inherent in our loan and lease portfolio: the ALLL and the AULC. Combined, these reserves comprise the total ACL. Our Credit Administration group is responsible for developing the methodology assumptions and estimates used in the calculation, as well as determining the appropriateness of the ACL. The ALLL represents the estimate of losses inherent in the loan portfolio at the reported date. Additions to the ALLL result from recording provision expense for loan losses or increased risk levels resulting from loan risk-rating downgrades, while reductions reflect charge-offs (net of recoveries), decreased risk levels resulting from loan risk-rating upgrades, or the sale of loans. The AULC is determined by applying the transaction reserve process to the unfunded portion of the loan exposures adjusted by an applicable funding expectation.

 

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We regularly evaluate the appropriateness of the ACL by performing on-going evaluations of the loan and lease portfolio, including such factors as the differing economic risks associated with each loan category, the financial condition of specific borrowers, the level of delinquent loans, the value of any collateral and, where applicable, the existence of any guarantees or other documented support. We evaluate the impact of changes in interest rates and overall economic conditions on the ability of borrowers to meet their financial obligations when quantifying our exposure to credit losses and assessing the appropriateness of our ACL at each reporting date. In addition to general economic conditions and the other factors described above, we also consider the impact of collateral value trends and portfolio diversification. A provision for credit losses is recorded to adjust the ACL to the level we have determined to be appropriate to absorb credit losses inherent in our loan and lease portfolio.

Our ACL evaluation process includes the on-going assessment of credit quality metrics, and a comparison of certain ACL benchmarks to current performance. While the total ACL balance has declined in recent quarters, all of the relevant benchmarks remain strong.

The table below reflects the allocation of our ACL among our various loan categories during each of the past five quarters:

Table 18—Allocation of Allowance for Credit Losses (1)

 

     2014     2013  

(dollar amounts in thousands)

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

Commercial

                         

Commercial and industrial

   $ 291,401         40   $ 278,512         41   $ 266,979         41   $ 265,801         41   $ 262,048         41

Commercial real estate

     115,472         11        137,346         11        160,306         12        162,557         11        164,522         11   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial

     406,873         51        415,858         52        427,285         53        428,358         52        426,570         52   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Consumer

                         

Automobile

     30,732         18        27,158         17        25,178         16        31,053         15        27,087         15   

Home equity

     100,375         18        105,943         18        113,177         19        111,131         19        124,068         20   

Residential mortgage

     52,658         12        47,191         12        39,068         12        39,577         12        51,252         12   

Other consumer

     40,398         1        38,951         1        27,210         —          37,751         2        37,053         1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer

     224,163         49        219,243         48        204,633         47        219,512         48        239,460         48   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total allowance for loan and lease losses

     631,036         100     635,101         100     631,918         100     647,870         100     666,030         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Allowance for unfunded loan commitments

     55,449           56,927           59,368           62,899           66,857      
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

    

Total allowance for credit losses

   $ 686,485         $ 692,028         $ 691,286         $ 710,769         $ 732,887      
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

    

Total allowance for loan and leases losses as % of:

                         

Total loans and leases

        1.35        1.38        1.42        1.50        1.57

Nonaccrual loans and leases

        194           195           193           201           200   

Nonperforming assets

        173           175           174           184           178   

Total allowance for credit losses as % of:

                         

Total loans and leases

        1.47        1.50        1.56        1.65        1.72

Nonaccrual loans and leases

        211           213           211           221           220   

Nonperforming assets

        188           191           191           202           196   

 

(1) Percentages represent the percentage of each loan and lease category to total loans and leases.

 

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2014 Third Quarter versus 2014 Second Quarter

The $5.5 million, or 1%, decrease in ACL compared with June 30, 2014, primarily reflected:

 

   

$21.9 million, or 16%, decline in CRE, reflecting continued improving portfolio asset quality metrics and performance.

 

   

$5.6 million, or 5%, decline in home equity directly attributable to the lower delinquency rate and improved portfolio performance metrics.

Partially offset by:

 

   

$12.9 million, or 5%, increase in C&I, reflecting an increased level of loans in the classified risk rating designation and overall portfolio growth.

 

   

$5.5 million, or 12%, increase in residential mortgage, primarily due to increased reserves on TDRs.

 

   

$3.6 million, or 13%, increase in automobile loans based on the portfolio growth.

2014 Third Quarter versus 2013 Fourth Quarter

The $24.3 million, or 3%, decline in ACL compared with December 31, 2013:

 

   

$47.1 million, or 29%, decline in CRE, reflecting continued improving portfolio asset quality metrics and performance.

 

   

$10.8 million, or 10%, decline in home equity as a result of the lower delinquency rate and improved portfolio performance metrics.

 

   

$7.5 million, or 12%, decline in AULC, reflecting lower risk exposures.

Partially offset by:

 

   

$25.6 million, or 10%, increase in C&I, reflecting the risk rating composition and overall growth in the portfolio.

 

   

$13.1 million, or 33%, increase in residential mortgage, primarily due to increased reserves on TDRs.

 

   

$2.6 million, or 7%, increase in other consumer reflecting the increasing credit card portfolio.

The ACL to total loans and leases declined to 1.47% at September 30, 2014, compared to 1.65% at December 31, 2013. Management believes the decline in the ratio is appropriate given the significant continued improvement in the risk profile of our loan portfolio. Further, the continued focus on early identification of loans with changes in credit metrics and proactive action plans for these loans, combined with originating high quality new loans will contribute to continued improvement in our key credit quality metrics.

We have significant exposure to loans secured by residential real estate and continue to be an active lender in our communities. The impact of the downturn in real estate values over the past several years has had a significant impact on some of our borrowers as evidenced by the higher delinquencies and NCOs since late 2007. Real estate values have rebounded from their 2007 levels in our primary markets.

Given the combination of these noted positive and negative factors, we believe that our ACL is appropriate and its coverage level is reflective of the quality of our portfolio and the current operating environment.

NCOs

Any loan in any portfolio may be charged-off prior to the policies described below if a loss confirming event has occurred. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency and that asset is the sole source of repayment. Additionally, discharged, collateral dependent non-reaffirmed debt in Chapter 7 bankruptcy filings will result in a charge-off to estimated collateral value, less anticipated selling costs at the time of the modification.

C&I and CRE loans are either charged-off or written down to net realizable value at 90-days past due. Automobile loans and other consumer loans are charged-off at 120-days past due. First-lien and junior-lien home equity loans are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due and 120-days past due, respectively. Residential mortgages are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due.

 

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The following table reflects NCO detail for each of the last five quarters:

Table 19—Quarterly Net Charge-off Analysis

 

     2014     2013  

(dollar amounts in thousands)

   Third     Second     First     Fourth     Third  

Net charge-offs by loan and lease type:

          

Commercial:

          

Commercial and industrial

   $ 12,587      $ 10,597      $ 8,606      $ 9,826      $ 1,661   

Commercial real estate:

          

Construction

     2,171        (171     918        (88     6,165   

Commercial

     (8,178     (2,020     (1,905     (2,783     6,398   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     (6,007     (2,191     (987     (2,871     12,563   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     6,580        8,406        7,619        6,955        14,224   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

          

Automobile

     3,976        2,926        4,642        3,759        2,721   

Home equity

     6,448        8,491        15,687        20,451        27,175   

Residential mortgage

     5,428        3,406        7,859        7,605        4,789   

Other consumer

     7,591        5,414        7,179        7,677        6,833   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     23,443        20,237        35,367        39,492        41,518   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net charge-offs

   $ 30,023      $ 28,643      $ 42,986      $ 46,447      $ 55,742   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs—annualized percentages:

          

Commercial:

          

Commercial and industrial

     0.27     0.23     0.20     0.22     0.04

Commercial real estate:

          

Construction

     1.12        (0.10     0.60        (0.06     4.36   

Commercial

     (0.78     (0.19     (0.18     (0.26     0.59   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     (0.48     (0.17     (0.08     (0.23     1.02   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     0.11        0.14        0.14        0.12        0.26   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

          

Automobile

     0.20        0.16        0.27        0.23        0.18   

Home equity

     0.31        0.41        0.75        0.98        1.30   

Residential mortgage

     0.38        0.24        0.58        0.57        0.36   

Other consumer

     7.61        5.66        7.44        7.98        7.19   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     0.42        0.37        0.68        0.77        0.83   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs as a % of average loans

     0.26     0.25     0.40     0.43     0.53
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

In assessing NCO trends, it is helpful to understand the process of how commercial loans are treated as they deteriorate over time. The ALLL established is consistent with the level of risk associated with the original underwriting. As a part of our normal portfolio management process for commercial loans, the loan is periodically reviewed and the ALLL is increased or decreased based on the enhanced risk rating. In certain cases, the standard ALLL is determined to not be appropriate, and a specific reserve is established based on the projected cash flow or collateral value of the specific loan. Charge-offs, if necessary, are generally recognized in a period after the specific ALLL was established. If the previously established ALLL exceeds that necessary to satisfactorily resolve the problem loan, a reduction in the overall level of the ALLL could be recognized. Consumer loans are treated in much the same manner as commercial loans, with increasing reserve factors applied based on the risk characteristics of the loan, although specific reserves are not identified for consumer loans. In summary, if loan quality deteriorates, the typical credit sequence would be periods of reserve building, followed by periods of higher NCOs as the previously established ALLL is utilized. Additionally, an increase in the ALLL either precedes or is in conjunction with increases in NALs. When a loan is classified as NAL, it is evaluated for specific ALLL or charge-off. As a result, an increase in NALs does not necessarily result in an increase in the ALLL or an expectation of higher future NCOs. Our overall NCOs are operating within our long-term target range.

All residential mortgage loans greater than 150-days past due are charged-down to the estimated value of the collateral, less anticipated selling costs. The remaining balance is in delinquent status until a modification can be completed, or the loan goes through the foreclosure process. For the home equity portfolio, virtually all of the defaults represent full charge-offs, as there is no remaining equity, creating a lower delinquency rate but a higher NCO impact.

 

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2014 Third Quarter versus 2014 Second Quarter

NCOs increased $1.4 million from the prior quarter to $30.0 million, primarily as a result of an increase in C&I, automobile, residential mortgage and other consumer portfolios. This was partially offset by continued improvement in home equity and the impact of recovery activity in the CRE portfolio. NCOs were an annualized 0.26% of average loans and leases in the current quarter, up slightly from 0.25% in the 2014 second quarter, and still below our long-term expectation of 0.35% - 0.55%. Given the low level of C&I and CRE NCO’s, there will continue to be some volatility on a quarter-to-quarter comparison basis.

The table below reflects NCO activity for the first nine-month periods ended September 30, 2014 and 2013:

Table 20—Year to Date Net Charge-off Analysis

 

     Nine Months Ended September 30,  

(dollar amounts in thousands)

   2014     2013  

Net charge-offs by loan and lease type:

    

Commercial:

    

Commercial and industrial

   $ 31,790      $ 6,564   

Commercial real estate:

    

Construction

     2,918        6,446   

Commercial

     (12,103     21,278   
  

 

 

   

 

 

 

Commercial real estate

     (9,185     27,724   
  

 

 

   

 

 

 

Total commercial

     22,605        34,288   
  

 

 

   

 

 

 

Consumer:

    

Automobile

     11,544        6,779   

Home equity

     30,626        61,812   

Residential mortgage

     16,693        19,557   

Other consumer

     20,184        19,783   
  

 

 

   

 

 

 

Total consumer

     79,047        107,931   
  

 

 

   

 

 

 

Total net charge-offs

   $ 101,652      $ 142,219   
  

 

 

   

 

 

 

Net charge-offs - annualized percentages:

    

Commercial:

    

Commercial and industrial

     0.23     0.05

Commercial real estate:

    

Construction

     0.56        1.47   

Commercial

     (0.38     0.63   
  

 

 

   

 

 

 

Commercial real estate

     (0.25     0.73   
  

 

 

   

 

 

 

Total commercial

     0.13        0.21   
  

 

 

   

 

 

 

Consumer:

    

Automobile

     0.21        0.17   

Home equity

     0.49        0.99   

Residential mortgage

     0.40        0.51   

Other consumer

     6.91        5.84   
  

 

 

   

 

 

 

Total consumer

     0.48        0.75   
  

 

 

   

 

 

 

Net charge-offs as a % of average loans

     0.30     0.46
  

 

 

   

 

 

 

2014 First Nine Months versus 2013 First Nine Months

NCOs decreased $40.6 million in the first nine-month period of 2014 to $101.7 million, primarily as a result of continued credit quality improvement and the impact of recovery activity in the CRE portfolio. This improvement was partially offset by an increase in C&I primarily relating to large losses associated with a small number of credit relationships.

 

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Market Risk

Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, foreign exchange rates, equity prices, and credit spreads. We have identified two primary sources of market risk: interest rate risk and price risk.

Interest Rate Risk

OVERVIEW

Huntington actively manages interest rate risk, as changes in market interest rates can have a significant impact on reported earnings. The interest rate risk process is designed to compare income simulations in market scenarios designed to alter the direction, magnitude, and speed of interest rate changes, as well as the slope of the yield curve. These scenarios are designed to illustrate the embedded optionality in the balance sheet from, among other things, faster or slower mortgage prepayments and changes in deposit mix.

INCOME SIMULATION AND ECONOMIC VALUE ANALYSIS

Interest rate risk measurement is calculated and reported to the ALCO monthly and ROC at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.

Huntington uses two approaches to model interest rate risk: Net Interest Income at Risk (NII at Risk) and Economic Value of Equity (EVE). Under NII at Risk, net interest income is modeled utilizing various assumptions for assets, liabilities, and derivative positions under various interest rate scenarios over a one-year time horizon. EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change. EVE is a period end measurement.

Table 21—Net Interest Income at Risk

 

     Net Interest Income at Risk (%)  

Basis point change scenario

     -25        +100        +200   
  

 

 

   

 

 

   

 

 

 

Board policy limits

     —          -2.0     -4.0
  

 

 

   

 

 

   

 

 

 

September 30, 2014

     -0.3     0.3     0.1

Through December 31, 2013, we reported ISE at Risk. We now report NII at Risk to isolate the change in income related solely to interest earning assets and interest bearing liabilities. The difference between the results for ISE at Risk and NII at Risk are not significant for this or any previous quarterly period.

The NII at Risk results included in the table above reflect the analysis used monthly by management. It models gradual -25, +100 and +200 basis point parallel shifts in market interest rates, implied by the forward yield curve over the next one-year period. Due to the current low level of short-term interest rates, the analysis reflects a declining interest rate scenario of 25 basis points, the point at which many assets and liabilities reach zero percent.

Huntington is within Board policy limits for the +100 and +200 basis point scenarios. There is no policy limit for the -25 basis point scenario. The NII at Risk reported at September 30, 2014, shows that Huntington’s earnings are not particularly sensitive to changes in interest rates over the next year. In recent periods, the amount of fixed rate assets, primarily indirect auto loans and securities, increased resulting in a reduction in asset sensitivity. This reduction is somewhat accentuated by our portfolio of mortgage-related loans and securities, whose expected maturities lengthen as rates rise. The reduced asset sensitivity for the +200 basis points scenario (relative to the +100 basis points scenario) relates to the modeled migration of money market accounts balances into CDs thereby shifting deposits from a variable rate to a fixed rate.

Table 22—Economic Value of Equity at Risk

 

     Economic Value of Equity at Risk (%)  

Basis point change scenario

     -25        +100        +200   
  

 

 

   

 

 

   

 

 

 

Board policy limits

     —          -5.0     -12.0
  

 

 

   

 

 

   

 

 

 

September 30, 2014

     0.1     -2.8     -7.5

 

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The EVE results included in the table above reflect the analysis used monthly by management. It models immediate -25, +100 and +200 basis point parallel shifts in market interest rates. Due to the current low level of short-term interest rates, the analysis reflects a declining interest rate scenario of 25 basis points, the point at which many assets and liabilities reach zero percent.

Huntington is within Board policy limits for the +100 and +200 basis point scenarios. There is no policy limit for the -25 basis point scenario. The EVE reported at September 30, 2014 shows that as interest rates increase (decrease) immediately, the economic value of equity position will decrease (increase). When interest rates rise, fixed rate assets generally lose economic value; the longer the duration, the greater the value lost. The opposite is true when interest rates fall. Compared to recent periods, the EVE results for September 30, 2014, reflect lower market rates and less sensitivity.

MSRs

(This section should be read in conjunction with Note 6 of Notes to Unaudited Condensed Consolidated Financial Statements.)

At September 30, 2014 we had a total of $161.9 million of capitalized MSRs representing the right to service $15.6 billion in mortgage loans. Of this $161.9 million, $25.4 million was recorded using the fair value method and $136.5 million was recorded using the amortization method.

MSR fair values are very sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be greatly reduced by prepayments. Prepayments usually increase when mortgage interest rates decline and decrease when mortgage interest rates rise. We have employed strategies to reduce the risk of MSR fair value changes or impairment. However, volatile changes in interest rates can diminish the effectiveness of these hedges. We typically report MSR fair value adjustments net of hedge-related trading activity in the mortgage banking income category of noninterest income. Changes in fair value between reporting dates are recorded as an increase or a decrease in mortgage banking income.

MSRs recorded using the amortization method generally relate to loans originated with historically low interest rates, resulting in a lower probability of prepayments and, ultimately, impairment. MSR assets are included in accrued income and other assets in the Unaudited Condensed Consolidated Financial Statements.

Price Risk

Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value and are subject to fair value accounting. We have price risk from trading securities, securities owned by our broker-dealer subsidiaries, foreign exchange positions, equity investments, investments in securities backed by mortgage loans, and marketable equity securities held by our insurance subsidiaries. We have established loss limits on the trading portfolio, on the amount of foreign exchange exposure that can be maintained, and on the amount of marketable equity securities that can be held by the insurance subsidiaries.

Liquidity Risk

Liquidity risk is the risk of loss due to the possibility that funds may not be available to satisfy current or future commitments resulting from external macro market issues, investor and customer perception of financial strength, and events unrelated to us, such as war, terrorism, or financial institution market specific issues. In addition, the mix and maturity structure of Huntington’s balance sheet, the amount of on-hand cash and unencumbered securities, and the availability of contingent sources of funding can have an impact on Huntington’s ability to satisfy current or future funding commitments. We manage liquidity risk at both the Bank and the parent company.

The overall objective of liquidity risk management is to ensure that we can obtain cost-effective funding to meet current and future obligations, and can maintain sufficient levels of on-hand liquidity, under both normal business-as-usual and unanticipated stressed circumstances. The ALCO was appointed by the ROC to oversee liquidity risk management and the establishment of liquidity risk policies and limits. Contingency funding plans are in place, which measure forecasted sources and uses of funds under various scenarios in order to prepare for unexpected liquidity shortages. Liquidity risk is reviewed monthly for the Bank and the parent company, as well as its subsidiaries. In addition, liquidity working groups meet regularly to identify and monitor liquidity positions, provide policy guidance, review funding strategies, and oversee the adherence to, and maintenance of, the contingency funding plans.

 

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Investment Securities Portfolio

The expected weighted average maturities of our AFS and HTM portfolios are significantly shorter than their contractual maturities as reflected in Note 4 and Note 5 of the Notes to Unaudited Condensed Consolidated Financial Statements. Particularly regarding the MBS and ABS, prepayments of principal and interest that historically occur in advance of scheduled maturities will shorten the expected life of these portfolios. The expected weighted average maturities, which take into account expected prepayments of principal and interest under existing interest rate conditions, are shown in the following table:

Table 23—Expected Life of Investment Securities

 

     September 30, 2014  
     Available-for-Sale & Other      Held-to-Maturity  
     Securities      Securities  
     Amortized      Fair      Amortized      Fair  

(dollar amounts in thousands)

   Cost      Value      Cost      Value  

Under 1 year

   $ 548,941       $ 547,010       $ —         $ —     

1 - 5 years

     4,190,053         4,225,353         1,312,997         1,296,070   

6 - 10 years

     3,136,697         3,120,732         2,183,496         2,170,986   

Over 10 years

     513,870         481,083         —           —     

Other securities

     346,781         347,626         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,736,342       $ 8,721,804       $ 3,496,493       $ 3,467,056   
  

 

 

    

 

 

    

 

 

    

 

 

 

Bank Liquidity and Sources of Funding

Our primary sources of funding for the Bank are retail and commercial core deposits. At September 30, 2014, these core deposits funded 73% of total assets (101% of total loans). At September 30, 2014 and December 31, 2013, total core deposits represented 93% and 95% of total deposits, respectively. To the extent we are unable to obtain sufficient liquidity through core deposits, we may meet our liquidity needs through other sources, asset securitization, or sale. Other sources include non-core deposits, FHLB advances, and other wholesale debt instruments.

The following tables reflect deposit composition and short-term borrowings detail for each of the last five quarters:

Table 24—Deposit Composition

 

    2014     2013  

(dollar amounts in millions)

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

By Type:

                   

Demand deposits—noninterest-bearing

  $ 14,754        29   $ 14,151        29   $ 14,314        29   $ 13,650        29   $ 13,421        29

Demand deposits—interest-bearing

    6,052        12        5,921        12        5,970        12        5,880        12        5,856        13   

Money market deposits

    18,174        36        17,563        36        17,693        36        17,213        36        16,212        34   

Savings and other domestic deposits

    5,038        10        5,036        10        5,115        10        4,871        10        4,946        11   

Core certificates of deposit

    3,150        6        3,272        7        3,557        7        3,723        8        4,108        9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits:

    47,168        93        45,943        94        46,649        94        45,337        95        44,543        96   

Other domestic deposits of $250,000 or more

    202        1        241        —          289        1        274        1        268        1   

Brokered deposits and negotiable CDs

    2,357        5        2,198        5        2,074        4        1,580        3        1,366        3   

Deposits in foreign offices

    402        1        367        1        337        1        316        1        387        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

  $ 50,129        100   $ 48,749        100   $ 49,349        100   $ 47,507        100   $ 46,564        100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits:

                   

Commercial

  $ 21,753        46   $ 20,629        45   $ 20,507        44   $ 19,982        44   $ 19,526        44

Consumer

    25,415        54        25,314        55        26,142        56        25,355        56        25,017        56   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

  $ 47,168        100   $ 45,943        100   $ 46,649        100   $ 45,337        100   $ 44,543        100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table 25—Federal Funds Purchased and Repurchase Agreements

 

     2014     2013  

(dollar amounts in millions)

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

Balance at period-end

          

Federal Funds purchased and securities sold under agreements to repurchase

   $ 1,491      $ 1,223      $ 1,342      $ 549      $ 655   

Other short-term borrowings

     40        29        56        4        6   

Weighted average interest rate at period-end

          

Federal Funds purchased and securities sold under agreements to repurchase

     0.05     0.05     0.06     0.06     0.07

Other short-term borrowings

     1.06        1.41        0.26        2.59        1.41   

Maximum amount outstanding at month-end during the period

          

Federal Funds purchased and securities sold under agreements to repurchase

   $ 1,491      $ 1,223      $ 1,342      $ 787      $ 787   

Other short-term borrowings

     40        29        56        19        9   

Average amount outstanding during the period

          

Federal Funds purchased and securities sold under agreements to repurchase

   $ 1,072      $ 910      $ 875      $ 624      $ 703   

Other short-term borrowings

     20        29        8        5        7   

Weighted average interest rate during the period

          

Federal Funds purchased and securities sold under agreements to repurchase

     0.07     0.06     0.06     0.08     0.08

Other short-term borrowings

     2.22        1.64        1.06        1.79        1.32   

The Bank maintains borrowing capacity at the FHLB and the Federal Reserve Bank Discount Window. The Bank does not consider borrowing capacity from the Federal Reserve Bank Discount Window as a primary source of liquidity. Total loans and securities pledged to the Federal Reserve Discount Window and the FHLB are $17.4 billion and $19.8 billion at September 30, 2014 and December 31, 2013, respectively.

In February 2014, the Bank issued $500.0 million of senior notes at 99.842% of face value. The senior bank note issuances mature on April 1, 2019 and have a fixed coupon rate of 2.20%. The senior note issuance may be redeemed one month prior to the maturity date at 100% of principal plus accrued and unpaid interest. In April 2014, the Bank issued $500.0 million of senior notes at 99.842% of face value. The senior note issuances mature on April 24, 2017 and have a fixed coupon rate of 1.375%. In April 2014, the Bank also issued $250.0 million of senior notes at 100% of face value. The senior bank note issuances mature on April 24, 2017 and have a variable coupon rate equal to the three month LIBOR plus 0.425%. Both senior note issuances may be redeemed one month prior to their maturity date at 100% of principal plus accrued and unpaid interest. At September 30, 2014, total wholesale funding was $9.7 billion, an increase from $7.0 billion at December 31, 2013. The increase from prior year-end primarily relates to an increase in other long-term debt, short-term borrowings, and subordinated notes, partially offset by a decrease in FHLB advances.

Liquidity Coverage Ratio

On October 24, 2013, the U.S. banking regulators jointly issued a proposal that would implement a quantitative liquidity requirement consistent with the Liquidity Coverage Ratio (LCR) standard established by the Basel Committee on Banking Supervision. The LCR is designed to promote the short term resilience of the liquidity risk profile of banks to which it applies.

On September 3, 2014, the U.S. banking regulators adopted a final LCR for internationally active banking organizations, generally those with $250 billion or more in total assets, and a Modified LCR rule for banking organizations, similar to Huntington, with $50 billion or more in total assets that are not internationally active banking organizations. The Modified LCR requires Huntington to maintain High Quality Liquid Assets (HQLA) to meet its net cash outflows over a prospective 30 calendar-day period, which takes into account the potential impact of idiosyncratic and market-wide shocks. The Modified LCR transition period begins on January 1, 2016, with Huntington required to maintain HQLA equal to 90 percent of the stated requirement. The ratio increases to 100 percent on January 1, 2017. Huntington expects to be compliant with the Modified LCR requirement within the transition periods established in the Modified LCR.

 

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At September 30, 2014, we believe the Bank had sufficient liquidity to meet its cash flow obligations for the foreseeable future.

Parent Company Liquidity

The parent company’s funding requirements consist primarily of dividends to shareholders, debt service, income taxes, operating expenses, funding of nonbank subsidiaries, repurchases of our stock, and acquisitions. The parent company obtains funding to meet obligations from dividends and interest received from the Bank, interest and dividends received from direct subsidiaries, net taxes collected from subsidiaries included in the federal consolidated tax return, fees for services provided to subsidiaries, and the issuance of debt securities.

At September 30, 2014 and December 31, 2013, the parent company had $0.7 billion and $1.0 billion, respectively, in cash and cash equivalents.

On October 15, 2014, the board of directors declared a quarterly common stock cash dividend of $0.06 per common share. The dividend is payable on January 2, 2015, to shareholders of record on December 19, 2014. Based on the current quarterly dividend of $0.06 per common share, cash demands required for common stock dividends are estimated to be approximately $48.9 million per quarter. On October 15, 2014, the board of directors declared a quarterly Series A and Series B Preferred Stock dividend payable on January 15, 2015 to shareholders of record on January 1, 2015. Based on the current dividend, cash demands required for Series A Preferred Stock are estimated to be approximately $7.7 million per quarter. Cash demands required for Series B Preferred Stock are expected to be approximately $0.3 million per quarter.

During the quarter the Bank paid dividends of $169.0 million to the holding company. We anticipate that the Bank will declare additional dividends to the holding company in the fourth quarter of 2014. To help meet any additional liquidity needs, we have an open-ended, automatic shelf registration statement filed and effective with the SEC, which permits us to issue an unspecified amount of debt or equity securities.

With the exception of the items discussed above, the parent company does not have any significant cash demands. It is our policy to keep operating cash on hand at the parent company to satisfy cash demands for at least the next 18 months. Considering the factors discussed above, and other analyses that we have performed, we believe the parent company has sufficient liquidity to meet its cash flow obligations for the foreseeable future.

Off-Balance Sheet Arrangements

In the normal course of business, we enter into various off-balance sheet arrangements. These arrangements include interest rate swaps, financial guarantees contained in standby letters-of-credit issued by the Bank and commitments by the Bank to sell mortgage loans.

INTEREST RATE SWAPS

Balance sheet hedging activity is arranged to receive hedge accounting treatment and is classified as either fair value or cash flow hedges. Fair value hedges are purchased to convert deposits and subordinated and other long-term debt from fixed-rate obligations to floating rate. Cash flow hedges are also used to convert floating rate loans made to customers into fixed rate loans. See Note 15 for more information.

STANDBY LETTERS-OF-CREDIT

Standby letters-of-credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most of these arrangements mature within two years and are expected to expire without being drawn upon. Standby letters-of-credit are included in the determination of the amount of risk-based capital that the parent company and the Bank are required to hold. Through our credit process, we monitor the credit risks of outstanding standby letters-of-credit. When it is probable that a standby letter-of-credit will be drawn and not repaid in full, a loss is recognized in the provision for credit losses. See Note 17 for more information.

COMMITMENTS TO SELL LOANS

Activity related to our mortgage origination activity supports the hedging of the mortgage pricing commitments to customers and the secondary sale to third parties. At September 30, 2014 and December 31, 2013, we had commitments to sell residential real estate loans of $556.0 million and $452.6 million, respectively. These contracts mature in less than one year.

We do not believe that off-balance sheet arrangements will have a material impact on our liquidity or capital resources.

 

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Operational Risk

As with all companies, we are subject to operational risk. Operational risk is the risk of loss due to human error; inadequate or failed internal systems and controls; violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards; and external influences such as market conditions, fraudulent activities, disasters, and security risks. We continuously strive to strengthen our system of internal controls to ensure compliance with laws, rules, and regulations, and to improve the oversight of our operational risk. For example, we actively and continuously monitor cyber-attacks such as attempts related to eFraud and loss of sensitive customer data. We evaluate internal systems, processes and controls to mitigate loss from cyber-attacks and, to date, have not experienced any material losses.

To mitigate operational risks, we have a senior management Operational Risk Committee and a senior management Legal, Regulatory, and Compliance Committee. The responsibilities of these committees, among other duties, include establishing and maintaining management information systems to monitor material risks and to identify potential concerns, risks, or trends that may have a significant impact and ensuring that recommendations are developed to address the identified issues. Both of these committees report any significant findings and recommendations to the Risk Management Committee. Additionally, potential concerns may be escalated to our ROC, as appropriate.

The goal of this framework is to implement effective operational risk techniques and strategies, minimize operational and fraud losses, and enhance our overall performance.

Representation and Warranty Reserve

We primarily conduct our mortgage loan sale and securitization activity with FNMA and FHLMC. In connection with these and other securitization transactions, we make certain representations and warranties that the loans meet certain criteria, such as collateral type and underwriting standards. We may be required to repurchase individual loans and / or indemnify these organizations against losses due to a loan not meeting the established criteria. We have a reserve for such losses and exposure, which is included in accrued expenses and other liabilities. The reserves are estimated based on historical and expected repurchase activity, average loss rates, and current economic trends. The level of mortgage loan repurchase losses depends upon economic factors, investor demand strategies and other external conditions containing a level of uncertainty and risk that may change over the life of the underlying loans. We currently do not have sufficient information to estimate the range of reasonably possible loss related to representation and warranty exposure.

The tables below reflect activity in the representations and warranties reserve:

Table 26—Summary of Reserve for Representations and Warranties on Mortgage Loans Serviced for Others

 

     2014     2013  

(dollar amounts in thousands)

   Third     Second     First     Fourth     Third  

Reserve for representations and warranties, beginning of period

   $ 15,249      $ 17,094      $ 22,027      $ 27,502      $ 28,039   

Reserve charges

     (499     (1,047     (6,132     (6,024     (2,490

Provision for representations and warranties

     (934     (798     1,199        549        1,953   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reserve for representations and warranties, end of period

   $ 13,816      $ 15,249      $ 17,094      $ 22,027      $ 27,502   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table 27—Mortgage Loan Repurchase Statistics

 

     2014     2013  

(dollar amounts in thousands)

   Third     Second     First     Fourth     Third  

Number of loans sold

     4,880        4,599        3,882        4,856        5,839   

Amount of loans sold (UPB)

   $ 660,133      $ 572,861      $ 487,822      $ 625,958      $ 861,897   

Number of loans repurchased (1)

     18        33        89        41        40   

Amount of loans repurchased (UPB)(1)

   $ 2,224      $ 3,766      $ 10,557      $ 5,204      $ 4,055   

Number of claims received

     38        43        35        341        222   

Successful dispute rate(2)

     25     40     34     40     36

Number of make whole payments(3)

     4        20        91        91        28   

Amount of make whole payments(3)

   $ 119      $ 844      $ 5,693      $ 5,742      $ 2,125   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Loans repurchased are loans that fail to meet the purchaser’s terms.

(2) 

Successful disputes are a percent of close out requests.

(3) 

Make whole payments are payments to reimburse for losses on foreclosed properties.

Foreclosure Documentation

Compared to the high volume servicers, we service a relatively low volume of residential mortgage foreclosures. We have reviewed our residential foreclosure process. We have not found evidence of financial injury to any borrowers from any foreclosure by the Bank that should not have proceeded. We continuously review our processes and controls to ensure that our foreclosure processes are appropriate.

Compliance Risk

Financial institutions are subject to many laws, rules, and regulations at both the federal and state levels. In September, for example, the Office of the Comptroller of the Currency issued its final rule formalizing its “heightened expectations” supervisory regime for the largest federally chartered depository institutions, including Huntington, to improve risk management and ensure boards can challenge decisions made by management. These broad-based laws, rules and regulations include, but are not limited to, expectations relating to anti-money laundering, lending limits, client privacy, fair lending, prohibitions against unfair, deceptive or abusive acts or practices, protections for military members as they enter active duty, and community reinvestment. Additionally, the volume and complexity of recent regulatory changes have increased our overall compliance risk. As such, we utilize various resources to help ensure expectations are met, including a team of compliance experts dedicated to ensuring our conformance with all applicable laws, rules, and regulations. Our colleagues receive training for several broad-based laws and regulations including, but not limited to, anti- money laundering and customer privacy. Additionally, colleagues engaged in lending activities receive training for laws and regulations related to flood disaster protection, equal credit opportunity, fair lending, and / or other courses related to the extension of credit. We set a high standard of expectation for adherence to compliance management and seek to continuously enhance our performance.

Capital

Both regulatory capital and shareholders’ equity are managed at the Bank and on a consolidated basis. We have an active program for managing capital and maintain a comprehensive process for assessing the Company’s overall capital adequacy. We believe our current levels of both regulatory capital and shareholders’ equity are adequate.

 

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Regulatory Capital

The following table presents risk-weighted assets and other financial data necessary to calculate certain financial ratios, including the Tier 1 common equity ratio, which we use to measure capital adequacy. We estimate the negative impact to Tier I common risk-based capital from the 2015 first quarter implementation of the Federal Reserve’s final Basel III capital rules will be approximately 40 bps on a fully phased-in basis.

Table 28—Capital Adequacy

 

     2014     2013  

(dollar amounts in millions)

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

Consolidated capital calculations:

          

Common shareholders’ equity

   $ 5,898      $ 5,855      $ 5,790      $ 5,704      $ 5,566   

Preferred shareholders’ equity

     386        386        386        386        386   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     6,284        6,241        6,176        6,090        5,952   

Goodwill

     (523     (505     (505     (444     (444

Other intangible assets

     (85     (81     (91     (93     (104

Other intangible assets deferred tax liability (1)

     30        28        32        33        36   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total tangible equity (2)

     5,706        5,683        5,612        5,586        5,440   

Preferred shareholders’ equity

     (386     (386     (386     (386     (386
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total tangible common equity (2)

   $ 5,320      $ 5,297      $ 5,226      $ 5,200      $ 5,054   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 64,331      $ 63,797      $ 61,146      $ 59,467      $ 56,639   

Goodwill

     (523     (505     (505     (444     (444

Other intangible assets

     (85     (81     (91     (93     (104

Other intangible assets deferred tax liability (1)

     30        28        32        33        36   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total tangible assets (2)

   $ 63,753      $ 63,239      $ 60,582      $ 58,963      $ 56,127   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tier 1 capital

   $ 6,180      $ 6,132      $ 6,107      $ 6,100      $ 6,018   

Preferred shareholders’ equity

     (386     (386     (386     (386     (386

Trust preferred securities

     (304     (304     (304     (299     (299

REIT preferred stock

     —          —          —          —          (50
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tier 1 common equity (2)

   $ 5,490      $ 5,442      $ 5,417      $ 5,415      $ 5,283   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Risk-weighted assets (RWA)

   $ 53,239      $ 53,035      $ 51,120      $ 49,690      $ 48,687   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tier 1 common equity / RWA ratio (2)

     10.31     10.26     10.60     10.90     10.85

Tangible equity / tangible asset ratio (2)

     8.95        8.99        9.26        9.47        9.69   

Tangible common equity / tangible asset ratio (2)

     8.35        8.38        8.63        8.82        9.00   

Tangible common equity / RWA ratio (2)

     9.99        9.99        10.22        10.46        10.38   

 

(1) 

Other intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate.

(2) 

Tangible equity, Tier 1 common equity, tangible common equity, and tangible assets are non-GAAP financial measures. Additionally, any ratios utilizing these financial measures are also non-GAAP. These financial measures have been included as they are considered to be critical metrics with which to analyze and evaluate financial condition and capital strength. Other companies may calculate these financial measures differently.

 

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The following table presents certain regulatory capital data at both the consolidated and Bank levels for each of the past five quarters:

Table 29—Regulatory Capital Data

 

            2014     2013  

(dollar amounts in millions)

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

Total risk-weighted assets

     Consolidated       $ 53,239      $ 53,035      $ 51,120      $ 49,690      $ 48,687   
     Bank         53,132        53,005        51,021        49,609        48,570   

Tier 1 risk-based capital

     Consolidated         6,180        6,132        6,107        6,100        6,017   
     Bank         5,963        5,982        5,872        5,682        5,540   

Tier 2 risk-based capital

     Consolidated         1,122        1,118        1,118        1,139        1,127   
     Bank         821        819        817        838        825   

Total risk-based capital

     Consolidated         7,302        7,250        7,225        7,239        7,144   
     Bank         6,784        6,801        6,689        6,520        6,365   

Tier 1 leverage ratio

     Consolidated         9.83     10.01     10.32     10.67     10.85
     Bank         9.49        9.78        9.96        9.97        10.01   

Tier 1 risk-based capital ratio

     Consolidated         11.61        11.56        11.95        12.28        12.36   
     Bank         11.22        11.29        11.51        11.45        11.41   

Total risk-based capital ratio

     Consolidated         13.72        13.67        14.13        14.57        14.67   
     Bank         12.77        12.83        13.11        13.14        13.11   

The decreases in the capital ratios were due to balance sheet growth and share repurchases that were partially offset by retained earnings and the 8.7 million common shares issued in the Camco acquisition. Specifically, all capital ratios were impacted by the repurchase of 32.1 million common shares over the last three quarters, 5.4 million of which were repurchased during the 2014 third quarter. The decrease in the regulatory Tier 1 risk-based capital ratio also reflected the redemption of $50 million of qualifying preferred securities on December 31, 2013.

Shareholders’ Equity

We generate shareholders’ equity primarily through the retention of earnings, net of dividends. Other potential sources of shareholders’ equity include issuances of common and preferred stock. Our objective is to maintain capital at an amount commensurate with our risk profile and risk tolerance objectives, to meet both regulatory and market expectations, and to provide the flexibility needed for future growth and business opportunities. Shareholders’ equity totaled $6.3 billion at September 30, 2014, an increase of $0.2 billion when compared with December 31, 2013.

Dividends

We consider disciplined capital management as a key objective, with dividends representing one component. Our strong capital ratios and expectations for continued earnings growth positions us to continue to actively explore additional capital management opportunities.

On October 15, 2014, our board of directors declared a quarterly cash dividend of $0.06 per common share, payable on January 2, 2015. Also, cash dividends of $0.05 per share were declared on July 16, 2014, April 16, 2014 and January 16, 2014.

On October 15, 2014, our board of directors also declared a quarterly cash dividend on our 8.50% Series A Non-Cumulative Perpetual Convertible Preferred Stock of $21.25 per share. The dividend is payable on January 15, 2015. Also, cash dividends of $21.25 per share were declared on July 16, 2014, April 16, 2014 and January 16, 2014.

On October 15, 2014, our board of directors also declared a quarterly cash dividend on our Floating Rate Series B Non-Cumulative Perpetual Preferred Stock of $7.33 per share. The dividend is payable on January 15, 2015. Also, cash dividends of $7.33 per share, $7.32 per share $7.35 per share were declared on July 16, 2014, April 16, 2014 and January 16, 2014, respectively.

 

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Share Repurchases

From time to time the board of directors authorizes the Company to repurchase shares of our common stock. Although we announce when the board of directors authorizes share repurchases, we typically do not give any public notice before we repurchase our shares. Future stock repurchases may be private or open-market repurchases, including block transactions, accelerated or delayed block transactions, forward transactions, and similar transactions. Various factors determine the amount and timing of our share repurchases, including our capital requirements, the number of shares we expect to issue for employee benefit plans and acquisitions, market conditions (including the trading price of our stock), and regulatory and legal considerations, including the FRB’s response to our capital plan.

On March 26, 2014, Huntington announced that the Federal Reserve did not object to Huntington’s proposed capital actions included in Huntington’s capital plan submitted to the Federal Reserve in January 2014. These actions included a potential repurchase of up to $250 million of common stock through the first quarter of 2015. Huntington’s board of directors authorized a share repurchase program consistent with Huntington’s capital plan. The new repurchase authorization represents a $23 million, or 10%, increase from the recently completed common stock repurchase authorization. During the 2014 third quarter, we repurchased 5.4 million shares, with a weighted average price of $9.70, under this program. Purchases of common stock may include open market purchases, privately negotiated transactions, and accelerated repurchase programs. We have approximately $86 million remaining under the current authorization.

Fair Value

Fair Value Measurements

The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. We estimate the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. We characterize active markets as those where transaction volumes are sufficient to provide objective pricing information, with reasonably narrow bid/ask spreads, and where received quoted prices do not vary widely. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. Inactive markets are characterized by low transaction volumes, price quotations that vary substantially among market participants, or in which minimal information is released publicly. When observable market prices do not exist, we estimate fair value primarily by using cash flow and other financial modeling methods. Our valuation methods consider factors such as liquidity and concentration concerns and, for the derivatives portfolio, counterparty credit risk. Other factors such as model assumptions, market dislocations, and unexpected correlations can affect estimates of fair value. Changes in these underlying factors, assumptions, or estimates in any of these areas could materially impact the amount of revenue or loss recorded.

The FASB ASC Topic 820, Fair Value Measurements, establishes a framework for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and establishes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the fair value measurement date. The three levels are defined as follows:

 

   

Level 1 – quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

   

Level 2 – inputs include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

   

Level 3 – inputs that are unobservable and significant to the fair value measurement. Financial instruments are considered Level 3 when values are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unobservable.

At the end of each quarter, we assess the valuation hierarchy for each asset or liability measured. As necessary, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs at the measurement date. The fair values measured at each level of the fair value hierarchy, additional discussion regarding fair value measurements, and a brief description of how fair value is determined for categories that have unobservable inputs, can be found in Note 14 of the Notes to Unaudited Condensed Consolidated Financial Statements.

 

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BUSINESS SEGMENT DISCUSSION

Overview

Our business segments are based on our internally-aligned segment leadership structure, which is how we monitor results and assess performance. During the 2014 first quarter, we reorganized our business segments to drive our ongoing growth and leverage the knowledge of our highly experienced team. We now have five major business segments: Retail and Business Banking, Commercial Banking, Automobile Finance and Commercial Real Estate (AFCRE), Regional Banking and The Huntington Private Client Group (RBHPCG), and Home Lending. A Treasury / Other function includes technology and operations, other unallocated assets, liabilities, revenue, and expense. All periods presented have been reclassified to conform to the current period classification.

Business segment results are determined based upon our management reporting system, which assigns balance sheet and income statement items to each of the business segments. The process is designed around our organizational and management structure and, accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions.

Revenue Sharing

Revenue is recorded in the business segment responsible for the related product or service. Fee sharing is recorded to allocate portions of such revenue to other business segments involved in selling to, or providing service to, customers. Results of operations for the business segments reflect these fee sharing allocations.

Expense Allocation

The management accounting process that develops the business segment reporting utilizes various estimates and allocation methodologies to measure the performance of the business segments. Expenses are allocated to business segments using a two-phase approach. The first phase consists of measuring and assigning unit costs (activity-based costs) to activities related to product origination and servicing. These activity-based costs are then extended, based on volumes, with the resulting amount allocated to business segments that own the related products. The second phase consists of the allocation of overhead costs to all five business segments from Treasury / Other. We utilize a full-allocation methodology, where all Treasury / Other expenses, except those related to reported Significant Items (except for the goodwill impairment), and a small amount of other residual unallocated expenses, are allocated to the five business segments.

Funds Transfer Pricing (FTP)

We use an active and centralized FTP methodology to attribute appropriate income to the business segments. The intent of the FTP methodology is to transfer interest rate risk from the business segments by providing matched duration funding of assets and liabilities. The result is to centralize the financial impact, management, and reporting of interest rate risk in the Treasury / Other function where it can be centrally monitored and managed. The Treasury / Other function charges (credits) an internal cost of funds for assets held in (or pays for funding provided by) each business segment. The FTP rate is based on prevailing market interest rates for comparable duration assets (or liabilities).

Net Income by Business Segment

The segregation of net income by business segment for the first nine-month period of September 30, 2014 and September 30, 2013 is presented in the following table:

Table 30—Net Income (Loss) by Business Segment

 

     Nine Months Ended September 30,  

(dollar amounts in thousands)

   2014     2013  

Retail and Business Banking

   $ 122,383      $ 97,320   

Commercial Banking

     99,484        83,022   

AFCRE

     155,157        180,916   

RBHPCG

     17,245        28,949   

Home Lending

     (12,906     3,219   

Treasury/Other

     87,415        89,684   
  

 

 

   

 

 

 

Total net income

   $ 468,778      $ 483,110   
  

 

 

   

 

 

 

 

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Treasury / Other

The Treasury / Other function includes revenue and expense related to assets, liabilities, and equity not directly assigned or allocated to one of the five business segments. Other assets include investment securities and bank owned life insurance. The financial impact associated with our FTP methodology, as described above, is also included.

Net interest income includes the impact of administering our investment securities portfolios and the net impact of derivatives used to hedge interest rate sensitivity. Noninterest income includes miscellaneous fee income not allocated to other business segments, such as bank owned life insurance income and any investment security and trading asset gains or losses. Noninterest expense includes certain corporate administrative, merger, and other miscellaneous expenses not allocated to other business segments. The provision for income taxes for the business segments is calculated at a statutory 35% tax rate, though our overall effective tax rate is lower. As a result, Treasury / Other reflects a credit for income taxes representing the difference between the lower actual effective tax rate and the statutory tax rate used to allocate income taxes to the business segments.

Optimal Customer Relationship (OCR)

Our OCR strategy is focused on building and deepening relationships with our customers through superior interactions, product penetration, and quality of service. We will deliver high-quality customer and prospect interactions through a fully integrated sales culture which will include all partners necessary to deliver a total Huntington solution. The quality of our relationships will lead to our ability to be the primary bank for our customers, yielding quality, annuitized revenue and profitable share of customers overall financial services revenue. We believe our relationship oriented approach will drive a competitive advantage through our local market delivery channels.

CONSUMER OCR PERFORMANCE

For both consumer and commercial OCR performance there are three key performance metrics: (1) the number of checking account households, (2) the number of product penetration per consumer checking household, and (3) the revenue generated from the consumer households of all business segments.

The growth in consumer checking account number of households is a result of both new sales of checking accounts and improved retention of existing checking account households. The overall objective is to grow the number of households, along with an increase in product penetration.

We use the checking account since it typically represents the primary banking relationship product. We count additional services by type, not number of services. For example, a household that has one checking account and one mortgage, we count as having two services. A household with four checking accounts, we count as having one service. The household relationship utilizing four or more services is viewed to be more profitable and loyal. The overall objective, therefore, is to decrease the percentage of 1-3 services per consumer checking account household, while increasing the percentage of those with 4 or more services. Since we have made significant strides toward having the vast majority of our customers with 4+ services, during the 2013 second quarter, we changed our measurement to 6+ services. We are holding ourselves to a higher performance standard.

 

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The following table presents consumer checking account household OCR metrics:

Table 31—Consumer Checking Household OCR Cross-sell Report

 

     2014     2013  
     Third     Second     First     Fourth     Third  

Number of households (2) (3)

     1,453,584        1,391,406        1,359,158        1,324,971        1,314,587   

Product Penetration by Number of Services (1)

          

1 Service

     3.3     3.0     3.0     3.0     3.2

2-3 Services

     18.4        18.4        18.8        19.2        19.5   

4-5 Services

     29.6        29.9        30.2        30.2        30.0   

6+ Services

     48.7        48.7        48.0        47.6        47.3   

Total revenue (in millions)

   $ 260.0$        256.6      $ 239.9      $ 232.5      $ 237.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The definitions and measurements used in our OCR process are periodically reviewed and updated prospectively.
(2) On March 1, 2014, Huntington acquired 9,904 Camco households.
(3) On September 12, 2014, Huntington acquired 37,939 Bank of America households.

Our emphasis on cross-sell, coupled with customers being attracted by the benefits offered through our “Fair Play” banking philosophy with programs such as 24-Hour Grace® on overdrafts and Asterisk-Free Checking™, are having a positive effect. The percent of consumer households with 6 or more products at the end of the 2014 third quarter was 48.7%, up from 47.3% at the end of the 2013 third quarter due to increased product sales and services provided.

COMMERCIAL OCR PERFORMANCE

For commercial OCR performance, there are three key performance metrics: (1) the number of commercial relationships, (2) the number of services penetration per commercial relationship, and (3) the revenue generated. Commercial relationships include relationships from all business segments.

The growth in the number of commercial relationships is a result of both new sales of checking accounts and improved retention of existing commercial accounts. The overall objective is to grow the number of relationships, along with an increase in product service distribution.

The commercial relationship is defined as a business banking or commercial banking customer with a checking account relationship. We use this metric because we believe that the checking account anchors a business relationship and creates the opportunity to increase our cross-sell. Multiple sales of the same type of service are counted as one service, the same as consumer.

The following table presents commercial relationship OCR metrics:

Table 32—Commercial Relationship OCR Cross-sell Report

 

     2014     2013  
     Third     Second     First     Fourth     Third  

Commercial Relationships (1)

     164,079        159,290        159,973        159,716        159,878   

Product Penetration by Number of Services (2)

          

1 Service

     16.6     16.9     19.4     21.1     22.1

2-3 Services

     42.2        41.8        41.1        41.4        41.1   

4+ Services

     41.2        41.3        39.5        37.5        36.8   

Total revenue (in millions)

   $ 213.1$        211.8      $ 213.3      $ 190.9      $ 193.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Checking account required.
(2) The definitions and measurements used in our OCR process are periodically reviewed and updated prospectively.

 

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By focusing on targeted relationships we are able to achieve higher product service penetration among our commercial relationships, and leverage these relationships to generate a deeper share of wallet.

Table 33—Average Loans/Leases and Deposits by Business Segment

 

     Nine Months Ended September 30, 2014  

(dollar amounts in millions)

   Retail and
Business Banking
     Commercial
Banking
     AFCRE      RBHPCG      Home
Lending
     Treasury
/ Other
    TOTAL  

Average Loans/Leases

                   

Commercial and industrial

   $ 3,623       $ 10,974       $ 2,847       $ 620       $ —         $ 97      $ 18,161   

Commercial real estate

     355         308         4,094         214         —           —          4,971   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial

     3,978         11,282         6,941         834         —           97        23,132   

Automobile

     —           —           7,388         —           —           (1     7,387   

Home equity

     7,484         2         1         732         166         (9     8,376   

Residential mortgage

     1,174         —           —           1,297         3,108         —          5,579   

Other consumer

     354         3         30         12         14         (24     389   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total consumer

     9,012         5         7,419         2,041         3,288         (34     21,731   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total loans and leases

   $ 12,990       $ 11,287       $ 14,360       $ 2,875       $ 3,288       $ 63      $ 44,863   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Average Deposits

                   

Demand deposits—noninterest-bearing

   $ 5,965       $ 4,673       $ 759       $ 1,614       $ 282       $ 293      $ 13,586   

Demand deposits—interest-bearing

     4,703         780         68         312         —           15        5,878   

Money market deposits

     9,900         3,733         260         3,853         —           7        17,753   

Savings and other domestic deposits

     4,856         85         5         80         —           (1     5,025   

Core certificates of deposit

     3,341         13         —           46         —           3        3,403   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total core deposits

     28,765         9,284         1,092         5,905         282         317        45,645   

Other deposits

     105         746         112         3         —           1,669        2,635   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total deposits

   $ 28,870       $ 10,030       $ 1,204       $ 5,908       $ 282       $ 1,986      $ 48,280   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     Nine Months Ended September 30, 2013  

(dollar amounts in millions)

   Retail and
Business Banking
     Commercial
Banking
     AFCRE      RBHPCG      Home
Lending
     Treasury
/ Other
    TOTAL  

Average Loans/Leases

                   

Commercial and industrial

   $ 3,440       $ 10,345       $ 2,556       $ 599       $ —         $ 67      $ 17,007   

Commercial real estate

     413         341         4,099         217         1         —          5,071   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial

     3,853         10,686         6,655         816         1         67        22,078   

Automobile

     —           —           5,403         —           —           (1     5,402   

Home equity

     7,396         2         1         754         172         (26     8,299   

Residential mortgage

     1,056         6         —           1,245         2,893         (46     5,154   

Other consumer

     320         4         54         15         14         44        451   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total consumer

     8,772         12         5,458         2,014         3,079         (29     19,306   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total loans and leases

   $ 12,625       $ 10,698       $ 12,113       $ 2,830       $ 3,080       $ 38      $ 41,384   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Average Deposits

                   

Demand deposits—noninterest-bearing

   $ 5,308       $ 4,195       $ 633       $ 1,911       $ 375       $ 292      $ 12,714   

Demand deposits—interest-bearing

     4,707         841         51         282         —           7        5,888   

Money market deposits

     8,563         3,123         248         3,344         —           9        15,287   

Savings and other domestic deposits

     4,893         85         6         84         2         (2     5,068   

Core certificates of deposit

     4,667         21         2         69         —           2        4,761   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total core deposits

     28,138         8,265         940         5,690         377         308        43,718   

Other deposits

     134         1,016         73         19         —           1,095        2,337   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total deposits

   $ 28,272       $ 9,281       $ 1,013       $ 5,709       $ 377       $ 1,403      $ 46,055   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Retail and Business Banking

Table 34—Key Performance Indicators for Retail and Business Banking

 

     Nine Months Ended September 30,     Change  

(dollar amounts in thousands unless otherwise noted)

   2014     2013     Amount     Percent  

Net interest income

   $ 678,502      $ 678,244      $ 258        —  

Provision for credit losses

     63,962        101,448        (37,486     (37

Noninterest income

     306,364        292,370        13,994        5   

Noninterest expense

     732,623        719,443        13,180        2   

Provision for income taxes

     65,898        52,403        13,495        26   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 122,383      $ 97,320      $ 25,063        26
  

 

 

   

 

 

   

 

 

   

 

 

 

Number of employees (average full-time equivalent)

     5,179        5,247        (68     (1 )% 

Total average assets (in millions)

   $ 14,784      $ 14,355      $ 429        3   

Total average loans/leases (in millions)

     12,990        12,625        365        3   

Total average deposits (in millions)

     28,870        28,272        598        2   

Net interest margin

     3.18     3.23     (0.05 )%      (2

NCOs

   $ 68,733      $ 97,552      $ (28,819     (30

NCOs as a % of average loans and leases

     0.71     1.03     (0.32 )%      (31

Return on average common equity

     12.0        9.1        2.9        32   

2014 First Nine Months vs. 2013 First Nine Months

Retail and Business Banking reported net income of $122.4 million in the first nine-month period of 2014. This was an increase of $25.1 million, or 26%, when compared to the year-ago period. The increase in net income reflected a combination of factors described below.

The increase in net interest income from the year-ago period reflected:

 

   

$0.6 billion, or 2%, increase in total average deposits.

 

   

$0.4 billion, or 3%, increase in average total loans combined with 10 basis points increase in loan spreads as a result of a reduction in the funds transfer price rates assigned to loans.

Partially offset by:

 

   

11 basis point decrease in deposit spreads that resulted from a reduction in the funds transfer price rates assigned to deposits.

The decrease in the provision for credit losses from the year-ago period reflected:

 

   

A $28.8 million, or 30%, decrease in NCOs, combined with improved credit metrics on business banking and consumer loans.

The increase in total average loans and leases from the year-ago period reflected:

 

   

$240 million, or 3%, increase in consumer loans, primarily due to growth in home equity lines of credit and residential mortgages, as well as the impact of the Camco acquisition.

 

   

$125 million, or 3%, increase in commercial loans, primarily due to C&I loan growth and the impact of the Camco acquisition.

 

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The increase in total average deposits from the year-ago period reflected:

 

   

$259 million deposit growth from our In-store branch network.

 

   

A continued focus on product mix in reducing the overall cost of deposits as evidenced by an increase in money market and noninterest bearing deposits, partially offset by a decrease in core certificates of deposit. In addition, the Camco acquisition contributed to the deposit increase.

 

   

While not having a meaningful impact on the 2014 third quarter average balance, the mid-September completion of the acquisition of the 24 Bank of America branches added approximately $0.7 billion to period-end deposits.

The increase in noninterest income from the year-ago period reflected:

 

   

$9.1 million, or 13%, increase in electronic banking income, primarily due to higher transaction volumes and an increase in the number of households.

 

   

$5.1 million, or 31%, increase in other noninterest income, primarily due to an increase in SBA loan servicing fees and an increase in revenue from credit card fees. We introduced the credit card product in the 2013 third quarter.

 

   

$4.4 million, or 3%, increase in service charges on deposit accounts, primarily due to the growth in the number of households and changing customer usage patterns.

Partially offset by:

 

   

$8.0 million, or 44% decline in mortgage banking income, primarily driven by lower refinancing activity referred to the Home Lending segment.

The increase in noninterest expense from the year-ago period reflected:

 

   

$23.6 million, or 8%, increase in allocated overhead expenses.

 

   

$3.3 million, or 13%, increase in equipment expense, primarily due to technology investments.

 

   

$3.4 million, or 12%, increase in outside data processing and other services expense, mainly the result of transaction costs associated with debit and credit card activity.

Partially offset by:

 

   

$11.2 million, or 5%, decrease in personnel costs, primarily due to the pension plan curtailment in 2013. Previous branch consolidations and various efficiency improvement initiatives also contributed to the decrease in personnel costs.

 

   

$5.3 million, or 46%, reduction in deposit and other insurance.

 

   

$1.7 million, or 8%, reduction in amortization of intangibles.

 

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Commercial Banking

Table 35—Key Performance Indicators for Commercial Banking

 

     Nine Months Ended September 30,     Change  

(dollar amounts in thousands unless otherwise noted)

   2014     2013     Amount     Percent  

Net interest income

   $ 218,257      $ 210,725      $ 7,532        4

Provision for credit losses

     30,905        41,685        (10,780     (26

Noninterest income

     149,165        152,109        (2,944     (2

Noninterest expense

     183,464        193,423        (9,959     (5

Provision for income taxes

     53,569        44,704        8,865        20   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 99,484      $ 83,022      $ 16,462        20
  

 

 

   

 

 

   

 

 

   

 

 

 

Number of employees (average full-time equivalent)

     1,034        1,080        (46     (4 )% 

Total average assets (in millions)

   $ 13,396      $ 11,703      $ 1,693        14   

Total average loans/leases (in millions)

     11,287        10,698        589        6   

Total average deposits (in millions)

     10,030        9,281        749        8   

Net interest margin

     2.56     2.74     (0.18 )%      (7

NCOs

   $ 10,982      $ (5,650   $ 16,632        N.R.   

NCOs as a % of average loans and leases

     0.13     (0.07 )%      0.20     N.R.   

Return on average common equity

     9.7        9.9        (0.2     (2

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

2014 First Nine Months vs. 2013 First Nine Months

Commercial Banking reported net income of $99.5 million in the first nine-month period of 2014. This was an increase of $16.5 million, or 20%, compared to the year-ago period. The increase in net income reflected a combination of factors described below.

The increase in net interest income from the year-ago period reflected:

 

   

$0.6 billion, or 6%, increase in average loans/leases.

 

   

$0.9 billion, or 803%, increase in average available-for-sale securities, primarily related to direct purchase municipal securities.

 

   

$0.7 billion, or 8%, increase in average total deposits.

Partially offset by:

 

   

18 basis point decrease in the net interest margin, primarily due to a 9 basis point compression in commercial loan spreads, as well as a 4 basis point compression from the international portfolio with products such as bankers acceptances and foreign insured receivables.

The decrease in the provision for credit losses from the year-ago period reflected:

 

   

Provision expense in the year-ago period reflected the results of our enhanced commercial risk rating system, as well as an overall net increase in the exposure at default assumptions included in the AULC component of our allowance calculation.

Partially offset by:

 

   

Increase in NCOs, primarily relating to large losses associated with a small number of credit relationships.

 

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The increase in total average assets from the year-ago period reflected:

 

   

$0.9 billion increase in available-for-sale securities driven from the addition of direct purchase municipal instruments. These instruments had been classified as C&I loans in the year-ago period.

 

   

$0.6 billion, or 565%, increase in the international loan portfolio, primarily bankers acceptances and foreign insured receivables.

 

   

$0.1 billion, or 1%, increase in the middle market loan portfolio, primarily due to our focus in specialty businesses.

Partially offset by:

 

   

$0.1 billion, or 54%, decrease in commercial loans managed by SAD, which reflected improved credit quality in the portfolio.

The increase in total average deposits from the year-ago period reflected:

 

   

$1.0 billion, or 12%, increase in core deposits, which primarily reflected a $0.5 billion increase in noninterest-bearing demand deposits. Middle market accounts, such as not-for-profit universities and healthcare, contributed $0.8 billion of the balance growth, while large corporate accounts contributed $0.3 billion.

The decrease in noninterest income from the year-ago period reflected:

 

   

$3.5 million, or 13%, decrease in commitment and other loan related fees, primarily reflecting a significant syndication fee in 2013.

 

   

$1.8 million, or 28%, decrease in equipment finance related fee income, primarily reflecting a significant lease syndication fee in 2013.

 

   

$1.1 million, or 2%, lower income in insurance, with most of the decline being in the title business, which has a direct correlation with our mortgage origination business.

Partially offset by:

 

   

$2.1 million, or 6%, increase in service charges on deposit accounts and other treasury management related revenue, primarily due to a new commercial card product implemented in 2013, as well as strong core cash management growth.

 

   

$1.8 million, or 29%, increase in fee income from international trade products, primarily due to bankers acceptances and letters of credit.

The decrease in noninterest expense from the year-ago period reflected:

 

   

$4.0 million, or 43%, decrease in deposit and other insurance expense.

 

   

$4.0 million, or 12%, decrease in allocated overhead expense.

 

   

$2.5 million, or 2%, decrease in personnel expense, primarily reflecting reduction in number of employees.

 

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Automobile Finance and Commercial Real Estate

Table 36—Key Performance Indicators for Automobile Finance and Commercial Real Estate

 

     Nine Months Ended September 30,     Change  

(dollar amounts in thousands unless otherwise noted)

   2014     2013     Amount     Percent  

Net interest income

   $ 290,297      $ 273,105      $ 17,192        6

Provision (reduction in allowance) for credit losses

     (42,035     (89,857     (47,822     (53

Noninterest income

     27,647        32,694        (5,047     (15

Noninterest expense

     121,276        117,323        3,953        3   

Provision for income taxes

     83,546        97,417        (13,871     (14
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 155,157      $ 180,916      $ (25,759     (14 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Number of employees (average full-time equivalent)

     288        278        10        4

Total average assets (in millions)

   $ 14,719      $ 12,727      $ 1,992        16   

Total average loans/leases (in millions)

     14,360        12,113        2,247        19   

Total average deposits (in millions)

     1,204        1,013        191        19   

Net interest margin

     2.65     2.86     (0.21 )%      (7

NCOs

   $ 542      $ 29,520      $ (28,978     (98

NCOs as a % of average loans and leases

     0.01     0.32     (0.31 )%      (97

Return on average common equity

     32.0        41.2        (9.2     (22

2014 First Nine Months vs. 2013 First Nine Months

AFCRE reported net income of $155.2 million in the first nine-month period of 2014. This was a decrease of $25.8 million, or 14%, compared to the year-ago period. The decrease in net income reflected a combination of factors described below.

The increase in net interest income from the year-ago period reflected:

 

   

$2.0 billion, or 37%, increase in automobile loans and leases, primarily due to continued strong origination volume which totaled $4.0 billion for the first nine months of 2014 compared to $3.2 billion for the first nine months of 2013.

Partially offset by:

 

   

21 basis point decrease in the net interest margin, primarily due to an 18 basis point reduction in loan spreads. This decline primarily reflects the impact of competitive pricing pressures in all of our portfolios, partially offset by a $5.1 million, or 5 basis points, recovery in the 2014 second quarter from the unexpected pay-off of an acquired commercial real estate loan.

The decrease in the provision (reduction in allowance) for credit losses from the year-ago period reflected:

 

   

Less improvement in credit quality than what was experienced in the year-ago period, reflecting a 15 basis point decline in NPA/loans in the current period compared to a 41 basis point decline in the year-ago period, offset by lower net charge offs.

The decrease in noninterest income from the year-ago period reflected:

 

   

$5.0 million, or 17%, decrease in other noninterest income, primarily due to decreases in market related gains associated with certain loans carried at fair value, operating lease related income and servicing income on securitized automobile loans.

The increase in noninterest expense from the year-ago period reflected:

 

   

$7.5 million, or 10%, increase in other noninterest expense, primarily due to a $8.8 million increase in allocated expenses, generally reflecting higher levels of business activity.

Partially offset by:

 

   

$3.0 million, or 32%, decrease in deposit and other insurance expense.

 

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Regional Banking and The Huntington Private Client Group

Table 37—Key Performance Indicators for Regional Banking and The Huntington Private Client Group

 

     Nine Months Ended September 30,     Change  

(dollar amounts in thousands unless otherwise noted)

   2014     2013     Amount     Percent  

Net interest income

   $ 76,399      $ 79,926      $ (3,527     (4 )% 

Provision for credit losses

     5,353        2,939        2,414        82   

Noninterest income

     132,080        144,029        (11,949     (8

Noninterest expense

     176,595        176,479        116        —     

Provision for income taxes

     9,286        15,588        (6,302     (40
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 17,245      $ 28,949      $ (11,704     (40 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Number of employees (average full-time equivalent)

     1,046        1,066        (20     (2 )% 

Total average assets (in millions)

   $ 3,789      $ 3,733      $ 56        2   

Total average loans/leases (in millions)

     2,875        2,830        45        2   

Total average deposits (in millions)

     5,908        5,709        199        3   

Net interest margin

     1.79     1.93     (0.14 )%      (7

NCOs

   $ 7,232      $ 8,020      $ (788     (10

NCOs as a % of average loans and leases

     0.34     0.38     (0.04 )%      (11

Return on average common equity

     4.6        7.8        (3.2     (41

Total assets under management (in billions)—eop

     15.5        17.0        (1.5     (9

Total trust assets (in billions)—eop

     81.6        78.7        2.9        4   

eop - End of Period.

        

2014 First Nine Months vs. 2013 First Nine Months

RBHPCG reported net income of $17.2 million in the first nine-month period of 2014. This was a decrease of $11.7 million, or 40%, when compared to the year-ago period. The decrease in net income reflected a combination of factors described below.

The decrease in net interest income from the year-ago period reflected:

 

   

14 basis point decrease in the net interest margin, primarily due to lower spreads on deposits.

Partially offset by:

 

   

$0.2 billion, or 3%, increase in average total deposits, primarily due to increased focus on deposit growth resulting from the alignment of private banking with the regional presidents.

The increase in provision for credit losses reflected:

 

   

Less improvement in the underlying credit quality of the loan portfolio compared to year-ago period, offset by reduced level of NCOs.

The decrease in noninterest income from the year-ago period reflected:

 

   

$6.2 million, or 7%, decrease in trust services, primarily due to reduced proprietary mutual fund revenue related to a reduction in asset values and due to the sale of the fixed income funds.

 

   

$3.0 million, or 26%, decrease in other noninterest income, primarily due to a gain realized from LIHTC investment sales in the 2013 first quarter.

 

   

$1.4 million, or 29%, decrease in service charges on deposit accounts.

 

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The increase in noninterest expense from the year-ago period reflected:

 

   

$2.9 million, or 116%, increase in professional services expense, primarily due to increased consulting fees.

Partially offset by:

 

   

$1.3 million, or 1%, decrease in personnel costs, primarily due to the pension plan curtailment gain in 2013.

 

   

$1.1 million, or 40%, decrease in deposit and other insurance expense.

 

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Home Lending

Table 38—Key Performance Indicators for Home Lending

 

     Nine Months Ended September 30,     Change  

(dollar amounts in thousands unless otherwise noted)

   2014     2013     Amount     Percent  

Net interest income

   $ 41,997      $ 38,139      $ 3,858        10

Provision for credit losses

     20,308        9,501        10,807        114   

Noninterest income

     59,946        85,599        (25,653     (30

Noninterest expense

     101,490        109,285        (7,795     (7

Provision for income taxes

     (6,949     1,733        8,682        N.R.   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (12,906   $ 3,219      $ 16,125        N.R.   
  

 

 

   

 

 

   

 

 

   

 

 

 

Number of employees (average full-time equivalent)

     993        1,100        (107     (10 )% 

Total average assets (in millions)

   $ 3,795      $ 3,653      $ 142        4   

Total average loans/leases (in millions)

     3,288        3,079        209        7   

Total average deposits (in millions)

     282        377        (95     (25

Net interest margin

     1.57     1.48     0.09        6   

NCOs

   $ 14,163      $ 12,799      $ 1,364        11   

NCOs as a % of average loans and leases

     0.57     0.55     0.02        4   

Return on average common equity

     (9.9     2.4        (12.3     (513

Mortgage banking origination volume (in millions)

   $ 2,637      $ 3,578      $ (941     (26

N.R.—Not relevant.

        

2014 First Nine Months vs. 2013 First Nine Months

Home Lending reported a net loss of $12.9 million in the first nine-month period of 2014 compared to net income of $3.2 million in the year-ago period. Home Lending supports the origination and servicing of mortgage loans across all segments. The decrease in net income reflected a combination of factors described below.

The increase in net interest income from the year-ago period reflected:

 

   

9 basis point increase in the net interest margin, primarily due to a 16 basis point increase in loan spreads. This increase is primarily driven by lower funding costs on the loan portfolio.

 

   

$0.2 billion, or 7%, increase in average total loans.

Partially offset by:

 

   

$0.1 billion, or 25%, decrease in average total deposits, driven by lower escrow balances.

The increase in provision for credit losses reflected:

 

   

The transfer of the student loan portfolio to loans held-for-sale during the 2014 first quarter and a $1.4 million, or 11%, increase in NCOs.

The decrease in noninterest income from the year-ago period reflected:

 

   

$22.8 million, or 28%, decrease in mortgage banking income, primarily due to a reduction in volume and gain on sale related to lower refinancing levels.

 

   

$2.4 million, or 54%, decrease in insurance income, primarily due to lower refinance volume related to title insurance referrals.

 

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The decrease in noninterest expense from the year-ago period reflected:

 

   

$8.1 million, or 11%, decrease in personnel costs, primarily due to lower mortgage production volume and a reduction in staff.

 

   

$1.2 million, or 43%, decrease in deposit and other insurance expense.

 

   

$0.9 million, or 5%, decrease in other noninterest expense, primarily due to lower mortgage repurchase expense.

Partially offset by:

 

   

$3.1 million, or 28%, increase in outside data processing and other services, spending on loan promotions.

ADDITIONAL DISCLOSURES

Forward-Looking Statements

This report, including MD&A, contains certain forward-looking statements, including certain plans, expectations, goals, projections, and statements, which are subject to numerous assumptions, risks, and uncertainties. Statements that do not describe historical or current facts, including statements about beliefs and expectations, are forward-looking statements. Forward-looking statements may be identified by words such as expect, anticipate, believe, intend, estimate, plan, target, goal, or similar expressions, or future or conditional verbs such as will, may, might, should, would, could, or similar variations. The forward-looking statements are intended to be subject to the safe harbor provided by Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995.

While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those contained or implied in the forward-looking statements: (1) worsening of credit quality performance due to a number of factors such as the underlying value of collateral that could prove less valuable than otherwise assumed and assumed cash flows may be worse than expected, (2) changes in general economic, political, or industry conditions, uncertainty in U.S. fiscal and monetary policy, including the interest rate policies of the Federal Reserve Board, volatility and disruptions in global capital and credit markets, (3) movements in interest rates, (4) competitive pressures on product pricing and services, (5) success, impact, and timing of our business strategies, including market acceptance of any new products or services implementing our “Fair Play” banking philosophy, (6) changes in accounting policies and principles and the accuracy of our assumptions and estimates used to prepare our financial statements, (7) extended disruption of vital infrastructure, (8) the final outcome of significant litigation, (9) the nature, extent, timing, and results of governmental actions, examinations, reviews, reforms, regulations, and interpretations, including those related to the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III regulatory capital reforms, as well as those involving the OCC, Federal Reserve, FDIC, and CFPB, and (10) the outcome of judicial and regulatory decisions regarding practices in the residential mortgage industry, including among other things the processes followed for foreclosing residential mortgages. Additional factors that could cause results to differ materially from those described above can be found in our 2013 Annual Report on Form 10-K and documents subsequently filed by us with the Securities and Exchange Commission.

All forward-looking statements speak only as of the date they are made and are based on information available at that time. We assume no obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance on such statements.

 

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Non-Regulatory Capital Ratios

In addition to capital ratios defined by banking regulators, the Company considers various other measures when evaluating capital utilization and adequacy, including:

 

   

Tangible common equity to tangible assets,

 

   

Tier 1 common equity to risk-weighted assets using Basel I and Basel III definitions, and

 

   

Tangible common equity to risk-weighted assets using Basel I definition.

These non-regulatory capital ratios are viewed by management as useful additional methods of reflecting the level of capital available to withstand unexpected market conditions. Additionally, presentation of these ratios allows readers to compare the Company’s capitalization to other financial services companies. These ratios differ from capital ratios defined by banking regulators principally in that the numerator excludes preferred securities, the nature and extent of which varies among different financial services companies. These ratios are not defined in Generally Accepted Accounting Principles (“GAAP”) or federal banking regulations. As a result, these non-regulatory capital ratios disclosed by the Company are considered non-GAAP financial measures.

Because there are no standardized definitions for these non-regulatory capital ratios, the Company’s calculation methods may differ from those used by other financial services companies. Also, there may be limits in the usefulness of these measures to investors. As a result, the Company encourages readers to consider the consolidated financial statements and other financial information contained in this Form 10-Q in their entirety, and not to rely on any single financial measure.

Risk Factors

Information on risk is discussed in the Risk Factors section included in Item 1A of our 2013 Form 10-K. Additional information regarding risk factors can also be found in the Risk Management and Capital discussion of this report.

Critical Accounting Policies and Use of Significant Estimates

Our financial statements are prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to establish critical accounting policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in our financial statements. Note 1 of Notes to Consolidated Financial Statements included in our 2013 Form 10-K, as supplemented by this report, lists significant accounting policies we use in the development and presentation of our financial statements. This MD&A, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors necessary for an understanding and evaluation of our company, financial position, results of operations, and cash flows.

An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements if a different amount within a range of estimates were used or if estimates changed from period to period. Estimates are made under facts and circumstances at a point in time, and changes in those facts and circumstances could produce results that significantly differ from when those estimates were made.

Our most significant accounting estimates relate to our ACL, income taxes and deferred tax assets, and fair value measurements of investment securities, goodwill, pension, and other real estate owned. These significant accounting estimates and their related application are discussed in our 2013 Form 10-K.

Recent Accounting Pronouncements and Developments

Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements discusses new accounting pronouncements adopted during 2014 and the expected impact of accounting pronouncements recently issued but not yet required to be adopted. To the extent the adoption of new accounting standards materially affect financial condition, results of operations, or liquidity, the impacts are discussed in the applicable section of this MD&A and the Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Item 1: Financial Statements

Huntington Bancshares Incorporated

Condensed Consolidated Balance Sheets

(Unaudited)

 

     2014     2013  

(dollar amounts in thousands, except number of shares)

   September 30,     December 31,  

Assets

    

Cash and due from banks

   $ 879,862      $ 1,001,132   

Interest-bearing deposits in banks

     72,898        57,043   

Trading account securities

     66,460        35,573   

Loans held for sale (includes $339,061 and $278,928 respectively, measured at fair value) (1)

     410,932        326,212   

Available-for-sale and other securities

     8,721,804        7,308,753   

Held-to-maturity securities

     3,496,493        3,836,667   

Loans and leases (includes $16,700 and $52,286 respectively, measured at fair value) (1)

     46,723,374        43,120,500   

Allowance for loan and lease losses

     (631,036 )      (647,870
  

 

 

   

 

 

 

Net loans and leases

     46,092,338        42,472,630   
  

 

 

   

 

 

 

Bank owned life insurance

     1,703,692        1,647,170   

Premises and equipment

     613,214        634,657   

Goodwill

     522,541        444,268   

Other intangible assets

     85,324        93,193   

Accrued income and other assets

     1,665,071        1,609,876   
  

 

 

   

 

 

 

Total assets

   $ 64,330,629      $ 59,467,174   
  

 

 

   

 

 

 

Liabilities and shareholders’ equity

    

Liabilities

    

Deposits

   $ 50,129,837      $ 47,506,718   

Short-term borrowings

     1,530,938        552,143   

Federal Home Loan Bank advances

     1,658,112        1,808,293   

Other long-term debt

     2,590,212        1,349,119   

Subordinated notes

     976,264        1,100,860   

Accrued expenses and other liabilities

     1,161,056        1,059,888   
  

 

 

   

 

 

 

Total liabilities

     58,046,419        53,377,021   
  

 

 

   

 

 

 

Shareholders’ equity

    

Preferred stock—authorized 6,617,808 shares:

    

Series A, 8.50% fixed rate, non-cumulative perpetual convertible preferred stock, par value of $0.01, and liquidation value per share of $1,000

     362,507        362,507   

Series B, floating rate, non-voting, non-cumulative perpetual preferred stock, par value of $0.01, and liquidation value per share of $1,000

     23,785        23,785   

Common stock

     8,161        8,322   

Capital surplus

     7,243,879        7,398,515   

Less treasury shares, at cost

     (12,938     (9,643

Accumulated other comprehensive loss

     (182,016     (214,009

Retained (deficit) earnings

     (1,159,168     (1,479,324
  

 

 

   

 

 

 

Total shareholders’ equity

     6,284,210        6,090,153   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 64,330,629      $ 59,467,174   
  

 

 

   

 

 

 

Common shares authorized (par value of $0.01)

     1,500,000,000        1,500,000,000   

Common shares issued

     816,091,946        832,217,098   

Common shares outstanding

     814,453,953        830,963,427   

Treasury shares outstanding

     1,637,993        1,253,671   

Preferred shares issued

     1,967,071        1,967,071   

Preferred shares outstanding

     398,007        398,007   

 

(1) Amounts represent loans for which Huntington has elected the fair value option.

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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Huntington Bancshares Incorporated

Condensed Consolidated Statements of Income

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(dollar amounts in thousands, except per share amounts)

   2014      2013     2014      2013  

Interest and fee income:

          

Loans and leases

   $ 424,658       $ 408,997      $ 1,248,104       $ 1,221,321   

Available-for-sale and other securities

          

Taxable

     43,065         35,280        123,549         114,004   

Tax-exempt

     7,959         2,677        20,049         8,052   

Held-to-maturity securities - taxable

     21,777         12,220        67,711         31,835   

Other

     3,601         3,738        9,424         15,601   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest income

     501,060         462,912        1,468,837         1,390,813   
  

 

 

    

 

 

   

 

 

    

 

 

 

Interest expense:

          

Deposits

     20,461         27,655        66,245         89,281   

Short-term borrowings

     292         158        712         571   

Federal Home Loan Bank advances

     981         197        2,056         771   

Subordinated notes and other long-term debt

     12,991         10,050        35,935         26,231   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest expense

     34,725         38,060        104,948         116,854   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income

     466,335         424,852        1,363,889         1,273,959   

Provision for credit losses

     24,480         11,400        78,495         65,714   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income after provision for credit losses

     441,855         413,452        1,285,394         1,208,245   
  

 

 

    

 

 

   

 

 

    

 

 

 

Service charges on deposit accounts

     69,118         72,918        206,333         201,810   

Mortgage banking income

     25,051         23,621        70,857         102,528   

Trust services

     28,045         30,470        87,191         92,296   

Electronic banking

     27,275         24,282        77,408         68,340   

Insurance income

     16,729         17,269        49,221         53,708   

Brokerage income

     17,155         16,636        52,227         54,473   

Bank owned life insurance income

     14,888         13,740        42,060         42,603   

Capital markets fees

     10,246         12,825        29,940         32,888   

Gain on sale of loans

     8,199         5,063        15,683         11,027   

Net gains on sales of securities

     198         184        17,658         981   

Impairment losses recognized in earnings on available-for-sale securities

     —           (86     —           (1,802

Other noninterest income

     30,445         36,845        97,323         103,452   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total noninterest income

     247,349         253,767        745,901         762,304   
  

 

 

    

 

 

   

 

 

    

 

 

 

Personnel costs

     275,409         229,326        785,486         752,083   

Outside data processing and other services

     53,073         49,313        158,901         148,476   

Net occupancy

     34,405         35,591        96,511         93,361   

Equipment

     30,183         28,191        87,682         78,018   

Marketing

     12,576         12,271        38,094         37,481   

Deposit and other insurance expense

     11,628         11,155        35,945         40,105   

Amortization of intangibles

     9,813         10,362        28,624         31,044   

Professional services

     13,763         12,487        43,890         29,020   

Other noninterest expense

     39,468         34,640        123,942         102,406   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total noninterest expense

     480,318         423,336        1,399,075         1,311,994   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income before income taxes

     208,886         243,883        632,220         658,555   

Provision for income taxes

     53,870         65,047        163,442         175,445   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

     155,016         178,836        468,778         483,110   

Dividends on preferred shares

     7,964         7,967        23,891         23,904   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income applicable to common shares

   $ 147,052       $ 170,869      $ 444,887       $ 459,206   
  

 

 

    

 

 

   

 

 

    

 

 

 

Average common shares—basic

     816,497         830,398        820,884         835,410   

Average common shares—diluted

     829,623         841,025        833,927         844,524   

Per common share:

          

Net income—basic

   $ 0.18       $ 0.21      $ 0.54       $ 0.55   

Net income—diluted

     0.18         0.20        0.53         0.54   

Cash dividends declared

     0.05         0.05        0.15         0.14   

OTTI losses for the periods presented:

          

Total OTTI losses

   $ —         $ (92   $ —         $ (1,808

Noncredit-related portion of loss recognized in OCI

     —           6        —           6   
  

 

 

    

 

 

   

 

 

    

 

 

 

Impairment losses recognized in earnings on available-for-sale securities

   $ —         $ (86   $ —         $ (1,802
  

 

 

    

 

 

   

 

 

    

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

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Huntington Bancshares Incorporated

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(dollar amounts in thousands)

   2014     2013      2014     2013  

Net income

   $ 155,016      $ 178,836       $ 468,778      $ 483,110   

Other comprehensive income, net of tax:

         

Unrealized gains on available-for-sale and other securities:

         

Non-credit-related impairment recoveries on debt securities not expected to be sold

     2,126        1,934         7,724        9,742   

Unrealized net gains (losses) on available-for-sale and other securities arising during the period, net of reclassification for net realized gains

     (8,918     4,594         21,483        (77,449
  

 

 

   

 

 

    

 

 

   

 

 

 

Total unrealized gains (losses) on available-for-sale and other securities

     (6,792     6,528         29,207        (67,707

Unrealized gains (losses) on cash flow hedging derivatives

     (21,229     15,332         (4,100     (54,048

Change in accumulated unrealized losses for pension and other post-retirement obligations

     5,732        31,109         6,886        41,805   
  

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income (loss)

     (22,289     52,969         31,993        (79,950
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 132,727      $ 231,805       $ 500,771      $ 403,160   
  

 

 

   

 

 

    

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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Huntington Bancshares Incorporated

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

 

    Preferred Stock                                   Accumulated              
                Series B                                   Other     Retained        
(All amounts in thousands,   Series A     Floating Rate     Common Stock     Capital     Treasury Stock     Comprehensive     Earnings        
except for per share amounts)   Shares     Amount     Shares     Amount     Shares     Amount     Surplus     Shares     Amount     Loss     (Deficit)     Total  

Nine Months Ended September 30, 2013

                       

Balance, beginning of period

    363      $ 362,507        35      $ 23,785        844,105      $ 8,441      $ 7,475,149        (1,292   $ (10,921   $ (150,817   $ (1,917,933   $ 5,790,211   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative effect of change in accounting principle for low income housing tax credits, net of tax of $53,896

                        (11,711     (11,711
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, beginning of period - as adjusted

    363      $ 362,507        35      $ 23,785        844,105      $ 8,441      $ 7,475,149        (1,292   $ (10,921   $ (150,817   $ (1,929,644   $ 5,778,500   

Net income

                        483,110        483,110   

Other comprehensive income (loss)

                      (79,950       (79,950

Repurchase of common stock

            (16,708     (167     (124,828             (124,995

Cash dividends declared:

                       

Common ($0.14 per share)

                        (116,648     (116,648

Preferred Series A ($63.75 per share)

                        (23,110     (23,110

Preferred Series B ($22.37 per share)

                        (794     (794

Recognition of the fair value of share-based compensation

                27,643                27,643   

Other share-based compensation activity

            4,119        41        9,648              (817     8,872   

Other

                (579     (79     28          (17     (568
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

    363      $ 362,507        35      $ 23,785        831,516      $ 8,315      $ 7,387,033        (1,371   $ (10,893   $ (230,767   $ (1,587,920   $ 5,952,060   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2014

                       

Balance, beginning of period

    363      $ 362,507        35      $ 23,785        832,217      $ 8,322      $ 7,398,515        (1,331   $ (9,643   $ (214,009   $ (1,479,324   $ 6,090,153   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

                        468,778        468,778   

Other comprehensive income (loss)

                      31,993          31,993   

Shares issued pursuant to acquisition

            8,694        87        91,577                91,664   

Shares issued to HIP

            276        3        2,594                2,597   

Repurchases of common stock

            (32,103     (321     (299,399             (299,720

Cash dividends declared:

                       

Common ($0.15 per share)

                        (122,984     (122,984

Preferred Series A ($63.75 per share)

                        (23,110     (23,110

Preferred Series B ($22.00 per share)

                        (781     (781

Recognition of the fair value of share-based compensation

                33,656                33,656   

Other share-based compensation activity

            6,162        62        14,897              (1,710     13,249   

Other

            846        8        2,039        (307     (3,295       (37     (1,285
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

    363      $ 362,507        35      $ 23,785        816,092      $ 8,161      $ 7,243,879        (1,638   $ (12,938   $ (182,016   $ (1,159,168   $ 6,284,210   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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Huntington Bancshares Incorporated

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Nine Months Ended
September 30,
 

(dollar amounts in thousands)

   2014     2013  

Operating activities

  

Net income

   $ 468,778      $ 483,110   

Adjustments to reconcile net income to net cash provided by operating activities:

  

Impairment of goodwill

     3,000        —     

Provision for credit losses

     78,495        65,714   

Depreciation and amortization

     238,974        210,311   

Share-based compensation expense

     33,656        27,643   

Change in deferred income taxes

     12,266        60,444   

Originations of loans held for sale

     (1,775,970     (2,276,606

Principal payments on and proceeds from loans held for sale

     1,733,936        2,435,673   

Gain on sale of loans held for sale

     (19,861     (42,963

Net gain on sales of securities

     (17,658     (981

Impairment losses recognized in earnings on available-for-sale securities

     —          1,802   

Net change in:

    

Trading account securities

     (30,887     17,038   

Accrued income and other assets

     (157,163     (36,350

Accrued expense and other liabilities

     61,660        (131,541
  

 

 

   

 

 

 

Net cash provided by (used for) operating activities

     629,226        813,294   
  

 

 

   

 

 

 

Investing activities

  

Change in interest bearing deposits in banks

     (15,855     103,781   

Cash received from acquisition, net of cash paid

     691,637        —     

Proceeds from:

    

Maturities and calls of available-for-sale and other securities

     1,056,833        1,161,018   

Maturities of held-to-maturity securities

     337,175        195,369   

Sales of available-for-sale and other securities

     1,093,176        362,434   

Purchases of available-for-sale and other securities

     (3,436,111     (830,992

Purchases of held-to-maturity securities

     —          (397,309

Net proceeds from sales of loans

     254,663        341,751   

Net loan and lease activity, excluding sales

     (3,229,382     (2,091,670

Proceeds from sale of operating lease assets

     362        9,146   

Purchases of premises and equipment

     (31,559     (89,100

Proceeds from sales of other real estate

     29,741        27,671   

Purchases of loans and leases

     (286,819     (7,417

Purchase of customer list

     (946     —     

Other, net

     3,495        2,550   
  

 

 

   

 

 

 

Net cash provided by (used for) investing activities

     (3,533,590     (1,212,768
  

 

 

   

 

 

 

Financing activities

  

Increase (decrease) in deposits

     1,321,398        315,008   

Increase (decrease) in short-term borrowings

     983,741        155,454   

Maturity/redemption of subordinated notes

     (124,907     (50,000

Proceeds from Federal Home Loan Bank advances

     3,355,499        2,600,000   

Maturity/redemption of Federal Home Loan Bank advances

     (3,579,439     (3,275,648

Proceeds from issuance of long-term debt

     1,250,000        748,727   

Maturity/redemption of long-term debt

     —          (2,086

Dividends paid on preferred stock

     (23,891     (23,910

Dividends paid on common stock

     (121,253     (109,046

Repurchases of common stock

     (299,720     (124,995

Net proceeds from issuance of common stock

     2,597        —     

Other, net

     19,069        10,822   
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     2,783,094        244,326   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (121,270     (155,148

Cash and cash equivalents at beginning of period

     1,001,132        1,262,806   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 879,862      $ 1,107,658   
  

 

 

   

 

 

 

Supplemental disclosures:

  

Income taxes paid (refunded)

   $ 87,454      $ 99,538   

Interest paid

     98,080        116,945   

Non-cash activities

  

Securities transferred to held-to-maturity from available-for-sale

     —          292,164   

Loans transferred to held-for-sale from portfolio

     85,022        50,344   

Loans transferred to portfolio from held-for-sale

     45,240        307,303   

Dividends accrued, paid in subsequent quarter

     46,580        47,907   

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Huntington Bancshares Incorporated

Notes to Unaudited Condensed Consolidated Financial Statements

1. BASIS OF PRESENTATION

The accompanying Unaudited Condensed Consolidated Financial Statements of Huntington reflect all adjustments consisting of normal recurring accruals which are, in the opinion of Management, necessary for a fair presentation of the consolidated financial position, the results of operations, and cash flows for the periods presented. These Unaudited Condensed Consolidated Financial Statements have been prepared according to the rules and regulations of the SEC and, therefore, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted. The Notes to Consolidated Financial Statements appearing in Huntington’s Form 8-K filed on May 28, 2014, which include descriptions of significant accounting policies, as updated by the information contained in this report, should be read in conjunction with these interim financial statements.

For statement of cash flows purposes, cash and cash equivalents are defined as the sum of “Cash and due from banks” which includes amounts on deposit with the Federal Reserve and “Federal funds sold and securities purchased under resale agreements.”

In conjunction with applicable accounting standards, all material subsequent events have been either recognized in the Unaudited Condensed Consolidated Financial Statements or disclosed in the Notes to Unaudited Condensed Consolidated Financial Statements.

2. ACCOUNTING STANDARDS UPDATE

ASU 2013-11— Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The ASU requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, unrecognized tax benefits should be presented in the financial statements as a liability and should not be combined with deferred tax assets in circumstances where availability or legal requirement and intent to settle additional incomes taxes is not met. The amendments were applied prospectively and were effective for interim and annual reporting periods beginning January 1, 2014. The amendments did not have a material impact to Huntington’s Unaudited Condensed Consolidated Financial Statements.

ASU 2014-01— Investments (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects.

The amendments in ASU 2014-01 permit entities to make an accounting policy election to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity recognizes the net investment performance in the income statement as a component of income tax expense (benefit). Huntington elected to early adopt the amended guidance during the first quarter of 2014. The guidance was applied retrospectively to all prior periods presented. The adoption resulted in an immaterial adjustment reducing retained earnings at the beginning of 2010. The impact to current period net income was not material. See discussion on Low Income Housing Tax Credit Partnerships in Note 16 for further information on this topic.

ASU 2014-04— Receivables (Topic 310): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The ASU clarifies that an in substance repossession or foreclosure occurs upon either the creditor obtaining legal title to the residential real estate property or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The amendments may be adopted using either a modified retrospective transition method or a prospective transition method. Management does not believe the amendments will have a material impact to Huntington’s Unaudited Condensed Consolidated Financial Statements.

ASU 2014-09—Revenue from Contracts with Customers (Topic 606): The amendments in ASU 2014-09 supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The general principle of the amendments require an entity to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance sets forth a five step approach to be utilized for revenue recognition. The amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Management is currently assessing the impact to Huntington’s Unaudited Condensed Consolidated Financial Statements.

 

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ASU 2014-11— Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in the ASU require repurchase-to-maturity transactions to be recorded and accounted for as secured borrowings. Amendments to Topic 860 also require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (i.e., a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement, as well as additional required disclosures. The accounting amendments and disclosures are effective for interim and annual periods beginning after December 15, 2014. The disclosures for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings are required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. Management is currently assessing the impact to Huntington’s Unaudited Condensed Consolidated Financial Statements.

ASU 2014-12— Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments require that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. Specifically, if the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Management is currently assessing the impact to Huntington’s Unaudited Condensed Consolidated Financial Statements.

ASU 2014-13—Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity The amendments allow a reporting entity that consolidates a collateralized financing entity within the scope of the guidance to elect to measure the financial assets and the financial liabilities of that collateralized financing entity using the measurement alternative. Under the measurement alternative, the reporting entity should measure both the financial assets and the financial liabilities of that collateralized financing entity in its consolidated financial statements using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Management does not believe the amendments will have a material impact to Huntington’s Unaudited Condensed Consolidated Financial Statements.

ASU 2014-14— Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. The amendments require a mortgage loan to be derecognized and a separate receivable to be recognized upon foreclosure if the loan has a government guarantee that is non-separable from the loan before foreclosure, the creditor has the ability and intent to convey the real estate property to the guarantor, and any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Additionally, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor upon foreclosure. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. Management does not believe the amendments will have a material impact to Huntington’s Unaudited Condensed Consolidated Financial Statements.

3. LOANS / LEASES AND ALLOWANCE FOR CREDIT LOSSES

Loans and leases for which Huntington has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are classified in the Unaudited Condensed Consolidated Balance Sheets as loans and leases. Except for loans which are accounted for at fair value, loans and leases are carried at the principal amount outstanding, net of unamortized deferred loan origination fees and costs and net of unearned income. At September 30, 2014, and December 31, 2013, the aggregate amount of these net unamortized deferred loan origination fees and costs, net of premiums or discounts, and net unearned income was $171.1 million and $192.9 million, respectively.

 

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Loan and Lease Portfolio Composition

The following table provides a detailed listing of Huntington’s loan and lease portfolio at September 30, 2014 and December 31, 2013:

 

     September 30,     December 31,  

(dollar amounts in thousands)

   2014     2013  

Loans and leases:

    

Commercial and industrial

   $ 18,790,592      $ 17,594,276   

Commercial real estate

     4,990,424        4,850,094   

Automobile

     8,321,630        6,638,713   

Home equity

     8,436,278        8,336,318   

Residential mortgage

     5,787,567        5,321,088   

Other consumer

     396,883        380,011   
  

 

 

   

 

 

 

Loans and leases

     46,723,374        43,120,500   
  

 

 

   

 

 

 

Allowance for loan and lease losses

     (631,036     (647,870
  

 

 

   

 

 

 

Net loans and leases

   $ 46,092,338      $ 42,472,630   
  

 

 

   

 

 

 

As shown in the table above, the primary loan and lease portfolios are: C&I, CRE, automobile, home equity, residential mortgage, and other consumer. For ACL purposes, these portfolios are further disaggregated into classes. The classes within each portfolio are as follows:

 

Portfolio

  

Class

Commercial and industrial    Owner occupied
   Purchased credit-impaired
   Other commercial and industrial
Commercial real estate    Retail properties
   Multi family
   Office
   Industrial and warehouse
   Purchased credit-impaired
   Other commercial real estate
Automobile    NA (1)
Home equity    Secured by first-lien
   Secured by junior-lien
Residential mortgage    Residential mortgage
   Purchased credit-impaired
Other consumer    Other consumer
   Purchased credit-impaired

 

(1) Not applicable. The automobile loan portfolio is not further segregated into classes.

Camco Financial acquisition

On March 1, 2014, Huntington completed its acquisition of Camco Financial in a stock and cash transaction valued at $109.5 million. Loans with a fair value of $559.4 million were transferred to Huntington. These loans were recorded at fair value in accordance with applicable accounting guidance, ASC 805. The fair values for the loans were estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms (Level 3), and reflected an estimate of probable losses and the credit risk associated with the loans.

 

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Purchased Credit-Impaired Loans

Purchased loans with evidence of deterioration in credit quality since origination for which it is probable at acquisition that we will be unable to collect all contractually required payments are considered to be credit impaired. Purchased credit-impaired loans are initially recorded at fair value, which is estimated by discounting the cash flows expected to be collected at the acquisition date. Because the estimate of expected cash flows reflects an estimate of future credit losses expected to be incurred over the life of the loans, an allowance for credit losses is not recorded at the acquisition date. The excess of cash flows expected at acquisition over the estimated fair value, referred to as the accretable yield, is recognized in interest income over the remaining life of the loan, or pool of loans, on a level-yield basis. The difference between the contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. A subsequent decrease in the estimate of cash flows expected to be received on purchased credit-impaired loans generally results in the recognition of an allowance for credit losses. Subsequent increases in cash flows result in reversal of any nonaccretable difference (or allowance for loan and lease losses to the extent any has been recorded) with a positive impact on interest income subsequently recognized. The measurement of cash flows involves assumptions and judgments for interest rates, prepayments, default rates, loss severity, and collateral values. All of these factors are inherently subjective and significant changes in the cash flow estimates over the life of the loan can result.

The following table reflects the contractually required payments receivable, cash flows expected to be collected, and fair value of the credit impaired Camco Financial loans at acquisition date:

 

     March 1,  

(dollar amounts in thousands)

   2014  

Contractually required payments including interest

   $ 14,363   

Less: nonaccretable difference

     (11,234
  

 

 

 

Cash flows expected to be collected

     3,129   

Less: accretable yield

     (143
  

 

 

 

Fair value of credit impaired loans acquired

   $ 2,986   
  

 

 

 

The following table presents a rollforward of the accretable yield for purchased credit impaired loans by acquisition for the three-month and nine-month periods ended September 30, 2014 and 2013:

 

     Three Months Ended
September 30, 2014
    Nine Months Ended
September 30, 2014
 

(dollar amounts in thousands)

   2014     2013     2014     2013  

Fidelity Bank

        

Balance, beginning of period

   $ 24,596      $ 32,705      $ 27,995      $ 23,251   

Additions

     —          —          —          —     

Accretion

     (3,070     (4,605     (10,722     (11,705

Reclassification from (to) nonaccretable difference

     (6     1,152        4,247        17,706   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 21,520      $ 29,252      $ 21,520      $ 29,252   
  

 

 

   

 

 

   

 

 

   

 

 

 

Camco Financial

        

Balance, beginning of period

   $ 154      $ —        $ —        $ —     

Impact of acquisition/purchase on March 1, 2014

     —          —          143        —     

Additions

     —          —          —          —     

Accretion

     (153     —          (5,335     —     

Reclassification from nonaccretable difference

     816        —          6,009        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 817      $ —        $ 817      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The allowance for loan losses recorded on the purchased credit-impaired loan portfolio at September 30, 2014 and December 31, 2013 was $3.2 million and $2.4 million, respectively. The following table reflects the ending and unpaid balances of all contractually required payments and carrying amounts of the acquired loans by acquisition at September 30, 2014 and December 31, 2013:

 

     September 30, 2014      December 31, 2013  

(dollar amounts in thousands)

   Ending
Balance
     Unpaid
Balance
     Ending
Balance
     Unpaid
Balance
 

Fidelity Bank

           

Commercial and industrial

   $ 30,005       $ 41,767       $ 35,526       $ 50,798   

Commercial real estate

     40,631         94,291         82,073         154,869   

Residential mortgage

     2,379         3,207         2,498         3,681   

Other consumer

     53         129         129         219   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 73,068       $ 139,394       $ 120,226       $ 209,567   
  

 

 

    

 

 

    

 

 

    

 

 

 

Camco Financial

           

Commercial and industrial

   $ 729       $ 1,696       $ —         $ —     

Commercial real estate

     2,032         3,855         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,761       $ 5,551       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Loan Purchases and Sales

The following table summarizes portfolio loan purchase and sale activity for the three-month and nine-month periods ended September 30, 2014 and 2013. The table below excludes mortgage loans originated for sale.

 

(dollar amounts in thousands)   Commercial
and Industrial
    Commercial
Real Estate
    Automobile     Home
Equity
    Residential
Mortgage
    Other
Consumer
    Total  

Portfolio loans and leases purchased during the:

             

Three-month period ended September 30, 2014

  $ 64,668      $ —        $ —        $ —        $ 2,224      $ —        $ 66,892   

Nine-month period ended September 30, 2014

  $ 270,272      $ —        $ —        $ —        $ 16,547      $ —        $ 286,819   

Three-month period ended September 30, 2013

  $ 28,432      $ —        $ —        $ —        $ —        $ —        $ 28,432   

Nine-month period ended September 30, 2013

  $ 84,169      $ —        $ —        $ —        $ —        $ —        $ 84,169   

Portfolio loans and leases sold or transferred to loans held for sale during the:

             

Three-month period ended September 30, 2014

  $ 179,065      $ —        $ —        $ —        $ —        $ —        $ 179,065   

Nine-month period ended September 30, 2014

  $ 283,796      $ 7,434      $ —        $ —        $ —          7,592      $ 298,822   

Three-month period ended September 30, 2013

  $ 70,823      $ —        $ —        $ —        $ 49,931      $ —        $ 120,754   

Nine-month period ended September 30, 2013

  $ 153,889      $ 3,991      $ —        $ —        $ 205,335      $ —        $ 363,215   

NALs and Past Due Loans

Loans are considered past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due date.

Any loan in any portfolio may be placed on nonaccrual status prior to the policies described below when collection of principal or interest is in doubt. When a borrower with debt is discharged in a Chapter 7 bankruptcy and not reaffirmed by the borrower, the loan is determined to be collateral dependent and placed on nonaccrual status.

 

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All classes within the C&I and CRE portfolios (except for purchased credit-impaired loans) are placed on nonaccrual status at 90-days past due. Residential mortgage loans are placed on nonaccrual status at 150-days past due, with the exception of residential mortgages guaranteed by government organizations which continue to accrue interest at the rate guaranteed by the government agency. First-lien home equity loans are placed on nonaccrual status at 150-days past due. Junior-lien home equity loans are placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien loan has been identified as nonaccrual. Automobile and other consumer loans are generally charged-off when the loan is 120-days past due.

For all classes within all loan portfolios, when a loan is placed on nonaccrual status, any accrued interest income is reversed with current year accruals charged to interest income, and prior year amounts charged-off as a credit loss.

For all classes within all loan portfolios, cash receipts received on NALs are applied entirely against principal until the loan or lease has been collected in full, after which time any additional cash receipts are recognized as interest income. However, for secured non-reaffirmed debt in a Chapter 7 bankruptcy, payments are applied to principal and interest when the borrower has demonstrated a capacity to continue payment of the debt and collection of the debt is reasonably assured. For unsecured non-reaffirmed debt in a Chapter 7 bankruptcy where the carrying value has been fully charged-off, payments are recorded as loan recoveries.

Regarding all classes within the C&I and CRE portfolios, the determination of a borrower’s ability to make the required principal and interest payments is based on an examination of the borrower’s current financial statements, industry, management capabilities, and other qualitative measures. For all classes within the consumer loan portfolio, the determination of a borrower’s ability to make the required principal and interest payments is based on multiple factors, including number of days past due and, in some instances, an evaluation of the borrower’s financial condition. When, in Management’s judgment, the borrower’s ability to make required principal and interest payments resumes and collectability is no longer in doubt, the loan or lease is returned to accrual status. For these loans that have been returned to accrual status, cash receipts are applied according to the contractual terms of the loan.

The following table presents NALs by loan class at September 30, 2014 and December 31, 2013:

 

     2014      2013  

(dollar amounts in thousands)

   September 30,      December 31,  

Commercial and industrial:

     

Owner occupied

   $ 31,576       $ 38,321   

Other commercial and industrial

     58,689         18,294   
  

 

 

    

 

 

 

Total commercial and industrial

   $ 90,265       $ 56,615   

Commercial real estate:

     

Retail properties

   $ 25,483       $ 27,328   

Multi family

     11,084         9,289   

Office

     10,601         18,995   

Industrial and warehouse

     4,738         6,310   

Other commercial real estate

     7,906         11,495   
  

 

 

    

 

 

 

Total commercial real estate

   $ 59,812       $ 73,417   

Automobile

   $ 4,834       $ 6,303   

Home equity:

     

Secured by first-lien

   $ 42,275       $ 36,288   

Secured by junior-lien

     30,440         29,901   
  

 

 

    

 

 

 

Total home equity

   $ 72,715       $ 66,189   

Residential mortgage

   $ 98,139       $ 119,532   

Other consumer

   $ —         $ —     
  

 

 

    

 

 

 

Total nonaccrual loans

   $ 325,765       $ 322,056   
  

 

 

    

 

 

 

 

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The following table presents an aging analysis of loans and leases, including past due loans, by loan class at September 30, 2014 and December 31, 2013: (1)

 

September 30, 2014

 
      Past Due             Total Loans
and Leases
    

90 or more

days past due

 
(dollar amounts in thousands)    30-59 Days      60-89 Days      90 or more days      Total      Current         and accruing  

Commercial and industrial:

                    

Owner occupied

   $ 7,937       $ 1,645       $ 21,812       $ 31,394       $ 4,344,893       $ 4,376,287       $ 37   

Purchased credit-impaired

     1,454         849         7,416         9,719         21,015         30,734         7,416   

Other commercial and industrial

     12,403         2,426         10,864         25,693         14,357,878         14,383,571         5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial and industrial

   $ 21,794       $ 4,920       $ 40,092       $ 66,806       $ 18,723,786       $ 18,790,592       $ 7,458 (2) 

Commercial real estate:

                    

Retail properties

   $ 3,028       $ —         $ 5,713       $ 8,741       $ 1,317,742       $ 1,326,483       $ —     

Multi family

     3,293         10,554         4,455         18,302         1,036,404         1,054,706         —     

Office

     476         901         4,922         6,299         973,043         979,342         —     

Industrial and warehouse

     2,210         272         2,375         4,857         482,009         486,866         —     

Purchased credit-impaired

     730         —           26,285         27,015         15,648         42,663         26,285   

Other commercial real estate

     1,330         428         4,337         6,095         1,094,269         1,100,364         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

   $ 11,067       $ 12,155       $ 48,087       $ 71,309       $ 4,919,115       $ 4,990,424       $ 26,285 (2) 

Automobile

   $ 45,944       $ 9,328       $ 4,875       $ 60,147       $ 8,261,483       $ 8,321,630       $ 4,827   

Home equity:

                    

Secured by first-lien

   $ 16,349       $ 7,627       $ 32,406       $ 56,382       $ 4,971,697       $ 5,028,079       $ 6,520   

Secured by junior-lien

     25,522         13,597         32,703         71,822         3,336,377         3,408,199         8,289   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity

   $ 41,871       $ 21,224       $ 65,109       $ 128,204       $ 8,308,074       $ 8,436,278       $ 14,809   

Residential mortgage:

                    

Residential mortgage

   $ 108,282       $ 41,245       $ 140,162       $ 289,689       $ 5,495,499       $ 5,785,188       $ 88,109   

Purchased credit-impaired

     —           —           —           —           2,379         2,379         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total residential mortgage

   $ 108,282       $ 41,245       $ 140,162       $ 289,689       $ 5,497,878       $ 5,787,567       $ 88,109 (3) 

Other consumer:

                    

Other consumer

   $ 5,934       $ 1,120       $ 638       $ 7,692       $ 389,138       $ 396,830       $ 638   

Purchased credit-impaired

     —           —           —           —           53         53         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other consumer

   $ 5,934       $ 1,120       $ 638       $ 7,692       $ 389,191       $ 396,883       $ 638   

Total loans and leases

   $ 234,892       $ 89,992       $ 298,963       $ 623,847       $ 46,099,527       $ 46,723,374       $ 142,126   

 

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December 31, 2013

 
                                               90 or more  
     Past Due             Total Loans      days past due  
(dollar amounts in thousands)    30-59 Days      60-89 Days      90 or more days      Total      Current      and Leases      and accruing  

Commercial and industrial:

                    

Owner occupied

   $ 5,935       $ 1,879       $ 25,658       $ 33,472       $ 4,314,400       $ 4,347,872       $ —     

Purchased credit-impaired

     241         433         14,562         15,236         20,290         35,526         14,562   

Other commercial and industrial

     10,342         3,075         11,210         24,627         13,186,251         13,210,878         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial and industrial

   $ 16,518       $ 5,387       $ 51,430       $ 73,335       $ 17,520,941       $ 17,594,276       $ 14,562 (2) 

Commercial real estate:

                    

Retail properties

   $ 19,372       $ 1,228       $ 5,252       $ 25,852       $ 1,237,717       $ 1,263,569       $ —     

Multi family

     2,425         943         6,726         10,094         1,015,497         1,025,591         —     

Office

     1,635         545         12,700         14,880         927,413         942,293         —     

Industrial and warehouse

     465         3,714         4,395         8,574         464,319         472,893         —     

Purchased credit-impaired

     1,311         —           39,142         40,453         41,620         82,073         39,142   

Other commercial real estate

     5,922         1,134         7,192         14,248         1,049,427         1,063,675         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

   $ 31,130       $ 7,564       $ 75,407       $ 114,101       $ 4,735,993       $ 4,850,094       $ 39,142 (2) 

Automobile

   $ 45,174       $ 8,863       $ 5,140       $ 59,177       $ 6,579,536       $ 6,638,713       $ 5,055   

Home equity

                    

Secured by first-lien

   $ 20,551       $ 8,746       $ 28,472       $ 57,769       $ 4,784,375       $ 4,842,144       $ 6,338   

Secured by junior-lien

     28,965         13,071         31,392         73,428         3,420,746         3,494,174         7,645   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity

   $ 49,516       $ 21,817       $ 59,864       $ 131,197       $ 8,205,121       $ 8,336,318       $ 13,983   

Residential mortgage

                    

Residential mortgage

   $ 101,584       $ 41,784       $ 158,956       $ 302,324       $ 5,016,266       $ 5,318,590       $ 90,115   

Purchased credit-impaired

     194         —           339         533         1,965         2,498         339   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total residential mortgage

   $ 101,778       $ 41,784       $ 159,295       $ 302,857       $ 5,018,231       $ 5,321,088       $ 90,454 (4) 

Other consumer

                    

Other consumer

   $ 6,465       $ 1,276       $ 998       $ 8,739       $ 371,143       $ 379,882       $ 998   

Purchased credit-impaired

     69         —           —           69         60         129         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other consumer

   $ 6,534       $ 1,276       $ 998       $ 8,808       $ 371,203       $ 380,011       $ 998   

Total loans and leases

   $ 250,650       $ 86,691       $ 352,134       $ 689,475       $ 42,431,025       $ 43,120,500       $ 164,194   

 

(1) NALs are included in this aging analysis based on the loan’s past due status.
(2) All amounts represent accruing purchased impaired loans related to acquisitions. Under the applicable accounting guidance (ASC 310-30), the loans were recorded at fair value upon acquisition and remain in accruing status.
(3) Includes $54,778 thousand guaranteed by the U.S. government.
(4) Includes $87,985 thousand guaranteed by the U.S. government.

Allowance for Credit Losses

Huntington maintains two reserves, both of which reflect Management’s judgment regarding the appropriate level necessary to absorb credit losses inherent in our loan and lease portfolio: the ALLL and the AULC. Combined, these reserves comprise the total ACL. The determination of the ACL requires significant estimates, including the timing and amounts of expected future cash flows on impaired loans and leases, consideration of current economic conditions, and historical loss experience pertaining to pools of homogeneous loans and leases, all of which may be susceptible to change.

 

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The appropriateness of the ACL is based on Management’s current judgments about the credit quality of the loan portfolio. These judgments consider on-going evaluations of the loan and lease portfolio, including such factors as the differing economic risks associated with each loan category, the financial condition of specific borrowers, the level of delinquent loans, the value of any collateral and, where applicable, the existence of any guarantees or other documented support. Further, Management evaluates the impact of changes in interest rates and overall economic conditions on the ability of borrowers to meet their financial obligations when quantifying our exposure to credit losses and assessing the appropriateness of our ACL at each reporting date. In addition to general economic conditions and the other factors described above, additional factors also considered include: the impact of increasing or decreasing residential real estate values; the diversification of CRE loans; the development of new or expanded Commercial business segments such as healthcare, ABL, and energy, and the overall condition of the manufacturing industry. Also, the ACL determination includes the on-going assessment of credit quality metrics, and a comparison of certain ACL benchmarks to current performance. Management’s determinations regarding the appropriateness of the ACL are reviewed and approved by the Company’s board of directors.

The ALLL consists of two components: (1) the transaction reserve, which includes a loan level allocation, specific reserves related to loans considered to be impaired, and loans involved in troubled debt restructurings, and (2) the general reserve. The transaction reserve component includes both (1) an estimate of loss based on pools of commercial and consumer loans and leases with similar characteristics and (2) an estimate of loss based on an impairment review of each impaired C&I and CRE loan greater than $1.0 million. For the C&I and CRE portfolios, the estimate of loss based on pools of loans and leases with similar characteristics is made by applying a PD factor and a LGD factor to each individual loan based on a regularly updated loan grade, using a standardized loan grading system. The PD factor and an LGD factor are determined for each loan grade using statistical models based on historical performance data. The PD factor considers on-going reviews of the financial performance of the specific borrower, including cash flow, debt-service coverage ratio, earnings power, debt level, and equity position, in conjunction with an assessment of the borrower’s industry and future prospects. The LGD factor considers analysis of the type of collateral and the relative LTV ratio. These reserve factors are developed based on credit migration models that track historical movements of loans between loan ratings over time and a combination of long-term average loss experience of our own portfolio and external industry data using a 24-month emergence period.

In the case of more homogeneous portfolios, such as automobile loans, home equity loans, and residential mortgage loans, the determination of the transaction reserve also incorporates PD and LGD factors. The estimate of loss is based on pools of loans and leases with similar characteristics. The PD factor considers current credit scores unless the account is delinquent, in which case a higher PD factor is used. The credit score provides a basis for understanding the borrower’s past and current payment performance, and this information is used to estimate expected losses over the 12-month emergence period. The performance of first-lien loans ahead of our junior-lien loans is available to use as part of our updated score process. The LGD factor considers analysis of the type of collateral and the relative LTV ratio. Credit scores, models, analyses, and other factors used to determine both the PD and LGD factors are updated frequently to capture the recent behavioral characteristics of the subject portfolios, as well as any changes in loss mitigation or credit origination strategies, and adjustments to the reserve factors are made as required. Models utilized in the ALLL estimation process are subject to the Company’s model validation policies.

The general reserve consists of the economic reserve and risk-profile reserve components. The economic reserve component considers the potential impact of changing market and economic conditions on portfolio performance. The risk-profile component considers items unique to our structure, policies, processes, and portfolio composition, as well as qualitative measurements and assessments of the loan portfolios including, but not limited to, management quality, concentrations, portfolio composition, industry comparisons, and internal review functions.

The estimate for the AULC is determined using the same procedures and methodologies as used for the ALLL. The loss factors used in the AULC are the same as the loss factors used in the ALLL while also considering a historical utilization of unused commitments. The AULC is reflected in accrued expenses and other liabilities in the Unaudited Condensed Consolidated Balance Sheet.

The ACL is increased through a provision for credit losses that is charged to earnings, based on Management’s quarterly evaluation of the factors previously mentioned, and is reduced by charge-offs, net of recoveries, and the ACL associated with securitized or sold loans. There were no material changes in assumptions or estimation techniques compared with prior periods that impacted the determination of the current period’s ALLL and AULC.

 

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The following table presents ALLL and AULC activity by portfolio segment for the three-month and nine-month periods ended September 30, 2014 and 2013:

 

(dollar amounts in thousands)    Commercial
and Industrial
    Commercial
Real Estate
    Automobile     Home
Equity
    Residential
Mortgage
    Other
Consumer
    Total  

Three-month period ended September 30, 2014:

              

ALLL balance, beginning of period

   $ 278,512      $ 137,346      $ 27,158      $ 105,943      $ 47,191      $ 38,951      $ 635,101   

Loan charge-offs

     (20,723     (4,664     (7,292     (9,584     (6,477     (9,771     (58,511

Recoveries of loans previously charged-off

     8,136        10,671        3,316        3,136        1,049        2,180        28,488   

Provision for loan and lease losses

     25,476        (27,881     7,550        880        10,895        9,038        25,958   

Allowance for loans sold or transferred to loans held for sale

     —          —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALLL balance, end of period

   $ 291,401      $ 115,472      $ 30,732      $ 100,375      $ 52,658      $ 40,398      $ 631,036   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AULC balance, beginning of period

   $ 44,750      $ 7,530      $ —        $ 1,977      $ 8      $ 2,662      $ 56,927   

Provision for unfunded loan commitments and letters of credit

     (1,545     (552     —          (18     2        635        (1,478
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AULC balance, end of period

   $ 43,205      $ 6,978      $ —        $ 1,959      $ 10      $ 3,297      $ 55,449   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ACL balance, end of period

   $ 334,606      $ 122,450      $ 30,732      $ 102,334      $ 52,668      $ 43,695      $ 686,485   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine-month period ended September 30, 2014:

              

ALLL balance, beginning of period

   $ 265,801      $ 162,557      $ 31,053      $ 111,131      $ 39,577      $ 37,751      $ 647,870   

Loan charge-offs

     (60,305     (17,772     (21,969     (43,844     (21,525     (24,934     (190,349

Recoveries of loans previously charged-off

     28,515        26,957        10,425        13,218        4,832        4,750        88,697   

Provision for loan and lease losses

     57,390        (56,270     11,223        19,870        29,774        23,958        85,945   

Allowance for loans sold or transferred to loans held for sale

     —          —          —          —          —          (1,127     (1,127
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALLL balance, end of period

   $ 291,401      $ 115,472      $ 30,732      $ 100,375      $ 52,658      $ 40,398      $ 631,036   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AULC balance, beginning of period

   $ 49,596      $ 9,891      $ —        $ 1,763      $ 9      $ 1,640      $ 62,899   

Provision for unfunded loan commitments and letters of credit

     (6,391     (2,913     —          196        1        1,657        (7,450
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AULC balance, end of period

   $ 43,205      $ 6,978      $ —        $ 1,959      $ 10      $ 3,297      $ 55,449   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ACL balance, end of period

   $ 334,606      $ 122,450      $ 30,732      $ 102,334      $ 52,668      $ 43,695      $ 686,485   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(dollar amounts in thousands)

   Commercial
and Industrial
    Commercial
Real Estate
    Automobile     Home
Equity
    Residential
Mortgage
    Other
Consumer
    Total  

Three-month period ended September 30, 2013:

              

ALLL balance, beginning of period

   $ 233,679      $ 255,849      $ 39,990      $ 115,626      $ 63,802      $ 24,130      $ 733,076   

Loan charge-offs

     (9,226     (22,759     (6,000     (30,206     (7,435     (9,626     (85,252

Recoveries of loans previously charged-off

     7,565        10,196        3,279        3,031        2,646        2,793        29,510   

Provision for loan and lease losses

     30,030        (78,764     (10,182     35,617        (7,691     19,756        (11,234

Allowance for loans sold or transferred to loans held for sale

     —          —          —          —          (70     —          (70
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALLL balance, end of period

   $ 262,048      $ 164,522      $ 27,087      $ 124,068      $ 51,252      $ 37,053      $ 666,030   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AULC balance, beginning of period

   $ 37,471      $ 4,408      $ —        $ 1,688      $ 6      $ 650      $ 44,223   

Provision for unfunded loan commitments and letters of credit

     13,621        8,394        —          59        7        553        22,634   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AULC balance, end of period

   $ 51,092      $ 12,802      $ —        $ 1,747      $ 13      $ 1,203      $ 66,857   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ACL balance, end of period

   $ 313,140      $ 177,324      $ 27,087      $ 125,815      $ 51,265      $ 38,256      $ 732,887   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine-month period ended September 30, 2013:

              

ALLL balance, beginning of period

   $ 241,051      $ 285,369      $ 34,979      $ 118,764      $ 61,658      $ 27,254      $ 769,075   

Loan charge-offs

     (31,220     (59,320     (16,907     (74,504     (25,028     (25,653     (232,632

Recoveries of loans previously charged-off

     24,656        31,596        10,129        12,692        5,471        5,869        90,413   

Provision for loan and lease losses

     27,561        (93,123     (1,114     67,116        9,485        29,583        39,508   

Allowance for loans sold or transferred to loans held for sale

     —          —          —          —          (334     —          (334
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALLL balance, end of period

   $ 262,048      $ 164,522      $ 27,087      $ 124,068      $ 51,252      $ 37,053      $ 666,030   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AULC balance, beginning of period

   $ 33,868      $ 4,740      $ —        $ 1,356      $ 3      $ 684      $ 40,651   

Provision for unfunded loan commitments and letters of credit

     17,224        8,062        —          391        10        519        26,206   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AULC balance, end of period

   $ 51,092      $ 12,802      $ —        $ 1,747      $ 13      $ 1,203      $ 66,857   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ACL balance, end of period

   $ 313,140      $ 177,324      $ 27,087      $ 125,815      $ 51,265      $ 38,256      $ 732,887   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Any loan in any portfolio may be charged-off prior to the policies described below if a loss confirming event has occurred. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency and that asset is the sole source of repayment. Additionally, discharged, collateral dependent non-reaffirmed debt in Chapter 7 bankruptcy filings will result in a charge-off to estimated collateral value, less anticipated selling costs.

C&I and CRE loans are either charged-off or written down to net realizable value at 90-days past due. Automobile loans and other consumer loans are charged-off at 120-days past due. First-lien and junior-lien home equity loans are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due and 120-days past due, respectively. Residential mortgages are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due.

 

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Credit Quality Indicators

To facilitate the monitoring of credit quality for C&I and CRE loans, and for purposes of determining an appropriate ACL level for these loans, Huntington utilizes the following categories of credit grades:

Pass - Higher quality loans that do not fit any of the other categories described below.

OLEM - The credit risk may be relatively minor yet represent a risk given certain specific circumstances. If the potential weaknesses are not monitored or mitigated, the loan may weaken or the collateral may be inadequate to protect Huntington’s position in the future. For these reasons, Huntington considers the loans to be potential problem loans.

Substandard - Inadequately protected loans by the borrower’s ability to repay, equity, and/or the collateral pledged to secure the loan. These loans have identified weaknesses that could hinder normal repayment or collection of the debt. It is likely Huntington will sustain some loss if any identified weaknesses are not mitigated.

Doubtful - Loans that have all of the weaknesses inherent in those loans classified as Substandard, with the added elements of the full collection of the loan is improbable and that the possibility of loss is high.

The categories above, which are derived from standard regulatory rating definitions, are assigned upon initial approval of the loan or lease and subsequently updated as appropriate.

Commercial loans categorized as OLEM, Substandard, or Doubtful are considered Criticized loans. Commercial loans categorized as Substandard or Doubtful are also considered Classified loans.

For all classes within all consumer loan portfolios, each loan is assigned a specific PD factor that is partially based on the borrower’s most recent credit bureau score, which we update quarterly. A credit bureau score is a credit score developed by Fair Isaac Corporation based on data provided by the credit bureaus. The credit bureau score is widely accepted as the standard measure of consumer credit risk used by lenders, regulators, rating agencies, and consumers. The higher the credit bureau score, the higher likelihood of repayment and therefore, an indicator of higher credit quality.

Huntington assesses the risk in the loan portfolio by utilizing numerous risk characteristics. The classifications described above, and also presented in the table below, represent one of those characteristics that are closely monitored in the overall credit risk management processes.

The following table presents each loan and lease class by credit quality indicator at September 30, 2014 and December 31, 2013:

 

     September 30, 2014  
     Credit Risk Profile by UCS classification  
(dollar amounts in thousands)    Pass      OLEM      Substandard      Doubtful      Total  

Commercial and industrial:

              

Owner occupied

   $ 4,119,379       $ 89,453       $ 162,615       $ 4,840       $ 4,376,287   

Purchased credit-impaired

     4,165         834         22,535         3,200         30,734   

Other commercial and industrial

     13,705,237         265,116         399,941         13,277         14,383,571   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial and industrial

   $ 17,828,781       $ 355,403       $ 585,091       $ 21,317       $ 18,790,592   

Commercial real estate:

              

Retail properties

   $ 1,258,929       $ 14,565       $ 52,414       $ 575       $ 1,326,483   

Multi family

     1,002,716         13,371         38,221         398         1,054,706   

Office

     890,187         27,216         59,971         1,968         979,342   

Industrial and warehouse

     464,848         2,324         19,399         295         486,866   

Purchased credit-impaired

     5,965         435         35,430         833         42,663   

Other commercial real estate

     1,044,671         10,451         43,766         1,476         1,100,364   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

   $ 4,667,316       $ 68,362       $ 249,201       $ 5,545       $ 4,990,424   

 

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     Credit Risk Profile by FICO score (1)  
     750+      650-749      <650      Other (2)      Total  

Automobile

   $ 3,981,751       $ 3,101,640       $ 999,642       $ 238,597       $ 8,321,630   

Home equity:

              

Secured by first-lien

   $ 3,161,826       $ 1,395,238       $ 282,120       $ 188,895       $ 5,028,079   

Secured by junior-lien

     1,837,617         1,104,230         361,402         104,950         3,408,199   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity

   $ 4,999,443       $ 2,499,468       $ 643,522       $ 293,845       $ 8,436,278   

Residential mortgage:

              

Residential mortgage

   $ 3,285,634       $ 1,778,024       $ 624,757       $ 96,773       $ 5,785,188   

Purchased credit-impaired

     593         1,213         573         —           2,379   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total residential mortgage

   $ 3,286,227       $ 1,779,237       $ 625,330       $ 96,773       $ 5,787,567   

Other consumer:

              

Other consumer

   $ 178,175       $ 174,755       $ 42,055       $ 1,845       $ 396,830   

Purchased credit-impaired

     —           53         —           —           53   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other consumer

   $ 178,175       $ 174,808       $ 42,055       $ 1,845       $ 396,883   
     December 31, 2013  
     Credit Risk Profile by UCS classification  
(dollar amounts in thousands)    Pass      OLEM      Substandard      Doubtful      Total  

Commercial and industrial:

              

Owner occupied

   $ 4,052,579       $ 130,645       $ 155,994       $ 8,654       $ 4,347,872   

Purchased credit-impaired

     5,015         661         27,693         2,157         35,526   

Other commercial and industrial

     12,630,512         211,860         364,343         4,163         13,210,878   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial and industrial

   $ 16,688,106       $ 343,166       $ 548,030       $ 14,974       $ 17,594,276   

Commercial real estate:

              

Retail properties

   $ 1,153,747       $ 16,003       $ 93,819       $ —         $ 1,263,569   

Multi family

     972,526         16,540         36,411         114         1,025,591   

Office

     847,411         4,866         87,722         2,294         942,293   

Industrial and warehouse

     431,057         14,138         27,698         —           472,893   

Purchased credit-impaired

     13,127         3,586         62,577         2,783         82,073   

Other commercial real estate

     977,987         16,270         68,653         765         1,063,675   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

   $ 4,395,855       $ 71,403       $ 376,880       $ 5,956       $ 4,850,094   
     Credit Risk Profile by FICO score (1)  
     750+      650-749      <650      Other (2)      Total  

Automobile

   $ 2,987,323       $ 2,517,756       $ 945,604       $ 188,030       $ 6,638,713   

Home equity:

              

Secured by first-lien

   $ 3,018,784       $ 1,412,445       $ 299,681       $ 111,234       $ 4,842,144   

Secured by junior-lien

     1,811,102         1,213,024         413,695         56,353         3,494,174   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity

   $ 4,829,886       $ 2,625,469       $ 713,376       $ 167,587       $ 8,336,318   

Residential mortgage

              

Residential mortgage

   $ 2,837,590       $ 1,710,183       $ 699,541       $ 71,276       $ 5,318,590   

Purchased credit-impaired

     588         989         921         —           2,498   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total residential mortgage

   $ 2,838,178       $ 1,711,172       $ 700,462       $ 71,276       $ 5,321,088   

Other consumer

              

Other consumer

   $ 161,858       $ 157,675       $ 45,370       $ 14,979       $ 379,882   

Purchased credit-impaired

     —           60         69         —           129   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other consumer

   $ 161,858       $ 157,735       $ 45,439       $ 14,979       $ 380,011   

 

(1) Reflects currently updated customer credit scores.
(2) Reflects deferred fees and costs, loans in process, loans to legal entities, etc.

 

 

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Impaired Loans

For all classes within the C&I and CRE portfolios, all loans with an outstanding balance of $1.0 million or greater are considered for individual evaluation on a quarterly basis for impairment. Generally, consumer loans within any class are not individually evaluated on a regular basis for impairment. All TDRs, regardless of the outstanding balance amount, are also considered to be impaired. Loans acquired with evidence of deterioration of credit quality since origination for which it is probable at acquisition that all contractually required payments will not be collected are also considered to be impaired.

Once a loan has been identified for an assessment of impairment, the loan is considered impaired when, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. This determination requires significant judgment and use of estimates, and the eventual outcome may differ significantly from those estimates.

When a loan in any class has been determined to be impaired, the amount of the impairment is measured using the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, the observable market price of the loan, or the fair value of the collateral, less anticipated selling costs, if the loan is collateral dependent. When the present value of expected future cash flows is used, the effective interest rate is the original contractual interest rate of the loan adjusted for any premium or discount. A specific reserve is established as a component of the ALLL when a commercial loan has been determined to be impaired. Subsequent to the initial measurement of impairment, if there is a significant change to the impaired loan’s expected future cash flows, or if actual cash flows are significantly different from the cash flows previously estimated, Huntington recalculates the impairment and appropriately adjusts the specific reserve. Similarly, if Huntington measures impairment based on the observable market price of an impaired loan or the fair value of the collateral of an impaired collateral dependent loan, Huntington will adjust the specific reserve. The consumer portfolios are assessed on a pooled basis using a discounted cash flow basis.

When a loan within any class is impaired, the accrual of interest income is discontinued unless the receipt of principal and interest is no longer in doubt. Interest income on TDRs is accrued when all principal and interest is expected to be collected under the post-modification terms. Cash receipts received on nonaccruing impaired loans within any class are generally applied entirely against principal until the loan has been collected in full, after which time any additional cash receipts are recognized as interest income. Cash receipts received on accruing impaired loans within any class are applied in the same manner as accruing loans that are not considered impaired.

 

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The following tables present the balance of the ALLL attributable to loans by portfolio segment individually and collectively evaluated for impairment and the related loan and lease balance at September 30, 2014 and December 31, 2013:

 

(dollar amounts in thousands)

   Commercial
and

Industrial
     Commercial
Real Estate
     Automobile      Home
Equity
     Residential
Mortgage
     Other
Consumer
     Total  

ALLL at September 30, 2014:

                    

Portion of ALLL balance:

                    

Attributable to purchased credit-impaired loans

   $ 2,873       $ 56       $ —         $ —         $ 287       $ —         $ 3,216   

Attributable to loans individually evaluated for impairment

     13,584         21,900         2,057         22,695         25,506         244         85,986   

Attributable to loans collectively evaluated for impairment

     274,944         93,516         28,675         77,680         26,865         40,154         541,834   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ALLL balance

   $ 291,401       $ 115,472       $ 30,732       $ 100,375       $ 52,658       $ 40,398       $ 631,036   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loan and Lease Ending Balances at September 30, 2014:

                    

Portion of loan and lease ending balance:

                    

Attributable to purchased credit-impaired loans

   $ 30,734       $ 42,663       $ —         $ —         $ 2,379       $ 53       $ 75,829   

Individually evaluated for impairment

     167,184         240,246         36,297         282,901         377,174         3,387         1,107,189   

Collectively evaluated for impairment

     18,592,674         4,707,515         8,285,333         8,153,377         5,408,014         393,443         45,540,356   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans and leases evaluated for impairment

   $ 18,790,592       $ 4,990,424       $ 8,321,630       $ 8,436,278       $ 5,787,567       $ 396,883       $ 46,723,374   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(dollar amounts in thousands)

   Commercial
and

Industrial
     Commercial
Real Estate
     Automobile      Home
Equity
     Residential
Mortgage
     Other
Consumer
     Total  

ALLL at December 31, 2013

                    

Portion of ALLL balance:

                    

Attributable to purchased credit-impaired loans

   $ 2,404       $ —         $ —         $ —         $ 36       $ —         $ 2,440   

Attributable to loans individually evaluated for impairment

     6,129         34,935         682         8,003         10,555         136         60,440   

Attributable to loans collectively evaluated for impairment

     257,268         127,622         30,371         103,128         28,986         37,615         584,990   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ALLL balance:

   $ 265,801       $ 162,557       $ 31,053       $ 111,131       $ 39,577       $ 37,751       $ 647,870   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loan and Lease Ending Balances at December 31, 2013

                    

Portion of loan and lease ending balances:

                    

Attributable to purchased credit-impaired loans

   $ 35,526       $ 82,073       $ —         $ —         $ 2,498       $ 129       $ 120,226   

Individually evaluated for impairment

     108,316         268,362         37,084         208,981         387,937         1,041         1,011,721   

Collectively evaluated for impairment

     17,450,434         4,499,659         6,601,629         8,127,337         4,930,653         378,841         41,988,553   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans and leases evaluated for impairment

   $ 17,594,276       $ 4,850,094       $ 6,638,713       $ 8,336,318       $ 5,321,088       $ 380,011       $ 43,120,500   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following tables present by class the ending, unpaid principal balance, and the related ALLL, along with the average balance and interest income recognized only for loans and leases individually evaluated for impairment and purchased credit-impaired loans: (1), (2)

 

     September 30, 2014      Three Months Ended
September 30, 2014
     Nine Months Ended
September 30, 2014
 
            Unpaid                    Interest             Interest  
     Ending      Principal      Related      Average      Income      Average      Income  

(dollar amounts in thousands)

   Balance      Balance (5)      Allowance      Balance      Recognized      Balance      Recognized  

With no related allowance recorded:

                    

Commercial and industrial:

                    

Owner occupied

   $ 6,788       $ 6,788       $ —         $ 5,365       $ 50       $ 4,650       $ 134   

Purchased credit-impaired

     —           —           —           —           —           —           —     

Other commercial and industrial

     2,411         11,077         —           5,137         70         6,768         256   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial and industrial

   $ 9,199       $ 17,865       $ —         $ 10,502       $ 120       $ 11,418       $ 390   

Commercial real estate:

                    

Retail properties

   $ 49,059       $ 50,144       $ —         $ 50,023       $ 617       $ 53,117       $ 1,854   

Multi family

     —           —           —           —           —           —           —     

Office

     2,442         6,092         —           4,040         49         4,280         279   

Industrial and warehouse

     1,644         1,702         —           3,619         45         5,940         221   

Purchased credit-impaired

     —           —           —           —           —           —           —     

Other commercial real estate

     5,214         5,246         —           7,962         85         6,879         221   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

   $ 58,359       $ 63,184       $ —         $ 65,644       $ 796       $ 70,216       $ 2,575   

Automobile

   $ —         $ —         $ —         $ —         $ —         $ —         $ —     

Home equity:

                    

Secured by first-lien

   $ —         $ —         $ —         $ —         $ —         $ —         $ —     

Secured by junior-lien

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity

   $ —         $ —         $ —         $ —         $ —         $ —         $ —     

Residential mortgage:

                    

Residential mortgage

   $ —         $ —         $ —         $ —         $ —         $ —         $ —     

Purchased credit-impaired

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total residential mortgage

   $ —         $ —         $ —         $ —         $ —         $ —         $ —     

Other consumer

                    

Other consumer

   $ —         $ —         $ —         $ —         $ —         $ —         $ —     

Purchased credit-impaired

     53         129         —           53         2         91         11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other consumer

   $ 53       $ 129       $ —         $ 53       $ 2       $ 91       $ 11   

 

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Table of Contents

With an allowance recorded:

                    

Commercial and industrial: (3)

                    

Owner occupied

   $ 38,363       $ 46,154       $ 2,924       $ 39,001       $ 383       $ 39,653       $ 1,172   

Purchased credit-impaired

     30,734         43,463         2,873         33,056         1,306         34,509         6,508   

Other commercial and industrial

     119,622         145,317         10,660         108,856         658         79,925         1,937   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial and industrial

   $ 188,719       $ 234,934       $ 16,457       $ 180,913       $ 2,347       $ 154,087       $ 9,617   

Commercial real estate: (4)

                    

Retail properties

   $ 66,854       $ 95,902       $ 5,635       $ 67,589       $ 505       $ 66,780       $ 1,569   

Multi family

     18,623         25,208         2,244         17,551         172         16,472         488   

Office

     54,062         58,414         8,629         53,262         624         52,981         1,771   

Industrial and warehouse

     10,412         11,645         659         9,279         90         9,198         199   

Purchased credit-impaired

     42,663         98,146         56         49,979         1,813         64,688         9,034   

Other commercial real estate

     31,936         41,811         4,733         41,661         469         45,316         1,483   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

   $ 224,550       $ 331,126       $ 21,956       $ 239,321       $ 3,673       $ 255,435       $ 14,544   

Automobile

   $ 36,297       $ 36,525       $ 2,057       $ 36,209       $ 632       $ 35,643       $ 2,034   

Home equity:

                    

Secured by first-lien

   $ 132,521       $ 138,020       $ 6,654       $ 131,301       $ 1,391       $ 121,861       $ 4,001   

Secured by junior-lien

     150,380         183,911         16,041         144,919         1,678         124,254         4,539   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity

   $ 282,901       $ 321,931       $ 22,695       $ 276,220       $ 3,069       $ 246,115       $ 8,540   

Residential mortgage (6):

                    

Residential mortgage

   $ 377,174       $ 424,252       $ 25,506       $ 391,288       $ 2,813       $ 384,787       $ 8,661   

Purchased credit-impaired

     2,379         3,207         287         2,369         101         2,373         504   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total residential mortgage

   $ 379,553       $ 427,459       $ 25,793       $ 393,657       $ 2,914       $ 387,160       $ 9,165   

Other consumer:

                    

Other consumer

   $ 3,387       $ 3,437       $ 244       $ 3,502       $ 53       $ 2,473       $ 146   

Purchased credit-impaired

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other consumer

   $ 3,387       $ 3,437       $ 244       $ 3,502       $ 53       $ 2,473       $ 146   
     December 31, 2013      Three Months Ended
September 30, 2013
     Nine Months Ended
September 30, 2013
 
            Unpaid                    Interest             Interest  
     Ending      Principal      Related      Average      Income      Average      Income  

(dollar amounts in thousands)

   Balance      Balance (5)      Allowance      Balance      Recognized      Balance      Recognized  

With no related allowance recorded:

                    

Commercial and industrial:

                    

Owner occupied

   $ 5,332       $ 5,373       $ —         $ 4,960       $ 42       $ 4,456       $ 126   

Purchased credit-impaired

     —           —           —           —           —           —           —     

Other commercial and industrial

     11,884         15,031         —           14,254         168         12,389         473   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial and industrial

   $ 17,216       $ 20,404       $ —         $ 19,214       $ 210       $ 16,845       $ 599   

Commercial real estate:

                    

Retail properties

   $ 55,773       $ 64,780       $ —         $ 38,514       $ 557       $ 47,186       $ 1,867   

Multi family

     —           —           —           4,203         63         4,836         220   

Office

     9,069         13,721         —           9,183         313         13,168         845   

Industrial and warehouse

     9,682         10,803         —           9,282         129         11,467         478   

Purchased credit-impaired

     82,073         154,869         —           —           —           —           —     

Other commercial real estate

     6,002         6,924         —           6,216         159         8,581         382   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

   $ 162,599       $ 251,097       $ —         $ 67,398       $ 1,221       $ 85,238       $ 3,792   

Home equity:

                    

Secured by first-lien

   $ —         $ —         $ —         $ —         $ —         $ —         $ —     

Secured by junior-lien

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity

   $ —         $ —         $ —         $ —         $ —         $ —         $ —     

 

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Table of Contents

Residential mortgage:

                    

Residential mortgage

   $ —         $ —         $ —         $ —         $ —         $ —         $ —     

Purchased credit-impaired

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total residential mortgage

   $ —         $ —         $ —         $ —         $ —         $ —         $ —     

Other consumer

                    

Other consumer

   $ —         $ —         $ —         $ —         $ —         $ —         $ —     

Purchased credit-impaired

     129         219         —           129         4         139         11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other consumer

   $ 129       $ 219       $ —         $ 129       $ 4       $ 139       $ 11   

With an allowance recorded:

                    

Commercial and industrial: (3)

                    

Owner occupied

   $ 40,271       $ 52,810       $ 3,421       $ 39,656       $ 332       $ 42,155       $ 1,024   

Purchased credit-impaired

     35,526         50,798         2,404         46,942         1,485         50,421         3,775   

Other commercial and industrial

     50,829         64,497         2,708         61,563         886         62,320         2,510   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial and industrial

   $ 126,626       $ 168,105       $ 8,533       $ 148,161       $ 2,703       $ 154,896       $ 7,309   

Commercial real estate: (4)

                    

Retail properties

   $ 72,339       $ 93,395       $ 5,984       $ 67,209       $ 448       $ 58,928       $ 1,303   

Multi family

     13,484         15,408         1,944         13,646         159         15,295         490   

Office

     50,307         54,921         9,927         49,486         490         46,543         1,291   

Industrial and warehouse

     9,162         10,561         808         10,381         303         16,535         671   

Purchased credit-impaired

     —           —           —           97,719         3,038         110,124         7,721   

Other commercial real estate

     42,544         50,960         16,272         32,579         332         37,436         1,150   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

   $ 187,836       $ 225,245       $ 34,935       $ 271,020       $ 4,770       $ 284,861       $ 12,626   

Automobile

   $ 37,084       $ 38,758       $ 682       $ 38,732       $ 817       $ 40,555       $ 2,121   

Home equity:

                    

Secured by first-lien

   $ 110,024       $ 116,846       $ 2,396       $ 90,952       $ 1,062       $ 92,723       $ 2,953   

Secured by junior-lien

     98,957         143,967         5,607         64,553         873         57,743         2,186   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity

   $ 208,981       $ 260,813       $ 8,003       $ 155,505       $ 1,935       $ 150,466       $ 5,139   

Residential mortgage (6):

                    

Residential mortgage

   $ 387,937       $ 427,924       $ 10,555       $ 356,855       $ 2,971       $ 365,148       $ 8,713   

Purchased credit-impaired

     2,498         3,681         36         2,169         78         2,232         198   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total residential mortgage

   $ 390,435       $ 431,605       $ 10,591       $ 359,024       $ 3,049       $ 367,380       $ 8,911   

Other consumer:

                    

Other consumer

   $ 1,041       $ 1,041       $ 136       $ 2,171       $ 29       $ 2,378       $ 83   

Purchased credit-impaired

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other consumer

   $ 1,041       $ 1,041       $ 136       $ 2,171       $ 29       $ 2,378       $ 83   

 

(1) These tables do not include loans fully charged-off.
(2) All automobile, home equity, residential mortgage, and other consumer impaired loans included in these tables are considered impaired due to their status as a TDR.
(3) At September 30, 2014, $59,078 thousand of the $188,719 thousand commercial and industrial loans with an allowance recorded were considered impaired due to their status as a TDR. At December 31, 2013, $43,805 thousand of the $126,626 thousand commercial and industrial loans with an allowance recorded were considered impaired due to their status as a TDR.
(4) At September 30, 2014, $30,519 thousand of the $224,550 thousand commercial real estate loans with an allowance recorded were considered impaired due to their status as a TDR. At December 31, 2013, $24,805 thousand of the $187,836 thousand commercial real estate loans with an allowance recorded were considered impaired due to their status as a TDR.
(5) The differences between the ending balance and unpaid principal balance amounts represent partial charge-offs.

 

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(6) At September 30, 2014, $27,388 thousand of the $379,553 thousand residential mortgages loans with an allowance recorded were guaranteed by the U.S. government. At December 31, 2013, $49,225 thousand of the $390,435 thousand residential mortgage loans with an allowance recorded were guaranteed by the U.S. government.

TDR Loans

TDRs are modified loans where a concession was provided to a borrower experiencing financial difficulties. Loan modifications are considered TDRs when the concessions provided are not available to the borrower through either normal channels or other sources. However, not all loan modifications are TDRs.

TDR Concession Types

The Company’s standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower’s specific circumstances at a point in time. All commercial TDRs are reviewed and approved by our SAD. The types of concessions provided to borrowers include:

 

   

Interest rate reduction: A reduction of the stated interest rate to a nonmarket rate for the remaining original life of the debt.

 

   

Amortization or maturity date change beyond what the collateral supports, including any of the following:

 

  (1) Lengthens the amortization period of the amortized principal beyond market terms. This concession reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.
  (2) Reduces the amount of loan principal to be amortized and increases the amount of the balloon payment at the end of the term of the loan. This concession also reduces the minimum monthly payment. Principal is generally not forgiven.
  (3) Extends the maturity date or dates of the debt beyond what the collateral supports. This concession generally applies to loans without a balloon payment at the end of the term of the loan.

 

   

Chapter 7 bankruptcy: A bankruptcy court’s discharge of a borrower’s debt is considered a concession when the borrower does not reaffirm the discharged debt.

 

   

Other: A concession that is not categorized as one of the concessions described above. These concessions include, but are not limited to: principal forgiveness, collateral concessions, covenant concessions, and reduction of accrued interest.

Principal forgiveness may result from any TDR modification of any concession type. However, the aggregate amount of principal forgiven as a result of loans modified as TDRs during the three-month and nine-month periods ended September 30, 2014 and 2013, was not significant.

Following is a description of TDRs by the different loan types:

Commercial loan TDRs – Commercial accruing TDRs often result from loans receiving a concession with terms that are not considered a market transaction to Huntington. The TDR remains in accruing status as long as the customer is less than 90-days past due on payments per the restructured loan terms and no loss is expected.

Commercial nonaccrual TDRs result from either: (1) an accruing commercial TDR being placed on nonaccrual status, or (2) a workout where an existing commercial NAL is restructured and a concession was given. At times, these workouts restructure the NAL so that two or more new notes are created. The primary note is underwritten based upon our normal underwriting standards and is sized so projected cash flows are sufficient to repay contractual principal and interest. The terms on the secondary note(s) vary by situation, and may include notes that defer principal and interest payments until after the primary note is repaid. Creating two or more notes often allows the borrower to continue a project or weather a temporary economic downturn and allows Huntington to right-size a loan based upon the current expectations for a borrower’s or project’s performance.

 

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Our strategy involving TDR borrowers includes working with these borrowers to allow them to refinance elsewhere, as well as allow them time to improve their financial position and remain our customer through refinancing their notes according to market terms and conditions in the future. A subsequent refinancing or modification of a loan may occur when either the loan matures according to the terms of the TDR-modified agreement or the borrower requests a change to the loan agreements. At that time, the loan is evaluated to determine if it is creditworthy. It is subjected to the normal underwriting standards and processes for other similar credit extensions, both new and existing. The refinanced note is evaluated to determine if it is considered a new loan or a continuation of the prior loan. A new loan is considered for removal of the TDR designation, whereas a continuation of the prior note requires a continuation of the TDR designation. In order for a TDR designation to be removed, the borrower must no longer be experiencing financial difficulties and the terms of the refinanced loan must not represent a concession.

Residential Mortgage loan TDRs – Residential mortgage TDRs represent loan modifications associated with traditional first-lien mortgage loans in which a concession has been provided to the borrower. The primary concessions given to residential mortgage borrowers are amortization or maturity date changes and interest rate reductions. Residential mortgages identified as TDRs involve borrowers unable to refinance their mortgages through the Company’s normal mortgage origination channels or through other independent sources. Some, but not all, of the loans may be delinquent.

Automobile, Home Equity, and Other Consumer loan TDRs – The Company may make similar interest rate, term, and principal concessions as with residential mortgage loan TDRs.

TDR Impact on Credit Quality

Huntington’s ALLL is largely determined by updated risk ratings assigned to commercial loans, updated borrower credit scores on consumer loans, and borrower delinquency history in both the commercial and consumer portfolios. These updated risk ratings and credit scores consider the default history of the borrower, including payment redefaults. As such, the provision for credit losses is impacted primarily by changes in borrower payment performance rather than the TDR classification. TDRs can be classified as either accrual or nonaccrual loans. Nonaccrual TDRs are included in NALs whereas accruing TDRs are excluded from NALs as it is probable that all contractual principal and interest due under the restructured terms will be collected.

Our TDRs may include multiple concessions and the disclosure classifications are presented based on the primary concession provided to the borrower. The majority of our concessions for the C&I and CRE portfolios are the extension of the maturity date coupled with an increase in the interest rate. In these instances, the primary concession is the maturity date extension.

TDR concessions may also result in the reduction of the ALLL within the C&I and CRE portfolios. This reduction is derived from payments and the resulting application of the reserve calculation within the ALLL. The transaction reserve for non-TDR C&I and CRE loans is calculated based upon several estimated probability factors, such as PD and LGD, both of which were previously discussed. Upon the occurrence of a TDR in our C&I and CRE portfolios, the reserve is measured based on discounted expected cash flows or collateral value, less anticipated selling costs, of the modified loan in accordance with ASC 310-10. The resulting TDR ALLL calculation often results in a lower ALLL amount because (1) the discounted expected cash flows or collateral value, less anticipated selling costs, indicate a lower estimated loss, (2) if the modification includes a rate increase, the discounting of the cash flows on the modified loan, using the pre-modification interest rate, exceeds the carrying value of the loan, or (3) payments may occur as part of the modification. The ALLL for C&I and CRE loans may increase as a result of the modification, as the discounted cash flow analysis may indicate additional reserves are required.

TDR concessions on consumer loans may increase the ALLL. The concessions made to these borrowers often include interest rate reductions, and therefore, the TDR ALLL calculation results in a greater ALLL compared with the non-TDR calculation as the reserve is measured based on the estimation of the discounted expected cash flows or collateral value, less anticipated selling costs, on the modified loan in accordance with ASC 310-10. The resulting TDR ALLL calculation often results in a higher ALLL amount because (1) the discounted expected cash flows or collateral value, less anticipated selling costs, indicate a higher estimated loss or, (2) due to the rate decrease, the discounting of the cash flows on the modified loan, using the pre-modification interest rate, indicates a reduction in the expected cash flows or collateral value, less anticipated selling costs. In certain instances, the ALLL may decrease as a result of payments made in connection with the modification.

Commercial loan TDRs – In instances where the bank substantiates that it will collect its outstanding balance in full, the note is considered for return to accrual status upon the borrower sustaining sufficient cash flows for a six-month period of time. This six-month period could extend before or after the restructure date. If a charge-off was taken as part of the restructuring, any interest or principal payments received on that note are applied to first reduce the bank’s outstanding book balance and then to recoveries of charged-off principal, unpaid interest, and/or fee expenses while the TDR is in nonaccrual status.

 

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Residential Mortgage, Automobile, Home Equity, and Other Consumer loan TDRs – Modified loans identified as TDRs are aggregated into pools for analysis. Cash flows and weighted average interest rates are used to calculate impairment at the pooled-loan level. Once the loans are aggregated into the pool, they continue to be classified as TDRs until contractually repaid or charged-off.

Residential mortgage loans not guaranteed by a U.S. government agency such as the FHA, VA, and the USDA, including TDR loans, are reported as accrual or nonaccrual based upon delinquency status. Nonaccrual TDRs are those that are greater than 150-days contractually past due. Loans guaranteed by U.S. government organizations continue to accrue interest upon delinquency.

The following tables present by class and by the reason for the modification, the number of contracts, post-modification outstanding balance, and the financial effects of the modification for the three-month and nine-month periods ended September 30, 2014 and 2013:

 

     New Troubled Debt Restructurings During The Three-Month Period Ended (1)  
     September 30, 2014     September 30, 2013  

(dollar amounts in thousands)

   Number of
Contracts
     Post-modification
Outstanding
Ending Balance
     Financial effects
of modification (2)
    Number of
Contracts
     Post-modification
Outstanding
Ending Balance
     Financial effects
of modification (2)
 

C&I—Owner occupied:

                

Interest rate reduction

     2       $ 360       $ —          2       $ 257       $ 9   

Amortization or maturity date change

     27         11,562         132        16         3,617         (10

Other

     1         91         —          4         2,935         166   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total C&I—Owner occupied

     30       $ 12,013       $ 132        22       $ 6,809       $ 165   

C&I—Other commercial and industrial:

                

Interest rate reduction

     2       $ 4,076       $ (14     7       $ 19,082       $ (1,491

Amortization or maturity date change

     78         35,952         (202     29         9,978         (1,730

Other

     6         683         (6     10         4,815         (40
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total C&I—Other commercial and industrial

     86       $ 40,711       $ (222     46       $ 33,875       $ (3,261

CRE—Retail properties:

                

Interest rate reduction

     1       $ 124       $ (1     2       $ 378       $ (5

Amortization or maturity date change

     7         1,997         (4     10         25,693         4,162   

Other

     —           —           —          5         8,034         (1,740
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total CRE—Retail properties

     8       $ 2,121       $ (5     17       $ 34,105       $ 2,417   

CRE—Multi family:

                

Interest rate reduction

     9       $ 2,744       $ (75     2       $ 1,455       $ (3

Amortization or maturity date change

     9         5,724         (3     5         731         (25

Other

     3         470         (4     2         161         6   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total CRE—Multi family

     21       $ 8,938       $ (82     9       $ 2,347       $ (22

CRE—Office:

                

Interest rate reduction

     —         $ —         $ —          2       $ 129       $ 1   

Amortization or maturity date change

     6         2,575         (7     4         3,032         153   

Other

     1         10,564         328        2         2,777         160   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total CRE—Office

     7       $ 13,139       $ 321        8       $ 5,938       $ 314   

CRE—Industrial and warehouse:

                

Interest rate reduction

     —         $ —         $ —          —         $ —         $ —     

 

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Amortization or maturity date change

     9         3,610         (45     2         497         (6

Other

     —           —           —          —           —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total CRE—Industrial and Warehouse

     9       $ 3,610       $ (45     2       $ 497       $ (6

CRE—Other commercial real estate:

                

Interest rate reduction

     3       $ 205       $ 95        4       $ 4,450       $ (44

Amortization or maturity date change

     3         1,762         (6     9         2,400         (14

Other

     —           —           —          7         5,111         54   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total CRE—Other commercial real estate

     6       $ 1,967       $ 89        20       $ 11,961       $ (4

Automobile:

                

Interest rate reduction

     7       $ 199       $ 2        3       $ 5       $ —     

Amortization or maturity date change

     381         2,531         34        458         2,639         (18

Chapter 7 bankruptcy

     165         1,420         34        151         1,096         (33

Other

     —           —           —          —           —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Automobile

     553       $ 4,150       $ 70        612       $ 3,740       $ (51

Residential mortgage:

                

Interest rate reduction

     7       $ 633       $ 10        26       $ 2,755       $ 36   

Amortization or maturity date change

     64         7,723         (37     146         20,578         320   

Chapter 7 bankruptcy

     33         3,082         128        92         10,107         134   

Other

     1         106         —          3         327         8   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Residential mortgage

     105       $ 11,544       $ 101        267       $ 33,767       $ 498   

First-lien home equity:

                

Interest rate reduction

     29       $ 2,730       $ 42        47       $ 4,239       $ 487   

Amortization or maturity date change

     69         5,518         (316     88         5,815         (390

Chapter 7 bankruptcy

     24         1,988         104        35         2,443         (27

Other

     —           —           —          —           —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total First-lien home equity

     122       $ 10,236       $ (170     170       $ 12,497       $ 70   

Junior-lien home equity:

                

Interest rate reduction

     3       $ 320       $ 15        4       $ 167       $ 30   

Amortization or maturity date change

     412         16,092         (2,140     441         14,301         (1,246

Chapter 7 bankruptcy

     49         750         710        462         1,787         14,062   

Other

     —           —           —          —           —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Junior-lien home equity

     464       $ 17,162       $ (1,415     907       $ 16,255       $ 12,846   

Other consumer:

                

Interest rate reduction

     1       $ —         $ —          1       $ 8       $ —     

Amortization or maturity date change

     14         642         33        3         8         —     

Chapter 7 bankruptcy

     2         5         —          2         5         —     

Other

     —           —           —          —           —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Other consumer

     17       $ 647       $ 33        6       $ 21       $ —     

Total new troubled debt restructurings

     1,428       $ 126,238       $ (1,193     2,086       $ 161,812       $ 12,966   

 

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(1) TDRs may include multiple concessions and the disclosure classifications are based on the primary concession provided to the borrower.
(2) Amounts represent the financial impact via provision for loan and lease losses as a result of the modification.

 

     New Troubled Debt Restructurings During The Nine-Month Period Ended (1)  
     September 30, 2014     September 30, 2013  

(dollar amounts in thousands)

   Number of
Contracts
     Post-modification
Outstanding
Ending Balance
     Financial effects
of modification (2)
    Number of
Contracts
     Post-modification
Outstanding
Ending Balance
     Financial effects
of modification (2)
 

C&I—Owner occupied:

                

Interest rate reduction

     17       $ 2,141       $ 21        16       $ 5,532       $ (463

Amortization or maturity date change

     64         19,899         70        49         12,631         (22

Other

     5         1,906         (35     12         5,358         255   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total C&I—Owner occupied

     86       $ 23,946       $ 56        77       $ 23,521       $ (230

C&I—Other commercial and industrial:

                

Interest rate reduction

     21       $ 49,557       $ (1,936     19       $ 61,838       $ (1,044

Amortization or maturity date change

     187         89,331         156        95         47,611         1,665   

Other

     16         7,354         (75     24         11,815         171   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total C&I—Other commercial and industrial

     224       $ 146,242       $ (1,855     138       $ 121,264       $ 792   

CRE—Retail properties:

                

Interest rate reduction

     4       $ 11,229       $ 420        4       $ 1,116       $ (8

Amortization or maturity date change

     17         24,147         (185     16         26,596         4,160   

Other

     9         13,765         (35     10         17,758         (557
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total CRE—Retail properties

     30       $ 49,141       $ 200        30       $ 45,470       $ 3,595   

CRE—Multi family:

                

Interest rate reduction

     20       $ 3,484       $ (75     8       $ 4,106       $ 7   

Amortization or maturity date change

     20         6,104         (5     13         1,966         (18

Other

     7         4,770         57        4         8,043         (2
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total CRE—Multi family

     47       $ 14,358       $ (23     25       $ 14,115       $ (13

CRE—Office:

                

Interest rate reduction

     2       $ 120       $ (1     6       $ 6,209       $ 1,657   

Amortization or maturity date change

     16         11,791         (367     11         7,375         175   

Other

     5         35,476         (3,153     4         3,059         159   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total CRE—Office

     23       $ 47,387       $ (3,521     21       $ 16,643       $ 1,991   

CRE—Industrial and warehouse:

                

Interest rate reduction

     2       $ 4,046       $ —          —         $ —         $ —     

Amortization or maturity date change

     14         7,166         167        7         1,590         (9

Other

     1         977         —          1         5,867         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total CRE—Industrial and Warehouse

     17       $ 12,189       $ 167        8       $ 7,457       $ (9

CRE—Other commercial real estate:

                

 

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Interest rate reduction

     8       $ 5,224       $ 146        13       $ 5,940       $ 8   

Amortization or maturity date change

     47         74,767         (2,781     13         3,100         (12

Other

     2         926         (1     8         5,463         53   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total CRE—Other commercial real estate

     57       $ 80,917       $ (2,636     34       $ 14,503       $ 49   

Automobile:

                

Interest rate reduction

     55       $ 627       $ 10        11       $ 78       $ —     

Amortization or maturity date change

     1,550         9,758         61        1,146         6,550         (52

Chapter 7 bankruptcy

     483         3,791         (7     864         5,384         344   

Other

     —           —           —          —           —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Automobile

     2,088       $ 14,176       $ 64        2,021       $ 12,012       $ 292   

Residential mortgage:

                

Interest rate reduction

     22       $ 2,866       $ (14     58       $ 11,228       $ —     

Amortization or maturity date change

     281         39,025         518        323         43,589         389   

Chapter 7 bankruptcy

     150         15,573         503        157         16,697         577   

Other

     4         405         5        15         1,612         38   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Residential mortgage

     457       $ 57,869       $ 1,012        553       $ 73,126       $ 1,004   

First-lien home equity:

                

Interest rate reduction

     124       $ 10,696       $ 646        106       $ 9,553       $ 908   

Amortization or maturity date change

     204         16,682         (647     165         11,365         (959

Chapter 7 bankruptcy

     67         4,410         204        93         5,897         587   

Other

     —           —           —          —           —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total First-lien home equity

     395       $ 31,788       $ 203        364       $ 26,815       $ 536   

Junior-lien home equity:

                

Interest rate reduction

     171       $ 6,142       $ 185        20       $ 916       $ 155   

Amortization or maturity date change

     1,045         41,177         (5,732     981         35,672         (3,613

Chapter 7 bankruptcy

     152         2,363         2,148        642         4,044         17,181   

Other

     —           —           —          —           —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Junior-lien home equity

     1,368       $ 49,682       $ (3,399     1,643       $ 40,632       $ 13,723   

Other consumer:

                

Interest rate reduction

     1       $ —         $ —          4       $ 227       $ 42   

Amortization or maturity date change

     44         1,777         11        8         72         5   

Chapter 7 bankruptcy

     21         446         (51     19         285         56   

Other

     —           —           —          —           —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Other consumer

     66       $ 2,223       $ (40     31       $ 584       $ 103   

Total new troubled debt restructurings

     4,858       $ 529,918       $ (9,772     4,945       $ 396,142       $ 21,833   

 

(1) TDRs may include multiple concessions and the disclosure classifications are based on the primary concession provided to the borrower.
(2) Amount represents the financial impact via provision for loan and lease losses as a result of the modification.

Any loan within any portfolio or class is considered as payment redefaulted at 90-days past due.

 

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The following tables present TDRs that have defaulted within one year of modification during the three-month and nine-month periods ended September 30, 2014 and 2013:

 

     Troubled Debt Restructurings That Have Redefaulted (1)  
     Within One Year Of Modification During The Three Months Ended  
     September 30, 2014      September 30, 2013  
     Number of      Ending      Number of      Ending  

(dollar amounts in thousands)

   Contracts      Balance      Contracts      Balance  

C&I—Owner occupied:

           

Interest rate reduction

     —         $ —           —         $ —     

Amortization or maturity date change

     2         388         3         349   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total C&I—Owner occupied

     2       $ 388         3       $ 349   

C&I—Other commercial and industrial:

           

Interest rate reduction

     —         $ —           —         $ —     

Amortization or maturity date change

     3         88         7         263   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total C&I—Other commercial and industrial

     3       $ 88         7       $ 263   

CRE—Retail Properties:

           

Interest rate reduction

     —         $ —           —         $ —     

Amortization or maturity date change

     —           —           —           —     

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total CRE—Retail properties

     —         $ —           —         $ —     

CRE—Multi family:

           

Interest rate reduction

     —         $ —           —         $ —     

Amortization or maturity date change

     1         138         2         225   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total CRE—Multi family

     1       $ 138         2       $ 225   

CRE—Office:

           

Interest rate reduction

     —         $ —           —         $ —     

Amortization or maturity date change

     —           —           —           —     

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total CRE—Office

     —         $ —           —         $ —     

CRE—Industrial and Warehouse:

           

Interest rate reduction

     1       $ 1,339         —         $ —     

Amortization or maturity date change

     —           —           1         361   

Other

     —           —           1         726   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total CRE—Industrial and Warehouse

     1       $ 1,339         2       $ 1,087   

CRE—Other commercial real estate:

           

Interest rate reduction

     —         $ —           —         $ —     

Amortization or maturity date change

     1         197         2         725   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total CRE—Other commercial real estate

     1       $ 197         2       $ 725   

Automobile:

           

Interest rate reduction

     —         $ —           —         $ —     

Amortization or maturity date change

     13         144         8         93   

Chapter 7 bankruptcy

     5         31         17         107   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Automobile

     18       $ 175         25       $ 200   

 

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Residential mortgage:

           

Interest rate reduction

     1       $ 118         —         $ —     

Amortization or maturity date change

     20         2,300         19         2,930   

Chapter 7 bankruptcy

     10         1,007         10         658   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Residential mortgage

     31       $ 3,425         29       $ 3,588   

First-lien home equity:

           

Interest rate reduction

     1       $ 39         —         $ —     

Amortization or maturity date change

     6         998         1         14   

Chapter 7 bankruptcy

     6         243         5         193   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total First-lien home equity

     13       $ 1,280         6       $ 207   

Junior-lien home equity:

           

Interest rate reduction

     —         $ —           1       $ —     

Amortization or maturity date change

     8         578         2         102   

Chapter 7 bankruptcy

     15         24         6         80   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Junior-lien home equity

     23       $ 602         9       $ 182   

Other consumer:

           

Interest rate reduction

     —         $ —           —         $ —     

Amortization or maturity date change

     —           —           —           —     

Chapter 7 bankruptcy

     —           —           1         94   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Other consumer

     —         $ —           1       $ 94   

Total troubled debt restructurings with subsequent redefault

     93       $ 7,632         86       $ 6,920   

 

(1) Subsequent redefault is defined as a payment redefault within 12 months of the restructuring date. Payment redefault is defined as 90-days past due for any loan within any portfolio or class. Any loan may be considered to be in payment redefault prior to the guidelines noted above when collection of principal or interest is in doubt.

 

     Troubled Debt Restructurings That Have Redefaulted (1)  
     Within One Year of Modification During The Nine Months  Ended  
     September 30, 2014      September 30, 2013  
     Number of      Ending      Number of      Ending  

(dollar amounts in thousands)

   Contracts      Balance      Contracts      Balance  

C&I—Owner occupied:

           

Interest rate reduction

     —         $ —           —         $ —     

Amortization or maturity date change

     4         788         7         820   

Other

     1         230         7         1,203   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total C&I—Owner occupied

     5       $ 1,018         14       $ 2,023   

C&I—Other commercial and industrial:

           

Interest rate reduction

     —         $ —           —         $ —     

Amortization or maturity date change

     10         1,132         16         379   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total C&I—Other commercial and industrial

     10       $ 1,132         16       $ 379   

CRE—Retail Properties:

           

Interest rate reduction

     —         $ —           —         $ —     

Amortization or maturity date change

     —           —           3         835   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total CRE—Retail properties

     —         $ —           3       $ 835   

 

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CRE—Multi family:

           

Interest rate reduction

     —         $ —           —         $ —     

Amortization or maturity date change

     2         350         2         225   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total CRE—Multi family

     2       $ 350         2       $ 225   

CRE—Office:

           

Interest rate reduction

     —         $ —           —         $ —     

Amortization or maturity date change

     1         493         2         1,131   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total CRE—Office

     1       $ 493         2       $ 1,131   

CRE—Industrial and Warehouse:

           

Interest rate reduction

     1       $ 1,339         —         $ —     

Amortization or maturity date change

     —           —           1         361   

Other

     —           —           1         726   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total CRE—Industrial and Warehouse

     1       $ 1,339         2       $ 1,087   

CRE—Other commercial real estate:

           

Interest rate reduction

     —         $ —           —         $ —     

Amortization or maturity date change

     2         758         3         774   

Other

     —           —           1         5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total CRE—Other commercial real estate

     2       $ 758         4       $ 779   

Automobile:

           

Interest rate reduction

     —         $ —           1       $ 112   

Amortization or maturity date change

     39         326         28         294   

Chapter 7 bankruptcy

     42         262         115         461   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Automobile

     81       $ 588         144       $ 867   

Residential mortgage:

           

Interest rate reduction

     4       $ 468         —         $ —     

Amortization or maturity date change

     64         7,354         56         8,317   

Chapter 7 bankruptcy

     33         2,952         46         3,826   

Other

     —           —           2         418   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Residential mortgage

     101       $ 10,774         104       $ 12,561   

First-lien home equity:

           

Interest rate reduction

     3       $ 202         —         $ —     

Amortization or maturity date change

     14         1,928         1         14   

Chapter 7 bankruptcy

     14         843         11         942   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total First-lien home equity

     31       $ 2,973         12       $ 956   

Junior-lien home equity:

           

Interest rate reduction

     —         $ —           1       $ —     

Amortization or maturity date change

     22         1,276         3         159   

Chapter 7 bankruptcy

     37         620         26         649   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Junior-lien home equity

     59       $ 1,896         30       $ 808   

Other consumer:

           

Interest rate reduction

     —         $ —           —         $ —     

Amortization or maturity date change

     —           —           —           —     

Chapter 7 bankruptcy

     —           —           2         96   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Other consumer

     —         $ —           2       $ 96   

Total troubled debt restructurings with subsequent redefault

     293       $ 21,321         335       $ 21,747   

 

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(1) Subsequent redefault is defined as a payment redefault within 12 months of the restructuring date. Payment redefault is defined as 90-days past due for any loan in any portfolio or class. Any loan in any portfolio or class may be considered to be in payment redefault prior to the guidelines noted above when collection of principal or interest is in doubt.

Pledged Loans and Leases

At September 30, 2014, the Bank has access to the Federal Reserve’s discount window and advances from the FHLB – Cincinnati. As of September 30, 2014, these borrowings and advances are secured by $17.4 billion of loans and securities.

 

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4. AVAILABLE-FOR-SALE AND OTHER SECURITIES

Listed below are the contractual maturities (under 1 year, 1-5 years, 6-10 years, and over 10 years) of available-for-sale and other securities at September 30, 2014 and December 31, 2013:

 

     September 30, 2014      December 31, 2013  

(dollar amounts in thousands)

   Amortized
Cost
     Fair Value      Amortized
Cost
     Fair Value  

U.S. Treasury:

           

Under 1 year

   $ —         $ —         $ 50,793       $ 51,086   

1-5 years

     5,429         5,424         507         516   

6-10 years

     —           —           —           —     

Over 10 years

     —           —           1         2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. Treasury

     5,429         5,424         51,301         51,604   
  

 

 

    

 

 

    

 

 

    

 

 

 

Federal agencies: mortgage-backed securities:

           

Under 1 year

     61,913         62,155         16,548         16,607   

1-5 years

     234,364         237,900         164,794         166,946   

6-10 years

     254,277         257,620         440,116         443,456   

Over 10 years

     4,417,140         4,429,157         2,940,986         2,939,212   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Federal agencies: mortgage-backed securities

     4,967,694         4,986,832         3,562,444         3,566,221   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other agencies:

           

Under 1 year

     33,124         33,418         2,833         2,880   

1-5 years

     9,725         10,178         291,726         297,510   

6-10 years

     72,141         72,243         19,318         19,498   

Over 10 years

     72,795         73,112         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other agencies

     187,785         188,951         313,877         319,888   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. Government backed agencies

     5,160,908         5,181,207         3,927,622         3,937,713   
  

 

 

    

 

 

    

 

 

    

 

 

 

Municipal securities:

           

Under 1 year

     234,499         234,252         191,788         190,762   

1-5 years

     230,524         234,392         206,719         211,916   

6-10 years

     857,371         863,298         556,873         554,772   

Over 10 years

     371,054         382,859         184,883         188,542   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total municipal securities

     1,693,448         1,714,801         1,140,263         1,145,992   
  

 

 

    

 

 

    

 

 

    

 

 

 

Private-label CMO:

           

Under 1 year

     —           —           —           —     

1-5 years

     —           —           —           —     

6-10 years

     1,467         1,533         1,997         2,089   

Over 10 years

     44,095         42,139         49,241         47,015   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total private-label CMO

     45,562         43,672         51,238         49,104   
  

 

 

    

 

 

    

 

 

    

 

 

 

Asset-backed securities:

           

Under 1 year

     —           —           —           —     

1-5 years

     259,345         260,221         434,825         438,156   

6-10 years

     124,605         123,519         260,354         260,880   

Over 10 years

     611,469         549,460         477,105         392,004   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total asset-backed securities

     995,419         933,200         1,172,284         1,091,040   
  

 

 

    

 

 

    

 

 

    

 

 

 

Covered bonds:

           

Under 1 year

     —           —           —           —     

1-5 years

     —           —           280,595         285,874   

6-10 years

     —           —           —           —     

Over 10 years

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total covered bonds

     —           —           280,595         285,874   
  

 

 

    

 

 

    

 

 

    

 

 

 

Corporate debt:

           

Under 1 year

     18,821         19,152         903         916   

1-5 years

     298,430         307,695         283,079         292,989   

6-10 years

     173,072         170,636         161,398         152,608   

Over 10 years

     —           —           10,113         10,727   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate debt

     490,323         497,483         455,493         457,240   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Other:

           

Under 1 year

     750         750         500         500   

1-5 years

     3,150         3,066         3,399         3,327   

6-10 years

     —           —           —           —     

Over 10 years

     —           —           —           —     

Non-marketable equity securities

     331,322         331,322         320,991         320,992   

Marketable equity securities

     15,460         16,303         16,522         16,971   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other

     350,682         351,441         341,412         341,790   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale and other securities

   $ 8,736,342       $ 8,721,804       $ 7,368,907       $ 7,308,753   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities at September 30, 2014 and December 31, 2013 include $157.0 million and $165.5 million of stock issued by the FHLB of Cincinnati, and $174.3 million and $155.4 million, respectively, of Federal Reserve Bank stock. Nonmarketable equity securities are recorded at amortized cost. Other securities also include marketable equity securities.

The following tables provide amortized cost, fair value, and gross unrealized gains and losses recognized in OCI by investment category at September 30, 2014 and December 31, 2013:

 

            Unrealized        

(dollar amounts in thousands)

   Amortized
Cost
     Gross
Gains
     Gross
Losses
    Fair
Value
 

September 30, 2014

          

U.S. Treasury

   $ 5,429       $ 9       $ (14   $ 5,424   

Federal agencies:

          

Mortgage-backed securities

     4,967,694         48,815         (29,677     4,986,832   

Other agencies

     187,785         1,367         (201     188,951   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total U.S. Government backed securities

     5,160,908         50,191         (29,892     5,181,207   

Municipal securities (1)

     1,693,448         33,347         (11,994     1,714,801   

Private-label CMO

     45,562         1,111         (3,001     43,672   

Asset-backed securities

     995,419         2,376         (64,595     933,200   

Corporate debt

     490,323         10,507         (3,347     497,483   

Other securities

     350,682         843         (84     351,441   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale and other securities

   $ 8,736,342       $ 98,375       $ (112,913   $ 8,721,804   
  

 

 

    

 

 

    

 

 

   

 

 

 
            Unrealized        

(dollar amounts in thousands)

   Amortized
Cost
     Gross
Gains
     Gross
Losses
    Fair
Value
 

December 31, 2013

          

U.S. Treasury

   $ 51,301       $ 303       $ —        $ 51,604   

Federal agencies:

          

Mortgage-backed securities

     3,562,444         42,319         (38,542     3,566,221   

Other agencies

     313,877         6,105         (94     319,888   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total U.S. Government backed securities

     3,927,622         48,727         (38,636     3,937,713   

Municipal securities (2)

     1,140,263         18,825         (13,096     1,145,992   

Private-label CMO

     51,238         1,188         (3,322     49,104   

Asset-backed securities

     1,172,284         6,771         (88,015     1,091,040   

Covered bonds

     280,595         5,279         —          285,874   

Corporate debt

     455,493         11,241         (9,494     457,240   

Other securities

     341,412         511         (133     341,790   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale and other securities

   $ 7,368,907       $ 92,542       $ (152,696   $ 7,308,753   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) On May 20, 2014 approximately $208.2 million of municipal equipment finance instruments were acquired.
(2) Effective December 31, 2013 approximately $600.4 million of direct purchase municipal instruments were reclassified from C&I loans to available-for-sale securities.

 

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At September 30, 2014, the carrying value of investment securities pledged to secure public and trust deposits, trading account liabilities, U.S. Treasury demand notes, and security repurchase agreements totaled $3.6 billion. There were no securities of a single issuer, which are not governmental or government-sponsored, that exceeded 10% of shareholders’ equity at September 30, 2014.

The following tables provide detail on investment securities with unrealized losses aggregated by investment category and the length of time the individual securities have been in a continuous loss position, at September 30, 2014 and December 31, 2013:

 

     Less than 12 Months     Over 12 Months     Total  

(dollar amounts in thousands )

   Fair
Value
     Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 

September 30, 2014

               

U.S. Treasury

   $ 4,910       $ (14   $ —         $ —        $ 4,910       $ (14

Federal agencies:

               

Mortgage-backed securities

     1,455,043         (10,664     466,552         (19,013     1,921,595         (29,677

Other agencies

     50,064         (169     1,275         (32     51,339         (201
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total U.S. Government backed securities

     1,510,017         (10,847     467,827         (19,045     1,977,844         (29,892

Municipal securities

     426,425         (10,709     140,218         (1,285     566,643         (11,994

Private-label CMO

     —           —          22,734         (3,001     22,734         (3,001

Asset-backed securities

     245,189         (1,856     338,569         (62,739     583,758         (64,595

Corporate debt

     82,328         (409     108,432         (2,938     190,760         (3,347

Other securities

     —           —          1,416         (84     1,416         (84
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 2,263,959       $ (23,821   $ 1,079,196       $ (89,092   $ 3,343,155       $ (112,913
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     Less than 12 Months     Over 12 Months     Total  

(dollar amounts in thousands )

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

December 31, 2013

               

U.S. Treasury

   $ —         $ —        $ —         $ —        $ —         $ —     

Federal agencies:

               

Mortgage-backed securities

     1,628,454         (37,174     12,682         (1,368     1,641,136         (38,542

TLGP securities

     —           —          —           —          —           —     

Other agencies

     2,069         (94     —           —          2,069         (94
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total U.S. Government backed securities

     1,630,523         (37,268     12,682         (1,368     1,643,205         (38,636

Municipal securities

     551,114         (12,395     7,531         (701     558,645         (13,096

Private-label CMO

     —           —          22,639         (3,322     22,639         (3,322

Asset-backed securities

     391,665         (9,720     107,419         (78,295     499,084         (88,015

Covered bonds

     —           —          —           —          —           —     

Corporate debt

     146,308         (7,729     26,155         (1,765     172,463         (9,494

Other securities

     3,078         (72     2,530         (61     5,608         (133
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 2,722,688       $ (67,184   $ 178,956       $ (85,512   $ 2,901,644       $ (152,696
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following table is a summary of realized securities gains and losses for the three-month and nine-month periods ended September 30, 2014 and 2013:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  

(dollar amounts in thousands)

   2014      2013     2014     2013  

Gross gains on sales of securities

   $ 198       $ 448      $ 17,678      $ 1,635   

Gross (losses) on sales of securities

     —           (264     (20     (654
  

 

 

    

 

 

   

 

 

   

 

 

 

Net gain on sales of securities

   $ 198       $ 184      $ 17,658      $ 981   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

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Collateralized Debt Obligations and Private-Label CMO Securities

Our highest risk segments of our investment portfolio are the CDO and 2003-2006 vintage private-label CMO portfolios. Of the $43.7 million of the private-label CMO securities reported at fair value at September 30, 2014, approximately $20.4 million are rated below investment grade. The CDOs are in the asset-backed securities portfolio. These segments are in run off, and we have not purchased these types of securities since 2008. The performance of the underlying securities in each of these segments reflects the deterioration of CDO issuers and 2003-2006 non-agency mortgages. Each of these securities in these two segments is subjected to a rigorous review of its projected cash flows. These reviews are supported with analysis from independent third parties.

The fair values of the private label CMO and CDO assets have been impacted by various market conditions. The unrealized losses were primarily the result of wider liquidity spreads on asset-backed securities and increased market volatility on non-agency mortgage and asset-backed securities that are collateralized by certain mortgage loans. In addition, the expected average lives of the asset-backed securities backed by trust-preferred securities have been extended, due to changes in the expectations of when the underlying securities would be repaid. The contractual terms and / or cash flows of the investments do not permit the issuer to settle the securities at a price less than the amortized cost. Huntington does not intend to sell, nor does it believe it will be required to sell these securities until the fair value is recovered, which may be maturity and; therefore, does not consider them to be other-than-temporarily impaired at September 30, 2014.

The following table summarizes the relevant characteristics of our CDO securities portfolio, which are included in asset-backed securities, at September 30, 2014. Each security is part of a pool of issuers and supports a more senior tranche of securities except for the I-Pre TSL II, and MM Comm III securities which are the most senior class.

Collateralized Debt Obligation Data

September 30, 2014

(dollar amounts in thousands)

 

                                        Actual              
                                        Deferrals     Expected        
                                        and     Defaults        
                                  # of Issuers     Defaults     as a % of        
                            Lowest     Currently     as a % of     Remaining        

Deal Name

  Par Value     Amortized
Cost
    Fair
Value
    Unrealized
Loss (2)
    Credit
Rating (3)
    Performing/
Remaining (4)
    Original
Coll ateral
    Performing
Collateral
    Excess
Subordination  (5)
 

Alesco II (1)

  $ 41,646      $ 29,034      $ 15,430      $ (13,604     C        29/33        10          —  

ICONS

    20,000        20,000        16,052        (3,948     BB        19/21        7        17        59   

I-Pre TSL II

    6,798        6,782        6,581        (201     AA        18/21        7        12        93   

MM Comm III

    5,626        5,375        4,440        (935     BB        5/9        5        9        30   

Pre TSL IX (1)

    5,000        3,955        2,422        (1,533     C        29/40        17        9        6   

Pre TSL XI (1)

    25,000        20,749        12,355        (8,394     C        44/57        16        9        8   

Pre TSL XIII (1)

    27,530        20,379        13,429        (6,950     C        43/58        18        15        9   

Reg Diversified (1)

    25,500        6,908        1,097        (5,811     D        23/41        38        10        —     

Soloso (1)

    12,500        2,440        342        (2,098     C        37/61        29        21        —     

Tropic III

    31,000        31,000        16,436        (14,564     CCC+        27/40        22        9        38   
 

 

 

   

 

 

   

 

 

   

 

 

           

Total at September 30, 2014

  $ 200,600      $ 146,622      $ 88,584      $ (58,038          
 

 

 

   

 

 

   

 

 

   

 

 

           

Total at December 31, 2013

  $ 214,419      $ 161,730      $ 84,136      $ (77,594          
 

 

 

   

 

 

   

 

 

   

 

 

           

 

(1) Security was determined to have OTTI. As such, the book value is net of recorded credit impairment.
(2) The majority of securities have been in a continuous loss position for 12 months or longer.
(3) For purposes of comparability, the lowest credit rating expressed is equivalent to Fitch ratings even where the lowest rating is based on another nationally recognized credit rating agency.
(4) Includes both banks and/or insurance companies.
(5) Excess subordination percentage represents the additional defaults in excess of both current and projected defaults that the CDO can absorb before the bond experiences credit impairment. Excess subordinated percentage is calculated by (a) determining what percentage of defaults a deal can experience before the bond has credit impairment, and (b) subtracting from this default breakage percentage both total current and expected future default percentages.

 

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Security Impairment

Huntington evaluated OTTI on the debt security types listed below.

Alt-A mortgage backed and private-label CMO securities are collateralized by first-lien residential mortgage loans. The securities are valued by a third party pricing specialist using a discounted cash flow approach and proprietary pricing model. The model uses inputs such as estimated prepayment speeds, losses, recoveries, default rates that are implied by the underlying performance of collateral in the structure or similar structures, discount rates that are implied by market prices for similar securities, collateral structure types, and house price depreciation / appreciation rates that are based upon macroeconomic forecasts. The remaining Alt-A mortgage backed securities were sold during the third quarter of 2014.

Collateralized Debt Obligations are backed by a pool of debt securities issued by financial institutions. The collateral generally consists of trust-preferred securities and subordinated debt securities issued by banks, bank holding companies, and insurance companies. A full cash flow analysis is used to estimate fair values and assess impairment for each security within this portfolio. A third party pricing specialist with direct industry experience in pooled-trust-preferred security evaluations is engaged to provide assistance estimating the fair value and expected cash flows on this portfolio. The full cash flow analysis is completed by evaluating the relevant credit and structural aspects of each pooled-trust-preferred security in the portfolio, including collateral performance projections for each piece of collateral in the security and terms of the security’s structure. The credit review includes an analysis of profitability, credit quality, operating efficiency, leverage, and liquidity using available financial and regulatory information for each underlying collateral issuer. The analysis also includes a review of historical industry default data, current/near term operating conditions, and the impact of macroeconomic and regulatory changes. Using the results of our analysis, we estimate appropriate default and recovery probabilities for each piece of collateral then estimate the expected cash flows for each security. The cumulative probability of default ranges from a low of 2.3% to 100%.

Many collateral issuers have the option of deferring interest payments on their debt for up to five years. For issuers who are deferring interest, assumptions are made regarding the issuers ability to resume interest payments and make the required principal payment at maturity; the cumulative probability of default for these issuers currently ranges from 31% to 100%, and a 10% recovery assumption. The fair value of each security is obtained by discounting the expected cash flows at a market discount rate, ranging from LIBOR plus 3.0% to LIBOR plus 13.0% as of September 30, 2014. The market discount rate is determined by reference to yields observed in the market for similarly rated collateralized debt obligations, specifically high-yield collateralized loan obligations. The relatively high market discount rate is reflective of the uncertainty of the cash flows and illiquid nature of these securities. The large differential between the fair value and amortized cost of some of the securities reflects the high market discount rate and the expectation that the majority of the cash flows will not be received until near the final maturity of the security (the final maturities range from 2032 to 2035).

On December 10, 2013, the Federal Reserve, the OCC, the FDIC, the CFTC and the SEC issued final rules to implement the Volcker Rule contained in section 619 of the Dodd-Frank Act, generally to become effective on July 21, 2015. The Volcker Rule prohibits an insured depository institution and its affiliates (referred to as “banking entities”) from: (i) engaging in “proprietary trading” and (ii) investing in or sponsoring certain types of funds (“covered funds”) subject to certain limited exceptions. These prohibitions impact the ability of U.S. banking entities to provide investment management products and services that are competitive with nonbanking firms generally and with non-U.S. banking organizations in overseas markets. The rule also effectively prohibits short-term trading strategies by any U.S. banking entity if those strategies involve instruments other than those specifically permitted for trading.

On January 14, 2014, the five federal agencies approved an interim final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities from the investment prohibitions of section 619 of the Volcker Rule. Under the interim final rule, the agencies permit the retention of an interest in or sponsorship of covered funds by banking entities if certain qualifications are met. In addition, the agencies released a non-exclusive list of issuers that meet the requirements of the interim final rule. At September 30, 2014, we had investments in ten different pools of trust preferred securities. Eight of our pools are included in the list of non-exclusive issuers. We have analyzed the ICONS and I-Pre TSL II pools that were not included on the list and believe that it is more likely than not that we would not be required to sell and will be able to hold these securities to recovery under the final Volcker Rule regulations.

 

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For the three-month and nine-month periods ended September 30, 2014 and 2013, the following table summarizes by security type the total OTTI losses recognized in the Unaudited Condensed Consolidated Statements of Income for securities evaluated for impairment as described above.

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  

(dollar amounts in thousands)

   2014      2013     2014      2013  

Available-for-sale and other securities:

          

Pooled-trust-preferred

     —           (86     —           (1,466

Private label CMO

     —           —          —           (336
  

 

 

    

 

 

   

 

 

    

 

 

 

Total debt securities

     —           (86     —           (1,802
  

 

 

    

 

 

   

 

 

    

 

 

 

Equity securities

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total available-for-sale and other securities

   $ —         $ (86   $ —         $ (1,802
  

 

 

    

 

 

   

 

 

    

 

 

 

The following table rolls forward the OTTI recognized in earnings on debt securities held by Huntington for the three-month and nine-month periods ended September 30, 2014 and 2013 as follows:

 

     Three Months Ended     Nine Months Ended  
     September 30,            September 30,         

(dollar amounts in thousands)

   2014      2013     2014      2013  

Balance, beginning of period

   $ 30,869       $ 49,851      $ 30,869       $ 49,433   

Reductions from sales/maturities

     —           (11,886     —           (13,184

Credit losses not previously recognized

     —           —          —           —     

Additional credit losses

     —           86        —           1,802   
  

 

 

    

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 30,869       $ 38,051      $ 30,869       $ 38,051   
  

 

 

    

 

 

   

 

 

    

 

 

 

As of September 30, 2014, Management has evaluated all other investment securities with unrealized losses and all non-marketable securities for impairment and concluded no additional OTTI is required.

5. HELD-TO-MATURITY SECURITIES

These are debt securities that Huntington has the intent and ability to hold until maturity. The debt securities are carried at amortized cost and adjusted for amortization of premiums and accretion of discounts using the interest method.

Listed below are the contractual maturities (under 1 year, 1-5 years, 6-10 years, and over 10 years) of held-to-maturity securities at September 30, 2014 and December 31, 2013:

 

     September 30, 2014      December 31, 2013  
     Amortized      Fair      Amortized      Fair  

(dollar amounts in thousands)

   Cost      Value      Cost      Value  

Federal agencies: mortgage-backed securities:

           

Under 1 year

   $ —         $ —         $ —         $ —     

1-5 years

     —           —           —           —     

6-10 years

     24,901         23,674         24,901         22,549   

Over 10 years

     3,249,587         3,223,650         3,574,156         3,506,018   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Federal agencies: mortgage-backed securities

     3,274,488         3,247,324         3,599,057         3,528,567   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other agencies:

           

Under 1 year

     —           —           —           —     

1-5 years

     —           —           —           —     

6-10 years

     54,766         55,186         38,588         39,075   

Over 10 years

     158,851         156,696         189,999         185,097   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other agencies

     213,617         211,882         228,587         224,172   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. Government backed agencies

     3,488,105         3,459,206         3,827,644         3,752,739   
  

 

 

    

 

 

    

 

 

    

 

 

 

Municipal securities:

           

Under 1 year

     —           —           —           —     

1-5 years

     —           —           —           —     

6-10 years

     —           —           —           —     

Over 10 years

     8,388         7,850         9,023         8,159   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total municipal securities

     8,388         7,850         9,023         8,159   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity securities

   $ 3,496,493       $ 3,467,056       $ 3,836,667       $ 3,760,898   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table provides amortized cost, gross unrealized gains and losses, and fair value by investment category at September 30, 2014 and December 31, 2013:

 

            Unrealized        

(dollar amounts in thousands)

   Amortized
Cost
     Gross
Gains
     Gross
Losses
    Fair Value  

September 30, 2014

          

Federal Agencies:

          

Mortgage-backed securities

   $ 3,274,488       $ 14,648       $ (41,812   $ 3,247,324   

Other agencies

     213,617         755         (2,490     211,882   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total U.S. Government backed securities

     3,488,105         15,403         (44,302     3,459,206   

Municipal securities

     8,388         —           (538     7,850   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total held-to-maturity securities

   $ 3,496,493       $ 15,403       $ (44,840   $ 3,467,056   
  

 

 

    

 

 

    

 

 

   

 

 

 
            Unrealized        

(dollar amounts in thousands)

   Amortized
Cost
     Gross
Gains
     Gross
Losses
    Fair Value  

December 31, 2013

          

Federal Agencies:

          

Mortgage-backed securities

   $ 3,599,057       $ 5,573       $ (76,063   $ 3,528,567   

Other agencies

     228,587         776         (5,191     224,172   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total U.S. Government backed securities

     3,827,644         6,349         (81,254     3,752,739   

Municipal securities

     9,023         —           (864     8,159   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total held-to-maturity securities

   $ 3,836,667       $ 6,349       $ (82,118   $ 3,760,898   
  

 

 

    

 

 

    

 

 

   

 

 

 

The following tables provide detail on held-to-maturity securities with unrealized losses aggregated by investment category and the length of time the individual securities have been in a continuous loss position, at September 30, 2014 and December 31, 2013:

 

     Less than 12 Months     Over 12 Months     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  

(dollar amounts in thousands )

   Value      Losses     Value      Losses     Value      Losses  

September 30, 2014

               

Federal Agencies:

               

Mortgage-backed securities

   $ 1,504,885       $ (16,953   $ 668,968       $ (24,859   $ 2,173,853       $ (41,812

Other agencies

     37,380         (146     71,374         (2,344     108,754         (2,490
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total U.S. Government backed securities

     1,542,265         (17,099     740,342         (27,203     2,282,607         (44,302

Municipal securities

     7,849         (538     —           —          7,849         (538
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 1,550,114       $ (17,637   $ 740,342       $ (27,203   $ 2,290,456       $ (44,840
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     Less than 12 Months     Over 12 Months     Total  

(dollar amounts in thousands )

   Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 

December 31, 2013

               

Federal Agencies:

               

Mortgage-backed securities

   $ 2,849,198       $ (73,711   $ 22,548       $ (2,352   $ 2,871,746       $ (76,063

Other agencies

     144,417         (5,191     ——           —          144,417         (5,191
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total U.S. Government backed securities

     2,993,615         (78,902     22,548         (2,352     3,016,163         (81,254

Municipal securities

     8,159         (864     —           —          8,159         (864
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 3,001,774       $ (79,766   $ 22,548       $ (2,352   $ 3,024,322       $ (82,118
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Security Impairment

Huntington evaluates the held-to-maturity securities portfolio on a quarterly basis for impairment. Impairment would exist when the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis at the balance sheet date. Under these circumstances, any impairment would be recognized in earnings. As of September 30, 2014, Management has evaluated held-to-maturity securities with unrealized losses for impairment and concluded no OTTI is required.

6. LOAN SALES AND SECURITIZATIONS

Residential Mortgage Loans

The following table summarizes activity relating to residential mortgage loans sold with servicing retained for the three-month and nine-month periods ended September 30, 2014 and 2013:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(dollar amounts in thousands)

   2014      2013      2014      2013  

Residential mortgage loans sold with servicing retained

   $ 654,747       $ 853,287       $ 1,703,056       $ 2,603,414   

Pretax gains resulting from above loan sales (1)

     16,781         23,224         43,853         91,519   

 

(1) Recorded in mortgage banking income.

A MSR is established only when the servicing is contractually separated from the underlying mortgage loans by sale or securitization of the loans with servicing rights retained. At initial recognition, the MSR asset is established at its fair value using assumptions consistent with assumptions used to estimate the fair value of existing MSRs. At the time of initial capitalization, MSRs may be recorded using either the fair value method or the amortization method. The election of the fair value method or amortization method is made at the time each servicing class is established. Subsequently, servicing rights are accounted for based on the methodology chosen for each respective servicing class. Any increase or decrease in the fair value of MSRs carried under the fair value method, as well as amortization or impairment of MSRs recorded using the amortization method, during the period is recorded as an increase or decrease in mortgage banking income, which is reflected in noninterest income in the Unaudited Condensed Consolidated Statements of Income.

The following tables summarize the changes in MSRs recorded using either the fair value method or the amortization method for the three-month and nine-month periods ended September 30, 2014 and 2013:

 

Fair Value Method:

   Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(dollar amounts in thousands)

   2014     2013     2014     2013  

Fair value, beginning of period

   $ 26,747      $ 37,544      $ 34,236      $ 35,202   

Change in fair value during the period due to:

        

Time decay (1)

     (467     (727     (1,848     (1,961

Payoffs (2)

     (1,343     (3,015     (4,869     (9,774

Changes in valuation inputs or assumptions (3)

     501        304        (2,081     10,639   
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair value, end of period:

   $ 25,438      $ 34,106      $ 25,438      $ 34,106   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average life (years)

     5.2        4.1        5.2        4.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents decrease in value due to passage of time, including the impact from both regularly scheduled loan principal payments and partial loan paydowns.
(2) Represents decrease in value associated with loans that paid off during the period.
(3) Represents change in value resulting primarily from market-driven changes in interest rates and prepayment speeds.

 

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Amortization Method:

   Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(dollar amounts in thousands)

   2014     2013     2014     2013  

Carrying value, beginning of period

   $ 133,113      $ 117,978      $ 128,064      $ 85,545   

New servicing assets created

     7,173        9,864        17,802        28,614   

Servicing assets acquired

     —          —          3,505        —     

Impairment (charge) / recovery

     487        (132     (1,573     21,459   

Amortization and other

     (4,311     (3,040     (11,336     (10,948
  

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value, end of period

   $ 136,462      $ 124,670      $ 136,462      $ 124,670   
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair value, end of period

   $ 141,976      $ 136,590      $ 141,976      $ 136,590   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average life (years)

     6.7        6.3        6.7        6.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs occur, the precise terms and conditions are typically not readily available. Therefore, the fair value of MSRs is estimated using a discounted future cash flow model. The model considers portfolio characteristics, contractually specified servicing fees and assumptions related to prepayments, delinquency rates, late charges, other ancillary revenues, costs to service, and other economic factors. Changes in the assumptions used may have a significant impact on the valuation of MSRs.

MSR values are very sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be greatly impacted by the level of prepayments. Huntington hedges the value of certain MSRs against changes in value attributable to changes in interest rates using a combination of derivative instruments and trading securities.

For MSRs under the fair value method, a summary of key assumptions and the sensitivity of the MSR value at September 30, 2014 and December 31, 2013, to changes in these assumptions follows:

 

     September 30, 2014     December 31, 2013  
           Decline in fair value due to           Decline in fair value due to  

(dollar amounts in thousands)

   Actual     10%
adverse
change
    20%
adverse
change
    Actual     10%
adverse
change
    20%
adverse
change
 

Constant prepayment rate (annualized)

     13.50    $ (1,127   $ (2,164     11.90    $ (1,935   $ (3,816

Spread over forward interest rate swap rates

     676 bps        (777     (1,508     1,069 bps        (1,376     (2,753

For MSRs under the amortization method, a summary of key assumptions and the sensitivity of the MSR value at September 30, 2014 and December 31, 2013, to changes in these assumptions follows:

 

     September 30, 2014     December 31, 2013  
           Decline in fair value due to           Decline in fair value due to  

(dollar amounts in thousands)

   Actual     10%
adverse
change
    20%
adverse
change
    Actual     10%
adverse
change
    20%
adverse
change
 

Constant prepayment rate (annualized)

     9.40    $ (4,485   $ (8,671     6.70    $ (6,813   $ (12,977

Spread over forward interest rate swap rates

     955 bps        (4,682     (9,064     940 bps        (6,027     (12,054

Total servicing fees included in mortgage banking income amounted to $10.8 million and $10.9 million for the three-month periods ended September 30, 2014 and 2013, respectively. For the nine-month periods ended September 30, 2014 and 2013, total servicing fees included in mortgage banking income were $32.6 million and $33.0 million, respectively. The unpaid principal balance of residential mortgage loans serviced for third parties was $15.6 billion and $15.2 billion at September 30, 2014 and December 31, 2013, respectively.

 

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Automobile Loans and Leases

Huntington has retained servicing responsibilities on sold automobile loans and receives annual servicing fees and other ancillary fees on the outstanding loan balances. Automobile loan servicing rights are accounted for using the amortization method. A servicing asset is established at fair value at the time of the sale. The servicing asset is then amortized against servicing income. Impairment, if any, is recognized when carrying value exceeds the fair value as determined by calculating the present value of expected net future cash flows. The primary risk characteristic for measuring servicing assets is payoff rates of the underlying loan pools. Valuation calculations rely on the predicted payoff assumption and, if actual payoff is quicker than expected, then future value would be impaired.

Changes in the carrying value of automobile loan servicing rights for the three-month and nine-month periods ended September 30, 2014 and 2013, and the fair value at the end of each period were as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(dollar amounts in thousands)

   2014     2013     2014     2013  

Carrying value, beginning of period

   $ 11,515      $ 25,688      $ 17,672      $ 35,606   

New servicing assets created

     —          —          —          —     

Amortization and other

     (2,476     (4,334     (8,633     (14,252
  

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value, end of period

   $ 9,039      $ 21,354      $ 9,039      $ 21,354   
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair value, end of period

   $ 9,130      $ 21,446      $ 9,130      $ 21,446   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average life (years)

     2.8        3.6        2.8        3.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

A summary of key assumptions and the sensitivity of the automobile loan servicing rights value to changes in these assumptions at September 30, 2014 and December 31, 2013 follows:

 

     September 30, 2014     December 31, 2013  
           Decline in fair value due to           Decline in fair value due to  

(dollar amounts in thousands)

   Actual     10%
adverse
change
    20%
adverse
change
    Actual     10%
adverse
change
    20%
adverse
change
 

Constant prepayment rate (annualized)

     14.63    $ (359   $ (604     14.65    $ (584   $ (1,183

Spread over forward interest rate swap rates

     500 bps        (3     (6     500 bps        (7     (15

Servicing income, net of amortization of capitalized servicing assets and impairment, amounted to $1.9 million and $2.5 million for the three-month periods ending September 30, 2014, and 2013, respectively. For the nine-month periods ended September 30, 2014 and 2013, total servicing income, net of amortization of capitalized servicing assets and impairment, was $6.0 million and $7.8 million, respectively. The unpaid principal balance of automobile loans serviced for third parties was $1.0 billion and $1.6 billion at September 30, 2014 and December 31, 2013, respectively.

Small Business Association (SBA) Portfolio

The following table summarizes activity relating to SBA loans sold with servicing retained for the three-month and nine-month periods ended September 30, 2014 and 2013:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  

(dollar amounts in thousands)

   2014      2013      2014      2013  

SBA loans sold with servicing retained

   $ 63,470       $ 49,808       $ 149,571       $ 116,094   

Pretax gains resulting from above loan sales (1)

     7,432         4,718         17,204         12,059   

 

(1) Recorded in other noninterest income.

 

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Huntington has retained servicing responsibilities on sold SBA loans and receives annual servicing fees on the outstanding loan balances. SBA loan servicing rights are accounted for using the amortization method. A servicing asset is established at fair value at the time of the sale using a discounted future cash flow model. The servicing asset is then amortized against servicing income. Impairment, if any, is recognized when carrying value exceeds the fair value as determined by calculating the present value of expected net future cash flows.

The following tables summarize the changes in the carrying value of the servicing asset for the three-month and nine-month periods ended September 30, 2014 and 2013, and the fair value at the end of each period were as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(dollar amounts in thousands)

   2014     2013     2014     2013  

Carrying value, beginning of period

   $ 17,192      $ 15,220      $ 16,865      $ 15,147   

New servicing assets created

     2,181        1,339        5,042        3,567   

Amortization and other

     (1,458     (1,154     (3,992     (3,309
  

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value, end of period

   $ 17,915      $ 15,405      $ 17,915      $ 15,405   
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair value, end of period

   $ 17,915      $ 15,405      $ 17,915      $ 15,405   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average life (years)

     3.5        3.5        3.5        3.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

A summary of key assumptions and the sensitivity of the SBA loan servicing rights value to changes in these assumptions at September 30, 2014 and December 31, 2013 follows:

 

     September 30, 2014     December 31, 2013  
           Decline in fair value due to           Decline in fair value due to  

(dollar amounts in thousands)

   Actual     10%
adverse
change
    20%
adverse
change
    Actual     10%
adverse
change
    20%
adverse
change
 

Constant prepayment rate (annualized)

     5.70    $ (206   $ (410     5.90    $ (221   $ (438

Discount rate

     1,500 bps        (937     (1,442     1,500 bps        (446     (873

Servicing income, net of amortization of capitalized servicing assets, amounted to $1.9 million and $1.6 million for the three-month periods ending September 30, 2014, and 2013, respectively. For the nine-month periods ended September 30, 2014 and 2013, total servicing income, net of amortization of capitalized servicing assets, was $5.4 million and $4.7 million, respectively. The unpaid principal balance of SBA loans serviced for third parties was $1.1 billion and $0.9 billion at September 30, 2014 and December 31, 2013, respectively.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Business segments are based on segment leadership structure, which reflects how segment performance is monitored and assessed. During the 2014 first quarter, we realigned our business segments to drive our ongoing growth and leverage the knowledge of our highly experienced team. We now have five major business segments: Retail and Business Banking, Commercial Banking, Automobile Finance and Commercial Real Estate (AFCRE), Regional Banking and The Huntington Private Client Group (RBHPCG), and Home Lending. A Treasury / Other function includes, along with technology and operations, other unallocated assets, liabilities, revenue, and expense. All periods presented have been reclassified to conform to the current period classification. During the 2014 third quarter, we moved our insurance brokerage business from Treasury / Other to Commercial Banking to align with a change in management responsibilities. Amounts relating to the realignment are disclosed in the table below.

A rollforward of goodwill by business segment for the first nine-month period of 2014 is presented in the table below:

 

     Retail &                      
     Business      Commercial            Home     Treasury/     Huntington  

(dollar amounts in thousands)

   Banking      Banking      AFCRE      RBHPCG     Lending     Other     Consolidated  

Balance, beginning of period

   $ 286,824       $ 16,169       $ —         $ 98,951      $ —        $ 42,324      $ 444,268   

Goodwill acquired during the period

     81,273         —           —           —          —          —          81,273   

Adjustments

     —           43,425         —           (8,939     3,000        (37,486     —     

Impairment

     —           —           —           —          (3,000     —          (3,000
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 368,097       $ 59,594       $ —         $ 90,012      $ —        $ 4,838      $ 522,541   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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During the 2014 third quarter, Huntington completed the acquisition of 24 Bank of America branches in Michigan and recorded $17.1 million of goodwill. The remaining $64.2 million of goodwill acquired during the period was the result of the Camco Financial acquisition, which was completed on March 1, 2014. For additional information on the acquisitions, see Business Combinations footnote.

Goodwill is not amortized but is evaluated for impairment on an annual basis at October 1 of each year or whenever events or changes in circumstances indicate the carrying value may not be recoverable. As a result of the 2014 first quarter reorganization in our reported business segments, goodwill was reallocated among the business segments. Immediately following the reallocation, impairment of $3.0 million was recorded in the Home Lending reporting segment.

At September 30, 2014 and December 31, 2013, Huntington’s other intangible assets consisted of the following:

 

(dollar amounts in thousands)

   Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Value
 

September 30, 2014

       

Core deposit intangible

   $ 400,058       $ (358,492   $ 41,566   

Customer relationship

     107,920         (64,310     43,610   

Other

     25,164         (25,016     148   
  

 

 

    

 

 

   

 

 

 

Total other intangible assets

   $ 533,142       $ (447,818   $ 85,324   
  

 

 

    

 

 

   

 

 

 

December 31, 2013

       

Core deposit intangible

   $ 380,249       $ (335,552   $ 44,697   

Customer relationship

     106,974         (58,675     48,299   

Other

     25,164         (24,967     197   
  

 

 

    

 

 

   

 

 

 

Total other intangible assets

   $ 512,387       $ (419,194   $ 93,193   
  

 

 

    

 

 

   

 

 

 

The estimated amortization expense of other intangible assets for the remainder of 2014 and the next five years is as follows:

 

(dollar amounts in thousands)

   Amortization
Expense
 

2014

   $ 10,390   

2015

     25,092   

2016

     11,205   

2017

     10,050   

2018

     8,528   

2019

     7,471   

8. OTHER LONG-TERM DEBT

In February 2014, the Bank issued $500.0 million of senior notes at 99.842% of face value. The senior bank note issuances mature on April 1, 2019 and have a fixed coupon rate of 2.20%. The senior note issuance may be redeemed one month prior to the maturity date at 100% of principal plus accrued and unpaid interest.

In April 2014, the Bank issued $500.0 million of senior notes at 99.842% of face value. The senior note issuances mature on April 24, 2017 and have a fixed coupon rate of 1.375%. In April 2014, the Bank also issued $250.0 million of senior notes at 100% of face value. The senior bank note issuances mature on April 24, 2017 and have a variable coupon rate equal to the three-month LIBOR plus 0.425%. Both senior note issuances may be redeemed one month prior to their maturity date at 100% of principal plus accrued and unpaid interest.

 

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9. OTHER COMPREHENSIVE INCOME

The components of other comprehensive income for the three-month and nine-month periods ended September 30, 2014 and 2013, were as follows:

 

     Three Months Ended  
     September 30, 2014  
     Tax (Expense)  

(dollar amounts in thousands)

   Pretax     Benefit     After-tax  

Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold

   $ 3,289      $ (1,163   $ 2,126   

Unrealized holding gains (losses) on available-for-sale debt securities arising during the period

     (14,000     4,908        (9,092

Less: Reclassification adjustment for net losses (gains) included in net income

     250        (88     162   
  

 

 

   

 

 

   

 

 

 

Net change in unrealized holding gains (losses) on available-for-sale debt securities

     (10,461     3,657        (6,804
  

 

 

   

 

 

   

 

 

 

Net change in unrealized holding gains (losses) on available-for-sale equity securities

     18        (6     12   

Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period

     (32,512     11,379        (21,133

Less: Reclassification adjustment for net (gains) losses included in net income

     (148     52        (96
  

 

 

   

 

 

   

 

 

 

Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships

     (32,660     11,431        (21,229
  

 

 

   

 

 

   

 

 

 

Net change in pension and other post-retirement obligations

     8,818        (3,086     5,732   
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

   $ (34,285   $ 11,996      $ (22,289
  

 

 

   

 

 

   

 

 

 
     Three Months Ended  
     September 30, 2013  
     Tax (Expense)  

(dollar amounts in thousands)

   Pretax     Benefit     After-tax  

Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold

   $ 2,975      $ (1,041   $ 1,934   

Unrealized holding gains (losses) on available-for-sale debt securities arising during the period

     4,388        (1,683     2,705   

Less: Reclassification adjustment for net losses (gains) included in net income

     3,023        (1,058     1,965   
  

 

 

   

 

 

   

 

 

 

Net change in unrealized holding gains (losses) on available-for-sale debt securities

     10,386        (3,782     6,604   
  

 

 

   

 

 

   

 

 

 

Net change in unrealized holding gains (losses) on available-for-sale equity securities

     (121     45        (76

Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period

     26,672        (9,335     17,337   

Less: Reclassification adjustment for net (gains) losses included in net income

     (3,085     1,080        (2,005
  

 

 

   

 

 

   

 

 

 

Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships

     23,587        (8,255     15,332   
  

 

 

   

 

 

   

 

 

 

Re-measurement obligation

     79,532        (27,836     51,696   

Defined benefit pension items

     (31,672     11,085        (20,587
  

 

 

   

 

 

   

 

 

 

Net change in pension and other post-retirement obligations

     47,860        (16,751     31,109   
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

   $ 81,712      $ (28,743   $ 52,969   
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Nine Months Ended  
     September 30, 2014  
     Tax (expense)  

(dollar amounts in thousands)

   Pretax     Benefit     After-tax  

Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold

   $ 11,949      $ (4,225   $ 7,724   

Unrealized holding gains (losses) on available-for-sale debt securities arising during the period

     48,682        (17,439     31,243   

Less: Reclassification adjustment for net losses (gains) included in net income

     (15,409     5,393        (10,016
  

 

 

   

 

 

   

 

 

 

Net change in unrealized holding gains (losses) on available-for-sale debt securities

     45,222        (16,271     28,951   
  

 

 

   

 

 

   

 

 

 

Net change in unrealized holding gains (losses) on available-for-sale equity securities

     394        (138     256   

Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period

     (2,454     858        (1,596

Less: Reclassification adjustment for net (gains) losses included in net income

     (3,853     1,349        (2,504
  

 

 

   

 

 

   

 

 

 

Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships

     (6,307     2,207        (4,100
  

 

 

   

 

 

   

 

 

 

Net change in pension and other post-retirement obligations

     10,594        (3,708     6,886   
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

   $ 49,903      $ (17,910   $ 31,993   
  

 

 

   

 

 

   

 

 

 
     Nine Months Ended  
     September 30, 2013  
     Tax (expense)  

(dollar amounts in thousands)

   Pretax     Benefit     After-tax  

Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold

   $ 14,987      $ (5,245   $ 9,742   

Unrealized holding gains (losses) on available-for-sale debt securities arising during the period

     (123,647     43,413        (80,234

Less: Reclassification adjustment for net losses (gains) included in net income

     4,254        (1,489     2,765   
  

 

 

   

 

 

   

 

 

 

Net change in unrealized holding gains (losses) on available-for-sale debt securities

     (104,406     36,679        (67,727
  

 

 

   

 

 

   

 

 

 

Net change in unrealized holding gains (losses) on available-for-sale equity securities

     32        (12     20   

Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period

     (71,579     25,053        (46,526

Less: Reclassification adjustment for net (gains) losses included in net income

     (11,571     4,049        (7,522
  

 

 

   

 

 

   

 

 

 

Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships

     (83,150     29,102        (54,048
  

 

 

   

 

 

   

 

 

 

Re-measurement obligation

     79,532        (27,836     51,696   

Defined benefit pension items

     (15,217     5,326        (9,891
  

 

 

   

 

 

   

 

 

 

Net change in pension and other post-retirement obligations

     64,315        (22,510     41,805   
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

   $ (123,209   $ 43,259      $ (79,950
  

 

 

   

 

 

   

 

 

 

 

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The following table presents activity in accumulated other comprehensive income (loss), net of tax, for the three-month and nine-month periods ended September 30, 2014 and 2013:

 

(dollar amounts in thousands)

   Unrealized gains
and (losses) on
debt securities
(1)
    Unrealized
gains and
(losses) on
equity
securities
     Unrealized
gains and
(losses) on
cash flow
hedging
derivatives
    Unrealized gains
(losses) for
pension and
other post-
retirement
obligations
    Total  

Balance, December 31, 2012

   $ 38,304      $ 194       $ 47,084      $ (236,399   $ (150,817

Other comprehensive income before reclassifications

     (70,492     20         (46,526     51,696        (65,302

Amounts reclassified from accumulated OCI to earnings

     2,765        —           (7,522     (9,891     (14,648
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Period change

     (67,727     20         (54,048     41,805        (79,950
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance, September 30, 2013

   $ (29,423   $ 214       $ (6,964   $ (194,594   $ (230,767
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance, December 31, 2013

   $ (39,234   $ 292       $ (18,844   $ (156,223   $ (214,009

Other comprehensive income before reclassifications

     38,967        256         (1,596     —          37,627   

Amounts reclassified from accumulated OCI to earnings

     (10,016     —           (2,504     6,886        (5,634
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Period change

     28,951        256         (4,100     6,886        31,993   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance, September 30, 2014

   $ (10,283   $ 548       $ (22,944   $ (149,337   $ (182,016
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) Amounts at September 30, 2014 and December 31, 2013 include $0.6 million and $0.2 million, respectively, of net unrealized losses on securities transferred from the available-for-sale securities portfolio to the held-to-maturity securities portfolio. The net unrealized gains will be recognized in earnings over the remaining life of the security using the effective interest method.

The following table presents the reclassification adjustments out of accumulated OCI included in net income and the impacted line items as listed on the Unaudited Condensed Consolidated Statements of Income for the three-month and nine-month periods ended September 30, 2014 and 2013:

 

Reclassifications out of accumulated OCI

     Amounts     Location of net gain (loss)
     reclassified from     reclassified from accumulated

Accumulated OCI components

   accumulated OCI    

OCI into earnings

     Three     Three      
     Months Ended     Months Ended      

(dollar amounts in thousands)

   September 30, 2014     September 30, 2013      

Gains (losses) on debt securities:

      

Amortization of unrealized gains (losses)

   $ 138      $ 187      Interest income - held-to-maturity securities - taxable

Realized gain (loss) on sale of securities

     (388     (3,125   Noninterest income - net gains (losses) on sale of securities

OTTI recorded

     —          (85   Noninterest income - net gains (losses) on sale of securities
  

 

 

   

 

 

   
     (250     (3,023   Total before tax
     88        1,058      Tax (expense) benefit
  

 

 

   

 

 

   
   $ (162   $ (1,965   Net of tax
  

 

 

   

 

 

   

Gains (losses) on cash flow hedging relationships:

  

   

Interest rate contracts

   $ 148      $ 3,078      Interest income - loans and leases

Interest rate contracts

     —          7      Noninterest income - other income
  

 

 

   

 

 

   
     148        3,085      Total before tax
     (52     (1,080   Tax (expense) benefit
  

 

 

   

 

 

   
   $ 96      $ 2,005      Net of tax
  

 

 

   

 

 

   

 

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Amortization of defined benefit pension and post-retirement items:

Actuarial gains (losses)

   $ (8,818   $ (1,192   Noninterest expense - personnel costs

Prior service costs

     —          —        Noninterest expense - personnel costs

Curtailment

     —          32,864      Noninterest expense - personnel costs
  

 

 

   

 

 

   
     (8,818     31,672      Total before tax
     3,086        (11,085   Tax (expense) benefit
  

 

 

   

 

 

   
   $ (5,732   $ 20,587      Net of tax
  

 

 

   

 

 

   

Reclassifications out of accumulated OCI

     Amounts     Location of net gain (loss)
     reclassified from     reclassified from accumulated

Accumulated OCI components

   accumulated OCI    

OCI into earnings

     Nine     Nine      
     Months Ended     Months Ended      

(dollar amounts in thousands)

   September 30, 2014     September 30, 2013      

Gains (losses) on debt securities:

      

Amortization of unrealized gains (losses)

   $ 476      $ 303      Interest income - held-to-maturity securities - taxable

Realized gain (loss) on sale of securities

     14,933        (2,754   Noninterest income - net gains (losses) on sale of securities

OTTI recorded

     —          (1,803   Noninterest income - net gains (losses) on sale of securities
  

 

 

   

 

 

   
     15,409        (4,254   Total before tax
     (5,393     1,489      Tax (expense) benefit
  

 

 

   

 

 

   
   $ 10,016      $ (2,765   Net of tax
  

 

 

   

 

 

   

Gains (losses) on cash flow hedging relationships:

      

Interest rate contracts

   $ 3,935      $ 11,367      Interest income - loans and leases

Interest rate contracts

     (82     204      Noninterest income - other income
  

 

 

   

 

 

   
     3,853        11,571      Total before tax
     (1,349     (4,049   Tax (expense) benefit
  

 

 

   

 

 

   
   $ 2,504      $ 7,522      Net of tax
  

 

 

   

 

 

   

Amortization of defined benefit pension and post-retirement items:

      

Actuarial gains (losses)

   $ (10,594   $ (21,101   Noninterest expense - personnel costs

Prior service costs

     —          3,454      Noninterest expense - personnel costs

Curtailment

     —          32,864      Noninterest expense - personnel costs
  

 

 

   

 

 

   
     (10,594     15,217      Total before tax
     3,708        (5,326   Tax (expense) benefit
  

 

 

   

 

 

   
   $ (6,886   $ 9,891      Net of tax
  

 

 

   

 

 

   

10. SHAREHOLDERS’ EQUITY

2014 Share Repurchase Program

On March 26, 2014, Huntington announced that the Federal Reserve did not object to Huntington’s proposed capital actions included in Huntington’s capital plan submitted to the Federal Reserve in January 2014. These actions included a potential repurchase of up to $250 million of common stock through the first quarter of 2015. The new repurchase authorization represents a $23 million, or 10%, increase from the recently completed common stock repurchase authorization. Purchases of common stock may include open market purchases, privately negotiated transactions, and accelerated repurchase programs. Huntington’s board of directors authorized a share repurchase program consistent with Huntington’s capital plan.

 

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On April 29, 2014, Huntington repurchased approximately 2.2 million shares of common stock from a third party under an accelerated share repurchase program. The accelerated share repurchase program enabled Huntington to purchase 1.9 million shares immediately, while the third party could have purchased shares in the market up through June 24, 2014 (the Repurchase Term). In connection with the repurchase of these shares, Huntington entered into a variable share forward sale agreement, which provides for a settlement, reflecting a price differential based on the adjusted volume-weighted average price as defined in the agreement with the third party. The variable share forward agreement was settled in shares, resulting in approximately 0.3 million shares being delivered to Huntington on June 27, 2014. Based on the adjusted volume-weighted average prices through June 24, 2014, the settlement of the variable share forward agreement did not have a material impact to Huntington.

During the three-month period ended September 30, 2014, Huntington repurchased a total of 5.4 million shares at a weighted average share price of $9.70. Huntington repurchased a total of 32.1 million shares of common stock during the nine-month period ended September 30, 2014, at a weighted average share price of $9.34.

2013 Share Repurchase Program

On March 14, 2013, Huntington announced that the Federal Reserve did not object to Huntington’s proposed capital actions included in Huntington’s capital plan submitted to the Federal Reserve in January of this year. These actions included an increase in the quarterly dividend per common share to $0.05, starting in the second quarter of 2013 and potential repurchase of up to $227 million of common stock through the first quarter of 2014. Huntington’s board of directors authorized a share repurchase program consistent with Huntington’s capital plan. This program replaced the previously authorized share repurchase program authorized by Huntington’s board of directors in 2012.

During the three-month period ended September 30, 2013, Huntington repurchased a total of 2.0 million shares at a weighted average share price of $8.18. Huntington repurchased a total of 16.7 million shares of common stock during the nine-month period ended September 30, 2013, at a weighted average share price of $7.46.

 

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11. EARNINGS PER SHARE

Basic earnings per share is the amount of earnings (adjusted for dividends declared on preferred stock) available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issued for stock options, restricted stock units and awards, distributions from deferred compensation plans, and the conversion of the Company’s convertible preferred. Potentially dilutive common shares are excluded from the computation of diluted earnings per share in periods in which the effect would be antidilutive. For diluted earnings per share, net income available to common shares can be affected by the conversion of the Company’s convertible preferred stock. Where the effect of this conversion would be dilutive, net income available to common shareholders is adjusted by the associated preferred dividends and deemed dividend. The calculation of basic and diluted earnings per share for each of the three-month and nine-month periods ended September 30, 2014 and 2013, was as follows:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
(dollar amounts in thousands, except per share amounts)    2014     2013     2014     2013  

Basic earnings per common share:

        

Net income

   $ 155,016      $ 178,836      $ 468,778      $ 483,110   

Preferred stock dividends

     (7,964     (7,967     (23,891     (23,904
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 147,052      $ 170,869      $ 444,887      $ 459,206   

Average common shares issued and outstanding

     816,497        830,398        820,884        835,410   

Basic earnings per common share

   $ 0.18      $ 0.21      $ 0.54      $ 0.55   

Diluted earnings per common share:

        

Net income available to common shareholders

   $ 147,052      $ 170,869      $ 444,887      $ 459,206   

Effect of assumed preferred stock conversion

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to diluted earnings per share

   $ 147,052      $ 170,869      $ 444,887      $ 459,206   

Average common shares issued and outstanding

     816,497        830,398        820,884        835,410   

Dilutive potential common shares:

        

Stock options and restricted stock units and awards

     11,367        9,254        11,397        7,764   

Shares held in deferred compensation plans

     1,506        1,373        1,443        1,350   

Other

     253        —          203        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Dilutive potential common shares:

     13,126        10,627        13,043        9,114   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total diluted average common shares issued and outstanding

     829,623        841,025        833,927        844,524   

Diluted earnings per common share

   $ 0.18      $ 0.20      $ 0.53      $ 0.54   

For the three-month periods ended September 30, 2014 and 2013, approximately 2.6 million and 5.6 million, respectively, of options to purchase shares of common stock were not included in the computation of diluted earnings per share because the effect would be antidilutive. For the nine-month periods ended September 30, 2014 and 2013, amounts not included in the computation of diluted earnings per share were 2.7 million and 9.7 million shares, respectively.

12. SHARE-BASED COMPENSATION

Huntington sponsors nonqualified and incentive share based compensation plans. These plans provide for the granting of stock options and other awards to officers, directors, and other employees. Compensation costs are included in personnel costs on the Unaudited Condensed Consolidated Statements of Income. Stock options are granted at the closing market price on the date of the grant. Options granted typically vest ratably over four years or when other conditions are met. Stock options, which represented a portion of our grant values, have no intrinsic value until the stock price increases. Options granted prior to May 2004 have a term of ten years. All options granted after May 2004 have a term of seven years.

In 2012, shareholders approved the Huntington Bancshares Incorporated 2012 Long-Term Incentive Plan (the Plan) which authorized 51.0 million shares for future grants. The Plan is the only active plan under which Huntington is currently granting share based options and awards. At September 30, 2014, 14.9 million shares from the Plan were available for future grants. Huntington issues shares to fulfill stock option exercises and restricted stock unit and award vesting from available authorized common shares. At September 30, 2014, the Company believes there are adequate authorized common shares to satisfy anticipated stock option exercises and restricted stock unit and award vesting in 2014.

 

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Huntington uses the Black-Scholes option pricing model to value options in determining our share-based compensation expense. Forfeitures are estimated at the date of grant based on historical rates, and updated as necessary, and reduce the compensation expense recognized. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. The expected dividend yield is based on the dividend rate and stock price at the date of the grant. Expected volatility is based on the estimated volatility of Huntington’s stock over the expected term of the option.

The following table illustrates total share-based compensation expense and related tax benefit for the three-month and nine-month periods ended September 30, 2014 and 2013:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  

(dollar amounts in thousands)

   2014      2013      2014      2013  

Share-based compensation expense

   $ 10,864       $ 9,746       $ 33,656       $ 27,643   

Tax benefit

     3,670         3,278         11,354         9,311   

Huntington’s stock option activity and related information for the nine-month period ended September 30, 2014, was as follows:

 

                  Weighted-         
           Weighted-      Average         
           Average      Remaining      Aggregate  
           Exercise      Contractual      Intrinsic  

(amounts in thousands, except years and per share amounts)

   Options     Price      Life (Years)      Value  

Outstanding at January 1, 2014

     23,300      $ 7.61         —           —     

Granted

     1,807        9.22         —           —     

Assumed

     214        —           —           —     

Exercised

     (2,799     5.97         —           —     

Forfeited/expired

     (2,074     17.45         —           —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding at September 30, 2014

     20,448      $ 6.99         4.1       $ 63,550   
  

 

 

   

 

 

    

 

 

    

 

 

 

Expected to vest at September 30, 2014 (1)

     5,102      $ 7.56         5.6       $ 11,098   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at September 30, 2014

     14,744      $ 6.75         3.5       $ 51,340   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) The number of options expected to vest includes an estimate of 602 thousand shares expected to be forfeited.

The aggregate intrinsic value represents the amount by which the fair value of underlying stock exceeds the “in-the-money” option exercise price. For the nine-month periods ended September 30, 2014 and 2013, cash received for the exercises of stock options was $16.7 million and $11.0 million, respectively. The tax benefit realized from stock option exercises was $2.4 million and $1.3 million for each respective period.

Huntington also grants restricted stock, restricted stock units, performance share awards and other stock-based awards. Restricted stock units and awards are issued at no cost to the recipient, and can be settled only in shares at the end of the vesting period. Restricted stock awards provide the holder with full voting rights and cash dividends during the vesting period. Restricted stock units do not provide the holder with voting rights or cash dividends during the vesting period, but do accrue a dividend equivalent that is paid upon vesting, and are subject to certain service restrictions. Performance share awards are payable contingent upon Huntington achieving certain predefined performance objectives over the three-year measurement period. The fair value of these awards is the closing market price of Huntington’s common stock on the date of award.

The weighted-average grant date fair value of nonvested shares granted for the nine-month periods ended September 30, 2014 and 2013, were $9.14 and $7.12, respectively. The total fair value of awards vested was $25.1 million and $14.8 million during the nine-month periods ended September 30, 2014, and 2013, respectively. As of September 30, 2014, the total unrecognized compensation cost related to nonvested awards was $71.3 million with a weighted-average expense recognition period of 2.6 years.

 

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The following table summarizes the status of Huntington’s restricted stock units, performance share awards, and restricted stock awards as of September 30, 2014, and activity for the nine-month period ended September 30, 2014:

 

           Weighted-            Weighted-            Weighted-  
           Average            Average            Average  
     Restricted     Grant Date      Restricted     Grant Date      Performance     Grant Date  
     Stock     Fair Value      Stock     Fair Value      Share     Fair Value  

(amounts in thousands, except per share amounts)

   Awards     Per Share      Units     Per Share      Awards     Per Share  

Nonvested at January 1, 2014

     —        $ —           12,064      $ 6.80         1,646      $ 6.95   

Granted

     —             4,573        9.15         1,076        9.08   

Assumed

     27        —           —          —           —          —     

Vested

     (14     9.53         (3,890     6.42         —          —     

Forfeited

     (1     9.53         (615     7.45         (131     7.16   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Nonvested at September 30, 2014

     12      $ 9.53         12,132      $ 7.78         2,591      $ 7.83   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

13. BENEFIT PLANS

Huntington sponsors the Plan, a non-contributory defined benefit pension plan covering substantially all employees hired or rehired prior to January 1, 2010. The Plan, which was modified in 2013 and no longer accrues service benefits to participants, provides benefits based upon length of service and compensation levels. The funding policy of Huntington is to contribute an annual amount that is at least equal to the minimum funding requirements but not more than the amount deductible under the Internal Revenue Code. There is no required minimum contribution for 2014. During the 2013 third quarter, the board of directors approved, and management communicated, a curtailment of the Company’s pension plan effective December 31, 2013.

In addition, Huntington has an unfunded defined benefit post-retirement plan that provides certain healthcare and life insurance benefits to retired employees who have attained the age of 55 and have at least 10 years of vesting service under this plan. For any employee retiring on or after January 1, 1993, post-retirement healthcare benefits are based upon the employee’s number of months of service and are limited to the actual cost of coverage. Life insurance benefits are a percentage of the employee’s base salary at the time of retirement, with a maximum of $50,000 of coverage. The employer paid portion of the post-retirement health and life insurance plan was eliminated for employees retiring on and after March 1, 2010. Eligible employees retiring on and after March 1, 2010, who elect retiree medical coverage, will pay the full cost of this coverage. Huntington will not provide any employer paid life insurance to employees retiring on and after March 1, 2010. Eligible employees will be able to convert or port their existing life insurance at their own expense under the same terms that are available to all terminated employees.

Beginning January 1, 2015, Huntington will terminate the company sponsored retiree health care plan for Medicare eligible retirees and their dependents. Instead, Huntington will partner with a third party to assist the retirees and their dependents in selecting individual policies from a variety of carriers on a private exchange. This plan amendment resulted in a measurement of the liability at the approval date. The result of the measurement was a $5.2 million reduction of the liability and increase in accumulated other comprehensive income. It will also result in a reduction of expense over the estimated life of plan participants.

The following table shows the components of net periodic benefit expense of the Plan and the Post-Retirement Benefit Plan:

 

     Pension Benefits     Post Retirement Benefits  
     Three Months Ended     Three Months Ended  
     September 30,     September 30,  

(dollar amounts in thousands)

   2014     2013     2014     2013  

Service cost (1)

   $ 435      $ 5,428      $ —        $ —     

Interest cost

     8,099        7,749        258        216   

Expected return on plan assets

     (11,446     (11,768     —          —     

Amortization of prior service cost

     —          —          (338     (339

Amortization of gain

     1,442        1,738        (144     (150

Curtailments

     —          (34,613     —          —     

Settlements

     2,500        2,000        —          —     

Recognized net actuarial loss

     —          1,061        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Benefit expense

   $ 1,030      $ (28,405   $ (224   $ (273
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Since no participants will be earning benefits after December 31, 2013, the 2014 service cost represents only administrative expenses.

 

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     Pension Benefits     Post Retirement Benefits  
     Nine Months Ended     Nine Months Ended  
     September 30,     September 30,  

(dollar amounts in thousands)

   2014     2013     2014     2013  

Service cost

   $ 1,305      $ 19,696      $ —        $ —     

Interest cost

     24,299        22,363        776        647   

Expected return on plan assets

     (34,338     (35,950     —       

Amortization of prior service cost

     —          (2,884     (1,016     (1,015

Amortization of gain

     4,326        21,306        (432     (450

Curtailments

     —          (34,613     —          —     

Settlements

     7,500        5,000        —          —     

Recognized net actuarial loss

     —          1,061        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Benefit expense

   $ 3,092      $ (4,021   $ (672   $ (818
  

 

 

   

 

 

   

 

 

   

 

 

 

The Bank, as trustee, held all Plan assets at September 30, 2014 and December 31, 2013. The Plan assets consisted of the following investments:

 

     Fair Value  

(dollar amounts in thousands)

   September 30, 2014     December 31, 2013  

Cash

   $ 3         —     $ —           —  

Cash equivalents:

          

Huntington funds—money market

     12,622         2        803         —     

Fixed income:

          

Huntington funds—fixed income funds

     —           —          74,048         11   

Corporate obligations

     214,356         33        180,757         28   

Mutual funds—fixed income

     46,857         7        —           —     

U.S. government obligations

     59,290         9        51,932         8   

U.S. government agencies

     7,047         1        6,146         1   

Equities:

          

Huntington funds

     71,061         11        289,379         45   

Mutual funds—equities

     120,202         19        —           —     

Exchange traded funds

     28,014         4        24,705         4   

Huntington common stock

     —           —          20,324         3   

Other common stock

     89,768         14        —           —     

Limited partnerships

     3,003         —          926         —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Fair value of plan assets

   $ 652,223         100   $ 649,020         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Investments of the Plan are accounted for at cost on the trade date and are reported at fair value. The Plan’s investments at September 30, 2014, are classified as Level 1 within the fair value hierarchy, except for corporate obligations, U.S. government obligations, and U.S. government agencies, which are classified as Level 2, and limited partnerships, which are classified as Level 3. In general, investments of the Plan are exposed to various risks, such as interest rate risk, credit risk, and overall market volatility. Due to the level of risk associated with certain investments, it is reasonably possible changes in the values of investments will occur in the near term and such changes could materially affect the amounts reported in the Plan assets.

The investment objective of the Plan is to maximize the return on Plan assets over a long time period, while meeting the Plan obligations. At September 30, 2014, Plan assets were invested 48% in equity investments, 50% in bonds, and 2% in cash with an average duration of 11.97 years on bond investments. The estimated life of benefit obligations was 11 years. Although it may fluctuate with market conditions, Management has targeted a long-term allocation of Plan assets of 20% to 50% in equity investments and 80% to 50% in bond investments. The allocation of Plan assets between equity investments and fixed income investments will change from time to time with the allocation to fixed income investments increasing as the funding level increases.

Huntington also sponsors other nonqualified retirement plans, the most significant being the SERP and the SRIP. The SERP provides certain former officers and directors, and the SRIP provides certain current and former officers and directors of Huntington and its subsidiaries with defined pension benefits in excess of limits imposed by federal tax law. During the 2013 third quarter, the board of directors approved, and management communicated, a curtailment of the Company’s SRIP plan effective December 31, 2013.

 

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Huntington has a defined contribution plan that is available to eligible employees. Huntington matches participant contributions, up to the first 4% of base pay contributed to the Plan.

The following table shows the costs of providing the SERP, SRIP, and defined contribution plans:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  

(dollar amounts in thousands)

   2014      2013      2014      2013  

SERP & SRIP

   $ 504       $ 1,570       $ 1,467       $ 3,949   

Defined contribution plan

     8,325         4,671         23,239         13,614   
  

 

 

    

 

 

    

 

 

    

 

 

 

Benefit cost

   $ 8,829       $ 6,241       $ 24,706       $ 17,563   
  

 

 

    

 

 

    

 

 

    

 

 

 

14. FAIR VALUES OF ASSETS AND LIABILITIES

Huntington follows the fair value accounting guidance under ASC 820 and ASC 825.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A three-level valuation hierarchy was established for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Transfers in and out of Level 1, 2, or 3 are recorded at fair value at the beginning of the reporting period.

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Mortgage loans held for sale

Huntington elected to apply the fair value option for mortgage loans originated with the intent to sell which are included in loans held for sale. Mortgage loans held for sale are classified as Level 2 and are estimated using security prices for similar product types.

Available-for-sale securities and trading account securities

Securities accounted for at fair value include both the available-for-sale and trading portfolios. Huntington uses prices obtained from third party pricing services and recent trades to determine the fair value of securities. AFS and trading securities are classified as Level 1 using quoted market prices (unadjusted) in active markets for identical securities that Huntington has the ability to access at the measurement date. 0.3% of the positions in these portfolios are Level 1, and consist of U.S. Treasury securities and money market mutual funds. When quoted market prices are not available, fair values are classified as Level 2 using quoted prices for similar assets in active markets, quoted prices of identical or similar assets in markets that are not active, and inputs that are observable for the asset, either directly or indirectly, for substantially the full term of the financial instrument. 83.3% of the positions in these portfolios are Level 2, and consist of U.S. Government and agency debt securities, agency mortgage backed securities, asset-backed securities, municipal securities and other securities. For both Level 1 and Level 2 securities, management uses various methods and techniques to corroborate prices obtained from the pricing service, including reference to dealer or other market quotes, and by reviewing valuations of comparable instruments. If relevant market prices are limited or unavailable, valuations may require significant management judgment or estimation to determine fair value, in which case the fair values are classified as Level 3. 16.4% of our positions are Level 3, and consist of non-agency ALT-A asset-backed securities, private-label CMO securities, CDO-preferred CDO securities and municipal securities. A significant change in the unobservable inputs for these securities may result in a significant change in the ending fair value measurement of these securities.

 

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The Alt-A, private label CMO and CDO-preferred securities portfolios are classified as Level 3 and as such use significant estimates to determine the fair value of these securities which results in greater subjectivity. The Alt-A and private label CMO securities portfolios are subjected to a monthly review of the projected cash flows, while the cash flows of the CDO-preferred securities portfolio are reviewed quarterly. These reviews are supported with analysis from independent third parties, and are used as a basis for impairment analysis.

Alt-A mortgage-backed and private-label CMO securities are collateralized by first-lien residential mortgage loans. The securities valuation methodology incorporates values obtained from a third party pricing specialist using a discounted cash flow approach and a proprietary pricing model and includes assumptions management believes market participants would use to value the securities under current market conditions. The model uses inputs such as estimated prepayment speeds, losses, recoveries, default rates that are implied by the underlying performance of collateral in the structure or similar structures, house price depreciation / appreciation rates that are based upon macroeconomic forecasts and discount rates that are implied by market prices for similar securities with similar collateral structures. The remaining Alt-A mortgage-backed securities were sold during the third quarter of 2014.

CDO-preferred securities are CDOs backed by a pool of debt securities issued by financial institutions. The collateral generally consists of trust-preferred securities and subordinated debt securities issued by banks, bank holding companies, and insurance companies. A full cash flow analysis is used to estimate fair values and assess impairment for each security within this portfolio. We engage a third party pricing specialist with direct industry experience in CDO-preferred securities valuations to provide assistance in estimating the fair value and expected cash flows for each security in this portfolio. The PD of each issuer and the market discount rate are the most significant inputs in determining fair value. Management evaluates the PD assumptions provided by the third party pricing specialist by comparing the current PD to the assumptions used the previous quarter, actual defaults and deferrals in the current period, and trend data on certain financial ratios of the issuers. Huntington also evaluates the assumptions related to discount rates. Relying on cash flows is necessary because there was a lack of observable transactions in the market and many of the original sponsors or dealers for these securities are no longer able to provide a fair value that is compliant with ASC 820.

Huntington utilizes the same processes to determine the fair value of investment securities classified as held-to-maturity for impairment evaluation purposes.

Automobile loans

Effective January 1, 2010, Huntington consolidated an automobile loan securitization that previously had been accounted for as an off-balance sheet transaction. As a result, Huntington elected to account for these automobile loan receivables at fair value per guidance supplied in ASC 825. The automobile loan receivables are classified as Level 3. The key assumptions used to determine the fair value of the automobile loan receivables included projections of expected losses and prepayment of the underlying loans in the portfolio and a market assumption of interest rate spreads. Certain interest rates are available from similarly traded securities while other interest rates are developed internally based on similar asset-backed security transactions in the market. During the first quarter of 2014 Huntington cancelled the 2009 and 2006 Automobile Trust. Huntington continues to report the associated automobile loan receivables at fair value due to its 2010 election.

MSRs

MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. Huntington determines the fair value of MSRs using an income approach model based upon our month-end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs, and changes in valuation inputs and assumptions. Servicing brokers and other sources of information (e.g. discussion with other mortgage servicers and industry surveys) are used to obtain information on market practice and assumptions. On at least a quarterly basis, third party marks are obtained from at least one service broker. Huntington reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. Any recommended change in assumptions and / or inputs are presented for review to the Mortgage Price Risk Subcommittee for final approval.

Derivatives

Derivatives classified as Level 1 consist of exchange traded options and forward commitments to deliver mortgage-backed securities which are valued using quoted prices. Asset and liability conversion swaps and options, and interest rate caps are classified as Level 2. These derivative positions are valued using a discounted cash flow method that incorporates current market interest rates. Derivatives classified as Level 3 consist primarily of interest rate lock agreements related to mortgage loan commitments. The determination of fair value includes assumptions related to the likelihood that a commitment will ultimately result in a closed loan, which is a significant unobservable assumption. A significant increase or decrease in the external market price would result in a significantly higher or lower fair value measurement.

 

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Assets and Liabilities measured at fair value on a recurring basis

Assets and liabilities measured at fair value on a recurring basis at September 30, 2014 and December 31, 2013 are summarized below:

 

      Fair Value Measurements at Reporting Date Using      Netting     Balance at  

(dollar amounts in thousands)

   Level 1      Level 2      Level 3      Adjustments (1)     September 30, 2014  

Assets

             

Loans held for sale

   $ —         $ 339,061       $ —         $ —        $ 339,061   

Trading account securities:

             

U.S. Treasury securities

     15,580         —           —           —          15,580   

Federal agencies: Mortgage-backed

     —           —           —           —          —     

Federal agencies: Other agencies

     —           2,246         —           —          2,246   

Municipal securities

     —           5,804         —           —          5,804   

Other securities

     39,605         3,225         —           —          42,830   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     55,185         11,275         —           —          66,460   

Available-for-sale and other securities:

             

U.S. Treasury securities

     5,424         —           —           —          5,424   

Federal agencies: Mortgage-backed

     —           4,986,832         —           —          4,986,832   

Federal agencies: Other agenlcies

     —           188,951         —           —          188,951   

Municipal securities

     —           460,006         1,254,795         —          1,714,801   

Private-label CMO

     —           12,738         30,934         —          43,672   

Asset-backed securities

     —           844,616         88,584         —          933,200   

Corporate debt

     —           497,483            —          497,483   

Other securities

     16,303         3,816         —           —          20,119   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     21,727         6,994,442         1,374,313         —          8,390,482   

Automobile loans

     —           —           16,700         —          16,700   

MSRs

     —           —           25,438         —          25,438   

Derivative assets

     44,244         217,448         4,262         (58,616     207,336   

Liabilities

             

Derivative liabilities

     39,227         134,710         727         (36,188     138,476   

Short-term borrowings

     —           2,990         —           —          2,990   

 

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      Fair Value Measurements at Reporting Date Using      Netting     Balance at  

(dollar amounts in thousands)

   Level 1      Level 2      Level 3      Adjustments (1)     December 31, 2013  

Assets

             

Mortgage loans held for sale

   $ —         $ 278,928       $ —         $ —        $ 278,928   

Trading account securities:

             

U.S. Treasury securities

     —           —           —           —          —     

Federal agencies: Mortgage-backed

     —           —           —           —          —     

Federal agencies: Other agencies

     —           834         —           —          834   

Municipal securities

     —           2,180         —           —          2,180   

Other securities

     32,081         478         —           —          32,559   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     32,081         3,492         —           —          35,573   

Available-for-sale and other securities:

             

U.S. Treasury securities

     51,604         —           —           —          51,604   

Federal agencies: Mortgage-backed

     —           3,566,221         —           —          3,566,221   

Federal agencies: Other agencies

     —           319,888         —           —          319,888   

Municipal securities

     —           491,455         654,537         —          1,145,992   

Private-label CMO

     —           16,964         32,140         —          49,104   

Asset-backed securities

     —           983,621         107,419         —          1,091,040   

Covered bonds

     —           285,874         —           —          285,874   

Corporate debt

     —           457,240         —           —          457,240   

Other securities

     16,971         3,828         —           —          20,799   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     68,575         6,125,091         794,096         —          6,987,762   

Automobile loans

     —           —           52,286         —          52,286   

MSRs

     —           —           34,236         —          34,236   

Derivative assets

     36,774         219,045         3,066         (58,856     200,029   

Liabilities

             

Derivative liabilities

     22,787         124,123         676         (18,312     129,274   

Short-term borrowings

     —           1,089         —           —          1,089   

 

(1) Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions and cash collateral held or placed with the same counterparties.

The tables below present a rollforward of the balance sheet amounts for the three-month and nine-month periods ended September 30, 2014 and 2013, for financial instruments measured on a recurring basis and classified as Level 3. The classification of an item as Level 3 is based on the significance of the unobservable inputs to the overall fair value measurement. However, Level 3 measurements may also include observable components of value that can be validated externally. Accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.

 

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Table of Contents
     Level 3 Fair Value Measurements
Three Months Ended September 30, 2014
 
                 Available-for-sale securities        

(dollar amounts in thousands)

   MSRs     Derivative
instruments
    Municipal
securities
    Private-
label CMO
    Asset-
backed
securities
    Automobile
loans
 

Opening balance

   $ 26,747      $ 6,196      $ 1,206,455      $ 31,633      $ 106,461      $ 25,498   

Transfers into Level 3

     —          —          —          —          —          —     

Transfers out of Level 3

     —          —          —          —          —          —     

Total gains/losses for the period:

            

Included in earnings

     (1,309     (1,847     —          8        171        (253

Included in OCI

     —          —          14,344        (137     5,826        —     

Purchases

     —          —          224,615        —          —          —     

Sales

     —          —          —          —          (22,870     —     

Repayments

     —          —          —          —          —          (8,545

Issues

     —          —          —          —          —          —     

Settlements

     —          (813     (190,619     (570     (1,004     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Closing balance

   $ 25,438      $ 3,536      $ 1,254,795      $ 30,934      $ 88,584      $ 16,700   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at end of the reporting date

   $ (1,309   $ (1,847   $ 14,344      $ (137   $ 5,468      $ (253
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    

 

Level 3 Fair Value Measurements

Three Months Ended September 30, 2013

  

  

                 Available-for-sale securities        

(dollar amounts in thousands)

   MSRs     Derivative
instruments
    Municipal
securities
    Private-
label CMO
    Asset-
backed
securities
    Automobile
loans
 

Opening balance

   $ 37,544      $ (4,226   $ 58,100      $ 32,926      $ 119,861      $ 91,140   

Transfers into Level 3

     —          —          —          —          —          —     

Transfers out of Level 3

     —          —          —          —          —          —     

Total gains/losses for the period:

            

Included in earnings

     (3,438     11,568        —          32        (25     (617

Included in OCI

     —          —          2,595        891        10,535        —     

Purchases

     —          —          —          —          —          —     

Sales

     —          —          —          —          (8,281     —     

Repayments

     —          —          —          —          —          (20,743

Issues

     —          —          —          —          —          —     

Settlements

     —          243        (1,840     (1,518     (7,188     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Closing balance

   $ 34,106      $ 7,585      $ 58,855      $ 32,331      $ 114,902      $ 69,780   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at end of the reporting date

   $ (3,437   $ 11,568      $ 2,595      $ 923      $ (25   $ (617
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Level 3 Fair Value Measurements
Nine Months Ended September 30, 2014
 
                 Available-for-sale securities        

(dollar amounts in thousands)

   MSRs     Derivative
instruments
    Municipal
securities
    Private-
label CMO
    Asset-
backed
securities
    Automobile
loans
 

Opening balance

   $ 34,236      $ 2,390      $ 654,537      $ 32,140      $ 107,419      $ 52,286   

Transfers into Level 3

     —          —          —          —          —          —     

Transfers out of Level 3

     —          —          —          —          —          —     

Total gains/losses for the period:

            

Included in earnings

     (8,798     2,785        —          24        38        (705

Included in OCI

     —          —          7,555        364        20,256        —     

Purchases

     —          —          805,893        —          —          —     

Sales

     —          —          —          —          (22,700     —     

Repayments

     —          —          —          —          —          (34,881

Issues

     —          —          —          —          —          —     

Settlements

     —          (1,639     (213,190     (1,594     (16,429     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Closing balance

   $ 25,438      $ 3,536      $ 1,254,795      $ 30,934      $ 88,584      $ 16,700   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at end of the reporting date

   $ (8,798   $ 2,785      $ 7,555      $ 364      $ 19,554      $ (705
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Level 3 Fair Value Measurements
Nine Months Ended September 30, 2013
 
                 Available-for-sale securities        

(dollar amounts in thousands)

   MSRs     Derivative
instruments
    Municipal
securities
    Private-
label CMO
    Asset-
backed
securities
    Automobile
loans
 

Opening balance

   $ 35,202      $ 12,702      $ 61,228      $ 48,775      $ 110,037      $ 142,762   

Transfers into Level 3

     —          —          —          —          —          —     

Transfers out of Level 3

     —          —          —          —          —          —     

Total gains/losses for the period:

            

Included in earnings

     (1,096     (1,591     —          (207     (2,321     16   

Included in OCI

     —          —          3,287        968        31,220        —     

Purchases

     —          —          —          —          —          —     

Sales

     —          —          —          (10,254     (8,281     —     

Repayments

     —          —          —          —          —          (72,998

Issues

     —          —          —          —          —          —     

Settlements

     —          (3,526     (5,660     (6,951     (15,753     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Closing balance

   $ 34,106      $ 7,585      $ 58,855      $ 32,331      $ 114,902      $ 69,780   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at end of the reporting date

   $ (1,096   $ (1,591   $ 3,287      $ (207   $ (2,321   $ 16   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The table below summarizes the classification of gains and losses due to changes in fair value, recorded in earnings for Level 3 assets and liabilities for the three-month and nine-month periods ended September 30, 2014 and 2013:

 

     Level 3 Fair Value Measurements
Three Months Ended September 30, 2014
 
                 Available-for-sale securities        

(dollar amounts in thousands)

   MSRs     Derivative
instruments
    Municipal
securities
     Private-
label CMO
    Asset-
backed
securities
    Automobile
loans
 

Classification of gains and losses in earnings:

             

Mortgage banking income

   $ (1,309   $ (1,847   $ —         $ —        $ —        $ —     

Securities gains (losses)

     —          —          —           —          170        —     

Interest and fee income

     —          —          —           8        1        (243

Noninterest income

     —          —          —           —          —          (10
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ (1,309   $ (1,847   $ —         $ 8      $ 171      $ (253
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
     Level 3 Fair Value Measurements
Three Months Ended September 30, 2013
 
                 Available-for-sale securities        

(dollar amounts in thousands)

   MSRs     Derivative
instruments
    Municipal
securities
     Private-
label CMO
    Asset-
backed
securities
    Automobile
loans
 

Classification of gains and losses in earnings:

             

Mortgage banking income

   $ (3,438   $ 11,568      $ —         $ —        $ —        $ —     

Securities gains (losses)

     —          —          —           —          (86     —     

Interest and fee income

     —          —          —           32        61        (1,032

Noninterest income

     —          —          —           —          —          415   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ (3,438   $ 11,568      $ —         $ 32      $ (25   $ (617
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
     Level 3 Fair Value Measurements
Nine Months Ended September 30, 2014
 
                 Available-for-sale securities        

(dollar amounts in thousands)

   MSRs     Derivative
instruments
    Municipal
securities
     Private-
label CMO
    Asset-
backed
securities
    Automobile
loans
 

Classification of gains and losses in earnings:

             

Mortgage banking income

   $ (8,798   $ 2,785      $ —         $ —        $ —        $ —     

Securities gains (losses)

     —          —          —           —          170        —     

Interest and fee income

     —          —          —           24        38        (819

Noninterest income

     —          —          —           —          —          114   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ (8,798   $ 2,785      $ —         $ 24      $ 208      $ (705
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
     Level 3 Fair Value Measurements
Nine Months Ended September 30, 2013
 
                 Available-for-sale securities        

(dollar amounts in thousands)

   MSRs     Derivative
instruments
    Municipal
securities
     Private-
label CMO
    Asset-
backed
securities
    Automobile
loans
 

Classification of gains and losses in earnings:

             

Mortgage banking income

   $ (1,096   $ (1,591     —         $ —        $ —        $ —     

Securities gains (losses)

     —          —          —           (334     (1,465     —     

Interest and fee income

     —          —          —           127        (856     (3,056

Noninterest income

     —          —          —           —          —          3,072   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ (1,096   $ (1,591   $ —         $ (207   $ (2,321   $ 16   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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Assets and liabilities under the fair value option

The following table presents the fair value and aggregate principal balance of certain assets and liabilities under the fair value option:

 

     September 30, 2014      December 31, 2013  

(dollar amounts in thousands)

   Fair value
carrying
amount
     Aggregate
unpaid
principal
     Difference      Fair value
carrying
amount
     Aggregate
unpaid
principal
     Difference  

Assets

                 

Mortgage loans held for sale

   $ 339,061       $ 326,658       $ 12,403       $ 278,928       $ 276,945       $ 1,983   

Automobile loans

     16,700         15,920         780         52,286         50,800         1,486   

The following tables present the net gains (losses) from fair value changes, including net gains (losses) associated with instrument specific credit risk for the three-month and nine-month periods ended September 30, 2014 and 2013:

 

     Net gains (losses) from
fair value changes
 
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(dollar amounts in thousands)

   2014     2013     2014     2013  

Assets

        

Mortgage loans held for sale

   $ 4,562      $ 18,459      $ 3,700      $ (6,885

Automobile loans

     (253     (618     (706     14   

 

     Gains (losses) included
in fair value changes associated
with instrument specific credit risk
 
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(dollar amounts in thousands)

   2014      2013      2014      2013  

Assets

           

Automobile loans

   $ 323       $ 468       $ 861       $ 1,620   

Assets and Liabilities measured at fair value on a nonrecurring basis

Certain assets and liabilities may be required to be measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition. These assets and liabilities are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. At September 30, 2014, assets measured at fair value on a nonrecurring basis were as follows:

 

            Fair Value Measurements Using               

(dollar amounts in thousands)

   Fair Value at
September 30, 2014
     Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Other
Unobservable
Inputs

(Level 3)
     Total
Gains/(Losses)

For the Three
Months Ended
September 30, 2014
    Total
Gains/(Losses)

For the Nine
Months Ended
September 30, 2014
 

Impaired loans

   $ 91,757       $ —         $ —         $ 91,757       $ (12,719   $ (33,819

Other real estate owned

     36,270         —           —           36,270         874        3,571   

Periodically, Huntington records nonrecurring adjustments of collateral-dependent loans measured for impairment when establishing the ACL. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Appraisals are generally obtained to support the fair value of the collateral and incorporate measures such as recent sales prices for comparable properties and cost of construction. In cases where the carrying value exceeds the fair value of the collateral less cost to sell, an impairment charge is recognized.

 

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Other real estate owned properties are included in accrued income and other assets and valued based on appraisals and third party price opinions, less estimated selling costs.

Significant unobservable inputs for assets and liabilities measured at fair value on a recurring and nonrecurring basis

The table below presents quantitative information about the significant unobservable inputs for assets and liabilities measured at fair value on a recurring and nonrecurring basis at September 30, 2014 and December 31, 2013:

 

Quantitative Information about Level 3 Fair Value Measurements  

(dollar amounts in thousands)

   Fair Value at
September 30, 2014
    

Valuation Technique

   Significant Unobservable Input      Range (Weighted Average)  

MSRs

   $ 25,438       Discounted cash flow      Constant prepayment rate         7.0% - 22.0% (13.0%)   
          
 
Spread over forward interest
rate swap rates
  
  
     352 - 1,100 (676)   
  

 

 

    

 

  

 

 

    

 

 

 

Derivative assets

     4,263       Consensus Pricing      Net market price         -4.7% - 15.8% (1.6%)   

Derivative liabilities

     727            Estimated Pull through %         50.0% - 89.0% (77.0%)   
  

 

 

    

 

  

 

 

    

 

 

 

Municipal securities

     1,254,795       Discounted cash flow      Discount rate         1.2% - 3.9% (2.6%)   
  

 

 

    

 

  

 

 

    

 

 

 

Private-label CMO

     30,934       Discounted cash flow      Discount rate         2.7% - 7.6% (6.1%)   
           Constant prepayment rate         13.6% - 32.6% (20.7%)   
           Probability of default         0.2% - 4.0% (0.7%)   
           Loss severity         0.0% - 64.0% (33.8%)   
  

 

 

    

 

  

 

 

    

 

 

 

Asset-backed securities

     88,584       Discounted cash flow      Discount rate         3.2% - 13.2% (7.1%)   
           Cumulative prepayment rate         0.0% - 100.0% (14.2%)   
           Cumulative default         2.3% - 100.0% (16.9%)   
           Loss given default         20.0% - 100.0% (93.7%)   
           Cure given deferral         0.0% - 75.0% (31.4%)   
  

 

 

    

 

  

 

 

    

 

 

 

Automobile loans

     16,700       Discounted cash flow      Constant prepayment rate         119.2%   
           Discount rate         0.2% - 5.0% (2.0%)   
  

 

 

    

 

  

 

 

    

 

 

 

Impaired loans

     91,757       Appraisal value      NA         NA   
  

 

 

    

 

  

 

 

    

 

 

 

Other real estate owned

     36,270       Appraisal value      NA         NA   
  

 

 

    

 

  

 

 

    

 

 

 

 

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Quantitative Information about Level 3 Fair Value Measurements  

(dollar amounts in thousands)

   Fair Value at
December 31, 2013
    

Valuation Technique

  

Significant Unobservable Input

   Range (Weighted Average)  

MSRs

   $ 34,236       Discounted cash flow    Constant prepayment rate      7% - 32% (12%)   
         Spread over forward interest rate swap rates      -158 - 4,216 (1,069)   
  

 

 

    

 

  

 

  

 

 

 

Derivative assets

     3,066       Consensus Pricing    Net market price      -5.25% - 13.53% (1.3%)   

Derivative liabilities

     676          Estimated Pull through %      50% - 89% (78%)   
  

 

 

    

 

  

 

  

 

 

 

Municipal securities

     654,537       Discounted cash flow    Discount rate      1.6% - 4.5% (2.4%)   
  

 

 

    

 

  

 

  

 

 

 

Private-label CMO

     32,140       Discounted cash flow    Discount rate      2.9% - 8.3% (6.3%)   
         Constant prepayment rate      12.0% - 31.6% (18.0%)   
         Probability of default      0.1% - 4.0% (0.7%)   
         Loss severity      8.0% - 64.0% (38.2%)   
  

 

 

    

 

  

 

  

 

 

 

Asset-backed securities

     107,419       Discounted cash flow    Discount rate      3.7% - 15.5% (8.1%)   
         Constant prepayment rate      5.7% - 5.7% (5.7%)   
         Cumulative prepayment rate      0.0% - 100% (16.6%)   
         Constant default      1.4% - 4.0% (2.8%)   
         Cumulative default      0.5% - 100% (18.2%)   
         Loss given default      20% - 100% (93.7%)   
         Cure given deferral      0.0% - 75% (35.8%)   
         Loss severity      49.0% - 69.0% (63.5%)   
  

 

 

    

 

  

 

  

 

 

 

Automobile loans

     52,286       Discounted cash flow    Constant prepayment rate      79.2%   
         Discount rate      0.3% - 5.0% (1.5%)   
  

 

 

    

 

  

 

  

 

 

 

Impaired loans

     114,256       Appraisal value    NA      NA   
  

 

 

    

 

  

 

  

 

 

 

Other real estate owned

     27,664       Appraisal value    NA      NA   
  

 

 

    

 

  

 

  

 

 

 

The following provides a general description of the impact of a change in an unobservable input on the fair value measurement and the interrelationship between unobservable inputs, where relevant/significant. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below.

A significant change in the unobservable inputs may result in a significant change in the ending fair value measurement of Level 3 instruments. In general, prepayment rates increase when market interest rates decline and decrease when market interest rates rise and higher prepayment rates generally result in lower fair values for MSR assets, Private-label CMO securities, Asset-backed securities, and automobile loans.

Credit loss estimates, such as probability of default, constant default, cumulative default, loss given default, cure given deferral, and loss severity, are driven by the ability of the borrowers to pay their loans and the value of the underlying collateral and are impacted by changes in macroeconomic conditions, typically increasing when economic conditions worsen and decreasing when conditions improve. An increase in the estimated prepayment rate typically results in a decrease in estimated credit losses and vice versa. Higher credit loss estimates generally result in lower fair values. Credit spreads generally increase when liquidity risks and market volatility increase and decrease when liquidity conditions and market volatility improve.

Discount rates and spread over forward interest rate swap rates typically increase when market interest rates increase and/or credit and liquidity risks increase and decrease when market interest rates decline and/or credit and liquidity conditions improve. Higher discount rates and credit spreads generally result in lower fair market values.

Net market price and pull through percentages generally increase when market interest rates increase and decline when market interest rates decline. Higher net market price and pull through percentages generally result in higher fair values.

 

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Fair values of financial instruments

The following table provides the carrying amounts and estimated fair values of Huntington’s financial instruments that are carried either at fair value or cost at September 30, 2014 and December 31, 2013:

 

     September 30, 2014      December 31, 2013  

(dollar amounts in thousands)

   Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

Financial Assets

           

Cash and short-term assets

   $ 952,760       $ 952,760       $ 1,058,175       $ 1,058,175   

Trading account securities

     66,460         66,460         35,573         35,573   

Loans held for sale

     410,932         410,932         326,212         326,212   

Available-for-sale and other securities

     8,721,804         8,721,804         7,308,753         7,308,753   

Held-to-maturity securities

     3,496,493         3,467,056         3,836,667         3,760,898   

Net loans and leases

     46,092,338         45,219,329         42,472,630         40,976,014   

Derivatives

     207,336         207,336         200,029         200,029   

Financial Liabilities

           

Deposits

     50,129,837         50,930,985         47,506,718         48,132,550   

Short-term borrowings

     1,530,938         1,522,460         552,143         543,552   

Federal Home Loan Bank advances

     1,658,112         1,658,370         1,808,293         1,808,558   

Other long-term debt

     2,590,212         2,604,544         1,349,119         1,342,890   

Subordinated notes

     976,264         970,949         1,100,860         1,073,116   

Derivatives

     138,476         138,476         129,274         129,274   

The following table presents the level in the fair value hierarchy for the estimated fair values of only Huntington’s financial instruments that are not already on the Unaudited Condensed Consolidated Balance Sheets at fair value at September 30, 2014 and December 31, 2013:

 

      Estimated Fair Value Measurements at Reporting Date Using      Balance at
September 30, 2014
 

(dollar amounts in thousands)

   Level 1      Level 2      Level 3     

Financial Assets

           

Held-to-maturity securities

   $ —         $ 3,467,056       $ —         $ 3,467,056   

Net loans and leases

     —           —           45,219,329         45,219,329   

Financial Liabilities

           

Deposits

     —           46,329,168         4,601,817         50,930,985   

Short-term borrowings

     —           —           1,522,460         1,522,460   

Federal Home Loan Bank advances

     —           —           1,658,370         1,658,370   

Other long-term debt

     —           —           2,604,544         2,604,544   

Subordinated notes

     —           —           970,949         970,949   
     Estimated Fair Value Measurements at Reporting Date Using      Balance at
December 31, 2013
 

(dollar amounts in thousands)

   Level 1      Level 2      Level 3     

Financial Assets

           

Held-to-maturity securities

   $ —         $ 3,760,898       $ —         $ 3,760,898   

Net loans and leases

     —           —           40,976,014         40,976,014   

Financial Liabilities

           

Deposits

     —           42,279,542         5,853,008         48,132,550   

Short-term borrowings

     —           —           543,552         543,552   

Federal Home Loan Bank advances

     —           —           1,808,558         1,808,558   

Other long-term debt

     —           —           1,342,890         1,342,890   

Subordinated notes

     —           —           1,073,116         1,073,116   

 

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The short-term nature of certain assets and liabilities result in their carrying value approximating fair value. These include trading account securities, customers’ acceptance liabilities, short-term borrowings, bank acceptances outstanding, FHLB advances, and cash and short-term assets, which include cash and due from banks, interest-bearing deposits in banks, and federal funds sold and securities purchased under resale agreements. Loan commitments and letters-of-credit generally have short-term, variable-rate features and contain clauses that limit Huntington’s exposure to changes in customer credit quality. Accordingly, their carrying values, which are immaterial at the respective balance sheet dates, are reasonable estimates of fair value. Not all the financial instruments listed in the table above are subject to the disclosure provisions of ASC Topic 820.

Certain assets, the most significant being operating lease assets, bank owned life insurance, and premises and equipment, do not meet the definition of a financial instrument and are excluded from this disclosure. Similarly, mortgage and nonmortgage servicing rights, deposit base, and other customer relationship intangibles are not considered financial instruments and are not included above. Accordingly, this fair value information is not intended to, and does not, represent Huntington’s underlying value. Many of the assets and liabilities subject to the disclosure requirements are not actively traded, requiring fair values to be estimated by Management. These estimations necessarily involve the use of judgment about a wide variety of factors, including but not limited to, relevancy of market prices of comparable instruments, expected future cash flows, and appropriate discount rates.

The following methods and assumptions were used by Huntington to estimate the fair value of the remaining classes of financial instruments:

Held-to-maturity securities

Fair values are determined by using models that are based on security-specific details, as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices, and interest rate spreads on relevant benchmark securities.

Loans and Direct Financing Leases

Variable-rate loans that reprice frequently are based on carrying amounts, as adjusted for estimated credit losses. The fair values for other loans and leases are estimated using discounted cash flow analyses and employ interest rates currently being offered for loans and leases with similar terms. The rates take into account the position of the yield curve, as well as an adjustment for prepayment risk, operating costs, and profit. This value is also reduced by an estimate of expected losses and the credit risk associated in the loan and lease portfolio. The valuation of the loan portfolio reflected discounts that Huntington believed are consistent with transactions occurring in the marketplace.

Deposits

Demand deposits, savings accounts, and money market deposits are, by definition, equal to the amount payable on demand. The fair values of fixed-rate time deposits are estimated by discounting cash flows using interest rates currently being offered on certificates with similar maturities.

Debt

Fixed-rate, long-term debt is based upon quoted market prices, which are inclusive of Huntington’s credit risk. In the absence of quoted market prices, discounted cash flows using market rates for similar debt with the same maturities are used in the determination of fair value.

15. DERIVATIVE FINANCIAL INSTRUMENTS

Derivative financial instruments are recorded in the Unaudited Condensed Consolidated Balance Sheet as either an asset or a liability (in accrued income and other assets or accrued expenses and other liabilities, respectively) and measured at fair value.

Derivatives used in Asset and Liability Management Activities

Huntington engages in balance sheet hedging activity, principally for asset liability management purposes, to convert fixed rate assets or liabilities into floating rate or vice versa. Balance sheet hedging activity is arranged to receive hedge accounting treatment and is classified as either fair value or cash flow hedges. Fair value hedges are purchased to convert deposits and subordinated and other long-term debt from fixed-rate obligations to floating rate. Cash flow hedges are also used to convert floating rate loans made to customers into fixed rate loans.

 

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The following table presents the gross notional values of derivatives used in Huntington’s asset and liability management activities at September 30, 2014, identified by the underlying interest rate-sensitive instruments:

 

     Fair Value      Cash Flow         

(dollar amounts in thousands)

   Hedges      Hedges      Total  

Instruments associated with:

        

Loans

   $ —         $ 9,315,000       $ 9,315,000   

Deposits

     69,100         —           69,100   

Subordinated notes

     475,000         —           475,000   

Other long-term debt

     2,285,000         —           2,285,000   
  

 

 

    

 

 

    

 

 

 

Total notional value at September 30, 2014

   $ 2,829,100       $ 9,315,000       $ 12,144,100   
  

 

 

    

 

 

    

 

 

 

The following table presents additional information about the interest rate swaps used in Huntington’s asset and liability management activities at September 30, 2014:

 

            Average            Weighted-Average  
     Notional      Maturity      Fair     Rate  

(dollar amounts in thousands)

   Value      (years)      Value     Receive     Pay  

Asset conversion swaps

            

Receive fixed - generic

   $ 9,315,000         2.2       $ (33,609     0.80     0.24
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total asset conversion swaps

     9,315,000         2.2         (33,609     0.80        0.24   

Liability conversion swaps

            

Receive fixed - generic

     2,829,100         3.4         45,832        1.73        0.25   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liability conversion swaps

     2,829,100         3.4         45,832        1.73        0.25   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total swap portfolio

   $ 12,144,100         2.5       $ 12,223        1.01     0.24
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

These derivative financial instruments were entered into for the purpose of managing the interest rate risk of assets and liabilities. Consequently, net amounts receivable or payable on contracts hedging either interest earning assets or interest bearing liabilities were accrued as an adjustment to either interest income or interest expense. The net amounts resulted in an increase to net interest income of $24.2 million and $23.1 million for the three-month periods ended September 30, 2014, and 2013, respectively. For the nine-month periods ended September 30, 2014 and 2013, the net amounts resulted in an increase to net interest income of $73.4 million and $73.2 million, respectively.

In connection with the sale of Huntington’s Class B Visa® shares, Huntington entered into a swap agreement with the purchaser of the shares. The swap agreement adjusts for dilution in the conversion ratio of Class B shares resulting from the Visa® litigation. At September 30, 2014, the fair value of the swap liability of $0.4 million is an estimate of the exposure liability based upon Huntington’s assessment of the potential Visa® litigation losses.

 

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The following table presents the fair values at September 30, 2014 and December 31, 2013 of Huntington’s derivatives that are designated and not designated as hedging instruments. Amounts in the table below are presented gross without the impact of any net collateral arrangements:

Asset derivatives included in accrued income and other assets:

 

     September 30,      December 31,  

(dollar amounts in thousands)

   2014      2013  

Interest rate contracts designated as hedging instruments

   $ 45,712       $ 49,998   

Interest rate contracts not designated as hedging instruments

     171,736         169,047   

Foreign exchange contracts not designated as hedging instruments

     28,110         28,499   

Commodities contracts not designated as hedging instruments

     15,617         4,278   
  

 

 

    

 

 

 

Total contracts

   $ 261,175       $ 251,822   
  

 

 

    

 

 

 

Liability derivatives included in accrued expenses and other liabilities:

 

     September 30,      December 31,  

(dollar amounts in thousands)

   2014      2013  

Interest rate contracts designated as hedging instruments

   $ 33,489       $ 25,321   

Interest rate contracts not designated as hedging instruments

     101,666         99,247   

Foreign exchange contracts not designated as hedging instruments

     23,020         18,909   

Commodities contracts not designated as hedging instruments

     15,112         3,838   
  

 

 

    

 

 

 

Total contracts

   $ 173,287       $ 147,315   
  

 

 

    

 

 

 

The changes in fair value of the fair value hedges are, to the extent that the hedging relationship is effective, recorded through earnings and offset against changes in the fair value of the hedged item.

The following table presents the change in fair value for derivatives designated as fair value hedges as well as the offsetting change in fair value on the hedged item for three-month and nine-month periods ended September 30, 2014 and 2013:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  

(dollar amounts in thousands)

   2014     2013     2014     2013  

Interest rate contracts

        

Change in fair value of interest rate swaps hedging deposits (1)

   $ (323   $ (336   $ (829   $ (3,650

Change in fair value of hedged deposits (1)

     315        340        809        3,645   

Change in fair value of interest rate swaps hedging subordinated notes (2)

     (6,601     (2,358     (2,520     (34,378

Change in fair value of hedged subordinated notes (2)

     6,601        2,358        2,520        34,378   

Change in fair value of interest rate swaps hedging other long-term debt (2)

     (13,196     466        (6,943     (1,106

Change in fair value of hedged other long-term debt (2)

     12,924        (316     9,450        1,255   

 

(1) Effective portion of the hedging relationship is recognized in Interest expense—deposits in the Unaudited Condensed Consolidated Statements of Income. Any resulting ineffective portion of the hedging relationship is recognized in noninterest income in the Unaudited Condensed Consolidated Statements of Income.
(2) Effective portion of the hedging relationship is recognized in Interest expense—subordinated notes and other long-term debt in the Unaudited Condensed Consolidated Statements of Income. Any resulting ineffective portion of the hedging relationship is recognized in noninterest income in the Unaudited Condensed Consolidated Statements of Income.

To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair value will not be included in current earnings but are reported as a component of OCI in the Unaudited Condensed Consolidated Statements of Shareholders’ Equity. These changes in fair value will be included in earnings of future periods when earnings are also affected by the changes in the hedged cash flows. To the extent these derivatives are not effective, changes in their fair values are immediately included in noninterest income.

 

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The following table presents the gains and (losses) recognized in OCI and the location in the Unaudited Condensed Consolidated Statements of Income of gains and (losses) reclassified from OCI into earnings for the three-month and nine-month periods ended September 30, 2014 and 2013 for derivatives designated as effective cash flow hedges:

 

Derivatives in cash flow hedging relationships

   Amount of gain or
(loss) recognized in
OCI on derivatives
(effective portion)

(after-tax)
   

Location of gain or (loss) reclassified from

accumulated OCI into earnings (effective portion)

   Amount of (gain) or loss
reclassified from
accumulated OCI into
earnings (effective
portion)
 
     Three Months Ended          Three Months Ended  
     September 30,          September 30,  

(dollar amounts in thousands)

   2014     2013          2014     2013  

Interest rate contracts

           

Loans

   $ (21,133   $ 17,337      Interest and fee income - loans and leases    $ (148   $ (3,078

Investment Securities

     —          —        Noninterest income - other income      —          (7

Subordinated notes

     —          —        Interest expense - subordinated notes and other long-term debt      —          —     
  

 

 

   

 

 

      

 

 

   

 

 

 

Total

   $ (21,133   $ 17,337         $ (148   $ (3,085
  

 

 

   

 

 

      

 

 

   

 

 

 

Derivatives in cash flow hedging relationships

   Amount of gain or
(loss) recognized in
OCI on derivatives
(effective portion)
(after-tax)
   

Location of gain or (loss) reclassified from

accumulated OCI into earnings (effective portion)

   Amount of (gain) or loss
reclassified from
accumulated OCI into
earnings (effective
portion)
 
     Nine Months Ended          Nine Months Ended  
     September 30,          September 30,  

(dollar amounts in thousands)

   2014     2013          2014     2013  

Interest rate contracts

           

Loans

   $ (1,596   $ (46,526   Interest and fee income - loans and leases    $ (3,853   $ (11,369

Investment Securities

     —          —        Interest and fee income - investment securities      —          (202

Subordinated notes

     —          —        Interest expense - subordinated notes and other long-term debt      —          —     
  

 

 

   

 

 

      

 

 

   

 

 

 

Total

   $ (1,596   $ (46,526      $ (3,853   $ (11,571
  

 

 

   

 

 

      

 

 

   

 

 

 

Reclassified gains and losses on swaps related to loans and investment securities and swaps related to subordinated debt are recorded within interest income and interest expense, respectively. During the next twelve months, Huntington expects to reclassify to earnings $26.2 million after-tax unrealized gains on cash flow hedging derivatives currently in OCI.

The following table details the gains and (losses) recognized in noninterest income on the ineffective portion on interest rate contracts for derivatives designated as cash flow hedges for three-month and nine-month periods ended September 30, 2014 and 2013:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  

(dollar amounts in thousands)

   2014      2013     2014      2013  

Derivatives in cash flow hedging relationships

          

Interest rate contracts

          

Loans

   $ 224       $ (13   $ 195       $ 895   

 

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Derivatives used in trading activities

Various derivative financial instruments are offered to enable customers to meet their financing and investing objectives and for their risk management purposes. Derivative financial instruments used in trading activities consisted predominantly of interest rate swaps, but also included interest rate caps, floors, and futures, as well as foreign exchange options and commodity contracts. Interest rate options grant the option holder the right to buy or sell an underlying financial instrument for a predetermined price before the contract expires. Interest rate futures are commitments to either purchase or sell a financial instrument at a future date for a specified price or yield and may be settled in cash or through delivery of the underlying financial instrument. Interest rate caps and floors are option-based contracts that entitle the buyer to receive cash payments based on the difference between a designated reference rate and a strike price, applied to a notional amount. Written options, primarily caps, expose Huntington to market risk but not credit risk. Purchased options contain both credit and market risk. The interest rate risk of these customer derivatives is mitigated by entering into similar derivatives having offsetting terms with other counterparties. The credit risk to these customers is evaluated and included in the calculation of fair value.

The net fair values of these derivative financial instruments, for which the gross amounts are included in accrued income and other assets or accrued expenses and other liabilities at September 30, 2014 and December 31, 2013, were $75.6 million and $80.5 million, respectively. The total notional values of derivative financial instruments used by Huntington on behalf of customers, including offsetting derivatives, were $13.5 billion and $14.3 billion at September 30, 2014 and December 31, 2013, respectively. Huntington’s credit risks from interest rate swaps used for trading purposes were $165.7 million and $160.4 million at the same dates, respectively.

Financial assets and liabilities that are offset in the Condensed Consolidated Balance Sheets

Huntington records derivatives at fair value as further described in Note 14. Huntington records these derivatives net of any master netting arrangement in the Unaudited Condensed Consolidated Balance Sheets. Collateral agreements are regularly entered into as part of the underlying derivative agreements with Huntington’s counterparties to mitigate counterparty credit risk.

All derivatives are carried on the Unaudited Condensed Consolidated Balance Sheets at fair value. Derivative balances are presented on a net basis taking into consideration the effects of legally enforceable master netting agreements. Cash collateral exchanged with counterparties is also netted against the applicable derivative fair values. Huntington enters into derivative transactions with two primary groups: broker-dealers and banks, and Huntington’s customers. Different methods are utilized for managing counterparty credit exposure and credit risk for each of these groups.

Huntington enters into transactions with broker-dealers and banks for various risk management purposes. These types of transactions generally are high dollar volume. Huntington enters into bilateral collateral and master netting agreements with these counterparties, and routinely exchange cash and high quality securities collateral with these counterparties. Huntington enters into transactions with customers to meet their financing, investing, payment and risk management needs. These types of transactions generally are low dollar volume. Huntington generally enters into master netting agreements with customer counterparties, however collateral is generally not exchanged with customer counterparties.

At September 30, 2014 and December 31, 2013, aggregate credit risk associated with these derivatives, net of collateral that has been pledged by the counterparty, was $19.1 million and $15.2 million, respectively. The credit risk associated with interest rate swaps is calculated after considering master netting agreements with broker-dealers and banks.

At September 30, 2014, Huntington pledged $116.2 million of investment securities and cash collateral to counterparties, while other counterparties pledged $82.2 million of investment securities and cash collateral to Huntington to satisfy collateral netting agreements. In the event of credit downgrades, Huntington would not be required to provide additional collateral.

 

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The following tables present the gross amounts of these assets and liabilities with any offsets to arrive at the net amounts recognized in the Unaudited Condensed Consolidated Balance Sheets at September 30, 2014 and December 31, 2013:

Offsetting of Financial Assets and Derivative Assets

 

                            Gross amounts not offset in
the condensed consolidated

balance sheets
       

(dollar amounts in thousands)

        Gross amounts
of recognized
assets
    Gross amounts
offset in the
condensed
consolidated
balance sheets
    Net amounts of
assets
presented in
the condensed
consolidated
balance sheets
    Financial
instruments
    cash collateral
received
    Net amount  

Offsetting of Financial Assets and Derivative Assets

  

         

September 30, 2014

    Derivatives      $ 280,690      $ (78,131   $ 202,559      $ (23,061   $ (370   $ 179,128   

December 31, 2013

    Derivatives        300,903        (111,458     189,445        (35,205     (360     153,880   

Offsetting of Financial Liabilities and Derivative Liabilities

 

                            Gross amounts not offset in
the condensed consolidated
balance sheets
       

(dollar amounts in thousands)

    Gross amounts
of recognized
liabilities
    Gross amounts
offset in the
condensed
consolidated
balance sheets
    Net amounts of
liabilities
presented in
the condensed
consolidated
balance sheets
    Financial
instruments
    cash collateral
received
    Net amount  

Offsetting of Financial Liabilities and Derivative Liabilities

  

         

September 30, 2014

    Derivatives      $ 192,802      $ (55,703   $ 137,099      $ (79,343   $ (518   $ 57,238   

December 31, 2013

    Derivatives        196,397        (76,539     119,858        (86,204     290        33,944   

Derivatives used in mortgage banking activities

Huntington also uses certain derivative financial instruments to offset changes in value of its residential MSRs. These derivatives consist primarily of forward interest rate agreements and forward commitments to deliver mortgage-backed securities. The derivative instruments used are not designated as hedges. Accordingly, such derivatives are recorded at fair value with changes in fair value reflected in mortgage banking income. The following table summarizes the derivative assets and liabilities used in mortgage banking activities

 

     September 30,     December 31,  

(dollar amounts in thousands)

   2014     2013  

Derivative assets:

    

Interest rate lock agreements

   $ 4,260      $ 3,066   

Forward trades and options

     517        3,997   
  

 

 

   

 

 

 

Total derivative assets

     4,777        7,063   
  

 

 

   

 

 

 

Derivative liabilities:

    

Interest rate lock agreements

     (282     (231

Forward trades and options

     (1,095     (40
  

 

 

   

 

 

 

Total derivative liabilities

     (1,377     (271
  

 

 

   

 

 

 

Net derivative asset (liability)

   $ 3,400      $ 6,792   
  

 

 

   

 

 

 

 

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The total notional value of these derivative financial instruments at September 30, 2014 and December 31, 2013, was $0.4 billion and $0.5 billion, respectively. The total notional amount at September 30, 2014, corresponds to trading assets with a fair value of $0.5 million and no trading liabilities. Net trading gains and (losses) related to MSR hedging for the three-month periods ended September 30, 2014 and 2013, were $(0.2) million and $0.1 million, respectively and $3.8 million and $(23.5) million for the nine-month periods ended September 30, 2014 and 2013, respectively. These amounts are included in mortgage banking income in the Unaudited Condensed Consolidated Statements of Income.

16. VIEs

Consolidated VIEs

Consolidated VIEs at September 30, 2014, consisted of automobile loan and lease securitization trusts formed in 2009 and 2006. Huntington has determined the trusts are VIEs. Huntington has concluded that it is the primary beneficiary of these trusts because it has the power to direct the activities of the entity that most significantly affect the entity’s economic performance and it has either the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. During the 2014 first quarter, Huntington cancelled the 2009 and 2006 Automobile Trusts. As a result, any remaining assets at the time of the cancellation are no longer part of the trusts.

The following tables present the carrying amount and classification of the consolidated trusts’ assets and liabilities that were included in the Unaudited Condensed Consolidated Balance Sheets at September 30, 2014 and December 31, 2013:

 

     September 30, 2014  
     2009      2006     Other         
     Automobile      Automobile     Consolidated         

(dollar amounts in thousands)

   Trust      Trust     Trusts      Total  

Assets:

          

Cash

   $ —         $ —        $ —         $ —     

Loans and leases

     —           —          —           —     

Allowance for loan and lease losses

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Net loans and leases

     —           —          —           —     

Accrued income and other assets

     —           —          243         243   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total assets

   $ —         $ —        $ 243       $ 243   
  

 

 

    

 

 

   

 

 

    

 

 

 

Liabilities:

          

Other long-term debt

   $ —         $ —        $ —         $ —     

Accrued interest and other liabilities

     —           —          243         243   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total liabilities

   $ —         $ —        $ 243       $ 243   
  

 

 

    

 

 

   

 

 

    

 

 

 
     December 31, 2013  
     2009      2006     Other         
     Automobile      Automobile     Consolidated         

(dollar amounts in thousands)

   Trust      Trust     Trusts      Total  

Assets:

          

Cash

   $ 8,580       $ 79,153      $ —         $ 87,733   

Loans and leases

     52,286         151,171        —           203,457   

Allowance for loan and lease losses

     —           (711     —           (711
  

 

 

    

 

 

   

 

 

    

 

 

 

Net loans and leases

     52,286         150,460        —           202,746   

Accrued income and other assets

     235         485        262         982   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total assets

   $ 61,101       $ 230,098      $ 262       $ 291,461   
  

 

 

    

 

 

   

 

 

    

 

 

 

Liabilities:

          

Other long-term debt

   $ —         $ —        $ —         $ —     

Accrued interest and other liabilities

     —           —          262         262   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total liabilities

   $ —         $ —        $ 262       $ 262   
  

 

 

    

 

 

   

 

 

    

 

 

 

The automobile loans and leases were designated to repay the securitized notes. Huntington services the loans and leases and uses the proceeds from principal and interest payments to pay the securitized notes during the amortization period. Huntington has not provided financial or other support that was not previously contractually required.

 

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Unconsolidated VIEs

The following tables provide a summary of the assets and liabilities included in Huntington’s Unaudited Condensed Consolidated Financial Statements, as well as the maximum exposure to losses, associated with its interests related to unconsolidated VIEs for which Huntington holds an interest, but is not the primary beneficiary, to the VIE at September 30, 2014, and December 31, 2013:

 

     September 30, 2014  

(dollar amounts in thousands)

   Total Assets      Total Liabilities      Maximum Exposure to Loss  

2012-1 Automobile Trust

   $ 2,898       $ —         $ 2,898   

2012-2 Automobile Trust

     4,071         —           4,071   

2011 Automobile Trust

     1,336         —           1,336   

Tower Hill Securities, Inc.

     56,145         65,000         56,145   

Trust Preferred Securities

     13,919         317,067         —     

Low Income Housing Tax Credit Partnerships

     340,133         141,791         340,133   

Other Investments

     82,934         17,084         82,934   
  

 

 

    

 

 

    

 

 

 

Total

   $ 501,436       $ 540,942       $ 487,517   
     December 31, 2013  

(dollar amounts in thousands)

   Total Assets      Total Liabilities      Maximum Exposure to Loss  

2012-1 Automobile Trust

   $ 5,975       $ —         $ 5,975   

2012-2 Automobile Trust

     7,396         —           7,396   

2011 Automobile Trust

     3,040         —           3,040   

Tower Hill Securities, Inc.

     66,702         65,000         66,702   

Trust Preferred Securities

     13,764         312,894         —     

Low Income Housing Tax Credit Partnerships

     317,226         134,604         317,226   

Other Investments

     90,278         9,772         90,278   
  

 

 

    

 

 

    

 

 

 

Total

   $ 504,381       $ 522,270       $ 490,617   

2012-1 AUTOMOBILE TRUST, 2012-2 AUTOMOBILE TRUST, and 2011 AUTOMOBILE TRUST

During the 2012 fourth quarter, 2012 first quarter and 2011 third quarter, we transferred automobile loans totaling $1.0 billion, $1.3 billion and $1.0 billion, respectively, to trusts in securitization transactions. The securitizations and the resulting sale of all underlying securities qualified for sale accounting. Huntington has concluded that it is not the primary beneficiary of these trusts because it has neither the obligation to absorb losses of the entities that could potentially be significant to the VIEs nor the right to receive benefits from the entities that could potentially be significant to the VIEs. Huntington is not required and does not currently intend to provide any additional financial support to the trusts. Investors and creditors only have recourse to the assets held by the trusts. The interest Huntington holds in the VIEs relates to servicing rights which are included within accrued income and other assets of Huntington’s Unaudited Condensed Consolidated Balance Sheets. The maximum exposure to loss is equal to the carrying value of the servicing asset.

TOWER HILL SECURITIES, INC.

In 2010, we transferred approximately $92.1 million of municipal securities, $86.0 million in Huntington Preferred Capital, Inc. (Real Estate Investment Trust) Class E Preferred Stock and cash of $6.1 million to Tower Hill Securities, Inc. in exchange for $184.1 million of Common and Preferred Stock of Tower Hill Securities, Inc. The municipal securities and the REIT Shares will be used to satisfy $65.0 million of mandatorily redeemable securities issued by Tower Hill Securities, Inc. and are not available to satisfy the general debts and obligations of Huntington or any consolidated affiliates. The transfer was recorded as a secured financing. Interests held by Huntington consist of municipal securities within available for sale and other securities and Series B preferred securities within other long term debt of Huntington’s Unaudited Condensed Consolidated Balance Sheets. The maximum exposure to loss is equal to the carrying value of the municipal securities.

 

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TRUST PREFERRED SECURITIES

Huntington has certain wholly-owned trusts whose assets, liabilities, equity, income, and expenses are not included within Huntington’s Unaudited Condensed Consolidated Financial Statements. These trusts have been formed for the sole purpose of issuing trust-preferred securities, from which the proceeds are then invested in Huntington junior subordinated debentures, which are reflected in Huntington’s Unaudited Condensed Consolidated Balance Sheets as subordinated notes. The trust securities are the obligations of the trusts, and as such, are not consolidated within Huntington’s Unaudited Condensed Consolidated Financial Statements. A list of trust preferred securities outstanding at September 30, 2014 follows:

 

           Principal amount of      Investment in  
           subordinated note/      unconsolidated  

(dollar amounts in thousands)

   Rate     debenture issued to trust (1)      subsidiary  

Huntington Capital I

     0.94 %(2)    $ 111,816       $ 6,186   

Huntington Capital II

     0.86 (3)      54,593         3,093   

Sky Financial Capital Trust III

     1.63 (4)      72,165         2,165   

Sky Financial Capital Trust IV

     1.63 (4)      74,320         2,320   

Camco Financial Trust

     1.56 (5)      4,173         155   
  

 

 

   

 

 

    

 

 

 

Total

     $ 317,067       $ 13,919   
    

 

 

    

 

 

 

 

(1) Represents the principal amount of debentures issued to each trust, including unamortized original issue discount.
(2) Variable effective rate at September 30, 2014, based on three month LIBOR + 0.70.
(3) Variable effective rate at September 30, 2014, based on three month LIBOR + 0.625.
(4) Variable effective rate at September 30, 2014, based on three month LIBOR + 1.40.
(5) Variable effective rate (including impact of purchase accounting accretion) at September 30, 2014, based on three month LIBOR + 1.33.

Each issue of the junior subordinated debentures has an interest rate equal to the corresponding trust securities distribution rate. Huntington has the right to defer payment of interest on the debentures at any time, or from time-to-time for a period not exceeding five years provided that no extension period may extend beyond the stated maturity of the related debentures. During any such extension period, distributions to the trust securities will also be deferred and Huntington’s ability to pay dividends on its common stock will be restricted. Periodic cash payments and payments upon liquidation or redemption with respect to trust securities are guaranteed by Huntington to the extent of funds held by the trusts. The guarantee ranks subordinate and junior in right of payment to all indebtedness of the Company to the same extent as the junior subordinated debt. The guarantee does not place a limitation on the amount of additional indebtedness that may be incurred by Huntington.

LOW INCOME HOUSING TAX CREDIT PARTNERSHIPS

Huntington makes certain equity investments in various limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (LIHTC) pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital, to facilitate the sale of additional affordable housing product offerings, and to assist in achieving goals associated with the Community Reinvestment Act. The primary activities of the limited partnerships include the identification, development, and operation of multi family housing that is leased to qualifying residential tenants. Generally, these types of investments are funded through a combination of debt and equity.

Huntington is a limited partner in each Low Income Housing Tax Credit Partnership. A separate unrelated third party is the general partner. Each limited partnership is managed by the general partner, who exercises full and exclusive control over the affairs of the limited partnership. The general partner has all the rights, powers and authority granted or permitted to be granted to a general partner of a limited partnership under the Ohio Revised Uniform Limited Partnership Act. Duties entrusted to the general partner of each limited partnership include, but are not limited to: investment in operating companies, company expenditures, investment of excess funds, borrowing funds, employment of agents, disposition of fund property, prepayment and refinancing of liabilities, votes and consents, contract authority, disbursement of funds, accounting methods, tax elections, bank accounts, insurance, litigation, cash reserve, and use of working capital reserve funds. Except for limited rights granted to consent to certain transactions, the limited partner(s) may not participate in the operation, management, or control of the limited partnership’s business, transact any business in the limited partnership’s name or have any power to sign documents for or otherwise bind the limited partnership. In addition, the general partner may only be removed by the limited partner(s) in the event the general partner fails to comply with the terms of the agreement and/or is negligent in performing its duties.

 

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Huntington believes the general partner of each limited partnership has the power to direct the activities which most significantly affect the performance of each partnership, therefore, Huntington has determined that it is not the primary beneficiary of any LIHTC partnership. Huntington uses the proportional amortization method to account for a majority of its investments in these entities. These investments are included in accrued income and other assets. Investments that do not meet the requirements of the proportional amortization method are recognized using the equity method. Investment losses related to these investments are included in non-interest-income in the Unaudited Condensed Consolidated Statements of Income.

During the 2014 first quarter, Huntington early adopted ASU 2014-01 (see Note 2). The amendments are required to be applied retrospectively to all periods presented. As a result of these changes, Huntington recorded a cumulative-effect adjustment to beginning retained earnings.

The following table summarizes the income statement amounts impacted by the change at the dates or for the periods indicated:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  

(dollar amounts in thousands)

   2013      2013  

Noninterest income

     

As previously reported

   $ 250,503         751,367   

As reported under the new guidance

     253,767         762,304   

Provision for income taxes

     

As previously reported

     62,132         166,700   

As reported under the new guidance

     65,047         175,445   

Net income

     

As previously reported

     178,487         480,918   

As reported under the new guidance

     178,836         483,110   

The following table presents the balances of Huntington’s affordable housing tax credit investments and related unfunded commitments at September 30, 2014 and December 31, 2013.

 

     September 30,     December 31,  

(dollar amounts in thousands)

   2014     2013  

Affordable housing tax credit investments

   $ 538,836      $ 484,799   

Less: amortization

     (198,703     (167,573
  

 

 

   

 

 

 

Net affordable housing tax credit investments

   $ 340,133      $ 317,226   
  

 

 

   

 

 

 

Unfunded commitments

   $ 141,791      $ 134,604   

The following table presents other information relating to Huntington’s affordable housing tax credit investments for the three-month and nine-month periods ended September 30, 2014 and 2013.

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  

(dollar amounts in thousands)

   2014      2013      2014      2013  

Tax credits and other tax benefits recognized

   $ 13,370       $ 13,984       $ 41,430       $ 41,861   

Proportional amortization method

           

Tax credit amortization expense included in provision for income taxes

     9,659         8,197         28,537         24,592   

Equity method

           

Tax credit investment losses included in non-interest income

     290         294         737         882   

Huntington did not recognize any impairment losses on tax credit investments during the three-month period or nine-months ended September 30, 2014. Huntington did recognize immaterial impairment losses for the nine-months ended September 30, 2013. The impairment losses recognized related to the fair value of the tax credit investments that were less than carrying value.

 

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OTHER INVESTMENTS

Other investments determined to be VIE’s include investments in New Market Tax Credit Investments, Historic Tax Credit Investments, Small Business Investment Companies, Rural Business Investment Companies, certain equity method investments and other miscellaneous investments.

17. COMMITMENTS AND CONTINGENT LIABILITIES

Commitments to extend credit

In the ordinary course of business, Huntington makes various commitments to extend credit that are not reflected in the Unaudited Condensed Consolidated Financial Statements. The contractual amounts of these financial agreements at September 30, 2014 and December 31, 2013, were as follows:

 

     September 30,      December 31,  

(dollar amounts in thousands)

   2014      2013  

Contract amount represents credit risk:

     

Commitments to extend credit

     

Commercial

   $ 10,943,604       $ 10,198,327   

Consumer

     7,288,323         6,544,606   

Commercial real estate

     872,448         765,982   

Standby letters-of-credit

     477,824         439,834   

Commitments to extend credit generally have fixed expiration dates, are variable-rate, and contain clauses that permit Huntington to terminate or otherwise renegotiate the contracts in the event of a significant deterioration in the customer’s credit quality. These arrangements normally require the payment of a fee by the customer, the pricing of which is based on prevailing market conditions, credit quality, probability of funding, and other relevant factors. Since many of these commitments are expected to expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements. The interest rate risk arising from these financial instruments is insignificant as a result of their predominantly short-term, variable-rate nature.

Standby letters-of-credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most of these arrangements mature within two years. The carrying amount of deferred revenue associated with these guarantees was $5.0 million and $2.1 million at September 30, 2014 and December 31, 2013, respectively.

Through the Company’s credit process, Huntington monitors the credit risks of outstanding standby letters-of-credit. When it is probable that a standby letter-of-credit will be drawn and not repaid in full, losses are recognized in the provision for credit losses. At September 30, 2014, Huntington had $478 million of standby letters-of-credit outstanding, of which 82% were collateralized. Included in this $478 million total are letters-of-credit issued by the Bank that support securities that were issued by customers and remarketed by The Huntington Investment Company, the Company’s broker-dealer subsidiary.

Huntington uses an internal grading system to assess an estimate of loss on its loan and lease portfolio. This same loan grading system is used to monitor credit risk associated with standby letters-of-credit. Under this grading system as of September 30, 2014, approximately $128 million of the standby letters-of-credit were rated strong with sufficient asset quality, liquidity, and good debt capacity and coverage; approximately $349 million were rated average with acceptable asset quality, liquidity, and modest debt capacity; and approximately less than $1 million were rated substandard with negative financial trends, structural weaknesses, operating difficulties, and higher leverage.

Commercial letters-of-credit represent short-term, self-liquidating instruments that facilitate customer trade transactions and generally have maturities of no longer than 90 days. The goods or cargo being traded normally secures these instruments.

Commitments to sell loans

Activity related to our mortgage origination activity supports the hedging of the mortgage pricing commitments to customers and the secondary sale to third parties. At September 30, 2014 and December 31, 2013, Huntington had commitments to sell residential real estate loans of $556.0 million and $452.6 million, respectively. These contracts mature in less than one year.

 

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Income Taxes

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state, city, and foreign jurisdictions. Federal income tax audits have been completed through 2009. In the first quarter of 2013, the IRS began an examination of our 2010 and 2011 consolidated federal income tax returns. The Company has appealed certain proposed adjustments resulting from the IRS examination of the 2006, 2007, 2008, 2009, and 2010 tax returns. Management believes the tax positions taken related to such proposed adjustments were 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. However, although no assurance can be given, Management believes 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 Ohio, Kentucky, Indiana, Michigan, Pennsylvania, West Virginia, and Illinois.

Huntington accounts for uncertainties in income taxes in accordance with ASC 740, Income Taxes. At September 30, 2014, Huntington had gross unrecognized tax benefits of $2.8 million in income tax liability related to uncertain tax positions. Total interest accrued on the unrecognized tax benefits was $4.2 million as of September 30, 2014. Huntington recognizes interest and penalties on income tax assessments or income tax refunds in the financial statements as a component of provision for income taxes. It is reasonably possible that the liability for unrecognized tax benefits could decrease in the next twelve months.

Litigation

The nature of Huntington’s business ordinarily results in a certain amount of claims, litigation, investigations, regulatory, and legal and administrative cases and proceedings, all of which are considered incidental to the normal conduct of business. When the Company determines it has meritorious defenses to the claims asserted, it vigorously defends itself. The Company will consider settlement of cases when, in Management’s judgment, it is in the best interests of both the Company and its shareholders to do so.

On at least a quarterly basis, Huntington assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. For matters where it is probable the Company will incur a loss and the amount can be reasonably estimated, Huntington establishes an accrual for the loss. Once established, the accrual is adjusted as appropriate to reflect any relevant developments. For matters where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established.

In certain cases, exposure to loss exists in excess of the accrual to the extent such loss is reasonably possible, but not probable. Management believes an estimate of the aggregate range of reasonably possible losses, in excess of amounts accrued, for current legal proceedings is from $0 to approximately $130.0 million at September 30, 2014. For certain other cases, Management cannot reasonably estimate the possible loss at this time. Any estimate involves significant judgment, given the varying stages of the proceedings (including the fact that many of them are currently in preliminary stages), the existence of multiple defendants in several of the current proceedings whose share of liability has yet to be determined, the numerous unresolved issues in many of the proceedings, and the inherent uncertainty of the various potential outcomes of such proceedings. Accordingly, Management’s estimate will change from time-to-time, and actual losses may be more or less than the current estimate.

While the final outcome of legal proceedings is inherently uncertain, based on information currently available, advice of counsel, and available insurance coverage, Management believes that the amount it has already accrued is adequate and any incremental liability arising from the Company’s legal proceedings will not have a material negative adverse effect on the Company’s consolidated financial position as a whole. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the Company’s consolidated financial position in a particular period.

The Bank has been a defendant in three lawsuits, which collectively may be material, arising from its commercial lending, depository, and equipment leasing relationships with Cyberco Holdings, Inc. (Cyberco), based in Grand Rapids, Michigan. In November 2004, the Federal Bureau of Investigation and the IRS raided the Cyberco facilities and Cyberco’s operations ceased. An equipment leasing fraud was uncovered, whereby Cyberco sought financing from equipment lessors and financial institutions, including the Bank, allegedly to purchase computer equipment from Teleservices Group, Inc. (Teleservices). Cyberco created fraudulent documentation to close the financing transactions while, in fact, no computer equipment was ever purchased or leased from Teleservices which proved to be a shell corporation.

 

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On June 22, 2007, a complaint in the United States District Court for the Western District of Michigan (District Court) was filed by El Camino Resources, Ltd, ePlus Group, Inc., and Bank Midwest, N.A., all of whom had financing relationships with Cyberco, against the Bank, which alleged that Cyberco defrauded plaintiffs and converted plaintiffs’ property through various means in connection with the equipment leasing scheme and alleged that the Bank aided and abetted Cyberco in committing the alleged fraud and conversion. The complaint further alleged that the Bank’s actions entitled one of the plaintiffs to recover $1.9 million from the Bank as a form of unjust enrichment. In addition, plaintiffs claimed direct damages of approximately $32.0 million and additional consequential damages in excess of $20.0 million. On July 1, 2010, the District Court issued an Opinion and Order adopting in full a federal magistrate’s recommendation for summary judgment in favor of the Bank on all claims except the unjust enrichment claim, and a partial summary judgment was entered on July 1, 2010. On February 6, 2012, the District Court dismissed the remaining count for unjust enrichment following a finding by the bankruptcy court that the plaintiff must pursue its rights, if any, with respect to that count in a bankruptcy court. The plaintiffs filed a notice of appeal on March 2, 2012, appealing the District Court’s judgment against them on the aiding and abetting and conversion claims. Oral arguments before the Sixth Circuit Court of Appeals were held January 24, 2013, and the Sixth Circuit Court of Appeals affirmed the District Court’s judgment in an opinion issued on April 8, 2013. The plaintiffs then filed a motion for rehearing en banc, which the Sixth Circuit denied on May 30, 2013. The period for plaintiffs to seek review in the United States Supreme Court has passed, and the case is completed.

The Bank has also been involved with the Chapter 7 bankruptcy proceedings of both Cyberco, filed on December 9, 2004, and Teleservices, filed on January 21, 2005. The Cyberco bankruptcy trustee commenced an adversary proceeding against the Bank on December 8, 2006, seeking over $70.0 million he alleged was transferred to the Bank. The Bank responded with a motion to dismiss and all but the preference claims were dismissed on January 29, 2008. The Cyberco bankruptcy trustee alleged preferential transfers in the amount of approximately $1.2 million. The Bankruptcy Court ordered the case to be tried in July 2012, and entered a pretrial order governing all pretrial conduct. The Bank filed a motion for summary judgment based on the Cyberco trustee seeking recovery in connection with the same alleged transfers as the Teleservices trustee in the case described below. The Bankruptcy Court granted the motion in principal part and the parties stipulated to a full dismissal which was entered on June 19, 2012.

The Teleservices bankruptcy trustee filed an adversary proceeding against the Bank on January 19, 2007, seeking to avoid and recover alleged transfers that occurred in two ways: (1) checks made payable to the Bank to be applied to Cyberco’s indebtedness to the Bank, and (2) deposits into Cyberco’s bank accounts with the Bank. A trial was held as to only the Bank’s defenses. Subsequently, the trustee filed a summary judgment motion on her affirmative case, alleging the fraudulent transfers to the Bank totaled approximately $73.0 million and seeking judgment in that amount (which includes the $1.2 million alleged to be preferential transfers by the Cyberco bankruptcy trustee). On March 17, 2011, the Bankruptcy Court issued an Opinion determining the alleged transfers made to the Bank were not received in good faith from the time period of April 30, 2004, through November 2004, and that the Bank had failed to show a lack of knowledge of the avoidability of the alleged transfers from September 2003, through April 30, 2004. The trustee then filed an amended motion for summary judgment on her affirmative case and a hearing was held on July 1, 2011.

On March 30, 2012, the Bankruptcy Court issued an Opinion on the trustee’s motion determining the Bank was the initial transferee of the checks made payable to it and was a subsequent transferee of all deposits into Cyberco’s accounts. The Bankruptcy Court ruled Cyberco’s deposits were themselves transfers to the Bank under the Bankruptcy Code, and the Bank was liable for both the checks and the deposits, totaling approximately $73.0 million. The Bankruptcy Court ruled the Bank may be entitled to a credit of approximately $4.0 million for the Cyberco trustee’s recoveries in preference actions filed against third parties that received payments from Cyberco within 90 days preceding Cyberco’s bankruptcy. Lastly, the Bankruptcy Court ruled that it will award prejudgment interest to the Teleservices trustee at a rate to be determined. A trial was held on these remaining issues on April 30, 2012, and the Court gave a bench opinion on July 23, 2012. In that opinion, the Court denied the Bank the $4.0 million credit, but ruled approximately $0.9 million in deposits were either double-counted or were outside the timeframe in which the Teleservices trustee can recover. Therefore, the Bankruptcy Court’s recommended award will be reduced by this $0.9 million. Further, the Bankruptcy Court ruled the interest rate specified in the federal statute governing post-judgment interest, which is based on treasury bill rates, will be the rate of interest for determining prejudgment interest. The rulings of the Bankruptcy Court in its March 2011 and March 2012 opinions, as well as its July 23, 2012, bench opinion, will not be reduced to judgment by the Bankruptcy Court. Rather, the Bankruptcy Court has delivered a report and recommendation to the District Court for the Western District of Michigan, recommending a judgment be entered in the principal amount of $71.8 million, plus interest through July 27, 2012, in the amount of $8.8 million. The District Court is conducting a de novo review of the fact findings and legal conclusions in the Bankruptcy Court’s opinion. Oral argument on the parties’ objections to the report and recommendation was held by the District Court on September 22, 2014. The parties’ rebuttal briefs were submitted to the District Court on October 6, 2014.

 

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In the pending bankruptcy cases of Cyberco and Teleservices, the Bank moved to substantively consolidate the two bankruptcy estates, principally on the ground that Teleservices was the alter ego and a mere instrumentality of Cyberco at all times. On July 2, 2010, the Bankruptcy Court issued an Opinion and Order denying the Bank’s motions for substantive consolidation of the two bankruptcy estates. The Bank appealed that decision to the Bankruptcy Appellate Panel (BAP) for the Sixth Circuit, which ruled that the order denying substantive consolidation would not be a final order until the Bankruptcy Court issued its opinion on the Bank’s defenses in the Teleservices adversary proceeding, and dismissed the appeal. The Bank appealed the BAP’s decision to the Sixth Circuit. When the Bankruptcy Court issued its March 17, 2010, opinion in the Teleservices adversary proceeding, the Bank again appealed the order denying substantive consolidation to the BAP, which appeal was held in abeyance pending decision by the Sixth Circuit on the appeal of the BAP’s 2010 order. On August 30, 2013, the Sixth Circuit affirmed the BAP’s 2010 decision dismissing the original appeal. The Bank filed a status report with the BAP on the second appeal and the trustees moved to dismiss the second appeal on the ground that the Bankruptcy Court’s orders denying substantive consolidation were still not final orders. The BAP granted the trustees’ motion in an Order dated December 23, 2013.

On January 17, 2012, the Company was named a defendant in a putative class action filed on behalf of all 88 counties in Ohio against MERSCORP, Inc. and numerous other financial institutions that participate in the mortgage electronic registration system (MERS). The complaint alleges that recording of mortgages and assignments thereof is mandatory under Ohio law and seeks a declaratory judgment that the defendants are required to record every mortgage and assignment on real property located in Ohio and pay the attendant statutory recording fees. The complaint also seeks damages, attorneys’ fees and costs. Although Huntington has not been named as a defendant in the other cases, similar litigation has been initiated against MERSCORP, Inc. and other financial institutions in other jurisdictions throughout the country.

18. PARENT COMPANY FINANCIAL STATEMENTS

The parent company unaudited condensed financial statements, which include transactions with subsidiaries, are as follows:

 

Balance Sheets

   September 30,      December 31,  

(dollar amounts in thousands)

   2014      2013  

Assets

     

Cash and cash equivalents

   $ 732,436       $ 966,065   

Due from The Huntington National Bank

     246,832         246,841   

Due from non-bank subsidiaries

     54,348         57,747   

Investment in The Huntington National Bank

     5,926,366         5,537,582   

Investment in non-bank subsidiaries

     518,615         587,388   

Accrued interest receivable and other assets

     274,656         286,036   
  

 

 

    

 

 

 

Total assets

   $ 7,753,253       $ 7,681,659   
  

 

 

    

 

 

 

Liabilities and Shareholders’ Equity

     

Long-term borrowing

   $ 1,039,969       $ 1,034,266   

Dividends payable, accrued expenses, and other liabilities

     429,074         557,240   
  

 

 

    

 

 

 

Total liabilities

     1,469,043         1,591,506   
  

 

 

    

 

 

 

Shareholders’ equity (1)

     6,284,210         6,090,153   
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 7,753,253       $ 7,681,659   
  

 

 

    

 

 

 

 

(1) See Huntington’s Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity.

 

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     Three Months Ended     Nine Months Ended  

Statements of Income

   September 30,     September 30,  

(dollar amounts in thousands)

   2014     2013     2014     2013  

Income

        

Dividends from

        

The Huntington National Bank

   $ 169,000      $ —        $ 244,000      $ —     

Non-bank subsidiaries

     8,827        18,000        12,468        18,000   

Interest from

        

The Huntington National Bank

     982        425        2,936        5,513   

Non-bank subsidiaries

     634        782        2,002        2,399   

Other

     209        353        2,514        1,266   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income

     179,652        19,560        263,920        27,178   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expense

        

Personnel costs

     17,608        12,951        42,753        41,161   

Interest on borrowings

     4,261        5,692        12,766        14,242   

Other

     10,370        11,923        39,423        26,790   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expense

     32,239        30,566        94,942        82,193   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and equity in undistributed net income of subsidiaries

     147,413        (11,006     168,978        (55,015

Provision (benefit) for income taxes

     (15,038     (12,043     (44,015     (20,229
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in undistributed net income of subsidiaries

     162,451        1,037        212,993        (34,786

Increase (decrease) in undistributed net income of:

        

The Huntington National Bank

     (4,828     189,726        248,359        516,436   

Non-bank subsidiaries

     (2,607     (11,927     7,426        1,460   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 155,016      $ 178,836      $ 468,778      $ 483,110   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) (1)

     (22,289     52,969        31,993        (79,950
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 132,727      $ 231,805      $ 500,771      $ 403,160   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) See Condensed Consolidated Statements of Comprehensive Income for other comprehensive income (loss) detail.

 

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     Nine Months Ended  

Statements of Cash Flows

   September 30,  

(dollar amounts in thousands)

   2014     2013  

Operating activities

    

Net income

   $ 468,778      $ 483,110   

Adjustments to reconcile net income to net cash provided by operating activities

    

Equity in undistributed net income of subsidiaries

     (255,253     (536,591

Depreciation and amortization

     291        323   

Other, net

     (10,376     (3,710
  

 

 

   

 

 

 

Net cash provided by (used for) operating activities

     203,440        (56,868
  

 

 

   

 

 

 

Investing activities

    

Repayments from subsidiaries

     6,400        251,853   

Advances to subsidiaries

     (1,000     (248,950

Cash paid for acquisitions, net of cash received

     (13,452     —     
  

 

 

   

 

 

 

Net cash provided by (used for) investing activities

     (8,052     2,903   
  

 

 

   

 

 

 

Financing activities

    

Payment of borrowings

     —          (50,000

Dividends paid on stock

     (145,143     (132,957

Repurchases of common stock

     (299,720     (124,995

Proceeds from issuance of common stock

     2,597        —     

Issuance of long-term debt

     —          399,200   

Other, net

     13,249        8,890   
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     (429,017     100,138   
  

 

 

   

 

 

 

Change in cash and cash equivalents

     (233,629     46,173   

Cash and cash equivalents at beginning of period

     966,065        921,471   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 732,436      $ 967,644   
  

 

 

   

 

 

 

Supplemental disclosure:

    

Interest paid

   $ 12,766      $ 14,242   

19. SEGMENT REPORTING

Our business segments are based on our internally-aligned segment leadership structure, which is how we monitor results and assess performance. During the 2014 first quarter, we reorganized our business segments to drive our ongoing growth and leverage the knowledge of our highly experienced team. We now have five major business segments: Retail and Business Banking, Commercial Banking, Automobile Finance and Commercial Real Estate (AFCRE), Regional Banking and The Huntington Private Client Group (RBHPCG), and Home Lending. A Treasury / Other function includes technology and operations, other unallocated assets, liabilities, revenue, and expense. All periods presented have been reclassified to conform to the current period classification.

Retail and Business Banking: The Retail and Business Banking segment provides a wide array of financial products and services to consumer and small business customers including but not limited to checking accounts, savings accounts, money market accounts, certificates of deposit, consumer loans, and small business loans and leases. Other financial services available to consumer and small business customers include investments, insurance services, interest rate risk protection products, foreign exchange hedging, and treasury management services. Huntington serves customers primarily through our network of traditional branches in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. Huntington also has branches located in grocery stores in Ohio and Michigan. In addition to our extensive branch network, customers can access Huntington through online banking, mobile banking, telephone banking, and ATMs.

Huntington established a “Fair Play” banking philosophy and built a reputation for meeting the banking needs of consumers in a manner which makes them feel supported and appreciated. Huntington believes customers are recognizing this and other efforts as key differentiators and it is earning us more customers and deeper relationships.

Business Banking is a dynamic and growing part of our business and we are committed to being the bank of choice for small businesses in our markets. Business Banking is defined as companies with revenues up to $20 million and consists of approximately 156,000 businesses. Huntington continues to develop products and services that are designed specifically to meet the needs of small business. Huntington continues to look for ways to help companies find solutions to their capital needs.

 

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Commercial Banking: Through a relationship banking model, this segment provides a wide array of products and services to the middle market, large corporate, and government public sector customers located primarily within our geographic footprint. The segment is divided into five business units: middle market, large corporate, specialty banking, capital markets and treasury management. During the 2014 third quarter, we moved our insurance brokerage business from Treasury / Other to Commercial Banking to align with a change in management responsibilities.

Middle Market Banking primarily focuses on providing banking solutions to companies with annual revenues of $20 million to $250 million. Through a relationship management approach, various products, capabilities and solutions are seamlessly orchestrated in a client centric way.

Corporate Banking works with larger, often more complex companies with revenues greater than $250 million. These entities, many of which are publically traded, require a different and customized approach to their banking needs.

Specialty Banking offers tailored products and services to select industries that have a foothold in the Midwest. Each banking team is comprised of industry experts with a dynamic understanding of the market and industry. Many of these industries are experiencing tremendous change, which creates opportunities for Huntington to leverage our expertise and help clients navigate, adapt and succeed.

Capital Markets has two distinct product capabilities: corporate risk management services and institutional sales, trading & underwriting. The Capital Markets Group offers a full suite of risk management tools including commodities, foreign exchange and interest rate hedging services. The Institutional Sales, Trading & Underwriting team provides access to capital and investment solutions for both municipal and corporate institutions.

The Treasury Management team helps businesses manage their working capital programs and reduce expenses. Our liquidity solutions help customers save and invest wisely, while our payables and receivables capabilities help them manage purchases and the receipt of payments for good and services. All of this is provided while helping customers take a sophisticated approach to managing their overhead, inventory, equipment and labor.

Automobile Finance and Commercial Real Estate: This segment provides lending and other banking products and services to customers outside of our normal retail and commercial banking segments. Our products and services include financing for the purchase of automobiles by customers at automotive dealerships, financing the acquisition of new and used vehicle inventory of automotive dealerships, and financing for land, buildings, and other commercial real estate owned or constructed by real estate developers, automobile dealerships, or other customers with real estate project financing needs. Products and services are delivered through highly specialized relationship-focused bankers and product partners. Huntington creates well-defined relationship plans which identify needs where solutions are developed and customer commitments are obtained.

The Automotive Finance team services automobile dealerships, its owners, and consumers buying automobiles through these dealerships. Huntington has provided new and used automobile financing and dealer services throughout the Midwest since the early 1950s. This consistency in the market and our focus on working with strong dealerships, has allowed us to expand into selected markets outside of the Midwest and to actively deepen relationships while building a strong reputation.

The Commercial Real Estate team serves real estate developers, REITs, and other customers with lending needs that are secured by commercial properties. Most of our customers are located within our footprint.

Regional Banking and The Huntington Private Client Group: RBHPCG business segment was created as the result of an organizational and management realignment that occurred in January 2014. Regional Banking and The Huntington Private Client Group is well positioned competitively as we have closely aligned with our eleven regional banking markets. A fundamental point of differentiation is our commitment to be actively engaged within our local markets—building connections with community and business leaders and offering a uniquely personal experience delivered by colleagues working within those markets.

The Huntington Private Client Group is organized into units consisting of The Huntington Private Bank, The Huntington Trust, The Huntington Investment Company, Huntington Community Development, Huntington Asset Advisors, and Huntington Asset Services. Our private banking, trust, investment and community development functions focus their efforts in our Midwest footprint and Florida; while our proprietary funds and ETFs, fund administration, custody and settlements functions target a national client base.

The Huntington Private Bank provides high net-worth customers with deposit, lending (including specialized lending options) and banking services.

 

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The Huntington Trust also serves high net-worth customers and delivers wealth management and legacy planning through investment and portfolio management, fiduciary administration, trust services and trust operations. This group also provides retirement plan services and corporate trust to businesses.

The Huntington Investment Company, a registered investment advisor, consists of registered representatives who work with our Retail and Private Bank to provide investment solutions for our customers. This team offers a wide range of products and services, including financial planning, brokerage, annuities, IRAs, 529 plans, market linked CDs and other investment products.

Huntington Community Development focuses on improving the quality of life for our communities and the residents of low-to moderate-income neighborhoods by developing and delivering innovative products and services to support affordable housing and neighborhood stabilization.

Huntington Asset Advisors provides investment management services through a variety of internal and external channels, including advising the Huntington Funds, our proprietary family of mutual funds and Huntington Strategy Shares, our Exchange Trade Funds.

Huntington Asset Services has a national clientele and offers administrative and operational support to fund complexes, including fund accounting, transfer agency, administration, custody and distribution services. This group also works with law firms and the court system to provide custody and settlement distribution services.

Home Lending: Home Lending originates and services consumer loans and mortgages for customers who are generally located in our primary banking markets. Consumer and mortgage lending products are primarily distributed through the Retail and Business Banking segment, as well as through commissioned loan originators. Home lending earns interest on loans held in the warehouse and portfolio, earns fee income from the origination and servicing of mortgage loans, and recognizes gains or losses from the sale of mortgage loans. Home Lending supports the origination and servicing of mortgage loans across all segments.

 

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Listed below is certain operating basis financial information reconciled to Huntington’s September 30, 2014, December 31, 2013, and September 30, 2013, reported results by business segment:

 

     Three Months Ended September 30,  
     Retail &                                        
Income Statements    Business      Commercial                  Home     Treasury/     Huntington  

(dollar amounts in thousands)

   Banking      Banking      AFCRE     RBHPCG     Lending     Other     Consolidated  

2014

                

Net interest income

   $ 230,318       $ 75,485       $ 99,262      $ 25,239      $ 14,620      $ 21,411      $ 466,335   

Provision for credit losses

     22,528         13,309         (18,334     3,179        3,798        —          24,480   

Noninterest income

     105,868         52,820         9,832        42,097        20,838        15,894        247,349   

Noninterest expense

     251,507         60,429         41,583        60,548        33,523        32,728        480,318   

Income taxes

     21,753         19,098         30,046        1,263        (652     (17,638     53,870   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 40,398       $ 35,469       $ 55,799      $ 2,346      $ (1,211   $ 22,215      $ 155,016   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2013

                

Net interest income

   $ 224,824       $ 70,566       $ 92,372      $ 25,898      $ 13,433      $ (2,241   $ 424,852   

Provision for credit losses

     43,127         50,299         (77,686     (7,349     3,009        —          11,400   

Noninterest income

     105,227         57,100         10,822        43,664        18,377        18,577        253,767   

Noninterest expense

     242,343         63,381         40,011        57,060        36,853        (16,312     423,336   

Income taxes

     15,603         4,895         49,304        6,948        (2,818     (8,885     65,047   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 28,978       $ 9,091       $ 91,565      $ 12,903      $ (5,234   $ 41,533      $ 178,836   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Nine Months Ended September 30,  
     Retail &                                        
Income Statements    Business      Commercial                  Home     Treasury/     Huntington  

(dollar amounts in thousands)

   Banking      Banking      AFCRE     RBHPCG     Lending     Other     Consolidated  

2014

                

Net interest income

   $ 678,502       $ 218,257       $ 290,297      $ 76,399      $ 41,997      $ 58,437      $ 1,363,889   

Provision for credit losses

     63,962         30,905         (42,035     5,353        20,308        2        78,495   

Noninterest income

     306,364         149,165         27,647        132,080        59,946        70,699        745,901   

Noninterest expense

     732,623         183,464         121,276        176,595        101,490        83,627        1,399,075   

Income taxes

     65,898         53,569         83,546        9,286        (6,949     (41,908     163,442   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 122,383       $ 99,484       $ 155,157      $ 17,245      $ (12,906   $ 87,415      $ 468,778   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2013

                

Net interest income

   $ 678,244       $ 210,725       $ 273,105      $ 79,926      $ 38,139      $ (6,180   $ 1,273,959   

Provision for credit losses

     101,448         41,685         (89,857     2,939        9,501        (2     65,714   

Noninterest income

     292,370         152,109         32,694        144,029        85,599        55,503        762,304   

Noninterest expense

     719,443         193,423         117,323        176,479        109,285        (3,959     1,311,994   

Income taxes

     52,403         44,704         97,417        15,588        1,733        (36,400     175,445   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 97,320       $ 83,022       $ 180,916      $ 28,949      $ 3,219      $ 89,684      $ 483,110   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Assets at      Deposits at  
     September 30,      December 31,      September 30,      December 31,  

(dollar amounts in thousands)

   2014      2013      2014      2013  

Retail & Business Banking

   $ 15,061,958       $ 14,440,869       $ 29,265,196       $ 28,293,993   

Commercial Banking

     14,438,025         12,524,270         10,791,342         10,187,891   

AFCRE

     15,631,308         14,081,112         1,361,907         1,170,518   

RBHPCG

     3,830,366         3,736,785         5,897,868         6,094,135   

Home Lending

     3,929,146         3,742,527         268,610         329,511   

Treasury / Other

     11,439,826         10,941,611         2,544,914         1,430,670   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 64,330,629       $ 59,467,174       $ 50,129,837       $ 47,506,718   
  

 

 

    

 

 

    

 

 

    

 

 

 

20. BUSINESS COMBINATIONS

BANK OF AMERICA BRANCH ACQUISITION

On September 12, 2014, Huntington completed its acquisition and conversion of 24 Bank of America branches, furthering our presence in Michigan. Under the terms of the agreement, Huntington acquired approximately $745.2 million of deposits. The deposits were recorded at fair value in accordance with ASC 805, “Business Combinations”. The fair values of deposits were estimated by discounting cash flows using interest rates currently being offered on deposits with similar maturities (Level 3). As part of the acquisition, Huntington recorded $17.1 million of goodwill.

Pro forma results have not been disclosed, as those amounts are not significant to the unaudited condensed consolidated financial statements.

CAMCO FINANCIAL

On March 1, 2014, Huntington completed its acquisition of Camco Financial in a stock and cash transaction valued at $109.5 million. Camco Financial operated 22 banking offices and served communities in Southeast Ohio. The acquisition provides Huntington the opportunity to enhance our presence in several areas within our existing footprint and to expand into a few new markets.

Under the terms of the merger agreement, Camco Financial shareholders received 0.7264 shares of Huntington common stock, on a tax-free basis, or a taxable cash payment of $6.00 for each share of Camco Financial common stock. The aggregate purchase price was $109.5 million, including $17.8 million of cash and $91.7 million of common stock and options to purchase common stock. The value of the 8.7 million shares issued in connection with the merger was determined based on the closing price of Huntington’s common stock on February 28, 2014.

Under the agreement, Huntington acquired approximately $559.4 million of loans and $557.4 million of deposits. Assets acquired and liabilities assumed were recorded at fair value in accordance with ASC 805, “Business Combinations”. The fair values for loans were estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms (Level 3). This value was reduced by an estimate of probable losses and the credit risk associated with the loans. The fair values of deposits were estimated by discounting cash flows using interest rates currently being offered on deposits with similar maturities (Level 3). As part of the acquisition, Huntington recorded $64.2 million of goodwill, all of which is nondeductible for tax purposes.

Pro forma results have not been disclosed, as those amounts are not significant to the unaudited condensed consolidated financial statements.

 

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Item 3: Quantitative and Qualitative Disclosures about Market Risk

Quantitative and qualitative disclosures for the current period can be found in the Market Risk section of this report, which includes changes in market risk exposures from disclosures presented in Huntington’s 2013 Form 10-K.

Item 4: Controls and Procedures

Disclosure Controls and Procedures

Huntington maintains disclosure controls and procedures designed to ensure that the information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Huntington’s Management, with the participation of its Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of Huntington’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon such evaluation, Huntington’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, Huntington’s disclosure controls and procedures were effective.

There have not been any changes in Huntington’s internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, Huntington’s internal controls over financial reporting.

PART II. OTHER INFORMATION

In accordance with the instructions to Part II, the other specified items in this part have been omitted because they are not applicable or the information has been previously reported.

Item 1: Legal Proceedings

Information required by this item is set forth in Note 17 of the Notes to Unaudited Condensed Consolidated Financial Statements included in Item 1 of this report and incorporated herein by reference.

Item 1A: Risk Factors

Information required by this item is set forth in Part 1 Item 2- Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and incorporated herein by reference.

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

(a) and (b)

Not Applicable

(c)

 

Period

   Total
Number of
Shares
Purchased
     Average
Price Paid
Per Share
     Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (1)
     Maximum Number of Shares (or
Approximate Dollar Value) that

May Yet Be Purchased Under
the Plans or Programs (2)
 

July 1, 2014 to July 31, 2014

     —         $ —           12,095,003       $ 139,161,145   

August 1, 2014 to August 31, 2014

     4,619,200         9.66         16,714,203         94,539,673   

September 1, 2014 to September 30, 2014

     818,600         9.93         17,532,803         86,410,975   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5,437,800       $ 9.70         17,532,803       $ 86,410,975   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The reported shares were repurchased pursuant to Huntington’s publicly announced stock repurchase authorizations.
(2) The number shown represents, as of the end of each period, the maximum number of shares (approximate dollar value) of Common Stock that may yet be purchased under publicly announced stock repurchase authorizations. The shares may be purchased, from time-to-time, depending on market conditions.

 

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On March 26, 2014, Huntington Bancshares Incorporated was notified by the Federal Reserve that it had no objection to Huntington’s proposed capital actions included in Huntington’s capital plan submitted to the Federal Reserve in January 2014. These actions included the potential repurchase of up to $250 million shares of common stock, through the first quarter of 2015. Huntington’s Board of Directors authorized a share repurchase program consistent with Huntington’s capital plan. During the 2014 third quarter, Huntington repurchased a total of 5.4 million shares at a weighted average share price of $9.70.

Item 6. Exhibits

Exhibit Index

This report incorporates by reference the documents listed below that we have previously filed with the SEC. The SEC allows us to incorporate by reference information in this document. The information incorporated by reference is considered to be a part of this document, except for any information that is superseded by information that is included directly in this document.

This information may be read and copied at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. The SEC also maintains an Internet web site that contains reports, proxy statements, and other information about issuers, like us, who file electronically with the SEC. The address of the site is http://www.sec.gov. The reports and other information filed by us with the SEC are also available at our Internet web site. The address of the site is http://www.huntington.com. Except as specifically incorporated by reference into this Quarterly Report on Form 10-Q, information on those web sites is not part of this report. You also should be able to inspect reports, proxy statements, and other information about us at the offices of the NASDAQ National Market at 33 Whitehall Street, New York, New York.

 

Exhibit
Number
   Document Description    Report or Registration Statement    SEC File or
Registration
Number
   Exhibit
Reference
 
3.1    Articles of Restatement of Charter.    Annual Report on Form 10-K for the year ended December 31, 1993    000-02525      3 (i) 
3.2    Articles of Amendment to Articles of Restatement of Charter.    Current Report on Form 8-K dated May 31, 2007    000-02525      3.1   
3.3    Articles of Amendment to Articles of Restatement of Charter.    Current Report on Form 8-K dated May 7, 2008    000-02525      3.1   
3.4    Articles of Amendment to Articles of Restatement of Charter.    Current Report on Form 8-K dated April 27, 2010    001-34073      3.1   
3.5    Articles Supplementary of Huntington Bancshares Incorporated, as of April 22, 2008.    Current Report on Form 8-K dated April 22, 2008    000-02525      3.1   
3.6    Articles Supplementary of Huntington Bancshares Incorporated, as of April 22. 2008.    Current Report on Form 8-K dated April 22, 2008    000-02525      3.2   
3.7    Articles Supplementary of Huntington Bancshares Incorporated, as of November 12, 2008.    Current Report on Form 8-K dated November 12, 2008    001-34073      3.1   
3.8    Articles Supplementary of Huntington Bancshares Incorporated, as of December 31, 2006.    Annual Report on Form 10-K for the year ended December 31, 2006    000-02525      3.4   
3.9    Articles Supplementary of Huntington Bancshares Incorporated, as of December 28, 2011.    Current Report on Form 8-K dated December 28, 2011.    001-34073      3.1   
3.10    Bylaws of Huntington Bancshares Incorporated, as amended and restated, as of July 16, 2014.    Current Report on Form 8-K dated July 17, 2014    001-34073      3.1   
4.1    Instruments defining the Rights of Security Holders—reference is made to Articles Fifth, Eighth, and Tenth of Articles of Restatement of Charter, as amended and supplemented. Instruments defining the rights of holders of long-term debt will be furnished to the Securities and Exchange Commission upon request.         
10.1    *Form of 2014 Restricted Stock Unit Grant Agreement for Executive Officers    Quarterly Report on Form 10-Q dated July 30, 2014    001-34073      10.1   
10.2    *Form of 2014 Stock Option Grant Agreement for Executive Officers    Quarterly Report on Form 10-Q dated July 30, 2014    001-34073      10.2   
10.3    *Form of 2014 Performance Stock Unit Grant Agreement for Executive Officers    Quarterly Report on Form 10-Q dated July 30, 2014    001-34073      10.3   
10.4    *Form of 2014 Restricted Stock Unit Grant Agreement for Executive Officers Version II    Quarterly Report on Form 10-Q dated July 30, 2014    001-34073      10.4   

 

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10.5    *Form of 2014 Stock Option Grant Agreement for Executive Officers Version II    Quarterly Report on Form 10-Q dated July 30, 2014      001-34073         10.5   
10.6    *Form of 2014 Performance Stock Unit Grant Agreement for Executive Officers Version II    Quarterly Report on Form 10-Q dated July 30, 2014      001-34073         10.6   
31.1    Rule 13a-14(a) Certification – Chief Executive Officer.         
31.2    Rule 13a-14(a) Certification – Chief Financial Officer.         
32.1    Section 1350 Certification – Chief Executive Officer.         
32.2    Section 1350 Certification – Chief Financial Officer.         
101    The following material from Huntington’s Form 10-Q Report for the quarterly period ended September 30, 2014, formatted in XBRL: (1) Unaudited Condensed Consolidated Balance Sheets, (2) Unaudited Condensed Consolidated Statements of Income, (3) Unaudited Condensed Consolidated Statements of Comprehensive Income (4) Unaudited Condensed Consolidated Statement of Changes in Shareholders’ Equity, (5) Unaudited Condensed Consolidated Statements of Cash Flows, and (6) the Notes to Unaudited Condensed Consolidated Financial Statements.         

 

* Denotes management contract or compensatory plan or arrangement

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Huntington Bancshares Incorporated

(Registrant)

 

Date: October 28, 2014   /s/ Stephen D. Steinour
  Stephen D. Steinour
  Chairman, Chief Executive Officer and President
Date: October 28, 2014   /s/ Howell D. McCullough III
  Howell D. McCullough III
  Chief Financial Officer

 

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