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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.

 

 

 


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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.

 

11


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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Table of Contents

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