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 March 31, 2015
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
Registrants 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 808,528,243 shares of Registrants common stock ($0.01 par value) outstanding on March 31, 2015.
HUNTINGTON BANCSHARES INCORPORATED
INDEX
2
Glossary of Acronyms and Terms
The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:
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 | |
Basel III | Refers to the final rule issued by the FRB and OCC and published in the Federal Register on October 11, 2013 | |
C&I | Commercial and Industrial | |
Camco Financial | Camco Financial Corp. | |
CCAR | Comprehensive Capital Analysis and Review | |
CDO | Collateralized Debt Obligations | |
CDs | Certificate of Deposit | |
CET1 | Common equity tier 1 on a transitional Basel III basis | |
CFPB | Bureau of Consumer Financial Protection | |
CFTC | Commodity Futures Trading Commission | |
CMO | Collateralized Mortgage Obligations | |
CRE | Commercial Real Estate | |
Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act | |
DTA/DTL | Deferred Tax Asset/Deferred Tax Liability | |
EFT | Electronic Fund Transfer | |
EPS | Earnings Per Share | |
EVE | Economic Value of Equity | |
FASB | Financial Accounting Standards Board | |
Fannie Mae | (see FNMA) | |
FDIC | Federal Deposit Insurance Corporation | |
FDICIA | Federal Deposit Insurance Corporation Improvement Act of 1991 | |
FHA | Federal Housing Administration | |
FHLB | Federal Home Loan Bank | |
FHLMC | Federal Home Loan Mortgage Corporation | |
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 | |
HAMP | Home Affordable Modification Program | |
HARP | Home Affordable Refinance Program |
3
HIP | Huntington Investment and Tax Savings Plan | |
HQLA | High Quality Liquid Asset | |
HTM | Held-to-Maturity | |
IRS | Internal Revenue Service | |
LCR | Liquidity Coverage Ratio | |
LIBOR | London Interbank Offered Rate | |
LGD | Loss-Given-Default | |
LIHTC | Low Income Housing Tax Credit | |
LTV | Loan to Value | |
Macquarie | Macquarie Equipment Finance, Inc. (U.S. operations) | |
MD&A | Managements Discussion and Analysis of Financial Condition and Results of Operations | |
MSA | Metropolitan Statistical Area | |
MSR | Mortgage Servicing Rights | |
NAICS | North American Industry Classification System | |
NALs | Nonaccrual Loans | |
NCO | Net Charge-off | |
NII | Net Interest Income | |
NIM | Net Interest Margin | |
NCO | Net Charge-off | |
NIM | Net Interest Margin | |
NPA | Nonperforming Asset | |
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 | |
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 | |
Plan | Huntington Bancshares Retirement Plan | |
Problem Loans | Includes nonaccrual loans and leases (Table 11), troubled debt restructured loans (Table 12), 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). | |
RBHPCG | Regional Banking and The Huntington Private Client Group | |
RCSA | Risk and Control Self-Assessments | |
REIT | Real Estate Investment Trust | |
ROC | Risk Oversight Committee | |
RWA | Risk-Weighted Assets | |
SAD | Special Assets Division | |
SBA | Small Business Administration | |
SEC | Securities and Exchange Commission | |
SERP | Supplemental Executive Retirement Plan | |
SRIP | Supplemental Retirement Income Plan | |
SSFA | Simplified Supervisory Formula Approach | |
TCE | Tangible Common Equity | |
TDR | Troubled Debt Restructured Loan | |
U.S. Treasury | U.S. Department of the Treasury | |
UCS | Uniform Classification System |
4
UDAP |
Unfair or Deceptive Acts or Practices | |
UPB |
Unpaid Principal Balance | |
USDA |
U.S. Department of Agriculture | |
VIE |
Variable Interest Entity | |
XBRL |
eXtensible Business Reporting Language |
5
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: | Managements 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 149 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 733 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 2014 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2014 Form 10-K. This MD&A should also be read in conjunction with the Unaudited Condensed Consolidated Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, and other information contained in this report.
Our discussion is divided into key segments:
| Executive OverviewProvides 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 OperationsReviews 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 CapitalDiscusses 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 DiscussionProvides an overview of financial performance for each of our major business segments and provides additional discussion of trends underlying consolidated financial performance. |
| Additional DisclosuresProvides 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.
6
Summary of 2015 First Quarter Results
For the quarter, we reported net income of $165.9 million, or $0.19 per common share, compared with $149.1 million, or $0.17 per common share, in the year-ago quarter (see Table 1).
Fully-taxable equivalent net interest income was $475.2 million for the quarter, up $31.9 million, or 7%, from the year-ago quarter. The results reflected a $6.2 billion, or 11%, increase in average earning assets, including a $4.4 billion, or 10%, increase in average loans and leases, as well as a $1.8 billion, or 16%, increase in average securities. The impact of these balance increases was partially offset by a 12 basis point decrease in the net interest margin. The primary items affecting the net interest margin were a 15 basis point negative impact from the mix and yield of earning assets and a 1 basis point reduction in the benefit from the impact of noninterest-bearing funds, partially offset by a 4 basis point reduction in funding costs.
The provision for credit losses decreased $4.0 million from the year-ago quarter to $20.6 million in the 2015 first quarter. NCOs decreased $18.6 million, or 43%, to $24.4 million. NCOs represented an annualized 0.20% of average loans and leases in the current quarter consistent with the prior quarter results, and down substantially from the 0.40% in the year-ago quarter. Residential and home equity NCOs continued to show a declining trend over the last five quarters. Commercial NCOs have been relatively consistent over the period with relatively low levels creating some quarter-to-quarter volatility.
Noninterest income decreased $16.9 million, or 7%, from the year-ago quarter. The year-over-year decrease primarily reflected the $17.0 million of securities gains realized in the 2014 first quarter compared to none in the current quarter. In addition, capital market fees increased $4.7 million, or 51%, primarily related to income from customer interest rate derivative products and underwriting fees. Electronic banking increased $3.8 million, or 16%, due to higher card related income and underlying customer growth. Service charges on deposit accounts decreased $2.4 million, or 4%, reflecting the decline from the late July 2014 implementation of changes in consumer products, partially offset by a 9% increase in consumer households and changing customer usage patterns.
Noninterest expense decreased $1.3 million, or less than 1%, from the year-ago quarter. Noninterest expense in the year-ago quarter included several Significant Items, which are further described in the Discussion of Results of Operations section. The results reflected a $15.0 million, or 29%, decrease in other expense (excluding the impact of Significant Items, other expenses decreased $4.6 million, or 11%), and a $3.6 million, or 26%, decrease in deposit and other insurance expense, primarily reflecting the benefit of $1.8 billion of bank-level debt issued over the past year. This was partially offset by a $15.4 million, or 6%, increase in personnel costs (excluding the impact of Significant Items, personnel costs increased $17.8 million, or 7%, primarily related to a $13.8 million increase in salaries reflecting a 1% increase in the number of full-time equivalent employees and a $4.0 million increase in benefits expense).
The tangible common equity to tangible assets ratio was 7.95% at March 31, 2015, down 68 basis points from a year ago. On a Basel III transitional basis, the regulatory common equity tier 1 (CET1) risk-based capital ratio was 9.51% at March 31, 2015, and the regulatory tier 1 risk-based capital ratio was 10.22%. On a Basel I basis, the tier 1 common risk-based capital ratio was 10.60% at March 31, 2014, and the regulatory tier 1 risk-based capital ratio was 11.95%. All capital ratios were impacted by the repurchase of 26.1 million common shares over the last four quarters.
Business Overview
General
Our general business objectives are: (1) grow net interest income and fee income, (2) deliver positive operating leverage, (3) increase primary relationships across all business segments, (4) continue to strengthen risk management and reduce volatility, and (5) maintain strong capital and liquidity positions.
Ongoing improvement in our expense control environment, continuing good core deposit growth, and strong mortgage and capital markets results were highlights for the quarter. In addition, we completed the successful close of our acquisition of Macquarie Equipment Finance, Inc. on March 31, 2015, and look forward to transitioning to the Huntington Technology Finance brand to align our enhanced capabilities with our combined customer base and prospects. Also in the quarter, we continued to expand within our core footprint via the launch of our previously announced 2015 in-store build out, enhancing our full-service branch network in a cost-efficient manner.
7
On April 21, 2015, the board of directors approved two capital actions. First, the board declared a quarterly cash dividend on the Companys common stock of $0.06 per common share. The dividend is payable July 1, 2015, to shareholders of record on June 17, 2015. Second, the board authorized the repurchase of up to $366 million of common shares over the five quarters through the 2016 second quarter. Both actions were proposed in the January 2015 CCAR capital plan, which received no objections from the Federal Reserve. Purchases of common stock may include open market purchases, privately negotiated transactions, and accelerated repurchase programs. During the 2015 first quarter, the Company repurchased 4.9 million common shares at an average price of $10.45 per share, which completed our previous repurchase authorization.
Economy
The automobile industry is expected to provide continued impetus for regional manufacturing growth and capital spending in 2015, offsetting slower anticipated growth in energy and non-transportation exports. Manufacturing employment growth and activity spurs employment growth directly in manufacturing and indirectly in service sectors as evidenced by the drop in unemployment rates during the recovery in our footprint states.
Home purchase prices are rising in our footprint states and the nation. In addition, office vacancy rates in our largest MSAs are down substantially during the economic recovery-to-date. Further, industrial vacancy rates in most of our largest footprint MSAs have been below the national average, reflecting generally healthy industrial real estate markets.
Legislative and Regulatory
Regulatory reforms continue to be adopted, including the 2015 first quarter implementation of the Basel III regulatory capital requirements.
Basel III Regulatory Capital RequirementsIn 2013, the Federal Reserve voted to adopt final capital rules implementing Basel III requirements for U.S. Banking organizations, which were effective for us beginning January 1, 2015. The final rules establish an integrated regulatory capital framework and implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. Consistent with the international Basel framework, the final rule includes a new regulatory minimum ratio of common equity tier 1 capital to risk-weighted assets. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets and includes a minimum leverage ratio of 4%. The Basel III capital rules establish two methodologies for calculating risk-weighted assets, the advanced and standardized approaches. We are subject to the standardized approach for calculating risk-weighted assets. The implementation of the Basel III capital requirements is transitional and phases-in through the end of 2018.
Expectations 2015
We remain committed to delivering solid results in a flat interest rate environment. We have built our budget around the current rate environment and our planned results are not dependent on a rate hike. While our customer activity levels, our pipelines and our balance sheet are strong, we will continue to be disciplined in growing our commercial real estate and C&I portfolios. We will continue disciplined execution of our strategic focus on investment in the business, controlled expenses and delivering full-year positive operating leverage.
On March 31, 2015, we completed our acquisition of Macquarie in a cash transaction valued at $457.8 million. Macquarie is the largest standalone, vendor independent provider of specialized technology financing with customer-centric asset management services in the United States. The acquisition gives us the ability to drive added growth to our national equipment finance business as well as additional health care and small business finance capabilities. We expect Macquarie, which added over 165 positions to our colleague base, to generate approximately $500 million in annual lease originations and approximately $75 million to $85 million in annualized revenue.
Excluding Significant Items and net MSR activity, we expect to deliver positive operating leverage in 2015, with and without the run rate impact of the Macquarie acquisition. Achieving annual positive operating leverage is a long-term strategic goal and we are committed to managing expenses in conjunction with our revenue outlook to achieve that goal. We expect noninterest expense growth of 2-4%, excluding Significant Items and the recurring expense related to the Macquarie acquisition.
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 2015 is expected to be in the range of 24% to 27%.
8
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 1Selected Quarterly Income Statement Data (1)
2015 | 2014 | |||||||||||||||||||
(dollar amounts in thousands, except per share amounts) |
First | Fourth | Third | Second | First | |||||||||||||||
Interest income |
$ | 502,096 | $ | 507,625 | $ | 501,060 | $ | 495,322 | $ | 472,455 | ||||||||||
Interest expense |
34,411 | 34,373 | 34,725 | 35,274 | 34,949 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest income |
467,685 | 473,252 | 466,335 | 460,048 | 437,506 | |||||||||||||||
Provision for credit losses |
20,591 | 2,494 | 24,480 | 29,385 | 24,630 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest income after provision for credit losses |
447,094 | 470,758 | 441,855 | 430,663 | 412,876 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Service charges on deposit accounts |
62,220 | 67,408 | 69,118 | 72,633 | 64,582 | |||||||||||||||
Trust services |
29,039 | 28,781 | 28,045 | 29,581 | 29,565 | |||||||||||||||
Electronic banking |
27,398 | 27,993 | 27,275 | 26,491 | 23,642 | |||||||||||||||
Mortgage banking income |
22,961 | 14,030 | 25,051 | 22,717 | 23,089 | |||||||||||||||
Brokerage income |
15,500 | 16,050 | 17,155 | 17,905 | 17,167 | |||||||||||||||
Insurance income |
15,895 | 16,252 | 16,729 | 15,996 | 16,496 | |||||||||||||||
Bank owned life insurance income |
13,025 | 14,988 | 14,888 | 13,865 | 13,307 | |||||||||||||||
Capital markets fees |
13,905 | 13,791 | 10,246 | 10,500 | 9,194 | |||||||||||||||
Gain on sale of loans |
4,589 | 5,408 | 8,199 | 3,914 | 3,570 | |||||||||||||||
Securities gains (losses) |
| (104 | ) | 198 | 490 | 16,970 | ||||||||||||||
Other income |
27,091 | 28,681 | 30,445 | 35,975 | 30,903 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total noninterest income |
231,623 | 233,278 | 247,349 | 250,067 | 248,485 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Personnel costs |
264,916 | 263,289 | 275,409 | 260,600 | 249,477 | |||||||||||||||
Outside data processing and other services |
50,535 | 53,685 | 53,073 | 54,338 | 51,490 | |||||||||||||||
Net occupancy |
31,020 | 31,565 | 34,405 | 28,673 | 33,433 | |||||||||||||||
Equipment |
30,249 | 31,981 | 30,183 | 28,749 | 28,750 | |||||||||||||||
Professional services |
12,727 | 15,665 | 13,763 | 17,896 | 12,231 | |||||||||||||||
Marketing |
12,975 | 12,466 | 12,576 | 14,832 | 10,686 | |||||||||||||||
Deposit and other insurance expense |
10,167 | 13,099 | 11,628 | 10,599 | 13,718 | |||||||||||||||
Amortization of intangibles |
10,206 | 10,653 | 9,813 | 9,520 | 9,291 | |||||||||||||||
Other expense |
36,062 | 50,868 | 39,468 | 33,429 | 51,045 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total noninterest expense |
458,857 | 483,271 | 480,318 | 458,636 | 460,121 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income before income taxes |
219,860 | 220,765 | 208,886 | 222,094 | 201,240 | |||||||||||||||
Provision for income taxes |
54,006 | 57,151 | 53,870 | 57,475 | 52,097 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 165,854 | $ | 163,614 | $ | 155,016 | $ | 164,619 | $ | 149,143 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Dividends on preferred shares |
7,965 | 7,963 | 7,964 | 7,963 | 7,964 | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Net income applicable to common shares |
$ | 157,889 | $ | 155,651 | $ | 147,052 | $ | 156,656 | $ | 141,179 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Average common sharesbasic |
809,778 | 811,967 | 816,497 | 821,546 | 829,659 | |||||||||||||||
Average common sharesdiluted |
823,809 | 825,338 | 829,623 | 834,687 | 842,677 | |||||||||||||||
Net income per common sharebasic |
$ | 0.19 | $ | 0.19 | $ | 0.18 | $ | 0.19 | $ | 0.17 | ||||||||||
Net income per common sharediluted |
0.19 | 0.19 | 0.18 | 0.19 | 0.17 | |||||||||||||||
Cash dividends declared per common share |
0.06 | 0.06 | 0.05 | 0.05 | 0.05 | |||||||||||||||
Return on average total assets |
1.02 | % | 1.00 | % | 0.97 | % | 1.07 | % | 1.01 | % | ||||||||||
Return on average common shareholders equity |
10.6 | 10.3 | 9.9 | 10.8 | 9.9 | |||||||||||||||
Return on average tangible common shareholders equity (2) |
12.2 | 11.9 | 11.4 | 12.4 | 11.4 | |||||||||||||||
Net interest margin (3) |
3.15 | 3.18 | 3.20 | 3.28 | 3.27 | |||||||||||||||
Efficiency ratio (4) |
63.5 | 66.2 | 65.3 | 62.7 | 66.4 | |||||||||||||||
Effective tax rate |
24.6 | 25.9 | 25.8 | 25.9 | 25.9 | |||||||||||||||
RevenueFTE |
||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest income |
$ | 467,685 | $ | 473,252 | $ | 466,335 | $ | 460,048 | $ | 437,506 | ||||||||||
FTE adjustment |
7,560 | 7,522 | 7,506 | 6,637 | 5,885 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest income (3) |
475,245 | 480,774 | 473,841 | 466,685 | 443,391 | |||||||||||||||
Noninterest income |
231,623 | 233,278 | 247,349 | 250,067 | 248,485 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total revenue (3) |
$ | 706,868 | $ | 714,052 | $ | 721,190 | $ | 716,752 | $ | 691,876 | ||||||||||
|
|
|
|
|
|
|
|
|
|
9
(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. |
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. During the 2014 fourth quarter, $8.6 million of franchise repositioning related expense was recorded for the consolidation of 26 branches and organizational actions. This resulted in a negative impact of $0.01 per common share. |
2. | Litigation Reserve. $11.9 million and $9.0 million of net additions to litigation reserves were recorded as other noninterest expense during the 2014 fourth quarter and 2014 first quarter, respectively. This resulted in a negative impact of $0.01 per common share in the 2014 fourth quarter and 2014 first quarter. |
3. | Merger and Acquisition. 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. |
10
The following table reflects the earnings impact of the above-mentioned Significant Items for periods affected by this Results of Operations discussion:
Table 2Significant Items Influencing Earnings Performance Comparison
Three Months Ended | ||||||||||||||||||||||||
March 31, 2015 (4) | December 31, 2014 | March 31, 2014 | ||||||||||||||||||||||
(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 |
$ | 165,854 | $ | 163,614 | $ | 149,143 | ||||||||||||||||||
Earnings per share, after-tax |
$ | 0.19 | $ | 0.19 | $ | 0.17 | ||||||||||||||||||
Significant Itemsfavorable (unfavorable) impact: |
Earnings (1) | EPS (2)(3) | Earnings (1) | EPS (2)(3) | Earnings (1) | EPS (2)(3) | ||||||||||||||||||
Franchise repositioning related expense |
$ | | $ | | $ | (8,643 | ) | $ | (0.01 | ) | $ | | $ | | ||||||||||
Net additions to litigation reserve |
| | (11,909 | ) | (0.01 | ) | (9,000 | ) | (0.01 | ) | ||||||||||||||
Mergers and acquisitions, net |
| | | | (11,823 | ) | (0.01 | ) |
(1) | Pretax. |
(2) | Based on average outstanding diluted common shares. |
(3) | After-tax. |
(4) | Quarter included $3.4 million of merger-related expense that was not a Significant Item for the quarter, but merger-related expense may be a Significant Item for the 2015 full year. |
11
Net Interest Income / Average Balance Sheet
The following tables detail the change in our average balance sheet and the net interest margin:
Table 3Consolidated Quarterly Average Balance Sheets
Average Balances | Change | |||||||||||||||||||||||||||
2015 | 2014 | 1Q15 vs. 1Q14 | ||||||||||||||||||||||||||
(dollar amounts in millions) |
First | Fourth | Third | Second | First | Amount | Percent | |||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||
Interest-bearing deposits in banks |
$ | 94 | $ | 85 | $ | 82 | $ | 91 | $ | 83 | $ | 11 | 13 | % | ||||||||||||||
Loans held for sale |
381 | 374 | 351 | 288 | 279 | 102 | 37 | |||||||||||||||||||||
Securities: |
||||||||||||||||||||||||||||
Available-for-sale and other securities: |
||||||||||||||||||||||||||||
Taxable |
7,664 | 7,291 | 6,935 | 6,662 | 6,240 | 1,424 | 23 | |||||||||||||||||||||
Tax-exempt |
1,874 | 1,684 | 1,620 | 1,290 | 1,115 | 759 | 68 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total available-for-sale and other securities |
9,538 | 8,975 | 8,555 | 7,952 | 7,355 | 2,183 | 30 | |||||||||||||||||||||
Trading account securities |
53 | 49 | 50 | 45 | 38 | 15 | 39 | |||||||||||||||||||||
Held-to-maturity securitiestaxable |
3,347 | 3,435 | 3,556 | 3,677 | 3,783 | (436 | ) | (12 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total securities |
12,938 | 12,459 | 12,161 | 11,674 | 11,176 | 1,762 | 16 | |||||||||||||||||||||
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|
|
|
|||||||||||||||
Loans and leases: (1) |
||||||||||||||||||||||||||||
Commercial: |
||||||||||||||||||||||||||||
Commercial and industrial |
19,116 | 18,880 | 18,581 | 18,262 | 17,631 | 1,485 | 8 | |||||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||
Construction |
887 | 822 | 775 | 702 | 612 | 275 | 45 | |||||||||||||||||||||
Commercial |
4,275 | 4,262 | 4,188 | 4,345 | 4,289 | (14 | ) | | ||||||||||||||||||||
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|
|
|
|
|
|||||||||||||||
Commercial real estate |
5,162 | 5,084 | 4,963 | 5,047 | 4,901 | 261 | 5 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial |
24,278 | 23,964 | 23,544 | 23,309 | 22,532 | 1,746 | 8 | |||||||||||||||||||||
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|
|
|
|
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|
|
|
|||||||||||||||
Consumer: |
||||||||||||||||||||||||||||
Automobile |
8,783 | 8,512 | 8,012 | 7,349 | 6,786 | 1,997 | 29 | |||||||||||||||||||||
Home equity |
8,484 | 8,452 | 8,412 | 8,376 | 8,340 | 144 | 2 | |||||||||||||||||||||
Residential mortgage |
5,810 | 5,751 | 5,747 | 5,608 | 5,379 | 431 | 8 | |||||||||||||||||||||
Other consumer |
425 | 413 | 398 | 382 | 386 | 39 | 10 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total consumer |
23,502 | 23,128 | 22,569 | 21,715 | 20,891 | 2,611 | 12 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total loans and leases |
47,780 | 47,092 | 46,113 | 45,024 | 43,423 | 4,357 | 10 | |||||||||||||||||||||
Allowance for loan and lease losses |
(612 | ) | (631 | ) | (633 | ) | (642 | ) | (649 | ) | 37 | (6 | ) | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net loans and leases |
47,168 | 46,461 | 45,480 | 44,382 | 42,774 | 4,394 | 10 | |||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total earning assets |
61,193 | 60,010 | 58,707 | 57,077 | 54,961 | 6,232 | 11 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
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|
|
|
|||||||||||||||
Cash and due from banks |
935 | 929 | 887 | 872 | 904 | 31 | 3 | |||||||||||||||||||||
Intangible assets |
593 | 602 | 583 | 591 | 535 | 58 | 11 | |||||||||||||||||||||
All other assets |
4,142 | 4,022 | 3,929 | 3,932 | 3,941 | 201 | 5 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total assets |
$ | 66,251 | $ | 64,932 | $ | 63,473 | $ | 61,830 | $ | 59,692 | $ | 6,559 | 11 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Liabilities and Shareholders Equity: |
||||||||||||||||||||||||||||
Deposits: |
||||||||||||||||||||||||||||
Demand depositsnoninterest-bearing |
$ | 15,253 | $ | 15,179 | $ | 14,090 | $ | 13,466 | $ | 13,192 | $ | 2,061 | 16 | % | ||||||||||||||
Demand depositsinterest-bearing |
6,173 | 5,948 | 5,913 | 5,945 | 5,775 | 398 | 7 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total demand deposits |
21,426 | 21,127 | 20,003 | 19,411 | 18,967 | 2,459 | 13 | |||||||||||||||||||||
Money market deposits |
19,368 | 18,401 | 17,929 | 17,680 | 17,648 | 1,720 | 10 | |||||||||||||||||||||
Savings and other domestic deposits |
5,169 | 5,052 | 5,020 | 5,086 | 4,967 | 202 | 4 | |||||||||||||||||||||
Core certificates of deposit |
2,814 | 3,058 | 3,167 | 3,434 | 3,613 | (799 | ) | (22 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total core deposits |
48,777 | 47,638 | 46,119 | 45,611 | 45,195 | 3,582 | 8 | |||||||||||||||||||||
Other domestic time deposits of $250,000 or more |
195 | 201 | 223 | 262 | 284 | (89 | ) | (31 | ) | |||||||||||||||||||
Brokered deposits and negotiable CDs |
2,600 | 2,434 | 2,262 | 2,070 | 1,782 | 818 | 46 | |||||||||||||||||||||
Deposits in foreign offices |
557 | 479 | 374 | 315 | 328 | 229 | 70 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total deposits |
52,129 | 50,752 | 48,978 | 48,258 | 47,589 | 4,540 | 10 | |||||||||||||||||||||
Short-term borrowings |
1,882 | 2,682 | 3,192 | 2,788 | 2,372 | (490 | ) | (21 | ) | |||||||||||||||||||
Long-term debt |
4,374 | 3,956 | 3,968 | 3,523 | 2,513 | 1,861 | 74 | |||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total interest-bearing liabilities |
43,132 | 42,211 | 42,048 | 41,103 | 39,282 | 3,850 | 10 | |||||||||||||||||||||
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|
|
|
|||||||||||||||
All other liabilities |
1,450 | 1,168 | 1,043 | 1,033 | 1,035 | 415 | 40 | |||||||||||||||||||||
Shareholders equity |
6,416 | 6,374 | 6,292 | 6,228 | 6,183 | 233 | 4 | |||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total liabilities and shareholders equity |
$ | 66,251 | $ | 64,932 | $ | 63,473 | $ | 61,830 | $ | 59,692 | $ | 6,559 | 11 | % | ||||||||||||||
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|
|
(1) | For purposes of this analysis, NALs are reflected in the average balances of loans. |
12
Table 4Consolidated Quarterly Net Interest Margin Analysis
Average Rates (2) | ||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||
Fully-taxable equivalent basis (1) |
First | Fourth | Third | Second | First | |||||||||||||||
Assets: |
||||||||||||||||||||
Interest-bearing deposits in banks |
0.18 | % | 0.23 | % | 0.19 | % | 0.04 | % | 0.03 | % | ||||||||||
Loans held for sale |
3.69 | 3.82 | 3.98 | 4.27 | 3.74 | |||||||||||||||
Securities: |
||||||||||||||||||||
Available-for-sale and other securities: |
||||||||||||||||||||
Taxable |
2.50 | 2.61 | 2.48 | 2.52 | 2.47 | |||||||||||||||
Tax-exempt |
3.05 | 3.26 | 3.02 | 3.15 | 3.03 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total available-for-sale and other securities |
2.61 | 2.73 | 2.59 | 2.63 | 2.55 | |||||||||||||||
Trading account securities |
1.17 | 1.05 | 0.85 | 0.70 | 1.12 | |||||||||||||||
Held-to-maturity securitiestaxable |
2.47 | 2.45 | 2.45 | 2.46 | 2.47 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total securities |
2.57 | 2.65 | 2.54 | 2.57 | 2.52 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans and leases: (3) |
||||||||||||||||||||
Commercial: |
||||||||||||||||||||
Commercial and industrial |
3.33 | 3.35 | 3.45 | 3.49 | 3.56 | |||||||||||||||
Commercial real estate: |
||||||||||||||||||||
Construction |
3.81 | 4.30 | 4.38 | 4.29 | 3.99 | |||||||||||||||
Commercial |
3.57 | 3.47 | 3.60 | 4.16 | 3.84 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial real estate |
3.62 | 3.60 | 3.72 | 4.17 | 3.86 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
3.39 | 3.40 | 3.51 | 3.64 | 3.63 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Consumer: |
||||||||||||||||||||
Automobile |
3.24 | 3.33 | 3.41 | 3.47 | 3.54 | |||||||||||||||
Home equity |
4.03 | 4.05 | 4.07 | 4.12 | 4.12 | |||||||||||||||
Residential mortgage |
3.75 | 3.84 | 3.78 | 3.77 | 3.78 | |||||||||||||||
Other consumer |
8.20 | 7.68 | 7.31 | 7.34 | 6.82 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer |
3.74 | 3.80 | 3.82 | 3.87 | 3.89 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans and leases |
3.56 | 3.60 | 3.66 | 3.75 | 3.75 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total earning assets |
3.38 | % | 3.41 | % | 3.44 | % | 3.53 | % | 3.53 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities: |
||||||||||||||||||||
Deposits: |
||||||||||||||||||||
Demand depositsnoninterest-bearing |
| % | | % | | % | | % | | % | ||||||||||
Demand depositsinterest-bearing |
0.05 | 0.04 | 0.04 | 0.04 | 0.04 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total demand deposits |
0.01 | 0.01 | 0.01 | 0.01 | 0.01 | |||||||||||||||
Money market deposits |
0.21 | 0.22 | 0.23 | 0.24 | 0.25 | |||||||||||||||
Savings and other domestic deposits |
0.15 | 0.16 | 0.16 | 0.17 | 0.20 | |||||||||||||||
Core certificates of deposit |
0.76 | 0.75 | 0.74 | 0.81 | 0.94 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total core deposits |
0.22 | 0.23 | 0.23 | 0.25 | 0.28 | |||||||||||||||
Other domestic time deposits of $250,000 or more |
0.42 | 0.43 | 0.44 | 0.43 | 0.41 | |||||||||||||||
Brokered deposits and negotiable CDs |
0.17 | 0.18 | 0.20 | 0.24 | 0.28 | |||||||||||||||
Deposits in foreign offices |
0.13 | 0.13 | 0.13 | 0.13 | 0.13 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total deposits |
0.22 | 0.23 | 0.23 | 0.25 | 0.28 | |||||||||||||||
Short-term borrowings |
0.12 | 0.12 | 0.11 | 0.10 | 0.09 | |||||||||||||||
Long-term debt |
1.31 | 1.35 | 1.35 | 1.44 | 1.67 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total interest-bearing liabilities |
0.32 | % | 0.32 | % | 0.33 | % | 0.34 | % | 0.36 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest rate spread |
3.06 | % | 3.09 | % | 3.11 | % | 3.19 | % | 3.17 | % | ||||||||||
Impact of noninterest-bearing funds on margin |
0.09 | 0.09 | 0.09 | 0.09 | 0.10 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest margin |
3.15 | % | 3.18 | % | 3.20 | % | 3.28 | % | 3.27 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | FTE yields are calculated assuming a 35% tax rate. |
(2) | Loan, lease, and deposit average rates include impact of applicable derivatives, non-deferrable fees, and amortized fees. |
(3) | For purposes of this analysis, NALs are reflected in the average balances of loans. |
13
2015 First Quarter versus 2014 First Quarter
Fully-taxable equivalent net interest income increased $31.9 million, or 7%, from the 2014 first quarter. This reflected the benefit from the $6.2 billion, or 11%, increase in average earning assets partially offset by a 12 basis point reduction in the FTE NIM to 3.15%. Average earning asset growth included a $4.4 billion, or 10%, increase in average loans and leases and a $1.8 billion, or 16%, increase in average securities. The NIM contraction reflected a 15 basis point decrease related to the mix and yield of earning assets and 1 basis point reduction in benefit from the impact of noninterest-bearing funds, partially offset by the 4 basis point reduction in funding costs.
Average earning assets increased $6.2 billion, or 11%, from the year-ago quarter, driven by:
| $2.0 billion, or 29%, increase in average Automobile loans, as the 2015 first quarter represented the fifth consecutive quarter of greater than $1.0 billion in automobile loan originations. |
| $1.8 billion, or 16%, increase in average securities, reflecting an increase of $1.8 billion of LCR Level 1 qualified securities. |
| $1.5 billion, or 8%, increase in average C&I loans and leases, primarily reflecting growth in trade finance in support of our middle market and corporate customers, asset finance, automobile dealer floorplan lending, and corporate banking. |
| $0.4 billion, or 8%, increase in average Residential mortgage loans as a result of the Camco acquisition in the year-ago quarter and a decrease in the rate of payoffs due to lower levels of refinancing. |
While not affecting average balances, $1.0 billion of automobile loans were transferred to loans held-for-sale on March 31, 2015 in anticipation of a future loan securitization. In addition, on March 31, 2015, the Company completed the previously announced acquisition of Macquarie subsequently rebranded as Huntington Technology Finance. The acquisition included $0.8 billion of equipment finance leases.
Average total deposits increased $4.5 billion, or 10%, from the year-ago quarter, including a $3.6 billion, or 8%, increase in average total core deposits. The increase in total deposits included $1.0 billion of deposits acquired in the Camco and Bank of America branch acquisitions. Average total liabilities increased $6.3 billion, or 12%, from the year-ago quarter, reflecting:
| $2.1 billion, or 16%, increase in noninterest-bearing deposits, reflecting the strategic focus on consumer checking account household and commercial checking account relationship growth. |
| $1.7 billion, or 10%, increase in money market deposits, reflecting consumer and commercial relationship growth as well as strong sales execution. |
| $1.9 billion, or 74%, increase in long-term borrowings, primarily reflecting a cost-effective method of funding incremental LCR-related securities growth including the issuance of $1.8 billion of bank-level senior debt over the past year. While not affecting average balances, the Macquarie acquisition included $0.5 billion of assumed debt. |
| $0.8 billion, or 46%, increase in brokered deposits and negotiable CDs, which were used to efficiently finance balance sheet growth while continuing to manage the overall cost of funds. |
Partially offset by:
| $0.8 billion, or 22%, 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. |
2015 First Quarter versus 2014 Fourth Quarter
Compared to the 2014 fourth quarter, fully-taxable equivalent net interest income decreased $5.5 million, or 1% annualized. While average earning assets increased $1.2 billion, or 2%, sequentially, the 3 basis point decrease in the NIM coupled with two fewer days in the 2015 first quarter more than offset the benefit of the larger balance sheet.
14
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 2015 first quarter was $20.6 million compared with $2.5 million for the 2014 fourth quarter and $24.6 million for the 2014 first quarter. NCOs compared to the 2014 fourth quarter remained relatively stable. The 2015 first quarter provision for credit losses was impacted by the extension of our consumer loss emergence periods and increases to our reserve factors for high dollar value commercial credits, partially offset by our decision to no longer utilize separate methods to estimate economic risks inherent in our portfolios. (See Credit Quality discussion). Given the low level of the provision for credit losses and the uneven nature of commercial charge-offs and recoveries, some degree of volatility on a quarter-to-quarter basis is expected.
Noninterest Income
The following table reflects noninterest income for each of the past five quarters:
Table 5Noninterest Income
2015 | 2014 | 1Q15 vs 4Q14 | 1Q15 vs 1Q14 | |||||||||||||||||||||||||||||||||
(dollar amounts in thousands) |
First | Fourth | Third | Second | First | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||
Service charges on deposit accounts |
$ | 62,220 | $ | 67,408 | $ | 69,118 | $ | 72,633 | $ | 64,582 | $ | (5,188 | ) | (8 | )% | $ | (2,362 | ) | (4 | )% | ||||||||||||||||
Trust services |
29,039 | 28,781 | 28,045 | 29,581 | 29,565 | 258 | 1 | (526 | ) | (2 | ) | |||||||||||||||||||||||||
Electronic banking |
27,398 | 27,993 | 27,275 | 26,491 | 23,642 | (595 | ) | (2 | ) | 3,756 | 16 | |||||||||||||||||||||||||
Mortgage banking income |
22,961 | 14,030 | 25,051 | 22,717 | 23,089 | 8,931 | 64 | (128 | ) | (1 | ) | |||||||||||||||||||||||||
Brokerage income |
15,500 | 16,050 | 17,155 | 17,905 | 17,167 | (550 | ) | (3 | ) | (1,667 | ) | (10 | ) | |||||||||||||||||||||||
Insurance income |
15,895 | 16,252 | 16,729 | 15,996 | 16,496 | (357 | ) | (2 | ) | (601 | ) | (4 | ) | |||||||||||||||||||||||
Bank owned life insurance income |
13,025 | 14,988 | 14,888 | 13,865 | 13,307 | (1,963 | ) | (13 | ) | (282 | ) | (2 | ) | |||||||||||||||||||||||
Capital markets fees |
13,905 | 13,791 | 10,246 | 10,500 | 9,194 | 114 | 1 | 4,711 | 51 | |||||||||||||||||||||||||||
Gain on sale of loans |
4,589 | 5,408 | 8,199 | 3,914 | 3,570 | (819 | ) | (15 | ) | 1,019 | 29 | |||||||||||||||||||||||||
Securities gains (losses) |
| (104 | ) | 198 | 490 | 16,970 | 104 | (100 | ) | (16,970 | ) | (100 | ) | |||||||||||||||||||||||
Other income |
27,091 | 28,681 | 30,445 | 35,975 | 30,903 | (1,590 | ) | (6 | ) | (3,812 | ) | (12 | ) | |||||||||||||||||||||||
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|||||||||||||||||||
Total noninterest income |
$ | 231,623 | $ | 233,278 | $ | 247,349 | $ | 250,067 | $ | 248,485 | $ | (1,655 | ) | (1 | )% | $ | (16,862 | ) | (7 | )% | ||||||||||||||||
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2015 First Quarter versus 2014 First Quarter
Noninterest income decreased $16.9 million, or 7%, from the year-ago quarter. The year-over-year decrease primarily reflected the $17.0 million of securities gains realized in the 2014 first quarter compared to none in the current quarter. Other notable noninterest income comparisons with the year-ago quarter included:
| $4.7 million, or 51%, increase in capital market fees primarily related to income from customer interest rate derivative products and underwriting fees. |
| $3.8 million, or 16%, increase in electronic banking due to higher card related income and underlying customer growth. |
| $2.4 million, or 4%, decrease in service charges on deposit accounts reflecting the decline from the late July 2014 implementation of changes in consumer products, partially offset by a 9% increase in consumer households and changing customer usage patterns. |
2015 First Quarter versus 2014 Fourth Quarter
Noninterest income decreased $1.7 million, or 1%, from the 2014 fourth quarter, reflecting typical seasonality within service charges on deposit accounts, which decreased $5.2 million, or 8 %. This was offset by an $8.9 million, or 64%, increase in mortgage banking income, primarily driven by higher gain on sale margin, a higher percentage of loans originated for sale, and a 6% increase in origination volume.
15
Noninterest Expense
(This section should be read in conjunction with Significant Item 1, 2, and 3.)
The following table reflects noninterest expense for each of the past five quarters:
Table 6Noninterest Expense
2015 | 2014 | 1Q15 vs 1Q14 | 1Q15 vs 4Q14 | |||||||||||||||||||||||||||||||||
(dollar amounts in thousands) |
First | Fourth | Third | Second | First | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||
Personnel costs |
$ | 264,916 | $ | 263,289 | $ | 275,409 | $ | 260,600 | $ | 249,477 | $ | 15,439 | 6 | % | $ | 1,627 | 1 | % | ||||||||||||||||||
Outside data processing and other services |
50,535 | 53,685 | 53,073 | 54,338 | 51,490 | (955 | ) | (2 | ) | (3,150 | ) | (6 | ) | |||||||||||||||||||||||
Net occupancy |
31,020 | 31,565 | 34,405 | 28,673 | 33,433 | (2,413 | ) | (7 | ) | (545 | ) | (2 | ) | |||||||||||||||||||||||
Equipment |
30,249 | 31,981 | 30,183 | 28,749 | 28,750 | 1,499 | 5 | (1,732 | ) | (5 | ) | |||||||||||||||||||||||||
Professional services |
12,727 | 15,665 | 13,763 | 17,896 | 12,231 | 496 | 4 | (2,938 | ) | (19 | ) | |||||||||||||||||||||||||
Marketing |
12,975 | 12,466 | 12,576 | 14,832 | 10,686 | 2,289 | 21 | 509 | 4 | |||||||||||||||||||||||||||
Deposit and other insurance expense |
10,167 | 13,099 | 11,628 | 10,599 | 13,718 | (3,551 | ) | (26 | ) | (2,932 | ) | (22 | ) | |||||||||||||||||||||||
Amortization of intangibles |
10,206 | 10,653 | 9,813 | 9,520 | 9,291 | 915 | 10 | (447 | ) | (4 | ) | |||||||||||||||||||||||||
Other expense |
36,062 | 50,868 | 39,468 | 33,429 | 51,045 | (14,983 | ) | (29 | ) | (14,806 | ) | (29 | ) | |||||||||||||||||||||||
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Total noninterest expense |
$ | 458,857 | $ | 483,271 | $ | 480,318 | $ | 458,636 | $ | 460,121 | $ | (1,264 | ) | | % | $ | (24,414 | ) | (5 | )% | ||||||||||||||||
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Number of employees (average full-time equivalent) |
11,914 | 11,875 | 11,946 | 12,000 | 11,848 | 66 | 1 | 39 | |
Impacts of Significant Items:
2015 | 2014 | |||||||||||
(dollar amounts in thousands) |
First (1) | Fourth | First | |||||||||
Personnel costs |
$ | 1 | $ | 2,165 | $ | 2,341 | ||||||
Outside data processing and other services |
51 | 306 | 4,291 | |||||||||
Net occupancy |
| 4,150 | 1,742 | |||||||||
Equipment |
| 2,003 | 134 | |||||||||
Professional services |
3,286 | | 2,172 | |||||||||
Marketing |
1 | 14 | 530 | |||||||||
Other expense |
12 | 11,644 | 10,393 | |||||||||
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Total noninterest expense adjustments |
$ | 3,351 | $ | 20,282 | $ | 21,603 | ||||||
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Adjusted Noninterest Expense (Non-GAAP):
2015 | 2014 | 1Q15 vs 1Q14 | 1Q15 vs 4Q14 | |||||||||||||||||||||||||
(dollar amounts in thousands) |
First (1) | Fourth | First | Amount | Percent | Amount | Percent | |||||||||||||||||||||
Personnel costs |
$ | 264,915 | $ | 261,124 | $ | 247,136 | $ | 17,779 | 7 | % | $ | 3,791 | 1 | % | ||||||||||||||
Outside data processing and other services |
50,484 | 53,379 | 47,199 | 3,285 | 7 | (2,895 | ) | (5 | ) | |||||||||||||||||||
Net occupancy |
31,020 | 27,415 | 31,691 | (671 | ) | (2 | ) | 3,605 | 13 | |||||||||||||||||||
Equipment |
30,249 | 29,978 | 28,616 | 1,633 | 6 | 271 | 1 | |||||||||||||||||||||
Professional services |
9,441 | 15,665 | 10,059 | (618 | ) | (6 | ) | (6,224 | ) | (40 | ) | |||||||||||||||||
Marketing |
12,974 | 12,452 | 10,156 | 2,818 | 28 | 522 | 4 | |||||||||||||||||||||
Deposit and other insurance expense |
10,167 | 13,099 | 13,718 | (3,551 | ) | (26 | ) | (2,932 | ) | (22 | ) | |||||||||||||||||
Amortization of intangibles |
10,206 | 10,653 | 9,291 | 915 | 10 | (447 | ) | (4 | ) | |||||||||||||||||||
Other expense |
36,050 | 39,224 | 40,652 | (4,602 | ) | (11 | ) | (3,174 | ) | (8 | ) | |||||||||||||||||
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Total adjusted noninterest expense |
$ | 455,506 | $ | 462,989 | $ | 438,518 | $ | 16,988 | 4 | % | $ | (7,483 | ) | (2 | )% | |||||||||||||
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(1) | Includes $3.4 million of merger-related expense that was not a Significant Item for the quarter, but may be a Significant Item for the 2015 full year. |
16
2015 First Quarter versus 2014 First Quarter
Reported noninterest expense decreased $1.3 million, or less than 1%, from the year-ago quarter. Excluding the impact of Significant Items, noninterest expense increased $17.0 million, or 4%, as we continued to invest in the growth of the franchise, including the Camco, Bank of America branch, and Macquarie acquisitions, as well as the ongoing expansion of our retail branch distribution through our in-store strategy, and investments in technology and data analytics. Changes in reported noninterest expense primarily reflect:
| $15.0 million, or 29%, decrease in other expense. Excluding the impact of Significant Items, other expenses decreased $4.6 million, or 11%, primarily related to $3.0 million of goodwill impairment in the 2014 first quarter and a $2.0 million, or 40%, decrease in state franchise taxes and protective advances. |
| $3.6 million, or 26%, decrease in deposit and other insurance expense, primarily reflecting the benefit of $1.8 billion of bank-level debt issued over the past year. |
Partially offset by
| $15.4 million, or 6%, increase in personnel costs. Excluding the impact of Significant Items, personnel costs increased $17.8 million, or 7%, primarily related to a $13.8 million increase in salaries reflecting a 1% increase in the number of full-time equivalent employees and a $4.0 million increase in benefits expense. |
2015 First Quarter versus 2014 Fourth Quarter
Reported noninterest expense decreased $24.4 million, or 5%, from the 2014 fourth quarter. Excluding the impact of Significant Items, noninterest expense decreased $7.5 million, or 2%. On a reported basis, other expense decreased $14.8 million, or 29%, largely reflecting the prior quarters $11.9 million net increase to litigation reserves. Other notable noninterest comparisons include a $3.1 million, or 6%, decrease in outside data processing and other services, a $2.9 million, or 19%, decrease in professional services, and a $2.9 million, or 22%, decrease in deposit and other insurance. Professional services during the 2015 first quarter included $3.3 million of expense related to the Macquarie acquisition.
Provision for Income Taxes
The provision for income taxes in the 2015 first quarter was $54.0 million. This compared with a provision for income taxes of $57.2 million in the 2014 fourth quarter and $52.1 million in the 2014 first quarter. All three quarters included the benefits from tax-exempt income, tax-advantaged investments, general business credits, and investments in qualified affordable housing projects. In prior periods, a valuation allowance was established against the capital loss carryforwards. The federal valuation allowance was based on the uncertainty of forecasted taxable income expected of the required character in order to utilize the capital loss carryforward. Based on current analysis of both positive and negative evidence and projected forecasted taxable income of the appropriate character, we believe it is more likely than not the capital loss carryforward deferred tax asset will be realized within the carryforward period. At March 31, 2015 there is no capital loss carryforward valuation allowance remaining. The net federal deferred tax asset was $54.7 million and the net state deferred tax asset was $43.7 million at March 31, 2015.
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. Certain proposed adjustments resulting from the IRS examination of our 2005 through 2009 tax returns have been settled with the IRS Appeals Office, subject to final approval by the Joint Committee on Taxation of the U.S. Congress. Various state and other jurisdictions remain open to examination, including Ohio, Kentucky, Indiana, Michigan, Pennsylvania, West Virginia, and Illinois.
We use a multi-faceted approach to risk governance. It begins with the board of directors defining our risk appetite as aggregate moderate-to-low. Risk awareness, identification and assessment, reporting, and active management are key elements in overall risk management. Controls include, among others, effective segregation of duties, access, authorization and reconciliation procedures, as well as staff education and a disciplined assessment process.
17
We identify primary risks, and the sources of those risks, across the Company. 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. In addition, our Credit Review group performs ongoing independent testing of our loan portfolio, the results of which are regularly reviewed with our Risk Oversight Committee.
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 2014 Form 10-K and subsequent filings with the SEC. The MD&A included in our 2014 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the Form 10-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 the 2014 Form 10-K.
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 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 March 31, 2015, loans and leases totaled $47.7 billion, relatively unchanged from December 31, 2014. There was continued growth in the C&I portfolio, primarily as a result of an increase in equipment leases of $0.8 billion related to the acquisition of Macquarie. This was offset by a reduction in the auto portfolio. The reduction reflected a transfer of approximately $1.0 billion in automobile loans to loans held-for-sale in anticipation of a future loan securitization. The CRE portfolio remained relatively consistent, as a result of continued runoff offset by new production within the requirements associated with achieving an acceptable return, our internal concentration limits and increased competition for projects sponsored by high quality developers.
At March 31, 2015, commercial loans and leases totaled $25.2 billion and represented 53% of our total loans and lease credit exposure. Our commercial portfolio is diversified along product type, customer size, and geography within our footprint, and is comprised of the following (see Commercial Credit discussion).
C&IC&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 are comprised of either targeted industries (for example, Healthcare, Food & Agribusiness, Energy, etc) and/or lending disciplines (Equipment Finance, 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.
18
CRECRE 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 CREConstruction 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 $22.5 billion at March 31, 2015, and represented 47% of our total loan and lease credit exposure. The consumer portfolio is comprised primarily of automobile loans, home equity loans and lines-of-credit, and residential mortgages (see Consumer Credit discussion). The decrease from December 31, 2014, primarily relates to the transfer of automobile loans to loans held-for-sale as discussed above.
AutomobileAutomobile 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 equityHome 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 borrowers 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 mortgageResidential 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 consumerPrimarily 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 with an initial focus on existing Huntington customers.
19
The table below provides the composition of our total loan and lease portfolio:
Table 7Loan and Lease Portfolio Composition
2015 | 2014 | |||||||||||||||||||||||||||||||||||||||
(dollar amounts in millions) |
March 31, | December 31, | September 30, | June 30, | March 31, | |||||||||||||||||||||||||||||||||||
Commercial: |
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Commercial and industrial |
$ | 20,109 | 42 | % | $ | 19,033 | 40 | % | $ | 18,791 | 40 | % | $ | 18,899 | 41 | % | $ | 18,046 | 41 | % | ||||||||||||||||||||
Commercial real estate: |
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Construction |
910 | 2 | 875 | 2 | 850 | 2 | 757 | 2 | 692 | 2 | ||||||||||||||||||||||||||||||
Commercial |
4,157 | 9 | 4,322 | 9 | 4,141 | 9 | 4,233 | 9 | 4,339 | 10 | ||||||||||||||||||||||||||||||
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Total commercial real estate |
5,067 | 11 | 5,197 | 11 | 4,991 | 11 | 4,990 | 11 | 5,031 | 12 | ||||||||||||||||||||||||||||||
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Total commercial |
25,176 | 53 | 24,230 | 51 | 23,782 | 51 | 23,889 | 52 | 23,077 | 53 | ||||||||||||||||||||||||||||||
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Consumer: |
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Automobile |
7,803 | 16 | 8,690 | 18 | 8,322 | 18 | 7,686 | 17 | 6,999 | 16 | ||||||||||||||||||||||||||||||
Home equity |
8,492 | 18 | 8,491 | 17 | 8,436 | 18 | 8,405 | 18 | 8,373 | 19 | ||||||||||||||||||||||||||||||
Residential mortgage |
5,795 | 12 | 5,831 | 12 | 5,788 | 12 | 5,707 | 12 | 5,542 | 12 | ||||||||||||||||||||||||||||||
Other consumer |
430 | 1 | 414 | 2 | 395 | 1 | 393 | 1 | 363 | | ||||||||||||||||||||||||||||||
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Total consumer |
22,520 | 47 | 23,426 | 49 | 22,941 | 49 | 22,191 | 48 | 21,277 | 47 | ||||||||||||||||||||||||||||||
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Total loans and leases |
$ | 47,696 | 100 | % | $ | 47,656 | 100 | % | $ | 46,723 | 100 | % | $ | 46,080 | 100 | % | $ | 44,354 | 100 | % | ||||||||||||||||||||
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As shown in the table above, our loan portfolio is diversified by consumer and commercial credit. At the corporate level, we manage the credit exposure in part via a credit concentration policy. The policy designates specific loan types, collateral types, and loan structures to be formally tracked and assigned limits as a percentage of capital. C&I lending by NAICS categories, specific limits for CRE primary project types, loans secured by residential real estate, shared national credit exposure, and designated high risk loan definitions represent examples of specifically tracked components of our concentration management process. Currently there are no identified concentrations that exceed the established limit. Our concentration management process is approved by the Risk Oversight Committee of our Board and is one of the strategies utilized to ensure a high quality, well diversified portfolio that is consistent with our overall objective of maintaining an aggregate moderate-to-low risk profile.
The table below provides our total loan and lease portfolio segregated by the type of collateral securing the loan or lease. The changes in the collateral composition are consistent with the portfolio growth metrics, with increases noted in the residential and vehicle categories.
Table 8Loan and Lease Portfolio by Collateral Type
2015 | 2014 | |||||||||||||||||||||||||||||||||||||||
(dollar amounts in millions) |
March 31, | December 31, | September 30, | June 30, | March 31, | |||||||||||||||||||||||||||||||||||
Secured loans: |
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Real estatecommercial |
$ | 8,463 | 18 | % | $ | 8,631 | 18 | % | $ | 8,628 | 18 | % | $ | 8,617 | 19 | % | $ | 8,612 | 19 | % | ||||||||||||||||||||
Real estateconsumer |
14,287 | 30 | 14,322 | 30 | 14,224 | 30 | 14,113 | 31 | 13,916 | 31 | ||||||||||||||||||||||||||||||
Vehicles |
9,938 | (1) | 21 | 10,932 | 23 | 10,268 | 22 | 9,782 | 21 | 9,270 | 21 | |||||||||||||||||||||||||||||
Receivables/Inventory |
6,090 | 13 | 5,968 | 13 | 6,023 | 13 | 5,932 | 13 | 5,717 | 13 | ||||||||||||||||||||||||||||||
Machinery/Equipment |
4,708 | (2) | 10 | 3,863 | 8 | 3,305 | 7 | 3,267 | 7 | 2,930 | 7 | |||||||||||||||||||||||||||||
Securities/Deposits |
956 | 2 | 964 | 2 | 1,232 | 3 | 1,349 | 3 | 1,064 | 2 | ||||||||||||||||||||||||||||||
Other |
1,167 | 2 | 919 | 2 | 918 | 2 | 940 | 2 | 870 | 3 | ||||||||||||||||||||||||||||||
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Total secured loans and leases |
45,609 | 96 | 45,599 | 96 | 44,598 | 95 | 44,000 | 96 | 42,379 | 96 | ||||||||||||||||||||||||||||||
Unsecured loans and leases |
2,087 | 4 | 2,057 | 4 | 2,125 | 5 | 2,080 | 4 | 1,975 | 4 | ||||||||||||||||||||||||||||||
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Total loans and leases |
$ | 47,696 | 100 | % | $ | 47,656 | 100 | % | $ | 46,723 | 100 | % | $ | 46,080 | 100 | % | $ | 44,354 | 100 | % | ||||||||||||||||||||
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(1) | Reflects the transfer of approximately $1.0 billion in automobile loans to loans held-for-sale. |
(2) | Reflects the addition of approximately $0.8 billion in equipment leases related to the acquisition of Macquarie. |
20
Commercial Credit
Refer to the Commercial Credit section of our 2014 Form 10-K for our commercial credit underwriting and on-going credit management processes.
C&I PORTFOLIO
The C&I portfolio continues to have strong origination activity as evidenced by the growth over the past 12 months. The credit quality of the portfolio remains strong as we maintain a focus on high quality originations. Problem loans have trended downward over the last several years, reflecting a combination of proactive risk identification and effective workout strategies implemented by the SAD. However, over the past year, C&I Problem Loans have begun to increase as the portfolio has increased in size. We continue to maintain a proactive approach to identifying borrowers that may be facing financial difficulty in order to maximize the potential solutions.
CRE PORTFOLIO
We manage the risks inherent in this portfolio specific to CRE lending, focusing on the quality of the developer and the specifics associated with each project. Generally, we: (1) limit our loans to 80% of the appraised value of the commercial real estate at origination, (2) require net operating cash flows to be 125% of required interest and principal payments, and (3) if the commercial real estate is nonowner occupied, require that at least 50% of the space of the project be preleased. We actively monitor both geographic and project-type concentrations and performance metrics of all CRE loan types, with a focus on loans identified as higher risk based on the risk rating methodology. Both macro-level and loan-level stress-test scenarios based on existing and forecast market conditions are part of the on-going portfolio management process for the CRE portfolio.
Dedicated real estate professionals originate and manage the portfolio. The portfolio is diversified by project type and loan size, and this diversification represents a significant portion of the credit risk management strategies employed for this portfolio. Subsequent to the origination of the loan, the Credit Review group provides an independent review and assessment of the quality of the underwriting and risk of new loan originations.
Appraisal values are obtained in conjunction with all originations and renewals, and on an as needed basis, in compliance with regulatory requirements. Appraisals are obtained from approved vendors and are reviewed by an internal appraisal review group comprised of certified appraisers to ensure the quality of the valuation used in the underwriting process. We continue to perform on-going portfolio level reviews within the CRE portfolio. These reviews generate action plans based on occupancy levels or sales volume associated with the projects being reviewed. Property values are updated using appraisals on a regular basis to ensure appropriate decisions regarding the on-going management of the portfolio reflect the changing market conditions. This highly individualized process requires working closely with all of our borrowers, as well as an in-depth knowledge of CRE project lending and the market environment.
Consumer Credit
Refer to the Consumer Credit section of our 2014 Form 10-K for our consumer credit underwriting and on-going credit management processes.
AUTOMOBILE PORTFOLIO
Our strategy in the automobile portfolio continues to focus on high quality borrowers as measured by both FICO and internal custom scores, combined with appropriate LTVs, terms, and profitability. Our strategy and operational capabilities allow us to appropriately manage the origination quality across the entire portfolio, including our newer markets. Although increased origination volume and entering new markets can be associated with increased risk levels, we believe our disciplined strategy and operational processes significantly mitigate these risks.
We have continued to consistently execute our value proposition and take advantage of available market opportunities. Importantly, we have maintained our high credit quality standards while expanding the portfolio.
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RESIDENTIAL REAL ESTATE SECURED PORTFOLIOS
The properties securing our residential mortgage and home equity portfolios are primarily located within our geographic footprint. Huntington continues to support our local markets with consistent underwriting across all residential secured products. The residential-secured portfolio originations continue to be of high quality, with the majority of the negative credit impact coming from loans originated in 2006 and earlier. Our portfolio management strategies associated with our Home Savers group allow us to focus on effectively helping our customers with appropriate solutions for their specific circumstances.
Table 9Selected Home Equity and Residential Mortgage Portfolio Data
(dollar amounts in millions)
Home Equity | Residential Mortgage | |||||||||||||||||||||||
Secured by first-lien | Secured by junior-lien | |||||||||||||||||||||||
03/31/15 | 12/31/14 | 03/31/15 | 12/31/14 | 03/31/15 | 12/31/14 | |||||||||||||||||||
Ending balance |
$ | 5,155 | $ | 5,129 | $ | 3,338 | $ | 3,362 | $ | 5,795 | $ | 5,831 | ||||||||||||
Portfolio weighted average LTV ratio(1) |
72 | % | 71 | % | 81 | % | 81 | % | 75 | % | 74 | % | ||||||||||||
Portfolio weighted average FICO score(2) |
763 | 759 | 750 | 752 | 751 | 752 | ||||||||||||||||||
Home Equity | Residential Mortgage (3) | |||||||||||||||||||||||
Secured by first-lien | Secured by junior-lien | |||||||||||||||||||||||
Three Months Ended March 31, | ||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||
Originations |
$ | 376 | $ | 300 | $ | 185 | $ | 163 | $ | 231 | $ | 198 | ||||||||||||
Origination weighted average LTV ratio(1) |
73 | % | 72 | % | 84 | % | 83 | % | 81 | % | 81 | % | ||||||||||||
Origination weighted average FICO score(2) |
780 | 763 | 769 | 756 | 751 | 752 |
(1) | The LTV ratios for home equity loans and home equity lines-of-credit are cumulative and reflect the balance of any senior loans. LTV ratios reflect collateral values at the time of loan origination. |
(2) | Portfolio weighted average FICO scores reflect currently updated customer credit scores whereas origination weighted average FICO scores reflect the customer credit scores at the time of loan origination. |
(3) | Represents only owned-portfolio originations. |
Home Equity Portfolio
Within the home equity portfolio, the standard product is a 10-year interest-only draw period with a 20-year fully amortizing term at the end of the draw period. Prior to 2007, the standard product was a 10-year draw period with a balloon payment. In either case, after the 10-year draw period, the borrower must reapply, subject to full underwriting guidelines, to continue with the interest only revolving structure or begin repaying the debt in a term structure.
The principal and interest payment associated with the term structure will be higher than the interest-only payment, resulting in maturity risk. Our maturity risk can be segregated into two distinct segments: (1) home equity lines-of-credit underwritten with a balloon payment at maturity and (2) home equity lines-of-credit with an automatic conversion to a 20-year amortizing loan. We manage this risk based on both the actual maturity date of the line-of-credit structure and at the end of the 10-year draw period. This maturity risk is embedded in the portfolio which we address with proactive contact strategies beginning one year prior to maturity. In certain circumstances, our Home Saver group is able to provide payment and structure relief to borrowers experiencing significant financial hardship associated with the payment adjustment. Our existing home equity line-of-credit (HELOC) maturity strategy is consistent with all recent regulatory guidance.
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The table below summarizes our home equity line-of-credit portfolio by maturity date based on the balloon structure described above:
Table 10Maturity Schedule of Home Equity Line-of-Credit Portfolio
March 31, 2015 | ||||||||||||||||||||||||
(dollar amounts in millions) |
1 year or less | 1 to 2 years | 2 to 3 years | 3 to 4 years | More than 4 years |
Total | ||||||||||||||||||
Secured by first-lien |
$ | 20 | $ | 2 | $ | 1 | $ | 2 | $ | 2,931 | $ | 2,956 | ||||||||||||
Secured by junior-lien |
163 | 117 | 82 | 16 | 2,584 | 2,962 | ||||||||||||||||||
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Total home equity line-of-credit |
$ | 183 | $ | 119 | $ | 83 | $ | 18 | $ | 5,515 | $ | 5,918 | ||||||||||||
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The reduction in maturities presented in over 1-year categories is a result of our change to a product with a 20-year amortization period after 10-year draw period structure. Home equity lines-of-credit with balloon payment risk are essentially eliminated after 2015. The amounts maturing in more than four years primarily consist of exposure with a 20-year amortization period after the 10-year draw period.
Historically, less than 30% of our home equity lines-of-credit that are one year or less from maturity actually reach the maturity date.
Residential Mortgages Portfolio
Huntington underwrites all applications centrally, with a focus on higher quality borrowers. We do not originate residential mortgages that allow negative amortization or allow the borrower multiple payment options and have incorporated regulatory requirements and guidance into our underwriting process. All residential mortgages are originated based on a completed full appraisal during the credit underwriting process. We update values in compliance with applicable regulations to facilitate our portfolio management, as well as our workout and loss mitigation functions.
Several government programs continued to impact the residential mortgage portfolio, including various refinance programs such as HARP and HAMP, which positively affected the availability of credit for the industry. During the three-month period ended March 31, 2015, we closed $62 million in HARP residential mortgages and $1.6 million in HAMP residential mortgages. The HARP and HAMP residential mortgage loans are part of our residential mortgage portfolio or serviced for others.
We are subject to repurchase risk associated with residential mortgage loans sold in the secondary market. An appropriate level of reserve for representations and warranties related to residential mortgage loans sold has been established to address this repurchase risk inherent in the portfolio (see Operational Risk discussion).
Credit Quality
(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)
We believe the most meaningful way to assess overall credit quality performance is through an analysis of credit quality performance ratios. This approach forms the basis of most of the discussion in the sections immediately following: NPAs and NALs, TDRs, ACL, and NCOs. In addition, we utilize delinquency rates, risk distribution and migration patterns, and product segmentation in the analysis of our credit quality performance.
Credit quality performance in the 2015 first quarter reflected continued strong performance in the net charge-offs and overall consumer performance metrics, as evidenced by recoveries in the CRE portfolio and lower losses across the consumer portfolio. This was partially offset by some deterioration in the C&I metrics. NPAs increased 19% to $400.8 million at March 31, 2015, with the majority of the increase centered in one large C&I relationship. NCOs increased by $1.5 million or 6% from the prior quarter, as a result of a significant increase related to the same C&I relationship. Total criticized loans increased in the C&I segment for the fourth consecutive quarter. As a result of the overall continued credit quality improvement, the ACL to total loans ratio declined slightly by 2 basis points to 1.38%.
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NPAs, NALs, AND TDRs
(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)
NPAs and NALs
NPAs consist of (1) NALs, which represent loans and leases no longer accruing interest, (2) OREO properties, and (3) other NPAs. Any loan in our portfolio may be placed on nonaccrual status prior to the policies described below when collection of principal or interest is in doubt. Also, when a borrower with discharged non-reaffirmed debt in a Chapter 7 bankruptcy is identified and the loan is determined to be collateral dependent, the loan is placed on nonaccrual status.
C&I and CRE loans (except for purchased credit impaired loans) are placed on nonaccrual status at 90-days past due, or earlier if repayment of principal and interest is in doubt.
Of the $182.6 million of CRE and C&I-related NALs at March 31, 2015, $126.1 million, or 69%, represented loans that were less than 30-days past due, demonstrating our continued commitment to proactive credit risk management. With the exception of residential mortgage loans guaranteed by government organizations which continue to accrue interest, first-lien loans secured by residential mortgage collateral are placed on nonaccrual status at 150-days past due. Junior-lien home equity loans are placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien loan has been identified as nonaccrual. Automobile and other consumer loans are generally charged-off prior to the loan reaching 120-days past due.
When loans are placed on nonaccrual, accrued interest income is reversed with current year accruals charged to interest income and prior year amounts generally charged-off as a credit loss. When, in our judgment, the borrowers ability to make required interest and principal payments has resumed and collectability is no longer in doubt, the loan or lease could be returned to accrual status.
The following table reflects period-end NALs and NPAs detail for each of the last five quarters:
Table 11Nonaccrual Loans and Leases and Nonperforming Assets
2015 | 2014 | |||||||||||||||||||
(dollar amounts in thousands) |
March 31, | December 31, | September 30, | June 30, | March 31, | |||||||||||||||
Nonaccrual loans and leases: |
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Commercial and industrial |
$ | 133,363 | $ | 71,974 | $ | 90,265 | $ | 75,274 | $ | 57,053 | ||||||||||
Commercial real estate |
49,263 | 48,523 | 59,812 | 65,398 | 71,344 | |||||||||||||||
Automobile |
4,448 | 4,623 | 4,834 | 4,384 | 6,218 | |||||||||||||||
Residential mortgage |
98,093 | 96,564 | 98,139 | 110,635 | 121,681 | |||||||||||||||
Home equity |
79,246 | 78,560 | 72,715 | 69,266 | 70,862 | |||||||||||||||
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Total nonaccrual loans and leases |
364,413 | 300,244 | 325,765 | 324,957 | 327,158 | |||||||||||||||
Other real estate owned, net |
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Residential |
30,544 | 29,291 | 30,661 | 31,761 | 30,581 | |||||||||||||||
Commercial |
3,407 | 5,748 | 5,609 | 2,934 | 5,110 | |||||||||||||||
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Total other real estate owned, net |
33,951 | 35,039 | 36,270 | 34,695 | 35,691 | |||||||||||||||
Other nonperforming assets(1) |
2,440 | 2,440 | 2,440 | 2,440 | 2,440 | |||||||||||||||
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Total nonperforming assets |
$ | 400,804 | $ | 337,723 | $ | 364,475 | $ | 362,092 | $ | 365,289 | ||||||||||
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Nonaccrual loans as a % of total loans and leases |
0.76 | % | 0.63 | % | 0.70 | % | 0.71 | % | 0.74 | % | ||||||||||
Nonperforming assets ratio(2) |
0.84 | 0.71 | 0.78 | 0.79 | 0.82 | |||||||||||||||
(NPA+90days)/(Loan+OREO)(3) |
1.08 | 0.98 | 1.08 | 1.08 | 1.17 |
(1) | Other nonperforming assets includes certain impaired investment securities. |
(2) | This ratio is calculated as nonperforming assets divided by the sum of loans and leases, other nonperforming assets, and net other real estate owned. |
(3) | This ratio is calculated as the sum of nonperforming assets and total accruing loans and leases past due 90 days or more divided by the sum of loans and leases and net other real estate owned. |
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2015 First Quarter versus 2014 Fourth Quarter
The $63.1 million, or 19%, increase in NPAs compared with December 31, 2014, represents the net impact of increases in the commercial portfolio:
| $61.4 million, or 85%, increase in C&I NALs, primarily reflecting the addition of one large C&I relationship to nonaccrual status. Given the absolute low level of problem credits in the portfolio, some volatility should be expected. |
TDR Loans
(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)
TDRs are modified loans where a concession was provided to a borrower experiencing financial difficulties. TDRs can be classified as either accrual or nonaccrual loans. Nonaccrual TDRs are included in NALs whereas accruing TDRs are excluded from NALs, as it is probable that all contractual principal and interest due under the restructured terms will be collected. TDRs primarily reflect our loss mitigation efforts to proactively work with borrowers in financial difficulty or regulatory regulations regarding the treatment of certain bankruptcy filing situations.
The table below presents our accruing and nonaccruing TDRs at period-end for each of the past five quarters:
Table 12Accruing and Nonaccruing Troubled Debt Restructured Loans
2015 | 2014 | |||||||||||||||||||
(dollar amounts in thousands) |
March 31, | December 31, | September 30, | June 30, | March 31, | |||||||||||||||
Troubled debt restructured loansaccruing: |
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Commercial and industrial |
$ | 162,207 | $ | 116,331 | $ | 89,783 | $ | 90,604 | $ | 102,970 | ||||||||||
Commercial real estate |
161,515 | 177,156 | 186,542 | 212,736 | 210,876 | |||||||||||||||
Automobile |
25,876 | 26,060 | 31,480 | 31,833 | 27,393 | |||||||||||||||
Home equity |
265,207 | 252,084 | 229,500 | 221,539 | 202,044 | |||||||||||||||
Residential mortgage |
268,441 | 265,084 | 271,762 | 289,239 | 284,194 | |||||||||||||||
Other consumer |
4,879 | 4,018 | 3,313 | 3,496 | 1,727 | |||||||||||||||
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Total troubled debt restructured loansaccruing |
888,125 | 840,733 | 812,380 | 849,447 | 829,204 | |||||||||||||||
Troubled debt restructured loansnonaccruing: |
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Commercial and industrial |
21,246 | 20,580 | 19,110 | 6,677 | 7,197 | |||||||||||||||
Commercial real estate |
28,676 | 24,964 | 28,618 | 24,396 | 27,972 | |||||||||||||||
Automobile |
4,283 | 4,552 | 4,817 | 4,287 | 5,676 | |||||||||||||||
Home equity |
26,379 | 27,224 | 25,149 | 22,264 | 20,992 | |||||||||||||||
Residential mortgage |
69,799 | 69,305 | 72,729 | 81,546 | 84,441 | |||||||||||||||
Other consumer |
165 | 70 | 74 | 120 | 120 | |||||||||||||||
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Total troubled debt restructured loansnonaccruing |
150,548 | 146,695 | 150,497 | 139,290 | 146,398 | |||||||||||||||
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Total troubled debt restructured loans |
$ | 1,038,673 | $ | 987,428 | $ | 962,877 | $ | 988,737 | $ | 975,602 | ||||||||||
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Our strategy is to structure TDRs in a manner that avoids new concessions subsequent to the initial TDR terms. However, there are times when subsequent modifications are required, such as when the modified loan matures. Often the loans are performing in accordance with the TDR terms, and a new note is originated with similar modified terms. These loans are subjected to the normal underwriting standards and processes for other similar credit extensions, both new and existing. If the loan is not performing in accordance with the existing TDR terms, typically an individualized approach to repayment is established. In accordance with ASC 310-20-35, the refinanced note is evaluated to determine if it is considered a new loan or a continuation of the prior loan. A new loan is considered for removal of the TDR designation. A continuation of the prior note requires the continuation of the TDR designation, and because the refinanced note constitutes a new or amended debt instrument, it is included in our TDR activity table (below) as a new TDR and a restructured TDR removal during the period. The types of concessions granted are consistent with those granted on new TDRs and include interest rate reductions, amortization or maturity date changes beyond what the collateral supports, and principal forgiveness based on the borrowers specific needs at a point in time. Our policy does not limit the number of times a loan may be modified. A loan may be modified multiple times if it is considered to be in the best interest of both the borrower and Huntington.
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Commercial loans are not automatically considered to be accruing TDRs upon the granting of a new concession. If the loan is in accruing status and no loss is expected based on the modified terms, the modified TDR remains in accruing status. For loans that are on nonaccrual status before the modification, collection of both principal and interest must not be in doubt, and the borrower must be able to exhibit sufficient cash flows for at least a six-month period of time to service the debt in order to return to accruing status. This six-month period could extend before or after the restructure date.
TDRs in the home equity and residential mortgage portfolio may continue to increase in the near term as we continue to appropriately manage the portfolio and work with our borrowers. Any granted change in terms or conditions that are not readily available in the market for that borrower, requires the designation as a TDR. There are no provisions for the removal of the TDR designation based on payment activity for consumer loans. A loan may be returned to accrual status when all contractually due interest and principal has been paid and the borrower demonstrates the financial capacity to continue to pay as agreed, with the risk of loss diminished.
The following table reflects TDR activity for each of the past five quarters:
Table 13Troubled Debt Restructured Loan Activity
2015 | 2014 | |||||||||||||||||||
(dollar amounts in thousands) |
First | Fourth | Third | Second | First | |||||||||||||||
TDRs, beginning of period |
$ | 987,428 | $ | 962,877 | $ | 988,737 | $ | 975,602 | $ | 954,841 | ||||||||||
New TDRs |
209,376 | 137,397 | 126,238 | 184,025 | 219,656 | |||||||||||||||
Payments |
(35,272 | ) | (51,908 | ) | (78,717 | ) | (66,530 | ) | (55,130 | ) | ||||||||||
Charge-offs |
(8,364 | ) | (8,611 | ) | (10,631 | ) | (5,134 | ) | (10,774 | ) | ||||||||||
Sales |
(5,148 | ) | (3,303 | ) | (1,951 | ) | (4,001 | ) | (14,169 | ) | ||||||||||
Transfer to OREO |
(2,369 | ) | (2,978 | ) | (3,554 | ) | (3,539 | ) | (2,597 | ) | ||||||||||
Restructured TDRsaccruing(1) |
(85,700 | ) | (26,350 | ) | (47,277 | ) | (83,586 | ) | (86,012 | ) | ||||||||||
Restructured TDRsnonaccruing(1) |
(20,849 | ) | (16,309 | ) | (2,212 | ) | (4,146 | ) | (23,038 | ) | ||||||||||
Other |
(429 | ) | (3,387 | ) | (7,756 | ) | (3,954 | ) | (7,175 | ) | ||||||||||
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TDRs, end of period |
$ | 1,038,673 | $ | 987,428 | $ | 962,877 | $ | 988,737 | $ | 975,602 | ||||||||||
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(1) | Represents existing TDRs that were re-underwritten with new terms providing a concession. A corresponding amount is included in the New TDRs amount above. |
ACL
(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)
Our total credit reserve is comprised of two different components, both of which in our judgment are appropriate to absorb credit losses inherent in our loan and lease portfolio: the ALLL and the AULC. Combined, these reserves comprise the total ACL. Our Credit Administration group is responsible for developing the methodology, assumptions and estimates used in the calculation, as well as determining the appropriateness of the ACL. The ALLL represents the estimate of losses inherent in the loan portfolio at the reported date. Additions to the ALLL result from recording provision expense for loan losses or increased risk levels resulting from loan risk-rating downgrades, while reductions reflect charge-offs (net of recoveries), decreased risk levels resulting from loan risk-rating upgrades, or the sale of loans. The AULC is determined by applying the transaction reserve process to the unfunded portion of the loan exposures adjusted by an applicable funding expectation.
During the 2015 first quarter, we reviewed our existing commercial and consumer credit models and enhanced certain processes and methods of ACL estimation. During this review, we analyzed the loss emergence periods used for consumer receivables collectively evaluated for impairment and, as a result, extended our loss emergence periods for products within these portfolios. As part of these enhancements to our credit reserve process, we evaluated the methods used to separately estimate economic risks inherent in our portfolios and decided to no longer utilize these separate estimation techniques. Economic risks are incorporated in our loss estimates elsewhere in our reserve calculation. The enhancements made to our credit reserve processes during the quarter allow for increased segmentation and analysis of the estimated incurred losses within our loan portfolios. The net ACL impact of these enhancements was immaterial.
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We regularly evaluate the appropriateness of the ACL by performing on-going evaluations of the loan and lease portfolio, including such factors as the differing economic risks associated with each loan category, the financial condition of specific borrowers, the level of delinquent loans, the value of any collateral and, where applicable, the existence of any guarantees or other documented support. We evaluate the impact of changes in interest rates and overall economic conditions on the ability of borrowers to meet their financial obligations when quantifying our exposure to credit losses and assessing the appropriateness of our ACL at each reporting date. In addition to general economic conditions and the other factors described above, additional factors also considered include: the impact of increasing or decreasing residential real estate values; the diversification of CRE loans; the development of new or expanded Commercial business verticals such as healthcare, ABL, and energy, and the overall condition of the manufacturing industry. A provision for credit losses is recorded to adjust the ACL to the level we have determined to be appropriate to absorb credit losses inherent in our loan and lease portfolio.
Our ACL evaluation process includes the on-going assessment of credit quality metrics, and a comparison of certain ACL benchmarks to current performance. While the total ACL balance has declined in recent quarters, all of the relevant benchmarks remain strong.
The table below reflects the allocation of our ACL among our various loan categories during each of the past five quarters:
Table 14Allocation of Allowance for Credit Losses (1)
2015 | 2014 | |||||||||||||||||||||||||||||||||||||||
(dollar amounts in thousands) |
March 31, | December 31, | September 30, | June 30, | March 31, | |||||||||||||||||||||||||||||||||||
Commercial |
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Commercial and industrial |
$ | 284,573 | 42 | % | $ | 286,995 | 40 | % | $ | 291,401 | 40 | % | $ | 278,512 | 41 | % | $ | 266,979 | 41 | % | ||||||||||||||||||||
Commercial real estate |
100,752 | 11 | 102,839 | 11 | 115,472 | 11 | 137,346 | 11 | 160,306 | 12 | ||||||||||||||||||||||||||||||
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Total commercial |
385,325 | 53 | 389,834 | 51 | 406,873 | 51 | 415,858 | 52 | 427,285 | 53 | ||||||||||||||||||||||||||||||
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Consumer |
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Automobile |
37,125 | 16 | 33,466 | 18 | 30,732 | 18 | 27,158 | 17 | 25,178 | 16 | ||||||||||||||||||||||||||||||
Home equity |
110,280 | 18 | 96,413 | 18 | 100,375 | 18 | 105,943 | 18 | 113,177 | 19 | ||||||||||||||||||||||||||||||
Residential mortgage |
55,380 | 12 | 47,211 | 12 | 52,658 | 12 | 47,191 | 12 | 39,068 | 12 | ||||||||||||||||||||||||||||||
Other consumer |
17,016 | 1 | 38,272 | 1 | 40,398 | 1 | 38,951 | 1 | 27,210 | | ||||||||||||||||||||||||||||||
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Total consumer |
219,801 | 47 | 215,362 | 49 | 224,163 | 49 | 219,243 | 48 | 204,633 | 47 | ||||||||||||||||||||||||||||||
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Total allowance for loan and lease losses |
605,126 | 100 | % | 605,196 | 100 | % | 631,036 | 100 | % | 635,101 | 100 | % | 631,918 | 100 | % | |||||||||||||||||||||||||
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Allowance for unfunded loan commitments |
54,742 | 60,806 | 55,449 | 56,927 | 59,368 | |||||||||||||||||||||||||||||||||||
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Total allowance for credit losses |
$ | 659,868 | $ | 666,002 | $ | 686,485 | $ | 692,028 | $ | 691,286 | ||||||||||||||||||||||||||||||
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Total allowance for loan and leases losses as % of: |
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Total loans and leases |
1.27 | % | 1.27 | % | 1.35% | 1.38 | % | 1.42 | % | |||||||||||||||||||||||||||||||
Nonaccrual loans and leases |
166 | 202 | 194 | 195 | 193 | |||||||||||||||||||||||||||||||||||
Nonperforming assets |
151 | 179 | 173 | 175 | 174 | |||||||||||||||||||||||||||||||||||
Total allowance for credit losses as % of: |
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Total loans and leases |
1.38 | % | 1.40 | % | 1.47% | 1.50 | % | 1.56 | % | |||||||||||||||||||||||||||||||
Nonaccrual loans and leases |
181 | 222 | 211 | 213 | 211 | |||||||||||||||||||||||||||||||||||
Nonperforming assets |
165 | 197 | 188 | 191 | 191 |
(1) | Percentages represent the percentage of each loan and lease category to total loans and leases. |
2015 First Quarter versus 2014 Fourth Quarter
The $6.1 million, or 1%, decline in the ACL compared with December 31, 2014, was driven by:
| $21.3 million or 56% decline in the other consumer portfolio, primarily driven by our assessment of consumer overdraft reserve factors, lower consumer overdraft balances, and the impact of no longer utilizing separate methods to estimate economic risks inherent in our portfolios. |
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| $2.4 million or 1% decline in the C&I portfolios. The decline was driven by the decision to no longer utilize separate methods to estimate economic risks inherent in our portfolio. However, the impact was largely offset by the increases to our reserve factors for high dollar value C&I credits. |
| $2.1 million or 2% decline in the CRE portfolio. The decline was driven by the decision to no longer utilize separate methods to estimate economic risks inherent in our portfolio. However, the impact was largely offset by the increases to our reserve factors for high dollar value CRE credits. |
Partially offset by:
| $13.9 million or 14% increase in the home equity portfolio. The increase was driven by the extension of loss emergence periods associated with our home equity products. It was partially offset by the impact of no longer utilizing separate methods to estimate economic risks inherent in our portfolio. |
| $8.2 million or 17% increase in the residential mortgage portfolio. The increase was driven by the extension of loss emergence periods associated with the residential mortgage products. It was partially offset by the impact of no longer utilizing separate methods to estimate economic risks inherent in our portfolio. |
| $3.7 million, or 11% increase in the automobile portfolio. The increase was driven by the extension of loss emergence periods associated with the automobile products. It was partially offset by the impact of no longer utilizing separate methods to estimate economic risks inherent in our portfolio. |
The ACL to total loans declined to 1.38% at March 31, 2015, compared to 1.40% at December 31, 2014. Management believes the decline in the ratio is appropriate given the continued improvement in the risk profile of our loan portfolio. Further, the continued focus on early identification of loans with changes in credit metrics and proactive action plans for these loans, originating high quality new loans and SAD resolutions, will contribute to maintaining our strong key credit quality metrics.
Given the combination of these noted positive and negative factors, we believe that our ACL is appropriate and its coverage level is reflective of the quality of our portfolio and the current operating environment.
NCOs
Any loan in any portfolio may be charged-off prior to the policies described below if a loss confirming event has occurred. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency and that asset is the sole source of repayment. Additionally, discharged, collateral dependent non-reaffirmed debt in Chapter 7 bankruptcy filings will result in a charge-off to estimated collateral value, less anticipated selling costs at the time of discharge.
C&I and CRE loans are either charged-off or written down to net realizable value at 90-days past due. Automobile loans and other consumer loans are charged-off at 120-days past due. First-lien and junior-lien home equity loans are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due and 120-days past due, respectively. Residential mortgages are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due.
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The following table reflects NCO detail for each of the last five quarters:
Table 15Quarterly Net Charge-off Analysis
2015 | 2014 | |||||||||||||||||||
(dollar amounts in thousands) |
First | Fourth | Third | Second | First | |||||||||||||||
Net charge-offs (recoveries) by loan and lease type: |
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Commercial: |
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Commercial and industrial |
$ | 11,403 |