Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2014

or

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 1-34073

 

 

Huntington Bancshares Incorporated

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   31-0724920

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

41 S. High Street, Columbus, Ohio   43287
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (614) 480-8300

Securities registered pursuant to Section 12(b) of the Act:

 

Title of class

 

Name of exchange on which registered

8.50% Series A non-voting, perpetual convertible preferred stock   NASDAQ
Common Stock—Par Value $0.01 per Share   NASDAQ

Securities registered pursuant to Section 12(g) of the Act:

Title of class

Floating Rate Series B Non-Cumulative Perpetual Preferred Stock

 

 

Depositary Shares (each representing a 1/40th interest in a share of Floating Rate Series B Non-Cumulative Perpetual Preferred Stock)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Exchange Act.   x     Yes   ¨     No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.   ¨     Yes   x     No

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 (or for such shorter period that the registrant was required to file such reports), 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x

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 definition 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 Act)   ¨     Yes   x     No

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2014, determined by using a per share closing price of $9.54, as quoted by NASDAQ on that date, was $7,626,169,305. As of January 31, 2015, there were 810,025,677 shares of common stock with a par value of $0.01 outstanding.

Documents Incorporated By Reference

Part III of this Form 10-K incorporates by reference certain information from the registrant’s definitive Proxy Statement for the 2015 Annual Shareholders’ Meeting.

 

 

 


Table of Contents

HUNTINGTON BANCSHARES INCORPORATED

INDEX

 

Part I.   
Item 1.   

Business

     5   
Item 1A.   

Risk Factors

     15   
Item 1B.   

Unresolved Staff Comments

     21   
Item 2.   

Properties

     21   
Item 3.   

Legal Proceedings

     21   
Item 4.   

Mine Safety Disclosures

     21   
Part II.      
Item 5.   

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

     21   
Item 6.   

Selected Financial Data

     23   
Item 7.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     25   
  

Introduction

     25   
  

Executive Overview

     25   
  

Discussion of Results of Operations

     29   
  

Risk Management and Capital

     38   
  

Credit Risk

     38   
  

Market Risk

     52   
  

Liquidity Risk

     53   
  

Operational Risk

     59   
  

Compliance Risk

     60   
  

Capital

     60   
  

Business Segment Discussion

     62   
  

Additional Disclosures

     83   
Item 7A.   

Quantitative and Qualitative Disclosures About Market Risk

     87   
Item 8.   

Financial Statements and Supplementary Data

     87   
Item 9.   

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     177   
Item 9A.   

Controls and Procedures

     177   
Item 9B.   

Other Information

     178   
Part III.      
Item 10.   

Directors, Executive Officers and Corporate Governance

     178   
Item 11.   

Executive Compensation

     178   
Item 13.   

Certain Relationships and Related Transactions, and Director Independence

     178   
Item 14.   

Principal Accountant Fees and Services

     178   
Part IV.      
Item 15.   

Exhibits and Financial Statement Schedules

     178   
Signatures      180   

 

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Glossary of Acronyms and Terms

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

 

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
BHC    Bank Holding Companies
C&I    Commercial and Industrial
Camco Financial    Camco Financial Corp.
CCAR    Comprehensive Capital Analysis and Review
CDO    Collateralized Debt Obligations
CDs    Certificate of Deposit
CFPB    Bureau of Consumer Financial Protection
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
EFT    Electronic Fund Transfer
EPS    Earnings Per Share
EVE    Economic Value of Equity
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
HIP    Huntington Investment and Tax Savings Plan
HQLA    High-Quality Liquid Assets
HTM    Held-to-Maturity

 

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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
NAICS    North American Industry Classification System
MD&A    Management’s Discussion and Analysis of Financial Condition and Results of Operations
MSA    Metropolitan Statistical Area
MSR    Mortgage Servicing Rights
NALs    Nonaccrual Loans
NCO    Net Charge-off
NIM    Net interest margin
NPAs    Nonperforming Assets
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
PD    Probability-Of-Default
Plan    Huntington Bancshares Retirement Plan
Problem Loans    Includes nonaccrual loans and leases (Table 13), accruing loans and leases past due 90 days or more (Table 14), troubled debt restructured loans (Table 15), and criticized commercial loans (credit quality indicators section of Footnote 3).
RBHPCG    Regional Banking and The Huntington Private Client Group
REIT    Real Estate Investment Trust
ROC    Risk Oversight Committee
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
UDAP    Unfair or Deceptive Acts or Practices
UPB    Unpaid Principal Balance
USDA    U.S. Department of Agriculture
VA    U.S. Department of Veteran Affairs
VIE    Variable Interest Entity

 

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Huntington Bancshares Incorporated

PART I

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 1: Business

We are a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. We have 11,873 average full-time equivalent employees. Through the Bank, we have 149 years of serving the financial needs of our customers. We provide full-service commercial, small business, consumer, and mortgage banking services, as well as automobile financing, equipment leasing, investment management, trust services, brokerage services, insurance programs, and other financial products and services. The Bank, organized in 1866, is our only bank subsidiary. At December 31, 2014, the Bank had 14 private client group offices and 715 branches as follows:

 

 

•    404 branches in Ohio

  

•    43 branches in Indiana

  
 

•    179 branches in Michigan

  

•    31 branches in West Virginia

  
 

•    48 branches in Pennsylvania

  

•    10 branches in Kentucky

  

Select financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office in Columbus, Ohio, a limited purpose office located in the Cayman Islands, and another located in Hong Kong. Our foreign banking activities, in total or with any individual country, are not significant.

Our business segments are based on our internally-aligned segment leadership structure, which is how we monitor results and assess performance. For each of our five business segments, we expect the combination of our business model and exceptional service to provide a competitive advantage that supports revenue and earnings growth. Our business model emphasizes the delivery of a complete set of banking products and services offered by larger banks, but distinguished by local delivery and customer service.

A key strategic emphasis has been for our business segments to operate in cooperation to provide products and services to our customers and to build stronger and more profitable relationships using our OCR sales and service process. The objectives of OCR are to:

 

  1. Provide a consultative sales approach to provide solutions that are specific to each customer.

 

  2. Leverage each business segment in terms of its products and expertise to benefit customers.

 

  3. Target prospects who may want to have multiple products and services as part of their relationship with us.

Following is a description of our five business segments and Treasury / Other function:

 

   

Retail and Business Banking – The Retail and Business Banking segment provides a wide array of financial products and services to consumer and small business customers including but not limited to checking accounts, savings accounts, money market accounts, certificates of deposit, consumer loans, and small business loans. Other financial services available to consumer and small business customers include investments, insurance, interest rate risk protection, foreign exchange hedging, and treasury management. Huntington serves customers primarily through our network of branches in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. In addition to our extensive branch network, customers can access Huntington through online banking, mobile banking, telephone banking, and ATMs.

Huntington has established a “Fair Play” banking philosophy and built a reputation for meeting the banking needs of consumers in a manner which makes them feel supported and appreciated. Huntington believes customers are recognizing this and other efforts as key differentiators, and it has earned us more customers, deeper relationships and the J.D. Power retail service excellence award for 2013 and 2014.

Business Banking is a dynamic and growing part of our business, and we are committed to being the bank of choice for small businesses in our markets. Business Banking is defined as serving companies with annual revenues under $20 million and we currently serve approximately 160,000 businesses. Huntington continues to develop products and services that are designed specifically to meet the needs of small business. Huntington continues to look for ways to help companies find solutions to their capital needs and is the number one SBA lender in the country. We have also won the J.D. Power award for small business service excellence in 2012 and 2014.

 

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Commercial Banking: Through a relationship banking model, this segment provides a wide array of products and services to the middle market, large corporate, and government public sector customers located primarily within our geographic footprint. The segment is divided into seven business units: middle market, large corporate, specialty banking, asset finance, capital markets, treasury management, and insurance. During the 2014 third quarter, we moved our insurance brokerage business from Treasury / Other to Commercial Banking to align with a change in management responsibilities. During the 2014 fourth quarter, we moved the Asset Based Lending group back into the commercial division and combined management with equipment finance and public capital to form the Asset Finance division.

Middle Market Banking primarily focuses on providing banking solutions to companies with annual revenues of $20 million to $250 million. Through a relationship management approach, various products, capabilities and solutions are seamlessly orchestrated in a client centric way.

Corporate Banking works with larger, often more complex, companies with annual revenues greater than $250 million. These entities, many of which are publically traded, require a different and customized approach to their banking needs.

Specialty Banking offers tailored products and services to select industries that have a foothold in the Midwest. Each banking team is comprised of industry experts with a dynamic understanding of the market and industry. Many of these industries are experiencing tremendous change, which creates opportunities for Huntington to leverage our expertise and help clients navigate, adapt and succeed.

Asset Finance is a combination of our Equipment Finance, Public Capital, Asset Based Lending, and Lender Finance divisions that focus on providing financing solutions against these respective asset classes.

Capital Markets has two distinct product capabilities: corporate risk management services and institutional sales, trading and underwriting. The Capital Markets Group offers a full suite of risk management tools including commodities, foreign exchange and interest rate hedging services. The Institutional Sales, Trading & Underwriting team provides access to capital and investment solutions for both municipal and corporate institutions.

Treasury Management teams help businesses manage their working capital programs and reduce expenses. Our liquidity solutions help customers save and invest wisely, while our payables and receivables capabilities help them manage purchases and the receipt of payments for goods and services. All of this is provided while helping customers take a sophisticated approach to managing their overhead, inventory, equipment and labor.

Insurance brokerage business specializes in commercial property and casualty, employee benefits, personal lines, life and disability and specialty lines of insurance. We also provide brokerage and agency services for residential and commercial title insurance and excess and surplus product lines of insurance. As an agent and broker, we do not assume underwriting risks; instead, we provide our customers with quality, noninvestment insurance contracts.

 

   

Automobile Finance and Commercial Real Estate: This segment provides lending and other banking products and services to customers outside of our traditional retail and commercial banking segments. Our products and services include providing financing for the purchase of vehicles by customers at franchised automotive dealerships, financing the acquisition of new and used vehicle inventory of franchised automotive dealerships, and financing for land, buildings, and other commercial real estate owned or constructed by real estate developers, automobile dealerships, or other customers with real estate project financing needs. Products and services are delivered through highly specialized relationship-focused bankers and product partners. Huntington creates well-defined relationship plans which identify needs where solutions are developed and customer commitments are obtained.

The Automotive Finance team services automobile dealerships, its owners, and consumers buying automobiles through these franchised dealerships. Huntington has provided new and used automobile financing and dealer services throughout the Midwest since the early 1950s. This consistency in the market and our focus on working with strong dealerships has allowed us to expand into selected markets outside of the Midwest and to actively deepen relationships while building a strong reputation.

The Commercial Real Estate team serves real estate developers, REITs, and other customers with borrowing needs that are secured by commercial properties. Most of these customers are located within our footprint.

 

   

Regional Banking and The Huntington Private Client Group: RBHPCG business segment was created as the result of an organizational and management realignment that occurred in January 2014. Regional Banking and The Huntington

 

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Private Client Group is well positioned competitively as we have closely aligned with our eleven regional banking markets. A fundamental point of differentiation is our commitment to be actively engaged within our local markets - building connections with community and business leaders and offering a uniquely personal experience delivered by colleagues working within those markets.

The Huntington Private Client Group is organized into units consisting of The Huntington Private Bank, The Huntington Trust, The Huntington Investment Company, Huntington Community Development, Huntington Asset Advisors, and Huntington Asset Services. Our private banking, trust, investment and community development functions focus their efforts in our Midwest footprint and Florida, while our proprietary funds and ETFs, fund administration, custody and settlements functions target a national client base.

The Huntington Private Bank provides high net-worth customers with deposit, lending (including specialized lending options) and other banking services.

The Huntington Trust also serves high net-worth customers and delivers wealth management and legacy planning through investment and portfolio management, fiduciary administration, trust services and trust operations. This group also provides retirement plan services and corporate trust to businesses and municipalities.

The Huntington Investment Company, a dually registered broker-dealer and registered investment advisor, employs representatives who work with our Retail and Private Bank to provide investment solutions for our customers. This team offers a wide range of products and services, including brokerage, annuities, advisory and other investment products.

Huntington Community Development focuses on improving the quality of life for our communities and the residents of low-to moderate-income neighborhoods by developing and delivering innovative products and services to support affordable housing and neighborhood stabilization.

Huntington Asset Advisors provides investment management services solely advising The Huntington Funds, our proprietary family of mutual funds, and Huntington Strategy Shares, our Exchange Trade Funds.

Huntington Asset Services has a national clientele and offers administrative and operational support to fund complexes, including fund accounting, transfer agency, administration, custody, and distribution services. This group also includes National Settlements, which works with law firms and the court system to provide custody and settlement distribution services.

 

   

Home Lending: Home Lending originates and services consumer loans and mortgages for customers who are generally located in our primary banking markets. Consumer and mortgage lending products are primarily distributed through the Retail and Business Banking segment, as well as through commissioned loan originators. Home Lending earns interest on loans held in the warehouse and portfolio, earns fee income from the origination and servicing of mortgage loans, and recognizes gains or losses from the sale of mortgage loans. Home Lending supports the origination and servicing of mortgage loans across all segments.

The Treasury / Other function includes technology and operations, other unallocated assets, liabilities, revenue, and expense.

The financial results for each of these business segments are included in Note 24 of Notes to Consolidated Financial Statements and are discussed in the Business Segment Discussion of our MD&A.

Competition

We compete with other banks and financial services companies such as savings and loans, credit unions, and finance and trust companies, as well as mortgage banking companies, automobile and equipment financing companies (including captive automobile finance companies), insurance companies, mutual funds, investment advisors, and brokerage firms, both within and outside of our primary market areas. Internet companies are also providing nontraditional, but increasingly strong, competition for our borrowers, depositors, and other customers.

We compete for loans primarily on the basis of a combination of value and service by building customer relationships as a result of addressing our customers’ entire suite of banking needs, demonstrating expertise, and providing convenience to our customers. We also consider the competitive pricing pressures in each of our markets.

We compete for deposits similarly on a basis of a combination of value and service and by providing convenience through a banking network of branches and ATMs within our markets and our website at www.huntington.com. We have also instituted customer friendly practices, such as our 24-Hour Grace ® account feature, which gives customers an additional business day to cover overdrafts to their consumer account without being charged overdraft fees.

 

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The table below shows our competitive ranking and market share based on deposits of FDIC-insured institutions as of June 30, 2014, in the top 10 metropolitan statistical areas (MSA) in which we compete:

 

MSA    Rank      Deposits (in
millions)
     Market Share  

Columbus, OH

     1       $ 14,879         28

Cleveland, OH

     5         4,782         8   

Detroit, MI

     6         4,753         5   

Indianapolis, IN

     4         2,852         7   

Pittsburgh, PA

     8         2,487         3   

Cincinnati, OH

     4         2,274         3   

Toledo, OH

     2         2,238         23   

Grand Rapids, MI

     2         2,111         12   

Youngstown, OH

     1         2,017         23   

Canton, OH

     1         1,610         26   

Source: FDIC.gov , based on June 30, 2014 survey.

Many of our nonfinancial institution competitors have fewer regulatory constraints, broader geographic service areas, greater capital, and, in some cases, lower cost structures. In addition, competition for quality customers has intensified as a result of changes in regulation, advances in technology and product delivery systems, consolidation among financial service providers, bank failures, and the conversion of certain former investment banks to bank holding companies.

Regulatory Matters

We are subject to regulation by the SEC, the Federal Reserve, the OCC, the CFPB, and other federal and state regulators.

Because we are a public company, we are subject to regulation by the SEC. The SEC has established five categories of issuers for the purpose of filing periodic and annual reports. Under these regulations, we are considered to be a large accelerated filer and, as such, must comply with SEC accelerated reporting requirements.

We are a bank holding company and are qualified as a financial holding company with the Federal Reserve. We are subject to examination and supervision by the Federal Reserve pursuant to the Bank Holding Company Act. We are required to file reports and other information regarding our business operations and the business operations of our subsidiaries with the Federal Reserve.

The Federal Reserve maintains a bank holding company rating system that emphasizes risk management, introduces a framework for analyzing and rating financial factors, and provides a framework for assessing and rating the potential impact of non-depository entities of a holding company on its subsidiary depository institution(s). The ratings assigned to us, like those assigned to other financial institutions, are confidential and may not be disclosed, except to the extent required by law.

The Federal Reserve utilizes an updated framework for the consolidated supervision of large financial institutions, including bank holding companies with consolidated assets of $50 billion or more. The objectives of the framework are to enhance the resilience of a firm, lower the probability of its failure, and reduce the impact on the financial system in the event of an institution’s failure. With regard to resiliency, each firm is expected to ensure that the consolidated organization and its core business lines can survive under a broad range of internal or external stresses. This requires financial resilience by maintaining sufficient capital and liquidity, and operational resilience by maintaining effective corporate governance, risk management, and recovery planning. With respect to lowering the probability of failure, each firm is expected to ensure the sustainability of its critical operations and banking offices under a broad range of internal or external stresses. This requires, among other things, that we have robust, forward-looking capital-planning processes that account for our unique risks.

The Bank, which is chartered by the OCC, is a national bank and our only bank subsidiary. It is subject to examination and supervision by the OCC and also by the CFPB, which was established by the Dodd-Frank Act in 2010. Our nonbank subsidiaries are also subject to examination and supervision by the Federal Reserve or, in the case of nonbank subsidiaries of the Bank, by the OCC. All subsidiaries are subject to examination and supervision by the CFPB to the extent they offer any consumer financial products or services. Our subsidiaries are subject to examination by other federal and state agencies, including, in the case of certain securities and investment management activities, regulation by the SEC and the Financial Industry Regulatory Authority.

 

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In September 2014, the OCC published final guidelines to strengthen the governance and risk management practices of large financial institutions, including the Bank. The guidelines became effective November 10, 2014, and require covered banks to establish and adhere to a written governance framework in order to manage and control their risk-taking activities. In addition, the guidelines provide standards for the institutions’ boards of directors to oversee the risk governance framework. Given its size and the phased implementation schedule, the Bank is subject to these heightened standards effective May 2016. As discussed in Item 1A: Risk Factors, the Bank currently has a written governance framework and associated controls.

Legislative and regulatory reforms continue to have significant impacts throughout the financial services industry.

The Dodd-Frank Act, enacted in 2010, is complex and broad in scope and several of its provisions are still being implemented. The Dodd-Frank Act established the CFPB, which has extensive regulatory and enforcement powers over consumer financial products and services, and the Financial Stability Oversight Council, which has oversight authority for monitoring and regulating systemic risk. In addition, the Dodd-Frank Act altered the authority and duties of the federal banking and securities regulatory agencies, implemented certain corporate governance requirements for all public companies including financial institutions with regard to executive compensation, proxy access by shareholders, and certain whistleblower provisions, and restricted certain proprietary trading, and hedge fund and private equity activities of banks and their affiliates. The Dodd-Frank Act also required the issuance of numerous implementing regulations, many of which have not yet been issued. The regulations will continue to take effect over several more years, continuing to make it difficult to anticipate the overall impact to us, our customers, or the financial industry in general.

In January 2014, seven final regulations issued by the CFPB, including the ability to repay and qualified mortgage standards, various mortgage servicing rules, a rule expanding the scope of the high-cost mortgage provision in the Truth in Lending Act, loan originator compensation requirements and appraisal rules, became effective and were successfully implemented by Huntington. On November 20, 2013, the CFPB issued its final rule on integrated mortgage disclosures under the Truth in Lending Act and the Real Estate Settlement Procedures Act, for which compliance is required by August 1, 2015. The CFPB finalized amendments to the integrated mortgage disclosures on January 20, 2015, which are also effective on August 1, 2015. On October 22, 2014, the CFPB finalized minor Amendments to the 2013 Mortgage Rules under the Truth in Lending Act (Regulation Z), making certain nonprofits exempt from some servicing rules and the ability to repay rule, and allowing a cure period for points and fees in Qualified Mortgages. These changes were effective as of November 3, 2014. In addition, the CFPB proposed changes to its servicing rules. We continue to monitor, evaluate and implement these new regulations.

Throughout 2014, the CFPB has continued its focus on fair lending practices of indirect automobile lenders. This focus has led to some lenders acknowledging that the CFPB and Department of Justice are considering taking public enforcement actions against them for their fair lending practices. Indirect automobile lenders have also received continuing pressure from the CFPB to limit or eliminate discretionary pricing by dealers. Finally, the CFPB has proposed its larger participant rule for indirect automobile lending which will bring larger non-bank indirect automobile lenders under CFPB supervision.

Banking regulatory agencies have increasingly over the last few years used their authority under Section 5 of the Federal Trade Commission Act to take supervisory or enforcement action with respect to UDAP by banks under standards developed many years ago by the Federal Trade Commission in order to address practices that may not necessarily fall within the scope of a specific banking or consumer finance law. The Dodd-Frank Act also gave to the CFPB similar authority to take action in connection with unfair, deceptive or abusive acts or practices by entities subject to CFPB supervisory or enforcement authority.

Large bank holding companies and national banks are required to submit annual capital plans to the Federal Reserve and OCC, respectively, and conduct stress tests.

The Federal Reserve’s Regulation Y requires large bank holding companies to submit capital plans to the Federal Reserve on an annual basis and to require such bank holding companies to obtain approval from the Federal Reserve under certain circumstances before making a capital distribution. This rule applies to us and all other bank holding companies with $50 billion or more of total consolidated assets.

A large bank holding company’s capital plan must include an assessment of the expected uses and sources of capital over at least the next nine quarters, a description of all planned capital actions over the planning horizon, a detailed description of the entity’s process for assessing capital adequacy, the entity’s capital policy, and a discussion of any expected changes to the bank holding company’s business plan that are likely to have a material impact on the firm’s capital adequacy or liquidity. The planning horizon for the most recent capital planning and stress testing cycle encompasses the 2014 fourth quarter through the 2016 fourth quarter as was submitted in our capital plan in January 2015. Rules to implement the Basel III capital reforms in the United States were finalized in July 2013 and will be phased-in by us beginning with 1Q 2015 results under the standardized approach. As such, the most recent

 

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CCAR cycle, which began October 1, 2014, overlaps with the implementation of the Basel III capital reforms based on the required nine quarter projection horizon. In accordance with stress test rules, we incorporated the revised capital framework into the capital planning projections and into the stress tests required under the Dodd-Frank Act. Capital adequacy at large banking organizations, including us, is assessed against a minimum 4.5 percent tier 1 common ratio and a 5 percent tier 1 leverage ratio as determined by the Federal Reserve.

Capital plans for 2015 were required to be submitted by January 5, 2015. The Federal Reserve will either object to a capital plan, in whole or in part, or provide a notice of non-objection no later than March 31, 2015, for plans submitted by the January 5, 2015, submission date. If the Federal Reserve objects to a capital plan, the bank holding company may not make any capital distributions other than those with respect to which the Federal Reserve has indicated its non-objection. While we can give no assurances as to the outcome or specific interactions with the regulators, based on the capital plan we submitted on January 5, 2015, we believe we have a strong capital position and that our capital adequacy process is robust.

In addition to the CCAR submission, section 165 of the Dodd-Frank Act requires that national banks, like The Huntington National Bank, conduct annual stress tests for submission in January 2015. The results of the stress tests will provide the OCC with forward-looking information that will be used in bank supervision and will assist the agency in assessing a company’s risk profile and capital adequacy. We submitted our stress test results to the OCC on January 5, 2015.

The regulatory capital rules indicate that common stockholders’ equity should be the dominant element within Tier 1 capital and that banking organizations should avoid overreliance on non-common equity elements. Under the Dodd-Frank Act, the ratio of common equity Tier 1 to risk-weighted assets became significant as a measurement of the predominance of common equity in Tier 1 capital and an indication of the quality of capital.

Conforming Covered Activities to implement the Volcker Rule.

On December 10, 2013, the Federal Reserve, the OCC, the FDIC, the CFTC and the SEC issued final rules to implement the Volcker Rule contained in section 619 of the Dodd-Frank Act, and established July 21, 2015, as the end of the conformance period. Section 619 generally prohibits insured depository institutions and any company affiliated with an insured depository institution from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund. These prohibitions are subject to a number of statutory exemptions, restrictions, and definitions. On December 18, 2014, The Federal Reserve Board announced it acted under Section 619 to give banking entities until July 21, 2016, to conform investments in and relationships with covered funds and foreign funds that were in place prior to December 31, 2013 (“legacy covered funds”). The Board also announced its intention to act next year to grant banking entities an additional one-year extension of the conformance period until July 21, 2017, to conform ownership interests in and relationships with legacy covered funds. The Bank continues its “good faith” efforts to conform with proprietary trading prohibitions and associated compliance requirements. The company does not expect Volcker compliance to have a material impact on its business model.

The Volcker Rule prohibits an insured depository institution and any company that controls an insured depository institution (such as a bank holding company), and any of their subsidiaries and affiliates (referred to as “banking entities”) from: (i) engaging in “proprietary trading” and (ii) investing in or sponsoring certain types of funds (“covered funds”) subject to certain limited exceptions. These prohibitions impact the ability of U.S. banking entities to provide investment management products and services that are competitive with nonbanking firms generally and with non-U.S. banking organizations in overseas markets. The rule also effectively prohibits short-term trading strategies by any U.S. banking entity if those strategies involve instruments other than those specifically permitted for trading.

The final Volcker Rule regulations do provide certain exemptions allowing banking entities to continue underwriting, market-making and hedging activities and trading certain government obligations, as well as various exemptions and exclusions from the definition of “covered funds”. The level of required compliance activity depends on the size of the banking entity and the extent of its trading. CEOs of larger banking entities, including Huntington, will have to attest annually in writing that their organization has in place processes to establish, maintain, enforce, review, test and modify compliance with the Volcker Rule regulations. Banking entities with significant permitted trading operations will have to report certain quantitative information, beginning between June 30, 2014 and December 31, 2016, depending on the size of the banking entity’s trading assets and liabilities.

On January 14, 2014, the five federal agencies approved an interim final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities from the investment prohibitions of the Volcker Rule. Under the interim final rule, the agencies permit the retention of an interest in or sponsorship of covered funds by banking entities if certain qualifications are met. In addition, the agencies released a non-exclusive list of issuers that meet the requirements of the interim final rule. At December 31, 2014, we had investments in nine different pools of trust preferred securities. Eight of our pools are included in the list of non-exclusive issuers. We have analyzed the other pool that was not included on the list and believe that we will continue to be able to own this investment under the final Volcker Rule regulations.

 

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There are restrictions on our ability to pay dividends.

Dividends from the Bank to the parent company are the primary source of funds for payment of dividends to our shareholders. However, there are statutory limits on the amount of dividends that the Bank can pay to the holding company. Regulatory approval is required prior to the declaration of any dividends in an amount greater than its undivided profits or if the total of all dividends declared in a calendar year would exceed the total of its net income for the year combined with its retained net income for the two preceding years, less any required transfers to surplus or common stock. The Bank is currently able to pay dividends to the holding company subject to these limitations.

If, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice, such authority may require, after notice and hearing, that such bank cease and desist from such practice. Depending on the financial condition of the Bank, the applicable regulatory authority might deem us to be engaged in an unsafe or unsound practice if the Bank were to pay dividends to the holding company.

The Federal Reserve and the OCC have issued policy statements that provide that insured banks and bank holding companies should generally only pay dividends out of current operating earnings. Additionally, the Federal Reserve may prohibit or limit bank holding companies from making capital distributions, including payment of preferred and common dividends, as part of the annual capital plan approval process.

We are subject to the current capital requirements mandated by the Federal Reserve and final Basel III capital and liquidity frameworks.

The Federal Reserve sets risk-based capital ratio and leverage ratio guidelines for bank holding companies. Under the guidelines and related policies, bank holding companies must maintain capital sufficient to meet both a risk-based asset ratio test and a leverage ratio test on a consolidated basis. The risk-based ratio is determined by allocating assets and specified off-balance sheet commitments into risk-weighted categories, with higher weighting assigned to categories perceived as representing greater risk. The risk-based ratio represents total capital divided by total risk-weighted assets. The leverage ratio is core capital divided by total assets adjusted as specified in the guidelines. The Bank is subject to substantially similar capital requirements.

On July 2, 2013, the Federal Reserve voted to adopt final capital rules implementing Basel III requirements for U.S. Banking organizations. The final rules establish an integrated regulatory capital framework and will 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. Under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. Consistent with the international Basel framework, the final rule includes a new minimum ratio of common equity tier 1 capital (Tier 1 Common) to risk-weighted assets and a Tier 1 Common capital conservation buffer of 2.5% of risk-weighted assets that will apply to all supervised financial institutions. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets and includes a minimum leverage ratio of 4% for all banking organizations. These new minimum capital ratios were effective for us on January 1, 2015, and will be fully phased-in on January 1, 2019.

The following are the Basel III regulatory capital levels that we must satisfy to avoid limitations on capital distributions and discretionary bonus payments during the applicable transition period, from January 1, 2015, until January 1, 2019:

 

     Basel III Regulatory Capital Levels  
     January 1,
2015
    January 1,
2016
    January 1,
2017
    January 1,
2018
    January 1,
2019
 

Tier 1 Common

     4.5     5.125     5.75     6.375     7.0

Tier 1 risk-based capital ratio

     6.0     6.625     7.25     7.875     8.5

Total risk-based capital ratio

     8.0     8.625     9.25     9.875     10.5

The final rule emphasizes Tier 1 Common capital, the most loss-absorbing form of capital, and implements strict eligibility criteria for regulatory capital instruments. The final rule also improves the methodology for calculating risk-weighted assets to enhance risk sensitivity. Banks and regulators use risk weighting to assign different levels of risk to different classes of assets.

We have evaluated the impact of the Basel III final rule on our regulatory capital ratios and estimate, on a fully phased-in basis, a reduction of approximately 40 basis points to our Basel I tier I common risk-based capital ratio. The estimate is based on management’s current interpretation, expectations, and understanding of the final U.S. Basel III rules. We anticipate that our capital ratios, on a Basel III basis, will continue to exceed the well-capitalized minimum capital requirements. We are evaluating options to mitigate the capital impact of the final rule prior to its effective implementation date.

Based on the final Basel III rule, banking organizations with more than $15 billion in total consolidated assets are required to phase-out of additional tier 1 capital any non-qualifying capital instruments (such as trust preferred securities and cumulative preferred shares) issued before September 12, 2010. We will begin the additional tier I capital phase-out of our trust preferred securities in 2015, but will be able to include these instruments in Tier II capital as a non-advanced approaches institution.

 

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Generally, under the currently applicable guidelines, a financial institution’s capital is divided into two tiers. Institutions that must incorporate market risk exposure into their risk-based capital requirements may also have a third tier of capital in the form of restricted short-term subordinated debt. These tiers are:

 

   

Tier 1 risk-based capital, or core capital, which includes total equity plus qualifying capital securities and minority interests subject to phase-out, excluding unrealized gains and losses accumulated in other comprehensive income, and nonqualifying intangible and servicing assets.

 

   

Tier 2 risk-based capital, or supplementary capital, which includes, among other things, cumulative and limited-life preferred stock, mandatory convertible securities, qualifying subordinated debt, and the ACL, up to 1.25% of risk-weighted assets.

 

   

Total risk-based capital is the sum of Tier 1 and Tier 2 risk-based capital.

The Federal Reserve and the other federal banking regulators require that all intangible assets (net of deferred tax), except originated or purchased MSRs, nonmortgage servicing assets, and purchased credit card relationships intangible assets, be deducted from Tier 1 capital. However, the total amount of these items included in capital cannot exceed 100% of its Tier 1 capital.

Under the general risk-based guidelines to remain adequately-capitalized, financial institutions are required to maintain a total risk-based capital ratio of 8%, with 4% being Tier 1 risk-based capital. The appropriate regulatory authority may set higher capital requirements when they believe an institution’s circumstances warrant an increase.

Under the leverage guidelines, financial institutions are required to maintain a Tier 1 leverage ratio of at least 3%. The minimum ratio is applicable only to financial institutions that meet certain specified criteria, including excellent asset quality, high liquidity, low interest rate risk exposure, and the highest regulatory rating. Financial institutions not meeting these criteria are required to maintain a minimum Tier 1 leverage ratio of 4%.

Failure to meet applicable capital guidelines could subject the financial institution to a variety of enforcement remedies available to the federal regulatory authorities. These include limitations on the ability to pay dividends, the issuance by the regulatory authority of a directive to increase capital, and the termination of deposit insurance by the FDIC. In addition, the financial institution could be subject to the measures described below under Prompt Corrective Action as applicable to under-capitalized institutions.

The risk-based capital standards of the Federal Reserve, the OCC, and the FDIC specify that evaluations by the banking agencies of a bank’s capital adequacy will include an assessment of the exposure to declines in the economic value of a bank’s capital due to changes in interest rates. These banking agencies issued a joint policy statement on interest rate risk describing prudent methods for monitoring such risk that rely principally on internal measures of exposure and active oversight of risk management activities by senior management.

FDICIA requires federal banking regulatory authorities to take Prompt Corrective Action with respect to depository institutions that do not meet minimum capital requirements. For these purposes, FDICIA establishes five capital tiers: well-capitalized, adequately-capitalized, under-capitalized, significantly under-capitalized, and critically under-capitalized.

Throughout 2014, our regulatory capital ratios and those of the Bank were in excess of the levels established for well-capitalized institutions. An institution is deemed to be well-capitalized if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or greater and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure.

 

                At December 31, 2014  

(dollar amounts in billions)

   Well-capitalized minimums     Actual     Excess
Capital (1)
 

Ratios:

         

Tier 1 leverage ratio

   Consolidated      5.00     9.74   $ 3.0   
   Bank      5.00        9.56        2.9   

Tier 1 risk-based capital ratio

   Consolidated      6.00        11.50        3.0   
   Bank      6.00        11.28        2.9   

Total risk-based capital ratio

   Consolidated      10.00        13.56        1.9   
   Bank      10.00        12.79        1.5   

 

(1) Amount greater than the well-capitalized minimum percentage.

 

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FDICIA generally prohibits a depository institution from making any capital distribution, including payment of a cash dividend or paying any management fee to its holding company, if the depository institution would become under-capitalized after such payment. Under-capitalized institutions are also subject to growth limitations and are required by the appropriate federal banking agency to submit a capital restoration plan. If any depository institution subsidiary of a holding company is required to submit a capital restoration plan, the holding company would be required to provide a limited guarantee regarding compliance with the plan as a condition of approval of such plan.

Depending upon the severity of the under capitalization, the under-capitalized institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately-capitalized, requirements to reduce total assets, cessation of receipt of deposits from correspondent banks, and restrictions on making any payment of principal or interest on their subordinated debt. Critically under-capitalized institutions are subject to appointment of a receiver or conservator within 90 days of becoming so classified.

Under FDICIA, a depository institution that is not well-capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. Since the Bank is well-capitalized, the FDICIA brokered deposit rule did not adversely affect its ability to accept brokered deposits. The Bank had $2.2 billion of such brokered deposits at December 31, 2014.

On September 3, 2014, the U.S. banking regulators approved a final rule to implement a minimum liquidity coverage ratio (LCR) requirement for banking organizations with total consolidated assets of $250 billion or more, and a less stringent modified LCR requirement to depository institution holding companies below the threshold but with total consolidated assets of $50 billion or more. The LCR requires covered banking organizations to maintain HQLA equal to projected stressed cash outflows over a 30 calendar-day stress scenario. We are covered by the modified LCR requirement and therefore subject to the phase-in of the rule beginning January 2016 at 90% and January 2017 at 100%. We will also be required to calculate the LCR monthly.

As a bank holding company, we must act as a source of financial and managerial strength to the Bank.

Under the Dodd-Frank Act, a bank holding company must act as a source of financial and managerial strength to each of its subsidiary banks and must commit resources to support each such subsidiary bank. The Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank. It may charge the bank holding company with engaging in unsafe and unsound practices if the bank holding company fails to commit resources to such a subsidiary bank or if it undertakes actions that the Federal Reserve believes might jeopardize the bank holding company’s ability to commit resources to such subsidiary bank.

Any loans by a holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, an appointed bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, the bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations.

Federal law permits the OCC to order the pro-rata assessment of shareholders of a national bank whose capital stock has become impaired, by losses or otherwise, to relieve a deficiency in such national bank’s capital stock. This statute also provides for the enforcement of any such pro-rata assessment of shareholders of such national bank to cover such impairment of capital stock by sale, to the extent necessary, of the capital stock owned by any assessed shareholder failing to pay the assessment. As the sole shareholder of the Bank, we are subject to such provisions.

Moreover, the claims of a receiver of an insured depository institution for administrative expenses and the claims of holders of deposit liabilities of such an institution are accorded priority over the claims of general unsecured creditors of such an institution, including the holders of the institution’s note obligations, in the event of liquidation or other resolution of such institution. Claims of a receiver for administrative expenses and claims of holders of deposit liabilities of the Bank, including the FDIC as the insurer of such holders, would receive priority over the holders of notes and other senior debt of the Bank in the event of liquidation or other resolution and over our interests as sole shareholder of the Bank.

Bank transactions with affiliates.

Federal banking law and regulation imposes qualitative standards and quantitative limitations upon certain transactions by a bank with its affiliates, including the bank’s bank holding company and certain companies the bank holding company may be deemed to control for these purposes. Transactions covered by these provisions must be on arm’s-length terms, and cannot exceed certain

 

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amounts which are determined with reference to the bank’s regulatory capital. Moreover, if the transaction is a loan or other extension of credit, it must be secured by collateral in an amount and quality expressly prescribed by statute, and if the affiliate is unable to pledge sufficient collateral, the bank holding company may be required to provide it.

Provisions added by the Dodd-Frank Act expanded the scope of (i) the definition of affiliate to include any investment fund having any bank or BHC-affiliated company as an investment advisor, (ii) credit exposures subject to the prohibition on the acceptance of low-quality assets or securities issued by an affiliate as collateral, the quantitative limits, and the collateralization requirements to now include credit exposures arising out of derivative, repurchase agreement, and securities lending/borrowing transactions, and (iii) transactions subject to quantitative limits to now also include credit collateralized by affiliate-issued debt obligations that are not securities. In addition, these provisions require that a credit extension to an affiliate remain secured in accordance with the collateral requirements at all times that it is outstanding, rather than the previous requirement of only at the inception or upon material modification of the transaction. They also raise significantly the procedural and substantive hurdles required to obtain a regulatory exemption from the affiliate transaction requirements. While these provisions became effective on July 21, 2012, the Federal Reserve has not yet issued a proposed rule to implement them.

As a financial holding company, we are subject to additional laws and regulations.

In order to maintain its status as a financial holding company, a bank holding company’s depository subsidiaries must all be both well-capitalized and well-managed, and must meet their Community Reinvestment Act obligations.

Financial holding company powers relate to financial activities that are specified in the Bank Holding Company Act or determined by the Federal Reserve, in coordination with the Secretary of the Treasury, to be financial in nature, incidental to an activity that is financial in nature, or complementary to a financial activity, provided that the complementary activity does not pose a safety and soundness risk. In addition, we are required by the Bank Holding Company Act to obtain Federal Reserve approval prior to acquiring, directly or indirectly, ownership or control of voting shares of any bank, if, after such acquisition, we would own or control more than 5% of its voting stock. Furthermore, the Dodd-Frank Act added a new provision to the Bank Holding Company Act, which requires bank holding companies with total consolidated assets equal to or greater than $50 billion to obtain prior approval from the Federal Reserve to acquire a nondepository company having total consolidated assets of $10 billion or more.

We also must comply with anti-money laundering and customer privacy regulations, as well as corporate governance, accounting, and reporting requirements.

The USA Patriot Act of 2001 and its related regulations require insured depository institutions, broker-dealers, and certain other financial institutions to have policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing. Federal banking regulators are required, when reviewing bank holding company acquisition and bank merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicants. The Financial Crimes Enforcement Network has proposed a rule for those same entities, and, if adopted, the proposal will prescribe customer due diligence requirements, including a new regulatory mandate to identify the beneficial owners of legal entities which are customers.

Pursuant to Title V of the Gramm-Leach-Bliley Act, we, like all other financial institutions, are required to:

 

   

provide notice to our customers regarding privacy policies and practices,

 

   

inform our customers regarding the conditions under which their nonpublic personal information may be disclosed to nonaffiliated third parties, and

 

   

give our customers an option to prevent certain disclosure of such information to nonaffiliated third parties.

The Sarbanes-Oxley Act of 2002 imposed new or revised corporate governance, accounting, and reporting requirements on us. In addition to a requirement that chief executive officers and chief financial officers certify financial statements in writing, the statute imposed requirements affecting, among other matters, the composition and activities of audit committees, disclosures relating to corporate insiders and insider transactions, code of ethics, and the effectiveness of internal controls over financial reporting.

Available Information

This information may be read and copied at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet web site that contains reports, proxy statements, and other information about issuers, like us, who file electronically with the SEC. The address of the site is http://www.sec.gov . The reports and other information filed by us with the SEC are also available at our Internet web site. The address of the site is http://www.huntington.com . Except as specifically incorporated by reference into this Annual Report on Form 10-K, information on those web sites is not part of this report. You also should be able to inspect reports, proxy statements, and other information about us at the offices of the NASDAQ National Market at 33 Whitehall Street, New York, New York.

 

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Item 1A: Risk Factors

Risk Governance

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. This does not preclude engagement in select higher risk activities. Rather, the definition is intended to represent an average of where we want our overall risk to be managed.

Three board committees primarily oversee implementation of this desired risk appetite and monitoring of our risk profile: The Audit Committee, Risk Oversight Committee, and the Technology Committee:

 

   

The Audit Committee is principally involved with overseeing the integrity of financial statements, providing oversight of the internal audit department, and selecting our external auditors. Our chief auditor reports directly to the Audit Committee Chair.

 

   

The Risk Oversight Committee supervises our risk management processes which primarily cover credit, market, liquidity, operational, compliance, legal, strategic, and reputational risks. It also approves the charters of executive risk management committees, sets risk limits on certain risk measures (e.g., economic value of equity), receives results of the risk self-assessment process, and routinely engages management in review of key risks. Our credit review executive reports directly to the Risk Oversight Committee.

 

   

The Technology Committee provides oversight of technology to meet defined standards for risk, security, and Company-defined targets; and ensure that exposure to security and redundancy risks are defined and transparent and provides oversight of the Bank’s overall third party relationship risk management process.

The Audit and Risk Oversight committees routinely hold executive sessions with our key officers engaged in accounting and risk management. On a periodic basis, the two committees meet in joint session to cover matters relevant to both such as the construct and appropriateness of the ACL, which is reviewed quarterly. All directors have access to information provided to each committee and all scheduled meetings are open to all directors.

Further, through its Compensation Committee, the board of directors seeks to ensure its system of rewards is risk-sensitive and aligns the interests of management, creditors, and shareholders. We utilize a variety of compensation-related tools to induce appropriate behavior, including common stock ownership thresholds for the chief executive officer and certain members of senior management, a requirement to hold until retirement, or exit from the company, a portion of net shares received upon exercise of stock options or release of restricted stock awards (50% for executive officers and 25% for other award recipients), equity deferrals, recoupment provisions, and the right to terminate compensation plans at any time.

Management has implemented an Enterprise Risk Management and Risk Appetite Framework. Critically important is our self-assessment process, in which each business segment produces an analysis of its risks and the strength of its risk controls. The segment analyses are combined with assessments by our risk management organization of major risk sectors (e.g., credit, market, liquidity, operational, reputational, compliance, etc.) to produce an overall enterprise risk assessment. Outcomes of the process include a determination of the quality of the overall control process, the direction of risk, and our position compared to the defined risk appetite.

Management also utilizes a wide series of metrics (key risk indicators) to monitor risk positions throughout the Company. In general, a range for each metric is established which allows the company, in aggregate, to operate within a moderate-to-low risk profile. Deviations from the range will indicate if the risk being measured is moving, which may then necessitate corrective action.

We also have four other executive level committees to manage risk: ALCO, Credit Policy and Strategy, Risk Management, and Capital Management. Each committee focuses on specific categories of risk and is supported by a series of subcommittees that are tactical in nature. We believe this structure helps ensure appropriate escalation of issues and overall communication of strategies.

Huntington utilizes three lines of defense with regard to risk management: (1) business segments, (2) corporate risk management, and (3) internal audit and credit review. To induce greater ownership of risk within its business segments, segment risk officers have been embedded to identify and monitor risk, elevate and remediate issues, establish controls, perform self-testing, and oversee the self-assessment process. Corporate Risk Management establishes policies, sets operating limits, reviews new or modified products/processes, ensures consistency and quality assurance within the segments, and produces the enterprise risk assessment. The Chief Risk Officer has significant input into the design and outcome of incentive compensation plans as they apply to risk. Internal Audit and Credit Review provide additional assurance that risk-related functions are operating as intended.

 

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Risk Overview

We, like other financial companies, are subject to a number of risks that may adversely affect our financial condition or results of operations, many of which are outside of our direct control, though efforts are made to manage those risks while optimizing returns. Among the risks assumed are: (1)  credit risk , which is the risk of loss due to loan and lease customers or other counterparties not being able to meet their financial obligations under agreed upon terms, (2)  market risk , which is the risk of loss due to changes in the market value of assets and liabilities due to changes in market interest rates, foreign exchange rates, equity prices, and credit spreads, (3)  liquidity risk , which is (a) the risk of loss due to the possibility that funds may not be available to satisfy current or future commitments based on external macro market issues, investor and customer perception of financial strength, and events unrelated to us such as war, terrorism, or financial institution market specific issues, and (b) the risk of loss based on our ability to satisfy current or future funding commitments due to the mix and maturity structure of our balance sheet, amount of on-hand cash and unencumbered securities and the availability of contingent sources of funding, (4)  operational and legal risk , which is the risk of loss due to human error, inadequate or failed internal systems and controls, including the use of financial or other quantitative methodologies that may not adequately predict future results, violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards, and external influences such as market conditions, fraudulent activities, disasters, and security risks, and (5)  compliance risk , which exposes us to money penalties, enforcement actions or other sanctions as a result of nonconformance with laws, rules, and regulations that apply to the financial services industry.

We also expend considerable effort to contain risk which emanates from execution of our business strategies and work relentlessly to protect the Company’s reputation. Strategic risk and reputational risk do not easily lend themselves to traditional methods of measurement. Rather, we closely monitor them through processes such as new product / initiative reviews, frequent financial performance reviews, employee and client surveys, monitoring market intelligence, periodic discussions between management and our board, and other such efforts.

In addition to the other information included or incorporated by reference into this report, readers should carefully consider that the following important factors, among others, could negatively impact our business, future results of operations, and future cash flows materially.

Credit Risks:

1. Our ACL level may prove to be inappropriate or be negatively affected by credit risk exposures which could materially adversely affect our net income and capital.

Our business depends on the creditworthiness of our customers. Our ACL of $666.0 million at December 31, 2014, represented Management’s estimate of probable losses inherent in our loan and lease portfolio as well as our unfunded loan commitments and letters of credit. We periodically review our ACL for appropriateness. In doing so, we consider economic conditions and trends, collateral values, and credit quality indicators, such as past charge-off experience, levels of past due loans, and NPAs. There is no certainty that our ACL will be appropriate over time to cover losses in the portfolio because of unanticipated adverse changes in the economy, market conditions, or events adversely affecting specific customers, industries, or markets. If the credit quality of our customer base materially decreases, if the risk profile of a market, industry, or group of customers changes materially, or if the ACL is not appropriate, our net income and capital could be materially adversely affected which, in turn, could have a material adverse effect on our financial condition and results of operations.

In addition, bank regulators periodically review our ACL and may require us to increase our provision for loan and lease losses or loan charge-offs. Any increase in our ACL or loan charge-offs as required by these regulatory authorities could have a material adverse effect on our financial condition and results of operations.

2. Weakness in economic conditions could materially adversely affect our business.

Our performance could be negatively affected to the extent there is deterioration in business and economic conditions which have direct or indirect material adverse impacts on us, our customers, and our counterparties. These conditions could result in one or more of the following:

 

   

A decrease in the demand for loans and other products and services offered by us;

 

   

A decrease in customer savings generally and in the demand for savings and investment products offered by us; and

 

   

An increase in the number of customers and counterparties who become delinquent, file for protection under bankruptcy laws, or default on their loans or other obligations to us.

An increase in the number of delinquencies, bankruptcies, or defaults could result in a higher level of NPAs, NCOs, provision for credit losses, and valuation adjustments on loans held for sale. The markets we serve are dependent on industrial and manufacturing businesses and thus are particularly vulnerable to adverse changes in economic conditions affecting these sectors.

 

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Market Risks:

1. Changes in interest rates could reduce our net interest income, reduce transactional income, and negatively impact the value of our loans, securities, and other assets. This could have a material adverse impact on our cash flows, financial condition, results of operations, and capital.

Our results of operations depend substantially on net interest income, which is the difference between interest earned on interest earning assets (such as investments and loans) and interest paid on interest bearing liabilities (such as deposits and borrowings). Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. Conditions such as inflation, deflation, recession, unemployment, money supply, and other factors beyond our control may also affect interest rates. If our interest earning assets mature or reprice faster than interest bearing liabilities in a declining interest rate environment, net interest income could be materially adversely impacted. Likewise, if interest bearing liabilities mature or reprice more quickly than interest earning assets in a rising interest rate environment, net interest income could be adversely impacted. The continuation of the current low interest rate environment could affect consumer and business behavior in ways that are adverse to us and could also constrict our net interest income margin which may restrict our ability to increase net interest income.

Changes in interest rates can affect the value of loans, securities, assets under management, and other assets, including mortgage and nonmortgage servicing rights. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans and leases may lead to an increase in NPAs and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows. When we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. However, we continue to incur interest expense as a cost of funding NALs without any corresponding interest income. In addition, transactional income, including trust income, brokerage income, and gain on sales of loans can vary significantly from period-to-period based on a number of factors, including the interest rate environment.

Rising interest rates reduce the value of our fixed-rate debt securities and cash flow hedging derivatives portfolio. Any unrealized loss from these portfolios impacts OCI, shareholders’ equity, and the Tangible Common Equity ratio. Any realized loss from these portfolios impacts regulatory capital ratios, notably Tier I and Total risk-based capital ratios. In a rising interest rate environment, pension and other post-retirement obligations somewhat mitigate negative OCI impacts from securities and financial instruments. For more information, refer to “Market Risk” of the MD&A.

Certain investment securities, notably mortgage-backed securities, are very sensitive to rising and falling rates. Generally, when rates rise, prepayments of principal and interest will decrease and the duration of mortgage-backed securities will increase. Conversely, when rates fall, prepayments of principal and interest will increase and the duration of mortgage-backed securities will decrease. In either case, interest rates have a significant impact on the value of mortgage-backed securities investments.

Liquidity Risks:

1. Changes in either Huntington’s financial condition or in the general banking industry could result in a loss of depositor confidence.

Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. The Bank uses its liquidity to extend credit and to repay liabilities as they become due or as demanded by customers. The board of directors establishes liquidity policies and limits and management establishes operating guidelines for liquidity.

Our primary source of liquidity is our large supply of deposits from consumer and commercial customers. The continued availability of this supply depends on customer willingness to maintain deposit balances with banks in general and us in particular. The availability of deposits can also be impacted by regulatory changes (e.g. changes in FDIC insurance, the Liquidity Coverage Ratio, etc.), and other events which can impact the perceived safety or economic benefits of bank deposits. While we make significant efforts to consider and plan for hypothetical disruptions in our deposit funding, market related, geopolitical or other events could impact the liquidity derived from deposits.

2. If we lose access to capital markets, we may not be able to meet the cash flow requirements of our depositors, creditors, and borrowers, or have the operating cash needed to fund corporate expansion and other corporate activities.

Wholesale funding sources include securitization, federal funds purchased, securities sold under repurchase agreements, non-core deposits, and long-term debt. The Bank is also a member of the Federal Home Loan Bank of Cincinnati, which provides members access to funding through advances collateralized with mortgage-related assets. We maintain a portfolio of highly-rated, marketable securities that is available as a source of liquidity.

 

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Capital markets disruptions can directly impact the liquidity of the Bank and Corporation. The inability to access capital markets funding sources as needed could adversely impact our financial condition, results of operations, cash flows, and level of regulatory-qualifying capital. We may, from time-to-time, consider using our existing liquidity position to opportunistically retire outstanding securities in privately negotiated or open market transactions.

Operational and Legal Risks:

1. We face security risks, including denial of service attacks, hacking and identity theft that could result in the disclosure of confidential information, adversely affect our business or reputation and create significant legal and financial exposure.

Our computer systems and network infrastructure are subject to security risks and could be susceptible to cyber-attacks, such as denial of service attacks, hacking, terrorist activities or identity theft. Financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks and other means. Denial of service attacks have been launched against a number of large financial services institutions, including us. None of these events resulted in a breach of our client data or account information; however, the performance of our website, www.huntington.com, was adversely affected, and in some instances customers were prevented from accessing our website. We expect to be subject to similar attacks in the future. While events to date primarily resulted in inconvenience, future cyber-attacks could be more disruptive and damaging. Hacking and identity theft risks, in particular, could cause serious reputational harm. Cyber threats are rapidly evolving and we may not be able to anticipate or prevent all such attacks and could be held liable for any security breach or loss.

Despite efforts to ensure the integrity of our systems, we will not be able to anticipate all security breaches of these types, nor will we be able to implement guaranteed preventive measures against such security breaches. Persistent attackers may succeed in penetrating defenses given enough resources, time and motive. The techniques used by cyber criminals change frequently, may not be recognized until launched and can originate from a wide variety of sources, including outside groups such as external service providers, organized crime affiliates, terrorist organizations or hostile foreign governments. These risks may increase in the future as we continue to increase our mobile-payment and other internet-based product offerings and expand our internal usage of web-based products and applications.

Even the most advanced internal control environment may be vulnerable to compromise. Targeted social engineering attacks are becoming more sophisticated and are extremely difficult to prevent. The successful social engineer will attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information in order to gain access to its data or that of its clients.

A successful penetration or circumvention of system security could cause us serious negative consequences, including significant disruption of operations, misappropriation of confidential information, or damage to our computers or systems or those of our customers and counterparties. A successful security breach could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our security measures, significant litigation exposure, and harm to our reputation, all of which could have a material adverse effect on the Company.

2. The resolution of significant pending litigation, if unfavorable, could have a material adverse effect on our results of operations for a particular period.

We face legal risks in our businesses, and the volume of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remain high. Substantial legal liability against us could have material adverse financial effects or cause significant reputational harm to us, which in turn could seriously harm our business prospects. It is possible that the ultimate resolution of these matters, if unfavorable, may be material to the results of operations for a particular reporting period.

Note 20 of the Notes to Consolidated Financial Statements updates the status of litigation concerning Cyberco Holdings, Inc. Although the bank maintains litigation reserves related to this case, the ultimate resolution of the matter, if unfavorable, may be material to our results of operations for a particular reporting period.

3. We face significant operational risks which could lead to financial loss, expensive litigation, and loss of confidence by our customers, regulators, and capital markets.

We are exposed to many types of operational risks, including the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or outsiders, or operational errors by employees. Huntington executes against a significant number of controls, a large percent of which are manual and dependent on adequate execution by colleagues and third party service providers. There is inherent risk that unknown single points of failure through the execution chain could give rise to material loss through inadvertent errors or malicious attack. These operational risks could lead to financial loss, expensive litigation, and loss of confidence by our customers, regulators, and the capital markets.

 

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Moreover, negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, and acquisitions and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to attract and retain customers and can also expose us to litigation and regulatory action.

Relative to acquisitions, we cannot predict if, or when, we will be able to identify and attract acquisition candidates or make acquisitions on favorable terms. We incur risks and challenges associated with the integration of acquired institutions in a timely and efficient manner, and we cannot guarantee that we will be successful in retaining existing customer relationships or achieving anticipated operating efficiencies.

4. Failure to maintain effective internal controls over financial reporting in the future could impair our ability to accurately and timely report our financial results or prevent fraud, resulting in loss of investor confidence and adversely affecting our business and stock price.

Effective internal controls over financial reporting are necessary to provide reliable financial reports and prevent fraud. As a financial holding company, we are subject to regulation that focuses on effective internal controls and procedures. Such controls and procedures are modified, supplemented, and changed from time-to-time as necessitated by our growth and in reaction to external events and developments. Any failure to maintain, in the future, an effective internal control environment could impact our ability to report our financial results on an accurate and timely basis, which could result in regulatory actions, loss of investor confidence, and adversely impact our business and stock price.

5. We rely on quantitative models to measure risks and to estimate certain financial values.

Quantitative models may be used to help manage certain aspects of our business and to assist with certain business decisions, including estimating probable loan losses, measuring the fair value of financial instruments when reliable market prices are unavailable, estimating the effects of changing interest rates and other market measures on our financial condition and results of operations, managing risk, and for capital planning purposes (including during the CCAR capital planning and capital adequacy process). Our measurement methodologies rely on many assumptions, historical analyses and correlations. These assumptions may not capture or fully incorporate conditions leading to losses, particularly in times of market distress, and the historical correlations on which we rely may no longer be relevant. Additionally, as businesses and markets evolve, our measurements may not accurately reflect this evolution. Even if the underlying assumptions and historical correlations used in our models are adequate, our models may be deficient due to errors in computer code, bad data, misuse of data, or the use of a model for a purpose outside the scope of the model’s design.

All models have certain limitations. Reliance on models presents the risk that our business decisions based on information incorporated from models will be adversely affected due to incorrect, missing, or misleading information. In addition, our models may not capture or fully express the risks we face, may suggest that we have sufficient capitalization when we do not, or may lead us to misjudge the business and economic environment in which we will operate. If our models fail to produce reliable results on an ongoing basis, we may not make appropriate risk management, capital planning, or other business or financial decisions. Strategies that we employ to manage and govern the risks associated with our use of models may not be effective or fully reliable. Also, information that we provide to the public or regulators based on poorly designed models could be inaccurate or misleading.

Banking regulators continue to focus on the models used by banks and bank holding companies in their businesses. Some of our decisions that the regulators evaluate, including distributions to our shareholders, could be affected adversely due to their perception that the quality of the models used to generate the relevant information is insufficient.

Compliance Risks:

1. Bank regulations regarding capital and liquidity, including the annual CCAR assessment process and the Basel III capital and liquidity standards, could require higher levels of capital and liquidity. Among other things, these regulations could impact our ability to pay common stock dividends, repurchase common stock, attract cost-effective sources of deposits, or require the retention of higher amounts of low yielding securities.

The Federal Reserve administers the annual CCAR, an assessment of the capital adequacy of bank holding companies with consolidated assets of $50 billion or more and of the practices used by covered banks to assess capital needs. Under CCAR, the Federal Reserve makes a qualitative assessment of capital adequacy on a forward-looking basis and reviews the strength of a bank holding company’s capital adequacy process. The Federal Reserve also makes a quantitative assessment of capital based on supervisory-run stress tests that assess the ability to maintain capital levels above each minimum regulatory capital ratio and above a

 

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tier 1 common ratio of 5% and common equity tier 1 ratio of 4.5%, after making all capital actions included in a bank holding company’s capital plan, under baseline and stressful conditions throughout a nine-quarter planning horizon. Capital plans for 2015 were required to be submitted by January 5, 2015, and the Federal Reserve will either object to the capital plan and/or planned capital actions, or provide a notice of non-objection, no later than March 31, 2015. We submitted our capital plan to the Federal Reserve on January 5, 2015. There can be no assurance that the Federal Reserve will respond favorably to our capital plan, capital actions or stress test and the Federal Reserve, OCC, or other regulatory capital requirements may limit or otherwise restrict how we utilize our capital, including common stock dividends and stock repurchases.

On July 2, 2013, the Federal Reserve voted to adopt final Basel III capital rules for U.S. Banking organizations. The final rules establish an integrated regulatory capital framework and will 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. Under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. As a Standardized Approach institution, the Basel III minimum capital requirements became effective for us on January 1, 2015, and will be fully phased-in on January 1, 2019.

On September 3, 2014, the U.S. banking regulators approved a final rule to implement a minimum liquidity coverage ratio (LCR) requirement for banking organizations with total consolidated assets of $250 billion or more, and a less stringent modified LCR requirement to depository institution holding companies below the threshold but with total consolidated assets of $50 billion or more. The LCR requires covered banking organizations to maintain HQLA equal to projected stressed cash outflows over a 30 calendar-day stress scenario. We are covered by the modified LCR requirement and therefore subject to the phase-in of the rule beginning January 2016 at 90% and January 2017 at 100%. We will also be required to calculate the LCR monthly. The LCR assigns less severe outflow assumptions to certain types of customer deposits, which should increase the demand, and perhaps the cost, among banks for these deposits. Additionally, the HQLA requirements will increase the demand for direct US government and US government- guaranteed debt that, while high quality, generally carry lower yields than other securities that banks hold in their investment portfolios.

2. If our regulators deem it appropriate, they can take regulatory actions that could result in a material adverse impact on our financial results, ability to compete for new business, constrain our ability to fund our liquidity needs or pay dividends, and increase the cost of our services.

We are subject to the supervision and regulation of various state and federal regulators, including the OCC, Federal Reserve, FDIC, SEC, CFPB, Financial Industry Regulatory Authority, and various state regulatory agencies. As such, we are subject to a wide variety of laws and regulations, many of which are discussed in the Regulatory Matters section. As part of their supervisory process, which includes periodic examinations and continuous monitoring, the regulators have the authority to impose restrictions or conditions on our activities and the manner in which we manage the organization. Such actions could negatively impact us in a variety of ways, including monetary fines, impacting our ability to pay dividends, precluding mergers or acquisitions, limiting our ability to offer certain products or services, or imposing additional capital requirements.

With the development of the CFPB, our consumer products and services are subject to increasing regulatory oversight and scrutiny with respect to compliance under consumer laws and regulations. We may face a greater number or wider scope of investigations, enforcement actions and litigation in the future related to consumer practices, thereby increasing costs associated with responding to or defending such actions. In addition, increased regulatory inquiries and investigations, as well as any additional legislative or regulatory developments affecting our consumer businesses, and any required changes to our business operations resulting from these developments, could result in significant loss of revenue, require remuneration to our customers, trigger fines or penalties, limit the products or services we offer, require us to increase our prices and therefore reduce demand for our products, impose additional compliance costs on us, cause harm to our reputation or otherwise adversely affect our consumer businesses.

3. Legislative and regulatory actions taken now or in the future that impact the financial industry may materially adversely affect us by increasing our costs, adding complexity in doing business, impeding the efficiency of our internal business processes, negatively impacting the recoverability of certain of our recorded assets, requiring us to increase our regulatory capital, limiting our ability to pursue business opportunities, and otherwise result in a material adverse impact on our financial condition, results of operation, liquidity, or stock price.

The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, establishes the CFPB, and requires the bureau and other federal agencies to implement many new and significant rules and regulations. It is not possible to predict the full extent to which the Dodd-Frank Act, or the resulting rules and regulations in their entirety, will impact our business. Compliance with these new laws and regulations have and will continue to result in additional costs, which could be significant, and may have a material and adverse effect on our results of operations. In addition, if we do not appropriately comply with current or future legislation and regulations that apply to our consumer operations, we may be subject to fines, penalties or judgments, or material regulatory restrictions on our businesses, which could adversely affect operations and, in turn, financial results.

 

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Item 1B: Unresolved Staff Comments

None.

Item 2: Properties

Our headquarters, as well as the Bank’s, is located in the Huntington Center, a thirty seven story office building located in Columbus, Ohio. Of the building’s total office space available, we lease approximately 28%. The lease term expires in 2030, with six five-year renewal options for up to 30 years but with no purchase option. The Bank has an indirect minority equity interest of 18.4% in the building.

Our other major properties consist of the following:

 

Description

  

Location

   Own    Lease
13 story office building, located adjacent to the Huntington Center    Columbus, Ohio    ü   
12 story office building, located adjacent to the Huntington Center    Columbus, Ohio    ü   
3 story office building - the Crosswoods building    Columbus, Ohio       ü
A portion of 200 Public Square Building    Cleveland, Ohio       ü
12 story office building    Youngstown, Ohio    ü   
10 story office building    Warren, Ohio       ü
10 story office building    Toledo, Ohio    ü   
A portion of the Grant Building    Pittsburgh, PA       ü
18 story office building    Charleston, West Virginia       ü
3 story office building    Holland, Michigan       ü
2 building office complex    Troy, Michigan       ü
Data processing and operations center (Easton)    Columbus, Ohio    ü   
Data processing and operations center (Northland)    Columbus, Ohio       ü
Data processing and operations center (Parma)    Cleveland, Ohio       ü
8 story office building    Indianapolis, Indiana    ü   

Item 3: Legal Proceedings

Information required by this item is set forth in Note 20 of the Notes to Consolidated Financial Statements and incorporated into this Item by reference.

Item 4: Mine Safety Disclosures

Not applicable.

PART II

Item 5: Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

The common stock of Huntington Bancshares Incorporated is traded on the NASDAQ Stock Market under the symbol “HBAN”. The stock is listed as “HuntgBcshr” or “HuntBanc” in most newspapers. As of January 31, 2015, we had 28,369 shareholders of record.

Information regarding the high and low sale prices of our common stock and cash dividends declared on such shares, as required by this Item, is set forth in Table 46 entitled Selected Quarterly Income Statement Data and incorporated into this Item by reference. Information regarding restrictions on dividends, as required by this Item, is set forth in Item 1 Business-Regulatory Matters and in Note 21 of the Notes to Consolidated Financial Statements and incorporated into this Item by reference.

The following graph shows the changes, over the five-year period, in the value of $100 invested in (i) shares of Huntington’s Common Stock; (ii) the Standard & Poor’s 500 Stock Index (the “S&P 500 Index”) and (iii) Keefe, Bruyette & Woods Bank Index (the “KBW Bank Index”), for the period December 31, 2009, through December 31, 2014. The KBW Bank Index is a market capitalization-weighted bank stock index published by Keefe, Bruyette & Woods. The index is composed of the largest banking companies and includes all money center banks and regional banks, including Huntington. An investment of $100 on December 31, 2009, and the reinvestment of all dividends, are assumed. The plotted points represent the closing price on the last trading day of the fiscal year indicated.

 

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LOGO

The following table provides information regarding Huntington’s purchases of its Common Stock during the three-month period ended December 31, 2014:

 

Period

   Total Number
of Shares
Purchased
     Average
Price Paid
Per Share
     Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (1)
     Maximum Number of Shares (or
Approximate Dollar Value) that
May Yet Be Purchased Under

the Plans or Programs (2)
 

October 1, 2014 to October 31, 2014

     2,647,087       $ 9.46         20,179,890       $ 61,369,532   

November 1, 2014 to November 30, 2014

     958,144         10.08         21,138,034         51,711,440   

December 1, 2014 to December 31, 2014

     —           —           21,138,034         51,711,440   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3,605,231       $ 9.63         21,138,034       $ 51,711,440   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The reported shares were repurchased pursuant to Huntington’s publicly announced stock repurchase authorization, which became effective April 1, 2014.
(2) The number shown represents, as of the end of each period, the maximum number of shares (approximate dollar value) of Common Stock that may yet be purchased under publicly announced stock repurchase authorizations. The shares may be purchased, from time-to-time, depending on market conditions.

On March 26, 2014, Huntington announced that the Federal Reserve did not object to Huntington’s proposed capital actions included in Huntington’s capital plan submitted to the Federal Reserve in January 2014. These actions included a potential repurchase of up to $250 million of common stock through the first quarter of 2015. This repurchase authorization represented a $23 million, or 10%, increase from the prior common stock repurchase authorization. Purchases of common stock may include open market purchases, privately negotiated transactions, and accelerated repurchase programs. Huntington’s board of directors authorized a share repurchase program consistent with Huntington’s capital plan. During the 2014 fourth quarter, Huntington repurchased a total of 3.6 million shares at a weighted average share price of $9.63. For the year ended December 31, 2014, Huntington purchased 35.7 million common shares at a weighted average price of $9.37 per share. For the year ended December 31, 2013, Huntington purchased 16.7 million common shares at a weighted average price of $7.46 per share.

 

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Item 6: Selected Financial Data

Table 1—Selected Financial Data (1)

 

       Year Ended December 31,  

(dollar amounts in thousands, except per share amounts)

   2014     2013     2012     2011     2010  

Interest income

   $ 1,976,462      $ 1,860,637      $ 1,930,263      $ 1,970,226      $ 2,145,392   

Interest expense

     139,321        156,029        219,739        341,056        526,587   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     1,837,141        1,704,608        1,710,524        1,629,170        1,618,805   

Provision for credit losses

     80,989        90,045        147,388        174,059        634,547   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     1,756,152        1,614,563        1,563,136        1,455,111        984,258   

Noninterest income

     979,179        1,012,196        1,106,321        992,317        1,053,660   

Noninterest expense

     1,882,346        1,758,003        1,835,876        1,728,500        1,673,805   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     852,985        868,756        833,581        718,928        364,113   

Provision for income taxes

     220,593        227,474        202,291        172,555        57,465   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 632,392      $ 641,282      $ 631,290      $ 546,373      $ 306,648   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends on preferred shares

     31,854        31,869        31,989        30,813        172,032   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to common shares

   $ 600,538      $ 609,413      $ 599,301      $ 515,560      $ 134,616   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share—basic

   $ 0.73      $ 0.73      $ 0.70      $ 0.60      $ 0.19   

Net income per common share—diluted

     0.72        0.72        0.69        0.59        0.18   

Cash dividends declared per common share

     0.21        0.19        0.16        0.10        0.04   

Balance sheet highlights

          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets (period end)

   $ 66,298,010      $ 59,467,174      $ 56,141,474      $ 54,448,673      $ 53,813,903   

Total long-term debt (period end)

     4,335,962        2,458,272        1,364,834        2,747,857        3,663,826   

Total shareholders’ equity (period end)

     6,328,170        6,090,153        5,778,500        5,416,121        4,974,803   

Average long-term debt

     3,494,987        1,670,502        1,986,612        3,182,900        3,893,246   

Average shareholders’ equity

     6,269,884        5,914,914        5,671,455        5,237,541        5,482,502   

Average total assets

     62,498,880        56,299,313        55,673,599        53,750,054        52,574,231   

Key ratios and statistics

          

Margin analysis—as a % of average earnings assets

          

Interest income (2)

     3.47     3.66     3.85     4.09     4.55

Interest expense

     0.24        0.30        0.44        0.71        1.11   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin (2)

     3.23     3.36     3.41     3.38     3.44
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Return on average total assets

     1.01     1.14     1.13     1.02     0.58

Return on average common shareholders’ equity

     10.2        11.0        11.3        10.6        3.5   

Return on average tangible common shareholders’ equity (3), (7)

     11.8        12.7        13.3        12.8        5.4   

Efficiency ratio (4)

     65.1        62.6        63.2        63.5        60.1   

Dividend payout ratio

     28.8        26.0        22.9        16.7        21.1   

Average shareholders’ equity to average assets

     10.03        10.51        10.19        9.74        10.43   

Effective tax rate

     25.9        26.2        24.3        24.0        15.8   

Tier 1 common risk-based capital ratio
(period end)
(7), (8)

     10.23        10.90        10.48        10.00        9.29   

Tangible common equity to tangible assets (period end)  (5), (7)

     8.17        8.82        8.74        8.30        7.55   

Tangible equity to tangible assets (period end) (6), (7)

     8.76        9.47        9.44        9.01        8.23   

Tier 1 leverage ratio (period end) (9)

     9.74        10.67        10.36        10.28        9.41   

Tier 1 risk-based capital ratio (period end) (9)

     11.50        12.28        12.02        12.11        11.55   

Total risk-based capital ratio (period end) (9)

     13.56        14.57        14.50        14.77        14.46   

Other data

          

Full-time equivalent employees (average)

     11,873        11,964        11,494        11,398        11,038   

Domestic banking offices (period end)

     729        711        705        668        620   

 

(1)

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

(2)  

On an FTE basis assuming a 35% tax rate.

(3)  

Net income (loss) excluding expense for amortization of intangibles for the period divided by average tangible shareholders’ equity. Average tangible shareholders’ equity equals average total 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.

 

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(4)  

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

(5)  

Tangible common equity (total common equity less goodwill and other intangible assets) divided by tangible assets (total assets less goodwill and other intangible assets). Other intangible assets are net of deferred tax and calculated assuming a 35% tax rate.

(6)  

Tangible equity (total equity less goodwill and other intangible assets) divided by tangible assets (total assets less goodwill and other intangible assets). Other intangible assets are net of deferred tax and calculated assuming a 35% tax rate.

(7)  

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

(8)  

In accordance with applicable regulatory reporting guidance, we are not required to retrospectively update historical filings for newly adopted accounting principles. Therefore, Tier 1 capital, Tier 1 common equity, and risk-weighted assets have not been updated for the adoption of ASU 2014-01.

(9)  

In accordance with applicable regulatory reporting guidance, we are not required to retrospectively update historical filings for newly adopted accounting principles. Therefore, regulatory capital data has not been updated for the adoption of ASU 2014-01.

 

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Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

We are a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through the Bank, we have 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 715 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 should be read in conjunction with the Consolidated Financial Statements, Notes to Consolidated Financial Statements, and other information contained in this report.

Our discussion is divided into key segments:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

Results for the Fourth Quarter - Provides a discussion of results for the 2014 fourth quarter compared with the 2013 fourth quarter.

 

   

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

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

EXECUTIVE OVERVIEW

2014 Financial Performance Review

In 2014, we reported net income of $632.4 million, or $0.72 per common share, relatively unchanged from the prior year. This resulted in a 1.01% return on average assets and a 11.8% return on average tangible common equity. In addition, we grew our base of consumer and business customers as we increased 2014 average earning assets by $6.1 billion, or 12%, over the prior year. Our strategic business investments and OCR sales approach continued to generate positive results in 2014. (Also, see Significant Items Influencing Financial Performance Comparisons within the Discussion of Results of Operations.)

Fully-taxable equivalent net interest income was $1.9 billion in 2014, an increase of $132.7 million, or 8%, compared with 2013. This reflected the impact of 12% earning asset growth, partially offset by 13% interest-bearing liability growth and a 13 basis point decrease in the NIM to 3.23%. The earning asset growth reflected a $3.6 billion, or 9%, increase in average loans and leases and a $2.7 billion, or 29%, increase in average securities. The loan growth reflected an increase in average automobile loans, as the growth in originations remained strong. Also, average C&I loans increased which primarily reflected growth in trade finance in support of our middle market and corporate customers. The securities growth primarily reflected an increase in LCR level 1 qualified securities and direct purchase municipal instruments. This earnings asset growth was partially offset by a $4.7 billion, or 13%, increase in interest-bearing liabilities. The interest-bearing liability growth reflected a $3.2 billion, or 104%, increase in short- and long-term borrowings

 

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and a $2.2 billion, or 14%, increase in money market deposits, partially offset by a $1.2 billion, or 27%, decrease in average core certificates of deposit. Borrowings have been a cost effective method to fund our incremental securities growth and the change in deposit mix reflects our strategic focus on changing funding sources. The NIM contraction reflected a 19 basis point decrease related to the mix and yield of earning assets and 3 basis point reduction in the benefit to the margin from the impact of noninterest-bearing funds, partially offset by the 9 basis point reduction in funding costs.

Noninterest income was $979.2 million in 2014, a decrease of $33.0 million, or 3%, compared with 2013. Mortgage banking income was down due to a reduction in origination and secondary marketing revenue as originations decreased and gain-on-sale margins compressed, and a negative impact from net MSR hedging activity. In addition, other income declined primarily due to a decrease in LIHTC gains and lower fees associated with commercial loan activity and trust services primarily due to a reduction in fees. These declines were partially offset by an increase in securities gains as we adjusted the mix of our securities portfolio to prepare for the LCR requirements and an increase in electronic banking income due to higher card related income and underlying customer growth.

Noninterest expense was $1.9 billion in 2014, an increase of $124.3 million, or 7%, compared with 2013. This reflected an increase in personnel costs, other expense, professional services, outside data processing and other services, and equipment. The increase included $65.5 million of significant items related to franchise repositioning, merger and acquisition costs, and additions to the litigation reserves ( This section should be read in conjunction with Table 8 – Noninterest Expense ). Excluding the impact of the significant items, other noninterest expense increased due to state franchise taxes, protective advances, and litigation expense. Professional services increased due to outside consultant expenses related to strategic planning and legal services. Outside data processing and other services increased, primarily reflecting higher debit and credit card processing costs and increased other technology investment expense, as we continue to invest in technology supporting our products, services, and our Continuous Improvement initiatives.

Credit quality continued to improve in 2014. NALs declined $21.8 million, or 7%, from 2013 to $300.2 million, or 0.63% of total loans and leases. NPAs declined $14.4 million, or 4%, compared to a year-ago to $337.7 million, or 0.71% of total loans and leases, OREO, and other NPAs. The decreases primarily reflected meaningful improvement in both CRE and residential mortgage NALs. The provision for credit losses decreased $9.1 million, or 10%, from 2013 due to the continued decline in NCOs and nonaccrual loans. NCOs decreased $64.0 million, or 34%, from the prior year to $124.6 million. NCOs were an annualized 0.27% of average loans and leases in the current year compared to 0.45% in 2013. The ACL as a percentage of total loans and leases decreased to 1.40% from 1.65% a year ago, while the ACL as a percentage of period-end total NALs increased slightly to 222% from 221%. However, criticized and classified loans did increase $95.1 million, or 7%, from prior year.

The tangible common equity to tangible assets ratio at December 31, 2014, was 8.17%, down 65 basis points from a year ago. Our Tier 1 common risk-based capital ratio at year end was 10.23%, down from 10.90% at the end of 2013. The regulatory Tier 1 risk-based capital ratio at December 31, 2014, was 11.50%, down from 12.28% at December 31, 2013. The decreases in the capital ratios were due to balance sheet growth and share repurchases that were partially offset by increased retained earnings and the stock issued in the Camco Financial acquisition. Specifically, all capital ratios were impacted by the repurchase of 35.7 million common shares over the last four quarters, 3.6 million of which were repurchased during the 2014 fourth quarter. This decrease was offset partially by the increase in retained earnings, as well as the issuance of 8.7 million common shares in the Camco acquisition. Huntington estimates the negative impact to Tier 1 common risk-based capital from the 2015 first quarter implementation of the Federal Reserve’s revised Basel III capital rules will be approximately 40 basis points on a fully phased-in basis.

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.

Huntington enjoys a unique and advantaged position in the industry and our future is bright. We are focused on executing our strategic plan, and we are very pleased with the results we are achieving. For the past several years we have invested in the company at a time when most of the industry has been pulling back. We have expanded and optimized our retail distribution, both physical and digital. We have invested in small business and commercial specialty lending verticals. We have added new products, such as our consumer and commercial credit cards and our new business and consumer checking accounts. These represent just a handful of the investments we have made. Our 2014 earnings reflected results from these investments. Yet significant opportunity remains as none of these investments are mature. We have a strong outlook for the future.

 

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Economy

We remain optimistic on the economy in our footprint as fundamentals look positive. Home prices are improving, and the recent reduction in interest rates provides another refinance window. Automobile sales were very strong in 2014 and appear poised for another great, if not even better, year in 2015. The state governments in our footprint are operating with surpluses, and most of the municipalities are on solid footing. We have good momentum on the consumer side. Our loan pipeline remains stable, and customer activity among our core small and middle market business customer base continues to trend favorably.

Legislative and Regulatory

A comprehensive discussion of legislative and regulatory matters affecting us can be found in the Regulatory Matters section included in Item 1 of this Form 10-K.

2015 Expectations

As we move into 2015, customer activity is strong, pipelines are stable, and our balance sheet is well positioned. We built our plan with an assumption of no change in interest rates and with the flexibility to quickly adjust to the evolving operating environment. We remain committed to investing in the business, disciplined expense control, and delivering full-year positive operating leverage.

Excluding Significant Items and net MSR hedging activity, we expect to deliver positive operating leverage in 2015 with revenue growth exceeding noninterest expense growth of 2-4%.

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 25% to 28%.

 

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Table 2—Selected Annual Income Statements (1)

 

     Year Ended December 31,  
            Change from 2013            Change from 2012        

(dollar amounts in thousands, except per share amounts)

   2014      Amount     Percent     2013      Amount     Percent     2012  

Interest income

   $ 1,976,462       $ 115,825        6   $ 1,860,637       $ (69,626     (4 )%    $ 1,930,263   

Interest expense

     139,321         (16,708     (11     156,029         (63,710     (29     219,739   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income

     1,837,141         132,533        8        1,704,608         (5,916     —          1,710,524   

Provision for credit losses

     80,989         (9,056     (10     90,045         (57,343     (39     147,388   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     1,756,152         141,589        9        1,614,563         51,427        3        1,563,136   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     273,741         1,939        1        271,802         9,623        4        262,179   

Trust services

     115,972         (7,035     (6     123,007         1,110        1        121,897   

Electronic banking

     105,401         12,810        14        92,591         10,301        13        82,290   

Mortgage banking income

     84,887         (41,968     (33     126,855         (64,237     (34     191,092   

Brokerage income

     68,277         (1,347     (2     69,624         (3,060     (4     72,684   

Insurance income

     65,473         (3,791     (5     69,264         (2,055     (3     71,319   

Bank owned life insurance income

     57,048         629        1        56,419         377        1        56,042   

Capital markets fees

     43,731         (1,489     (3     45,220         (2,126     (4     48,160   

Gain on sale of loans

     21,091         2,920        16        18,171         (40,011     (69     58,182   

Securities gains (losses)

     17,554         17,136        4,100        418         (4,351     (91     4,769   

Other income

     126,004         (12,821     (9     138,825         304        —          137,707   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total noninterest income

     979,179         (33,017     (3     1,012,196         (94,125     (9     1,106,321   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Personnel costs

     1,048,775         47,138        5        1,001,637         13,444        1        988,193   

Outside data processing and other services

     212,586         13,039        7        199,547         9,292        5        190,255   

Net occupancy

     128,076         2,732        2        125,344         14,184        13        111,160   

Equipment

     119,663         12,870        12        106,793         3,846        4        102,947   

Professional services

     59,555         18,968        47        40,587         (25,171     (38     65,758   

Marketing

     50,560         (625     (1     51,185         (13,078     (20     64,263   

Deposit and other insurance expense

     49,044         (1,117     (2     50,161         (18,169     (27     68,330   

Amortization of intangibles

     39,277         (2,087     (5     41,364         (5,185     (11     46,549   

Gain on early extinguishment of debt

     —           —          —          —           798        (100     (798

Other expense

     174,810         33,425        24        141,385         (57,834     (29     199,219   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total noninterest expense

     1,882,346         124,343        7        1,758,003         (77,873     (4     1,835,876   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income before income taxes

     852,985         (15,771     (2     868,756         35,175        4        833,581   

Provision for income taxes

     220,593         (6,881     (3     227,474         25,183        12        202,291   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 632,392       $ (8,890     (1 )%    $ 641,282       $ 9,992        2   $ 631,290   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Dividends on preferred shares

     31,854         (15     —          31,869         (120     —          31,989   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income applicable to common shares

   $ 600,538       $ (8,875     (1 )%    $ 609,413       $ 10,112        2   $ 599,301   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Average common shares—basic

     819,917         (14,288     (2 )%      834,205         (23,757     (3 )%      857,962   

Average common shares—diluted

     833,081         (10,893     (1     843,974         (19,428     (2     863,402   

Per common share:

                

Net income—basic

   $ 0.73       $ —            $ 0.73       $ 0.03        4   $ 0.70   

Net income—diluted

     0.72         —          —          0.72         0.03        4        0.69   

Cash dividends declared

     0.21         0.02        11        0.19         0.03        19        0.16   

Revenue—FTE

                

Net interest income

   $ 1,837,141       $ 132,533        8   $ 1,704,608       $ (5,916       $ 1,710,524   

FTE adjustment

     27,550         210        1        27,340         6,934        34        20,406   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income (2)

     1,864,691         132,743        8        1,731,948         1,018        —          1,730,930   

Noninterest income

     979,179         (33,017     (3     1,012,196         (94,125     (9     1,106,321   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue (2)

   $ 2,843,870       $ 99,726        4   $ 2,744,144       $ (93,107     (3 )%    $ 2,837,251   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(1)  

Comparisons for presented periods are impacted by a number of factors. Refer to “Significant Items”.

(2)  

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

 

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DISCUSSION OF RESULTS OF OPERATIONS

This section provides a review of financial performance from a consolidated perspective. It also includes a “Significant Items” section that summarizes key issues important for a complete understanding of performance trends. Key consolidated balance sheet and income statement 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.”

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 among the three years ended December 31, 2014, 2013, and 2012 were impacted by a number of Significant Items summarized below.

 

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

 

   

During 2014, $28.0 million of franchise repositioning related expense was recorded for the consolidation of 26 branches and organizational actions. This resulted in a negative impact of $0.02 per common share in 2014.

 

   

During 2013, $23.5 million of franchise repositioning related expense was recorded. This resulted in a negative impact of $0.02 per common share in 2013.

 

  2. Litigation Reserve. $20.9 million and $23.5 million of net additions to litigation reserves were recorded as other noninterest expense in 2014 and 2012, respectively. This resulted in a negative impact of $0.02 per common share in 2014 and 2012.

 

  3. Mergers and Acquisitions. During 2014, $15.8 million of net noninterest expense was recorded related to the acquisition of 24 Bank of America branches and Camco Financial. This resulted in a negative impact of $0.01 per common share in 2014.

 

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

 

  5. State deferred tax asset valuation allowance adjustment. During 2012, a valuation allowance of $21.3 million (net of tax) was released for the portion of the deferred tax asset and state net operating loss carryforwards expected to be realized. This resulted in a positive impact of $0.02 per common share in 2012. Additional information can be found in the Provision for Income Taxes section within this MD&A.

 

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  6. Bargain Purchase Gain. During 2012, an $11.2 million bargain purchase gain associated with the FDIC-assisted Fidelity Bank acquisition was recorded in noninterest income. This resulted in a positive impact of $0.01 per common share in 2012.

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

Table 3—Significant Items Influencing Earnings Performance Comparison

 

     2014     2013     2012  

(dollar amounts in thousands, except per share amounts)

   After-tax     EPS     After-tax     EPS     After-tax     EPS  

Net income—GAAP

   $ 632,392        $ 641,282        $ 631,290     

Earnings per share, after-tax

  

  $ 0.72        $ 0.72        $ 0.69   

Significant items—favorable (unfavorable) impact:

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

Franchise repositioning related expense

   $ (27,976   $ (0.02   $ (23,461   $ (0.02   $ —        $ —     

Net additions to litigation reserve

     (20,909     (0.02     —          —          (23,500     (0.02

Mergers and acquisitions, net

     (15,818     (0.01     —          —          —          —     

Pension curtailment gain

     —          —          33,926        0.03        —          —     

State deferred tax asset valuation allowance adjustment (3)

     —          —          —          —          21,251        0.02   

Bargain purchase gain

     —          —          —          —          11,217        0.01   

(1) Pretax unless otherwise noted.

(2) Based upon the annual average outstanding diluted common shares.

(3) After-tax.

Net Interest Income / Average Balance Sheet

Our primary source of revenue is net interest income, which is the difference between interest income from earning assets (primarily loans, securities, and direct financing leases), and interest expense of funding sources (primarily interest-bearing deposits and borrowings). Earning asset balances and related funding sources, as well as changes in the levels of interest rates, impact net interest income. The difference between the average yield on earning assets and the average rate paid for interest-bearing liabilities is the net interest spread. Noninterest-bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. The impact of the noninterest-bearing sources of funds, often referred to as “free” funds, is captured in the net interest margin, which is calculated as net interest income divided by average earning assets. Both the net interest margin and net interest spread are presented on a fully-taxable equivalent basis, which means that tax-free interest income has been adjusted to a pretax equivalent income, assuming a 35% tax rate.

The following table shows changes in fully-taxable equivalent interest income, interest expense, and net interest income due to volume and rate variances for major categories of earning assets and interest-bearing liabilities:

Table 4—Change in Net Interest Income Due to Changes in Average Volume and Interest Rates (1)

 

     2014     2013  
     Increase (Decrease) From
Previous Year Due To
    Increase (Decrease) From
Previous Year Due To
 

Fully-taxable equivalent basis (2)

(dollar amounts in millions)

   Volume     Yield/
Rate
    Total     Volume     Yield/
Rate
    Total  

Loans and leases

   $ 136.7      $ (94.5   $ 42.2      $ 66.1      $ (108.7   $ (42.6

Investment securities

     69.7        10.2        79.9        (3.7     2.0        (1.7

Other earning assets

     (6.3     0.2        (6.1     (16.8     (1.7     (18.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income from earning assets

     200.1        (84.1     116.0        45.6        (108.4     (62.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deposits

     5.2        (35.0     (29.8     1.0        (46.9     (45.9

Short-term borrowings

     1.5        —          1.5        (0.3     (0.7     (1.0

Long-term debt

     30.1        (18.5     11.6        (7.9     (9.0     (16.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense of interest-bearing liabilities

     36.8        (53.5     (16.7     (7.2     (56.6     (63.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   $ 163.3      $ (30.6   $ 132.7      $ 52.8      $ (51.8   $ 1.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  

The change in interest rates due to both rate and volume has been allocated between the factors in proportion to the relationship of the absolute dollar amounts of the change in each.

(2)  

Calculated assuming a 35% tax rate.

 

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Table 5—Consolidated Average Balance Sheet and Net Interest Margin Analysis

 

     Average Balances  
Fully-taxable equivalent basis (1)          Change from 2013           Change from 2012        

(dollar amounts in millions)

   2014     Amount     Percent     2013     Amount     Percent     2012  

Assets

              

Interest-bearing deposits in banks

   $ 85      $ 15        21   $ 70      $ (25     (26 )%    $ 95   

Loans held for sale

     323        (198     (38     521        (566     (52     1,087   

Available-for-sale and other securities:

              

Taxable

     6,785        402        6        6,383        (1,515     (19     7,898   

Tax-exempt

     1,429        866        154        563        136        32        427   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     8,214        1,268        18        6,946        (1,379     (17     8,325   

Trading account securities

     46        (34     (43     80        13        19        67   

Held-to-maturity securities—taxable

     3,612        1,457        68        2,155        1,230        133        925   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     11,872        2,691        29        9,181        (136     (1     9,317   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (2)

              

Commercial:

              

Commercial and industrial

     18,342        1,168        7        17,174        1,230        8        15,944   

Commercial real estate:

              

Construction

     728        148        26        580        (2     —          582   

Commercial

     4,271        (178     (4     4,449        (749     (14     5,198   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     4,999        (30     (1     5,029        (751     (13     5,780   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     23,341        1,138        5        22,203        479        2        21,724   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

              

Automobile loans and leases

     7,670        1,991        35        5,679        1,153        25        4,526   

Home equity

     8,395        85        1        8,310        (5     —          8,315   

Residential mortgage

     5,623        425        8        5,198        8        —          5,190   

Other consumer

     396        (40     (9     436        (19     (4     455   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     22,084        2,461        13        19,623        1,137        6        18,486   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     45,425        3,599        9        41,826        1,616        4        40,210   

Allowance for loan and lease losses

     (638     87        (12     (725     151        (17     (876
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans and leases

     44,787        3,686        9        41,101        1,767        4        39,334   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     57,705        6,107        12        51,598        889        2        50,709   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and due from banks

     898        (10     (1     908        (182     (17     1,090   

Intangible assets

     578        21        4        557        (43     (7     600   

All other assets

     3,956        (5     —          3,961        (190     (5     4,151   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 62,499      $ 6,200        11   $ 56,299      $ 625        1   $ 55,674   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

              

Deposits:

              

Demand deposits—noninterest-bearing

   $ 13,988      $ 1,117        9   $ 12,871      $ 671        6   $ 12,200   

Demand deposits—interest-bearing

     5,896        41        1        5,855        44        1        5,811   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     19,884        1,158        6        18,726        715        4        18,011   

Money market deposits

     17,917        2,242        14        15,675        1,774        13        13,901   

Savings and other domestic deposits

     5,031        2        —          5,029        96        2        4,933   

Core certificates of deposit

     3,315        (1,234     (27     4,549        (1,672     (27     6,221   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     46,147        2,168        5        43,979        913        2        43,066   

Other domestic time deposits of $250,000 or more

     242        (64     (21     306        (20     (6     326   

Brokered time deposits and negotiable CDs

     2,139        533        33        1,606        16        1        1,590   

Deposits in foreign offices

     375        29        8        346        (26     (7     372   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     48,903        2,666        6        46,237        883        2        45,354   

Short-term borrowings

     2,761        1,358        97        1,403        (194     (12     1,597   

Long-term debt

     3,495        1,825        109        1,670        (317     (16     1,987   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     41,171        4,732        13        36,439        (299     (1     36,738   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

All other liabilities

     1,070        (4     —          1,074        9        1        1,065   

Shareholders’ equity

     6,270        355        6        5,915        244        4        5,671   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 62,499      $ 6,200        11   $ 56,299      $ 625        1   $ 55,674   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Continued

 

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Table 6—Consolidated Average Balance Sheet and Net Interest Margin Analysis (Continued)

 

Fully-taxable equivalent basis (1)    Interest Income / Expense      Average Rate (2)  

(dollar amounts in thousands)

   2014      2013      2012      2014     2013     2012  

Assets

               

Interest-bearing deposits in banks

   $ 103       $ 102       $ 202         0.12     0.15     0.21

Loans held for sale

     12,728         18,905         36,769         3.94        3.63        3.38   

Securities:

               

Available-for-sale and other securities:

               

Taxable

     171,080         148,557         184,340         2.52        2.33        2.33   

Tax-exempt

     44,562         25,663         17,659         3.12        4.56        4.14   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     215,642         174,220         201,999         2.63        2.51        2.43   

Trading account securities

     421         355         853         0.92        0.44        1.27   

Held-to-maturity securities—taxable

     88,724         50,214         24,088         2.46        2.33        2.60   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total securities

     304,787         224,789         226,940         2.57        2.45        2.43   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Loans and leases: (2)

               

Commercial:

               

Commercial and industrial

     643,484         643,731         639,458         3.51        3.75        4.01   

Commercial real estate:

               

Construction

     31,414         23,440         22,886         4.31        4.04        3.93   

Commercial

     163,192         182,622         208,552         3.82        4.11        4.01   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Commercial real estate

     194,606         206,062         231,438         3.89        4.10        4.00   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total commercial

     838,090         849,793         870,896         3.59        3.83        4.01   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Consumer:

               

Automobile loans and leases

     262,931         221,469         214,053         3.43        3.90        4.73   

Home equity

     343,281         345,379         355,869         4.09        4.16        4.28   

Residential mortgage

     213,268         199,601         212,661         3.79        3.84        4.10   

Other consumer

     28,824         27,939         33,279         7.30        6.41        7.31   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total consumer

     848,304         794,388         815,862         3.84        4.05        4.41   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total loans and leases

     1,686,394         1,644,181         1,686,758         3.71        3.93        4.19   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total earning assets

   $ 2,004,012       $ 1,887,977       $ 1,950,669         3.47     3.66     3.85
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

               

Deposits:

               

Demand deposits—noninterest-bearing

   $ —         $ —         $ —                  

Demand deposits—interest-bearing

     2,272         2,525         3,579         0.04        0.04        0.06   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total demand deposits

     2,272         2,525         3,579         0.01        0.01        0.02   

Money market deposits

     42,156         38,830         40,164         0.24        0.25        0.29   

Savings and other domestic deposits

     8,779         13,292         18,928         0.17        0.26        0.38   

Core certificates of deposit

     26,998         50,544         84,983         0.81        1.11        1.37   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total core deposits

     80,205         105,191         147,654         0.25        0.34        0.48   

Other domestic time deposits of $250,000 or more

     1,036         1,442         2,140         0.43        0.47        0.66   

Brokered time deposits and negotiable CDs

     4,728         9,100         11,694         0.22        0.57        0.74   

Deposits in foreign offices

     483         508         679         0.13        0.15        0.18   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total deposits

     86,452         116,241         162,167         0.25        0.35        0.49   

Short-term borrowings

     2,940         1,475         2,391         0.11        0.11        0.15   

Long-term debt

     49,929         38,313         55,181         1.43        2.29        2.78   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     139,321         156,029         219,739         0.34        0.43        0.60   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income

   $ 1,864,691       $ 1,731,948       $ 1,730,930          
  

 

 

    

 

 

    

 

 

        

Net interest rate spread

              3.13        3.23        3.25   

Impact of noninterest-bearing funds on margin

              0.10        0.13        0.16   
           

 

 

   

 

 

   

 

 

 

Net interest margin

              3.23     3.36     3.41
           

 

 

   

 

 

   

 

 

 

 

(1)  

FTE yields are calculated assuming a 35% tax rate.

(2)  

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

 

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Table of Contents

2014 vs. 2013

Fully-taxable equivalent net interest income for 2014 increased $132.7 million, or 8%, from 2013. This reflected the impact of 12% earning asset growth, partially offset by 13% interest-bearing liability growth and a 13 basis point decrease in the NIM to 3.23%.

Average earning assets increased $6.1 billion, or 12%, from the prior year, driven by:

 

   

$2.7 billion, or 29%, increase in average securities, reflecting an increase of Liquidity Coverage Ratio (LCR) Level 1 qualified securities and direct purchase municipal instruments.

 

   

$2.0 billion, or 35%, increase in average Automobile loans, as originations remained strong.

 

   

$1.2 billion, or 7%, increase in average C&I loans and leases, primarily reflecting growth in trade finance in support of our middle market and corporate customers.

 

   

$0.4 billion, or 8%, increase in average Residential mortgage loans as a result of the Camco Financial acquisition and a decrease in the rate of payoffs due to lower levels of refinancing.

Average noninterest bearing deposits increased $1.1 billion, or 9%, while average interest-bearing liabilities increased $4.7 billion, or 13%, from 2013, primarily reflecting:

 

   

$3.2 billion, or 104%, increase in short- and long-term borrowings, which are a cost effective method of funding incremental securities growth.

 

   

$2.2 billion, or 14%, increase in money market deposits, reflecting the strategic focus on customer growth and increased share-of-wallet among both consumer and commercial customers.

 

   

$0.5 billion, or 33%, increase in brokered deposits and negotiated CDs, which were used to efficiently finance balance sheet growth while continuing to manage the overall cost of funds.

Partially offset by:

 

   

$1.2 billion, or 27%, 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.

The primary items impacting the decrease in the NIM were:

 

   

19 basis point negative impact from the mix and yield on earning assets, primarily reflecting lower rates on loans, and the impact of an increased total securities balance.

 

   

3 basis point decrease in the benefit to the margin of non-interest bearing funds, reflecting lower interest rates on total interest bearing liabilities from the prior year.

Partially offset by:

 

   

9 basis point positive impact from the mix and yield of total interest-bearing liabilities, reflecting the strategic focus on changing the funding sources from higher rate time deposits to no-cost demand deposits and low-cost money market deposits.

2013 vs. 2012

Fully-taxable equivalent net interest income for 2013 increased $1.0 million, or less than 1%, from 2012. This reflected the impact of 4% loan growth, a 5 basis point decrease in the NIM to 3.36%, as well as a 7% reduction in other earning assets, the majority of which were loans held for sale. The primary items impacting the decrease in the NIM were:

 

   

19 basis point negative impact from the mix and yield of earning assets primarily reflecting a decrease in consumer loan yields.

 

   

3 basis point decrease in the benefit to the margin of non-interest bearing funds, reflecting lower interest rates on total interest bearing liabilities from the prior year.

Partially offset by:

 

   

14 basis point positive impact from the mix and yield of deposits reflecting the strategic focus on changing the funding sources from higher rate time deposits to no-cost demand deposits and low-cost money market deposits.

 

   

3 basis point positive impact from noncore funding primarily reflecting lower debt costs.

 

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Table of Contents

Average earning assets increased $0.9 billion, or 2%, from the prior year, driven by:

 

   

$1.2 billion, or 8%, increase in average C&I loans and leases. This reflected the continued growth within the middle market healthcare vertical, equipment finance, and dealer floorplan.

 

   

$1.2 billion, or 25%, increase in average on balance sheet automobile loans, as the growth in originations remained strong and our investments in the Northeast and upper Midwest continued to grow as planned.

Partially offset by:

 

   

$0.8 billion, or 13%, decrease in average CRE loans, as acceptable returns for new originations were balanced against internal concentration limits and increased competition for projects sponsored by high quality developers.

 

   

$0.6 billion, or 52%, decrease in loans held-for-sale reflecting the impact of automobile loan securitizations completed in 2012.

While there was minimal impact on the full-year average balance sheet, $1.9 billion of net investment securities were purchased during the 2013 fourth quarter. Our investment securities portfolio is evaluated under established asset/liability management objectives. Additionally, $0.6 billion of direct purchase municipal instruments were reclassified on December 31, 2013, from C&I loans to available-for-sale securities.

Average noninterest-bearing deposits increased $0.7 billion, or 6%, while average interest-bearing liabilities decreased $0.3 billion, or 1%, from 2012, primarily reflecting:

 

   

$1.7 billion, or 27%, decrease in average core certificates of deposit due to the strategic focus on changing the funding sources to no-cost demand deposits and low-cost money market deposits.

 

   

$0.6 billion, or 47%, decrease in short-term borrowings due to a focused effort to reduce collateralized deposits.

Partially offset by:

 

   

$1.8 billion, or 13%, increase in money market deposits reflecting the strategic focus on customer growth and increased share of wallet among both consumer and commercial customers.

While there was minimal impact on the full-year average balance sheet, average subordinated notes and other long-term debt reflect the issuance of $0.5 billion and $0.8 billion of long-term debt in the 2013 fourth quarter and the 2013 third quarter, respectively.

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 in 2014 was $81.0 million, down $9.1 million, or 10%, from 2013, reflecting a $64.0 million, or 34%, decrease in NCOs. The provision for credit losses in 2014 was $43.6 million less than total NCOs.

The provision for credit losses in 2013 was $90.0 million, down $57.3 million, or 39%, from 2012, reflecting a $153.8 million, or 45%, decrease in NCOs. The provision for credit losses in 2013 was $98.6 million less than total NCOs.

 

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Table of Contents

Noninterest Income

(This section should be read in conjunction with Significant Item 6.)

The following table reflects noninterest income for the past three years:

Table 7—Noninterest Income

 

     Twelve Months Ended December 31,  
            Change from 2013            Change from 2012        

(dollar amounts in thousands)

   2014      Amount     Percent     2013      Amount     Percent     2012  

Service charges on deposit accounts

   $ 273,741       $ 1,939        1   $ 271,802       $ 9,623        4   $ 262,179   

Trust services

     115,972         (7,035     (6     123,007         1,110        1        121,897   

Electronic banking

     105,401         12,810        14        92,591         10,301        13        82,290   

Mortgage banking income

     84,887         (41,968     (33     126,855         (64,237     (34     191,092   

Brokerage income

     68,277         (1,347     (2     69,624         (3,060     (4     72,684   

Insurance income

     65,473         (3,791     (5     69,264         (2,055     (3     71,319   

Bank owned life insurance income

     57,048         629        1        56,419         377        1        56,042   

Capital markets fees

     43,731         (1,489     (3     45,220         (2,940     (6     48,160   

Gain on sale of loans

     21,091         2,920        16        18,171         (40,011     (69     58,182   

Securities gains (losses)

     17,554         17,136        4,100        418         (4,351     (91     4,769   

Other income

     126,004         (12,821     (9     138,825         1,118        1        137,707   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 979,179       $ (33,017     (3 )%    $ 1,012,196       $ (94,125     (9 )%    $ 1,106,321   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

2014 vs. 2013

Noninterest income decreased $33.0 million, or 3%, from the prior year, primarily reflecting:

 

   

$42.0 million, or 33%, decrease in mortgage banking income primarily driven by a $27.7 million, or 33%, reduction in origination and secondary marketing revenue as originations decreased and gain-on-sale margins compressed, and a $14.2 million negative impact from net MSR hedging activity.

 

   

$12.8 million, or 9%, decrease in other income primarily due to a decrease in LIHTC gains and lower fees associated with commercial loan activity.

 

   

$7.0 million, or 6%, decrease in trust services primarily due to a reduction in fees.

Partially offset by:

 

   

$17.1 million increase in securities gains as we adjusted the mix of our securities portfolio to prepare for the LCR requirements.

 

   

$12.8 million, or 14%, increase in electronic banking income due to higher card related income and underlying customer growth.

2013 vs. 2012

Noninterest income decreased $94.1 million, or 9%, from the prior year, primarily reflecting:

 

   

$64.2 million, or 34%, decrease in mortgage banking income primarily driven by 9% reduction in volume, lower gain on sale margin, and a higher percentage of originations held on the balance sheet.

 

   

$40.0 million, or 69%, decrease in gain on sale of loans as no auto loan securitizations occurred in 2013 compared to $2.3 billion of auto loan securitizations in 2012.

 

   

$4.4 million, or 91%, decrease in securities gains as the prior year had certain securities designated as available-for-sale that were sold and the proceeds from those sales were reinvested into the held-to-maturity portfolio.

Partially offset by:

 

   

$10.3 million, or 13%, increase in electronic banking income due to continued consumer household growth.

 

   

$9.6 million, or 4%, increase in service charges on deposit accounts reflecting 8% consumer household and 6% commercial relationship growth and changing customer usage patterns. This more than offset the approximately $28.0 million negative impact of the February 2013 implementation of a new posting order for consumer transaction accounts.

 

   

$1.1 million, or 1%, increase in other income. In accordance with ASC 323-740, the low income housing tax credit investment amortization expense is now presented as a component of provision for income taxes. Previously, the amortization expense was included in other income. This change resulted in higher other income. In addition, there was an increase in fees associated with commercial loan activity. These increases were partially offset by an $11.2 million bargain purchase gain associated with the FDIC-assisted Fidelity Bank acquisition in the prior year.

 

35


Table of Contents

Noninterest Expense

(This section should be read in conjunction with Significant Items 1, 2, 3 and 4.)

The following table reflects noninterest expense for the past three years:

Table 8—Noninterest Expense

 

     Twelve Months Ended December 31,  
            Change from 2013            Change from 2012        

(dollar amounts in thousands)

   2014      Amount     Percent     2013      Amount     Percent     2012  

Personnel costs

   $ 1,048,775       $ 47,138        5   $ 1,001,637       $ 13,444        1   $ 988,193   

Outside data processing and other services

     212,586         13,039        7        199,547         9,292        5        190,255   

Net occupancy

     128,076         2,732        2        125,344         14,184        13        111,160   

Equipment

     119,663         12,870        12        106,793         3,846        4        102,947   

Professional services

     59,555         18,968        47        40,587         (25,171     (38     65,758   

Marketing

     50,560         (625     (1     51,185         (13,078     (20     64,263   

Deposit and other insurance expense

     49,044         (1,117     (2     50,161         (18,169     (27     68,330   

Amortization of intangibles

     39,277         (2,087     (5     41,364         (5,185     (11     46,549   

Gain on early extinguishment of debt

     —           —          —          —           798        (100     (798

Other expense

     174,810         33,425        24        141,385         (57,834     (29     199,219   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total noninterest expense

   $ 1,882,346       $ 124,343        7   $ 1,758,003       $ (77,873     (4 )%    $ 1,835,876   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Number of employees (average full-time equivalent)

     11,873         (91     (1