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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

QUARTERLY PERIOD ENDED March 31, 2014

Commission File Number 1-34073

 

 

Huntington Bancshares Incorporated

 

 

 

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

41 South High Street, Columbus, Ohio 43287

Registrant’s telephone number (614) 480-8300

 

 

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

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

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

 

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

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

There were 827,771,805 shares of Registrant’s common stock ($0.01 par value) outstanding on March 31, 2014.

 

 

 


Table of Contents

HUNTINGTON BANCSHARES INCORPORATED

INDEX

 

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements (Unaudited)

  

Condensed Consolidated Balance Sheets at March 31, 2014 and December 31, 2013

     52   

Condensed Consolidated Statements of Income for the three months ended March 31, 2014 and 2013

     53   

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013

     54   

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2014 and 2013

     55   

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013

     56   

Notes to Unaudited Condensed Consolidated Financial Statements

     57   

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

  

Executive Overview

     7   

Discussion of Results of Operations

     9   

Risk Management and Capital:

     17   

Credit Risk

     17   

Market Risk

     28   

Liquidity Risk

     30   

Operational Risk

     33   

Compliance Risk

     35   

Capital

     35   

Fair Value

     38   

Business Segment Discussion

     39   

Additional Disclosures

     50   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     125   

Item 4. Controls and Procedures

     125   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     125   

Item 1A. Risk Factors

     125   

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

     125   

Item 6. Exhibits

     126   

Signatures

     128   

 

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Glossary of Acronyms and Terms

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

 

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

 

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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 Asset
HTM    Held-to-Maturity
IRC    Internal Revenue Code of 1986, as amended
IRS    Internal Revenue Service
ISE    Interest Sensitive Earnings
LCR    Liquidity Coverage Ratio
LIBOR    London Interbank Offered Rate
LGD    Loss-Given-Default
LIHTC    Low Income Housing Tax Credit
LTV    Loan to Value
MD&A    Management’s Discussion and Analysis of Financial Condition and Results of Operations
MSA    Metropolitan Statistical Area
MSR    Mortgage Servicing Rights
NALs    Nonaccrual Loans
NAV    Net Asset Value
NCO    Net Charge-off
NIM    Net interest margin
NCUA    National Credit Union Administration
NPAs    Nonperforming Assets
NPR    Notice of Proposed Rulemaking
N.R.    Not relevant. Denominator of calculation is a gain in the current period compared with a loss in the prior period, or vice-versa
NSF / OD    Nonsufficient Funds and Overdraft
OCC    Office of the Comptroller of the Currency
OCI    Other Comprehensive Income (Loss)
OCR    Optimal Customer Relationship
OLEM    Other Loans Especially Mentioned
OREO    Other Real Estate Owned
OTTI    Other-Than-Temporary Impairment
PD    Probability-Of-Default
Plan    Huntington Bancshares Retirement Plan
Problem Loans    Includes nonaccrual loans and leases (Table 12), troubled debt restructured loans (Table 13), accruing loans and leases past due 90 days or more (aging analysis section of Footnote 3), and Criticized commercial loans (credit quality indicators section of Footnote 3).
REIT    Real Estate Investment Trust
Reg E    Regulation E, of the Electronic Fund Transfer Act
RBHPCG    Regional Banking and The Huntington Private Client Group
ROC    Risk Oversight Committee
SAD    Special Assets Division
SBA    Small Business Administration
SEC    Securities and Exchange Commission
SERP    Supplemental Executive Retirement Plan
Sky Financial    Sky Financial Group, Inc.
SRIP    Supplemental Retirement Income Plan

 

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

 

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PART I. FINANCIAL INFORMATION

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

 

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

INTRODUCTION

We are a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through the Bank, we have 148 years of servicing the financial needs of our customers. Through our subsidiaries, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, insurance service programs, and other financial products and services. Our 727 branches are located in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. Selected financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office in Columbus, Ohio and a limited purpose office located in the Cayman Islands and another limited purpose office located in Hong Kong. Our foreign banking activities, in total or with any individual country, are not significant.

This MD&A provides information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows. The MD&A included in our 2013 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2013 Form 10-K. This MD&A should also be read in conjunction with the financial statements, notes and other information contained in this report.

Our discussion is divided into key segments:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

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

 

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EXECUTIVE OVERVIEW

Summary of 2014 First Quarter Results

For the quarter, we reported net income of $149.1 million, or $0.17 per common share, compared with $153.3 million, or $0.17 per common share, in the year-ago quarter ( see Table 1 ).

Fully-taxable equivalent net interest income was $443.4 million for the quarter, up $13.3 million, or 3%, from the year-ago quarter. The results reflected a $2.6 billion, or 6%, increase in average loans, as well as a $1.4 billion, or 14%, increase in other earning assets. These were partially offset by a 15 basis point decrease in the net interest margin. The primary items affecting the net interest margin were a 22 basis point negative impact from the mix and yield of earning assets, partially offset by a 7 basis point reduction in funding costs.

The provision for credit losses decreased $5.0 million, or 17%, from the year-ago quarter. This reflected the continued decline in classified, criticized and nonaccrual loans. NCOs decreased $8.7 million, or 17%, to $43.0 million, primarily due to improvement of the CRE portfolio. Given the absolute low level of C&I and CRE NCOs, there will continue to be some volatility in quarter to quarter comparisons. NCOs were an annualized 0.40% of average loans and leases in the current quarter, compared to 0.51% in the year-ago quarter.

Noninterest income decreased $8.1 million, or 3%, from the year-ago quarter. Mortgage banking income declined $22.2 million, or 49%, primarily driven by 41% reduction in volume, lower gain on sale, and a higher percentage of originations held on the balance sheet. Other income declined by $7.0 million, or 18%, as the year-ago quarter included an $8.8 million gain on the sale of LIHTC investments. Securities gains increased $17.5 million, as we adjusted the mix of our securities portfolio to prepare for the Liquidity Coverage Ratio rules. Service charges on deposit accounts increased $3.7 million, or 6%, which reflected 7% consumer household and 3% commercial relationship growth. This more than offset the negative impact of the February 2013 implementation of a new posting order for consumer transaction accounts. Electronic banking increased $2.9 million, or 14%, due to continued consumer household growth.

Noninterest expense increased $17.3 million, or 4%, from the year-ago quarter. The current quarter results were negatively affected by $12.6 million of one-time merger related expenses related to our acquisition of Camco Financial (see below), $9.0 million addition to litigation reserves, and $3.0 million goodwill impairment related to the reorganization of our business segments (see below). Personnel costs decreased $9.4 million, or 4%, primarily reflecting the curtailment of the pension plan as of the end of 2013. Also, the year-ago quarter included $6.9 million of franchise repositioning related expense.

The tangible common equity to tangible assets ratio at March 31, 2014, was 8.63%, down 28 basis points from a year ago. Our Tier 1 common risk-based capital ratio was 10.60%, down slightly from 10.62% a year ago. The regulatory Tier 1 risk-based capital ratio at March 31, 2014, was 11.95%, down slightly from 12.16% a year ago. The decrease in the regulatory Tier 1 risk-based capital ratio reflected the redemption of $50 million of qualifying preferred securities on December 31, 2013 and an increase in risk-weighted assets caused by organic balance sheet growth, as well as assets acquired from Camco Financial. These declines were offset by an increase in retained earnings. All capital ratios were impacted by the repurchase of 27 million common shares over the last four quarters, 15 million of which were repurchased during the 2014 first quarter, as well as the issuance of 9 million common shares in the Camco Financial acquisition.

The Federal Reserve completed its review of our January 2014 capital plan submission and did not object to our proposed capital actions. These actions include a 20% increase in the dividend per common share to $0.06, potentially starting in the fourth quarter of 2014, and the potential repurchase of up to $250 million of common stock through the first quarter of 2015. Huntington’s proposed capital actions represent an 11% increase in the capital return relative to the dividends paid during the four quarters covered by last year’s plan and the recently completed $227 million share repurchase program. Our capital priorities remain the same, with reinvesting excess capital to organically grow the business our top priority.

Business Overview

General

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

We continued to deliver solid financial performance in the 2014 first quarter with strong balance sheet growth that drove increased net interest income year over year. We also invested in key businesses and our distribution network for future growth. We are particularly pleased that we have been able to proceed with our ongoing investments, while controlling expenses across the enterprise and achieving positive operating leverage. In addition, we saw significant increases in C&I and automobile lending and our customer base once again expanded.

 

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OTHER HIGHLIGHTS

Camco Financial Acquisition – On March 1, 2014, we completed our acquisition of Camco Financial and converted their banking offices to Huntington branches. As a result, we acquired $0.6 billion of deposits and $0.6 billion of loans.

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

Accounting Standards Update – We early adopted ASU 2014-01 (see Note 1). The amendments are required to be applied retroactively to all periods presented. We elected to change the method of recognition in investments that previously qualified for the effective yield method to the proportional amortization method. As a result of these changes, we recorded a cumulative-effect adjustment to beginning retained earnings.

Branch Acquisition Announcement – On April 9, 2014, we announced the signing of a definitive agreement to acquire 11 branches in Central and East Michigan from Bank of America Corporation. We will purchase approximately $450 million of deposits, with a deposit premium of 3.5% based on deposit balances near the time the transaction closes. The transaction is expected to be completed in the second half of 2014.

Economy

Our loan pipelines are strong and we see signs that our customers are more confident in the economy. Our Midwestern markets are recovering with downward unemployment trends and ongoing investments by manufacturers and other businesses. Notwithstanding these tailwinds, we continue to face a challenging regulatory and competitive environment.

2014 Expectations

Net interest income is expected to increase moderately. We anticipate an increase in earning assets as total loans moderately grow and investment securities remain near current levels. However, those benefits to net interest income are expected to be mostly offset by continued downward pressure on NIM. While we are maintaining a disciplined approach to loan pricing, asset yields remain under pressure but the continued opportunity of deposit repricing remains, albeit closer to current levels.

The C&I portfolio is expected to see growth consistent with the anticipated increase in customer activity. Our C&I loan pipeline remains robust with much of this reflecting the positive impact from our investments in specialized commercial verticals, automotive dealer relationships, focused OCR sales process, and continued support of middle market and small business lending. Automobile loan originations remain strong and portfolio balances are expected to continue to grow. Residential mortgages, home equity, and CRE loan balances are expected to increase modestly.

We anticipate the increase in total loans will outpace growth in total deposits modestly. This reflects our continued focus on the overall cost of funds, through the issuance of long-term debt as well as the continued shift towards low- and no-cost demand deposits and money market deposit accounts.

Noninterest income, excluding the impact of any net MSR activity and securities gains, is expected to be slightly higher than current seasonally low levels. Beginning in July, we anticipate a change in our consumer checking accounts that is estimated to impact service charges on deposits negatively by $6 million per quarter.

Noninterest expense is expected to be slightly higher than current levels, excluding the net $22 million of negative impact from Significant Items we experienced in the 2014 first quarter. The 2014 second quarter is expected to be negatively impacted by annual peak marketing expenses, a full quarter’s inclusion of Camco Financial, and annual merit increases to personnel expense. We are committed to delivering positive operating leverage for the 2014 full year.

NPAs are expected to show continued improvement. NCOs are within our expected normalized range of 35 to 55 basis points. The level of provision for credit losses was below our long-term expectation, and we continue to expect moderate quarterly volatility.

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

 

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DISCUSSION OF RESULTS OF OPERATIONS

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

Table 1—Selected Quarterly Income Statement Data (1)

 

     2014     2013  

(dollar amounts in thousands, except per share amounts)

   First     Fourth     Third     Second     First  

Interest income

   $ 472,455     $ 469,824      $ 462,912      $ 462,582      $ 465,319  

Interest expense

     34,949       39,175       38,060       37,645       41,149  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     437,506       430,649       424,852       424,937       424,170  

Provision for credit losses

     24,630       24,331       11,400       24,722       29,592  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     412,876       406,318       413,452       400,215       394,578  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     64,582       69,992       72,918       68,009       60,883  

Mortgage banking income

     23,089       24,327       23,621       33,659       45,248  

Trust services

     29,565       30,711       30,470       30,666       31,160  

Electronic banking

     23,642       24,251       24,282       23,345       20,713  

Insurance income

     16,496       15,556       17,269       17,187       19,252  

Brokerage income

     17,071       15,116       16,532       19,546       17,995  

Bank owned life insurance income

     13,307       13,816       13,740       15,421       13,442  

Capital markets fees

     9,194       12,332       12,825       12,229       7,834  

Gain on sale of loans

     3,570       7,144       5,063       3,348       2,616  

Securities gains (losses)

     16,970       1,239       98       (410     (509

Other income

     30,999       35,407       36,950       28,919       37,984  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     248,485       249,891       253,768       251,919       256,618  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Personnel costs

     249,477       249,554       229,326       263,862       258,895  

Outside data processing and other services

     51,490       51,071       49,313       49,898       49,265  

Net occupancy

     33,433       31,983       35,591       27,656       30,114  

Equipment

     28,750       28,775       28,191       24,947       24,880  

Marketing

     10,686       13,704       12,271       14,239       10,971  

Deposit and other insurance expense

     13,718       10,056       11,155       13,460       15,490  

Amortization of intangibles

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

Professional services

     12,231       11,567       12,487       9,341       7,192  

Other expense

     51,045       38,979       34,640       32,100       35,666  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     460,121       446,009       423,336       445,865       442,793  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     201,240       210,200       243,884       206,269       208,403  

Provision for income taxes

     52,097       52,029       65,047       55,269       55,129  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 149,143     $ 158,171      $ 178,837      $ 151,000      $ 153,274  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends on preferred shares

     7,964       7,965       7,967       7,967       7,970  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to common shares

   $ 141,179     $ 150,206      $ 170,870      $ 143,033      $ 145,304  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares—basic

     829,659       830,590       830,398       834,730       841,103  

Average common shares—diluted

     842,677       842,324       841,025       843,840       848,708  

Net income per common share—basic

   $ 0.17     $ 0.18      $ 0.21      $ 0.17      $ 0.17  

Net income per common share—diluted

     0.17       0.18       0.20       0.17       0.17  

Cash dividends declared per common share

     0.05       0.05       0.05       0.05       0.04  

Return on average total assets

     1.01     1.09     1.27     1.08     1.12

Return on average common shareholders’ equity

     9.9       10.5       12.3       10.4       10.8  

Return on average tangible common shareholders’ equity (2)

     11.3       12.1       14.2       12.1       12.6  

Net interest margin (3)

     3.27       3.28       3.34       3.38      3.42  

Efficiency ratio (4)

     66.4       63.4       60.3       63.7       62.9  

Effective tax rate

     25.9       24.8       26.7       26.8       26.5  

 

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Revenue—FTE

              

Net interest income

   $ 437,506      $ 430,649      $ 424,852      $ 424,937      $ 424,170  

FTE adjustment

     5,885        8,196        6,634        6,587        5,923  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income (3)

     443,391        438,845        431,486        431,524        430,093  

Noninterest income

     248,485        249,891        253,768        251,919        256,618  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue (3)

   $ 691,876      $ 688,736      $ 685,254      $ 683,443      $ 686,711  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  

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

(2)  

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

(3)  

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

(4)  

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

Significant Items

Definition of Significant Items

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

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

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

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

Significant Items Influencing Financial Performance Comparisons

Earnings comparisons were impacted by the Significant Items summarized below:

 

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

 

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

 

3. Franchise Repositioning Related Expense. During the 2013 fourth quarter, $6.9 million of franchise repositioning related expense was recorded. This resulted in a negative impact of $0.01 per common share.

 

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Table of Contents

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

Table 2—Significant Items Influencing Earnings Performance Comparison

 

     Three Months Ended  
     March 31, 2014     December 31, 2013     March 31, 2013  

(dollar amounts in thousands, except per share amounts)

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

Net income

   $ 149,143       $ 158,171       $ 153,274     

Earnings per share, after-tax

     $ 0.17       $ 0.18        $ 0.17  

Significant Items—favorable (unfavorable) impact:

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

Camco Financial Acquisition

     (11,823     (0.01     —          —          —           —     

Addition to Litigation Reserve

     (9,000     (0.01     —          —          —           —     

Franchise repositioning related expense

         (6,909     (0.01     

 

(1)  

Pretax.

(2)  

Based on average outstanding diluted common shares

(3)  

After-tax

 

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Net Interest Income / Average Balance Sheet

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

Table 3 - Consolidated Quarterly Average Balance Sheets

 

     Average Balances     Change  
     2014     2013     1Q14 vs. 1Q13  

(dollar amounts in millions)

   First     Fourth     Third     Second     First     Amount     Percent  

Assets:

              

Interest-bearing deposits in banks

   $ 83     $ 71     $ 54     $ 84     $ 72     $ 11       15

Loans held for sale

     279       322       379       678       709       (430     (61

Securities:

              

Available-for-sale and other securities:

              

Taxable

     6,240       5,818       6,040       6,728       6,964       (724     (10

Tax-exempt

     1,115       548       565       591       549       566       103  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     7,355       6,366       6,605       7,319       7,513       (158     (2

Trading account securities

     38       76       76       84       85       (47     (55

Held-to-maturity securities—taxable

     3,783       3,038       2,139       1,711       1,717       2,066       120  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     11,176       9,480       8,820       9,114       9,315       1,861       20  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (1)

              

Commercial:

              

Commercial and industrial

     17,631       17,671       17,032       17,033       16,954       677       4  

Commercial real estate:

              

Construction

     612       573       565       586       598       14       2  

Commercial

     4,289       4,331       4,345       4,429       4,694       (405     (9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     4,901       4,904       4,910       5,015       5,292       (391     (7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     22,532       22,575       21,942       22,048       22,246       286       1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Automobile

     6,786       6,502       6,075       5,283       4,833       1,953       40  

Home equity

     8,340       8,346       8,341       8,263       8,395       (55     (1

Residential mortgage

     5,379       5,331       5,256       5,225       4,978       401       8  

Other consumer

     386       385       380       461       412       (26     (6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     20,891       20,564       20,052       19,232       18,618       2,273       12  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     43,423       43,139       41,994       41,280       40,864       2,559       6  

Allowance for loan and lease losses

     (649     (668     (717     (746     (772     123       (16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans and leases

     42,774       42,471       41,277       40,534       40,092       2,682       7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     54,961       53,012       51,247       51,156       50,960       4,001       8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and due from banks

     904       846       944       940       904       —         —    

Intangible assets

     535       542       552       563       571       (36     (6

All other assets

     3,941       3,917       3,889       3,976       4,065       (124     (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 59,692     $ 57,649     $ 55,915     $ 55,889     $ 55,728     $ 3,964       7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Shareholders’ Equity:

              

Deposits:

              

Demand deposits—noninterest-bearing

   $ 13,192     $ 13,337     $ 13,088     $ 12,879     $ 12,165     $ 1,027       8

Demand deposits—interest-bearing

     5,775       5,755     $ 5,763     $ 5,927     $ 5,977       (202     (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     18,967       19,092       18,851       18,806       18,142       825       5  

Money market deposits

     17,648       16,827       15,739       15,069       15,045       2,603       17  

Savings and other domestic deposits

     4,967       4,912       5,007       5,115       5,083       (116     (2

Core certificates of deposit

     3,613       3,916       4,176       4,778       5,346       (1,733     (32
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     45,195       44,747       43,773       43,768       43,616       1,579       4  

Other domestic time deposits of $250,000 or more

     284       275       268       324       360       (76     (21

Brokered deposits and negotiable CDs

     1,782       1,398       1,553       1,779       1,697       85       5  

Deposits in foreign offices

     328       354       376       316       340       (12     (4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     47,589       46,774       45,970       46,187       46,013       1,576       3  

Short-term borrowings

     883       629       710       701       762       121       16  

Federal Home Loan Bank advances

     1,499       851       549       757       686       813       119  

Subordinated notes and other long-term debt

     2,503       2,244       1,753       1,292       1,348       1,155       86  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     39,282       37,161       35,894       36,058       36,644       2,638       7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

All other liabilities

     1,035       1,095       1,054       1,064       1,085       (50     (5

Shareholders’ equity

     6,183       6,056       5,879       5,888       5,834       349       6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 59,692     $ 57,649     $ 55,915     $ 55,889     $ 55,728     $ 3,964       7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

 

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Table 4—Consolidated Quarterly Net Interest Margin Analysis

 

     Average Rates (2)  

Fully-taxable equivalent basis (1)

   2014     2013  
   First     Fourth     Third     Second     First  

Assets

          

Interest-bearing deposits in banks

     0.03     0.04     0.07     0.27     0.16 %

Loans held for sale

     3.74       4.46       3.89       3.39       3.22  

Securities:

          

Available-for-sale and other securities:

          

Taxable

     2.47       2.38       2.34       2.29       2.31  

Tax-exempt

     3.03       6.34       4.04       3.94       3.96  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     2.55       2.72       2.48       2.42       2.43  

Trading account securities

     1.12       0.42       0.23       0.60       0.50  

Held-to-maturity securities—taxable

     2.47       2.42       2.29       2.29       2.29  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     2.52       2.60       2.41       2.38       2.39  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (3)

          

Commercial:

          

Commercial and industrial

     3.56       3.54       3.68       3.75       3.83  

Commercial real estate:

          

Construction

     3.99       4.04       3.91       3.93       4.05  

Commercial

     3.84       3.97       4.10       4.13       4.00  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     3.86       3.98       4.08       4.09       4.01  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     3.63       3.63       3.77       3.83       3.87  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

          

Automobile

     3.54       3.67       3.80       3.96       4.28  

Home equity

     4.12       4.11       4.10       4.16       4.20  

Residential mortgage

     3.78       3.77       3.81       3.82       3.97  

Other consumer

     6.84       6.64       6.98       6.66       7.05  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     3.89       3.93       3.99       4.07       4.22  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     3.75       3.77       3.87       3.95       4.03  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     3.53     3.58     3.64     3.68     3.75
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

          

Deposits:

          

Demand deposits—noninterest-bearing

     —       —       —       —       —  

Demand deposits—interest-bearing

     0.04       0.04       0.04       0.04       0.04  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     0.01       0.01       0.01       0.01       0.01  

Money market deposits

     0.25       0.27       0.26       0.24       0.23  

Savings and other domestic deposits

     0.20       0.24       0.25       0.27       0.30  

Core certificates of deposit

     0.94       1.05       1.05       1.13       1.19  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     0.28       0.32       0.32       0.34       0.37  

Other domestic time deposits of $250,000 or more

     0.41       0.39       0.44       0.50       0.52  

Brokered deposits and negotiable CDs

     0.28       0.39       0.55       0.62       0.67  

Deposits in foreign offices

     0.13       0.14       0.14       0.14       0.17  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     0.28       0.32       0.33       0.36       0.38  

Short-term borrowings

     0.07       0.08       0.09       0.10       0.12  

Federal Home Loan Bank advances

     0.12       0.14       0.14       0.14       0.18  

Subordinated notes and other long-term debt

     1.66       2.10       2.29       2.35       2.54  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     0.36     0.42     0.42     0.42     0.45
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest rate spread

     3.17     3.15     3.20     3.26     3.30

Impact of noninterest-bearing funds on margin

     0.10       0.13       0.14       0.12       0.12  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin

     3.27 %     3.28 %     3.34 %     3.38 %     3.42 %
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  

FTE yields are calculated assuming a 35% tax rate.

(2)  

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

(3)  

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

 

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Table 5—Average Loans/Leases and Deposits

 

     First Quarter      Fourth Quarter      1Q14 vs 1Q13     1Q14 vs 4Q13  

(dollar amounts in millions)

   2014      2013      2013      Amount     Percent     Amount     Percent  

Loans/Leases:

                 

Commercial and industrial

   $ 17,631      $ 16,954      $ 17,671      $ 677       4 %   $ (40     (0 )%

Commercial real estate

     4,901        5,292        4,904        (391     (7     (3     (0
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     22,532        22,246        22,575        286       1        (43     (0

Automobile

     6,786        4,833        6,502        1,953       40        284       4   

Home equity

     8,340        8,395        8,346        (55     (1     (6     (0

Residential mortgage

     5,379        4,978        5,331        401       8        48       1   

Other loans

     386        412        385        (26     (6     1       0   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     20,891        18,618        20,564        2,273       12        327       2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

   $ 43,423      $ 40,864        43,139      $ 2,559       6 %   $ 284       1 %
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Deposits:

                 

Demand deposits—noninterest-bearing

   $ 13,192      $ 12,165      $ 13,337      $ 1,027       8 %   $ (145     (1 )%

Demand deposits—interest-bearing

     5,775        5,977        5,755        (202     (3     20       0   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     18,967        18,142        19,092        825       5        (125     (1

Money market deposits

     17,648        15,045        16,827        2,603       17        821       5   

Savings and other domestic time deposits

     4,967        5,083        4,912        (116     (2     55       1   

Core certificates of deposit

     3,613        5,346        3,916        (1,733     (32     (303     (8
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     45,195        43,616        44,747        1,579       4        448       1   

Other deposits

     2,394        2,397        2,027        (3     (0     367       18   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

   $ 47,589      $ 46,013      $ 46,774      $ 1,576       3 %   $ 815       2 %
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

2014 First Quarter versus 2013 First Quarter

Fully-taxable equivalent (FTE) net interest income increased $13.3 million, or 3%, from the 2013 first quarter. This reflected the benefit from the $2.6 billion, or 6%, of average loan growth and a $1.4 billion, or 14%, increase in other earnings assets, the majority of which were investment securities that meet the requirements for HQLA as proposed in the LCR rules issued by the regulators in October 2013. This was partially offset by the 15 basis point decrease in the FTE net interest margin to 3.27%. The 22 basis point negative impact on NIM from the mix and yield of earning assets was partially offset by the 7 basis point reduction in funding costs.

Average loans and leases increased $2.6 billion, or 6%, from the prior year, driven by:

 

   

$2.0 billion, or 40%, increase in average automobile loans, as originations remained strong and our investments throughout the Northeast and upper Midwest continued to grow as planned.

 

   

$0.7 billion, or 4%, increase in average C&I loans and leases. This reflected the continued growth within Business Banking, dealer floorplan, and domestic subsidiaries of foreign owned companies.

Partially offset by:

 

   

$0.4 billion, or 7%, decrease in average CRE loans. This decrease reflected continued runoff of the noncore portfolio.

Average noninterest bearing deposits increased $1.0 billion, or 8%, while average interest-bearing liabilities increased $2.6 billion, or 7%, from the 2013 first quarter, primarily reflecting:

 

   

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

 

   

$2.1 billion, or 75%, increase in short- and long-term borrowings, which were used to efficiently finance growth in loans and HQLA securities while continuing to lower the overall cost of funds.

Partially offset by:

 

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$1.7 billion, or 32%, decrease in average core certificates of deposit due to the strategic focus on changing the funding sources to no-cost demand deposits and lower cost money market deposits.

2014 First Quarter versus 2013 Fourth Quarter

Compared to the 2013 fourth quarter, fully-taxable equivalent net interest income increased $4.5 million, or 1%, reflecting a $1.9 billion, or 4% increase in average earnings assets, partially offset by a 1 basis point decrease in NIM. The primary items affecting the NIM were a 5 basis point negative impact from the mix and yield of earning assets, partially offset by a 4 basis point reduction in funding costs.

Provision for Credit Losses

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

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

The provision for credit losses for the 2014 first quarter was $24.6 million and increased $0.3 million, or 1%, from the prior quarter and declined $5.0 million, or 17%, from the year-ago quarter. The current quarter’s provision for credit losses was $18.4 million less than total NCOs for the same period. (See Credit Quality discussion). Given the absolute low level of the provision for credit losses and the uncertain and uneven nature of the economic recovery, some degree of volatility on a quarter-to-quarter basis is expected.

Noninterest Income

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

Table 6—Noninterest Income

 

     2014      2013     1Q14 vs 1Q13     1Q14 vs 4Q13  

(dollar amounts in thousands)

   First      Fourth      Third      Second     First     Amount     Percent     Amount     Percent  

Service charges on deposit accounts

   $ 64,582      $ 69,992      $ 72,918      $ 68,009     $ 60,883     $ 3,699       6 %   $ (5,410     (8 )%

Mortgage banking income

     23,089        24,327        23,621        33,659       45,248       (22,159     (49     (1,238     (5

Trust services

     29,565        30,711        30,470        30,666       31,160       (1,595     (5     (1,146     (4

Electronic banking

     23,642        24,251        24,282        23,345       20,713       2,929       14        (609     (3

Insurance income

     16,496        15,556        17,269        17,187       19,252       (2,756     (14     940       6   

Brokerage income

     17,071        15,116        16,532        19,546       17,995       (924     (5     1,955       13   

Bank owned life insurance income

     13,307        13,816        13,740        15,421       13,442       (135     (1     (509     (4

Capital markets fees

     9,194        12,332        12,825        12,229       7,834       1,360       17        (3,138     (25

Gain on sale of loans

     3,570        7,144        5,063        3,348       2,616       954       36        (3,574     (50

Securities gains (losses)

     16,970        1,239        98        (410     (509     17,479       N.R.        15,731       1,270   

Other income

     30,999        35,407        36,950        28,919       37,984       (6,985     (18     (4,408     (12
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 248,485      $ 249,891      $ 253,768      $ 251,919     $ 256,618     $ (8,133     (3 )%   $ (1,406     (1 )%
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

2014 First Quarter versus 2013 First Quarter

In the 2014 first quarter, noninterest income decreased $8.1 million, or 3%, from the year-ago quarter, primarily reflecting:

 

   

$22.2 million, or 49%, decrease in mortgage banking income primarily driven by 41% reduction in volume, lower gain on sale, and a higher percentage of originations held on the balance sheet.

 

   

$7.0 million, or 18%, decrease in other income as the year-ago quarter included an $8.8 million gain on the sale of LIHTC investments.

Partially offset by:

 

   

$17.5 million increase in securities gains as we adjusted the mix of our securities portfolio to prepare for the LCR.

 

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$3.7 million, or 6%, increase in service charges on deposit accounts reflecting 7% consumer household and 3% commercial relationship growth. This more than offset the negative impact of the February 2013 implementation of a new posting order for consumer transaction accounts.

 

   

$2.9 million, or 14%, increase in electronic banking due to continued consumer household growth.

2014 First Quarter versus 2013 Fourth Quarter

Compared to the 2013 fourth quarter, noninterest income decreased $1.4 million, or 1%, reflecting typical seasonality within service charges on deposit accounts, which decreased $5.4 million. Other linked quarter changes were a $3.6 million decrease in gain on sale of loans from reduced SBA loan sales, a $4.4 million decrease in other income, and a $3.1 million decrease in capital market fees related to customer derivatives. These were partially offset by a $15.7 million increase in securities gains.

Noninterest Expense

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

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

Table 7—Noninterest Expense

 

     2014      2013      1Q14 vs 1Q13     1Q14 vs 4Q13  

(dollar amounts in thousands)

   First      Fourth      Third      Second      First      Amount     Percent     Amount     Percent  

Personnel costs

   $ 249,477      $ 249,554      $ 229,326      $ 263,862      $ 258,895      $ (9,418     (4 )%   $ (77     (0 )%

Outside data processing and other services

     51,490        51,071        49,313        49,898        49,265        2,225       5        419       1   

Net occupancy

     33,433        31,983        35,591        27,656        30,114        3,319       11        1,450       5   

Equipment

     28,750        28,775        28,191        24,947        24,880        3,870       16        (25     (0

Marketing

     10,686        13,704        12,271        14,239        10,971        (285     (3     (3,018     (22

Deposit and other insurance expense

     13,718        10,056        11,155        13,460        15,490        (1,772     (11     3,662       36   

Amortization of intangibles

     9,291        10,320        10,362        10,362        10,320        (1,029     (10     (1,029     (10

Professional services

     12,231        11,567        12,487        9,341        7,192        5,039       70        664       6   

Other expense

     51,045        38,979        34,640        32,100        35,666        15,379       43        12,066       31   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

   $ 460,121      $ 446,009      $ 423,336      $ 445,865      $ 442,793      $ 17,328       4 %   $ 14,112       3 %
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Number of employees (average full-time equivalent)

     11,848        11,765        12,080        12,063        11,949        (101     (1 )%     83       1 %

2014 First Quarter versus 2013 First Quarter

In the 2014 first quarter, noninterest expense increased $17.3 million, or 4%, from the year-ago quarter. When adjusting for the $21.6 million of Significant Items, noninterest expense decreased $4.3 million. The $17.3 million increase in the reported noninterest expenses primarily reflects:

 

   

$15.4 million, or 43%, increase in other expense, reflecting a $9.0 million addition to litigation reserves and a $3.0 million goodwill impairment.

 

   

$5.0 million, or 70%, increase in professional services, including $2.2 million of one-time merger related expenses.

 

   

$3.9 million, or 16%, increase in equipment expense, reflecting increased depreciation on technology investments.

 

   

$3.3 million, or 11%, increase in net occupancy, reflecting $1.7 million of one-time merger related expenses.

 

   

$2.2 million, or 5%, increase in outside data processing and other services, reflecting $4.3 million of one-time merger related expenses.

Partially offset by:

 

   

$9.4 million, or 4%, decrease in personnel costs, primarily reflecting the curtailment of the pension plan of the end of 2013 that was partially offset by $2.3 million of one-time merger related expenses.

 

 

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2014 First Quarter versus 2013 Fourth Quarter

Noninterest expense of $460.1 million for the 2014 first quarter included $21.6 million of Significant Items and was up $14.1 million, or 3%, from the 2013 fourth quarter noninterest expense of $446.0 million, which included a $6.9 million Significant Item. After excluding the impact of Significant Items from both quarters, noninterest expense was essentially unchanged as the remaining $3.7 million increase in deposit and other insurance was largely offset by the remaining $3.0 million decline in marketing.

Provision for Income Taxes

The provision for income taxes in the 2014 first quarter was $52.1 million. This compared with a provision for income taxes of $52.0 million in the 2013 fourth quarter and $55.1 million in the 2013 first quarter. All three quarters included the benefits from tax-exempt income, tax-advantaged investments, and general business credits. At March 31, 2014, we had a net federal deferred tax asset of $123.7 million and a net state deferred tax asset of $42.3 million. Based on both positive and negative evidence and our level of forecasted future taxable income, we determined no impairment existed to the net federal and state deferred tax asset at March 31, 2014. For regulatory capital purposes, there was no disallowed net deferred tax asset at March 31, 2014.

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

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

RISK MANAGEMENT AND CAPITAL

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

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

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

Credit Risk

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

 

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

Loan and Lease Credit Exposure Mix

At March 31, 2014, loans and leases totaled $44.4 billion, representing a $1.2 billion, or 3%, increase compared to $43.1 billion at December 31, 2013, primarily reflecting growth in the C&I and automobile portfolio. In addition, we added $559.4 million in loans from our acquisition of Camco Financial during the 2014 first quarter. The Camco Financial portfolio represents approximately 50% of the growth in the quarter, centered in CRE, home equity and residential mortgage.

At March 31, 2014, commercial loans and leases totaled $23.1 billion and represented 53% of our total loan and lease credit exposure. Our commercial portfolio is diversified along product type, customer size, and geography across our footprint, and is comprised of the following loan types ( see Commercial Credit discussion) .

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

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

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

Total consumer loans and leases were $21.3 billion at March 31, 2014, and represented 47% of our total loan and lease credit exposure. The consumer portfolio is comprised primarily of automobile, home equity loans and lines-of-credit, and residential mortgages (see Consumer Credit discussion) .

Automobile – Automobile loans are comprised primarily of loans made through automotive dealerships and include exposure in selected states outside of our primary banking markets. The exposure outside of our primary banking markets represents 18% of the total exposure, with no individual state representing more than 5%. Applications are underwritten utilizing an automated underwriting system that applies consistent policies and processes across the portfolio.

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

 

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

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

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

Table 8—Loan and Lease Portfolio Composition

 

     2014     2013  

(dollar amounts in millions)

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

Commercial: (1)

                         

Commercial and industrial

   $ 18,046        41 %   $ 17,594        41 %   $ 17,335        41 %   $ 17,113        41 %   $ 17,267        42 %

Commercial real estate:

                         

Construction

     692        2        557        1        544        1        607        1        574        1   

Commercial

     4,339        10        4,293        10        4,328        10        4,286        10        4,485        11   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial real estate

     5,031        12        4,850        11        4,872        11        4,893        11        5,059        12   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial

     23,077        53        22,444        52        22,207        52        22,006        52        22,326        54   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Consumer:

                         

Automobile

     6,999        16        6,639        15        6,317        15        5,810        14        5,036        12   

Home equity

     8,373        19        8,336        18        8,347        20        8,369        20        8,474        21   

Residential mortgage

     5,542        12        5,321        12        5,307        12        5,168        12        5,051        12   

Other consumer

     363        —          380        2        378        1        387        2        397        1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer

     21,277        47        20,676        48        20,349        48        19,734        48        18,958        46   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans and leases

   $ 44,354        100 %   $ 43,120        100 %   $ 42,556        100 %   $ 41,740        100 %   $ 41,284        100 %
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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

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

 

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The table below provides our total loan and lease portfolio segregated by the type of collateral securing the loan or lease:

Table 9—Loan and Lease Portfolio by Collateral Type

 

     2014     2013  

(dollar amounts in millions)

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

Secured loans:

                         

Real estate—commercial

   $ 8,612        19 %   $ 8,622        20 %   $ 8,769        21 %   $ 8,749        21 %   $ 9,041        22 %

Real estate—consumer

     13,916        31        13,657        32        13,654        32        13,537        32        13,525        33   

Vehicles

     9,270        21        8,989        21        8,275        19        7,763        19        6,924        17   

Receivables/Inventory

     5,717        13        5,534        13        5,367        13        5,260        13        5,383        13   

Machinery/Equipment

     2,930        7        2,738        6        2,778        7        2,831        7        2,815        7   

Securities/Deposits

     1,064        2        786        2        905        2        924        2        840        2   

Other

     870        3        1,016        2        948        2        1,020        2        1,014        2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total secured loans and leases

     42,379        96        41,342        96        40,696        96        40,084        96        39,542        96   

Unsecured loans and leases

     1,975        4        1,778        4        1,860        4        1,656        4        1,742        4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans and leases

   $ 44,354        100 %   $ 43,120        100 %   $ 42,556        100 %   $ 41,740        100 %   $ 41,284        100 %
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Commercial Credit

Refer to the “Commercial Credit” section of our 2013 Form 10-K for our commercial credit underwriting and on-going credit management processes.

C&I PORTFOLIO

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

CRE PORTFOLIO

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

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

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

Consumer Credit

Refer to the “Consumer Credit” section of our 2013 Form 10-K for our consumer credit underwriting and on-going credit management processes.

 

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AUTOMOBILE PORTFOLIO

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

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

RESIDENTIAL REAL ESTATE SECURED PORTFOLIOS

The properties securing our residential mortgage and home equity portfolios are primarily located within our geographic footprint. While home prices have rebounded from the 2009-2010 levels, they remain below the peak. Huntington continues to support our local markets with consistent underwriting across all residential secured products. The residential-secured portfolio originations continue to be of high quality, with the majority of the negative credit impact coming from loans originated in 2006 and earlier. Our portfolio management strategies associated with our Home Savers group allows us to focus on effectively helping our customers with appropriate solutions for their specific circumstances.

Table 10—Selected Home Equity and Residential Mortgage Portfolio Data

(dollar amounts in millions)

 

     Home Equity     Residential Mortgage  
     Secured by first-lien     Secured by junior-lien        
     03/31/14     12/31/13     03/31/14     12/31/13     03/31/14     12/31/13  

Ending balance

   $ 4,886     $ 4,842     $ 3,487     $ 3,494     $ 5,542     $ 5,321  

Portfolio weighted average LTV ratio (1)

     71     71     81     81     74     74

Portfolio weighted average FICO score (2)

     757       758       746       741       745       743  
     Home Equity     Residential Mortgage (3)  
     Secured by first-lien     Secured by junior-lien        
     Three Months Ended March 31,  
     2014     2013     2014     2013     2014     2013  

Originations

   $ 300     $ 548     $ 163     $ 106     $ 198     $ 319  

Origination weighted average LTV ratio (1)

     72     66     83     81     81     75

Origination weighted average FICO score (2)

     763       778       756       751       752       759  

 

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

Home Equity Portfolio

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

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

 

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

Table 11—Maturity Schedule of Home Equity Line-of-Credit Portfolio

 

     March 31, 2014  

(dollar amounts in millions)

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

Secured by first-lien

   $ 53      $ 20      $ 3      $ 2      $ 2,472      $ 2,550  

Secured by junior-lien

     237        183        135        92        2,337        2,984  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity line-of-credit

   $ 290      $ 203      $ 138      $ 94      $ 4,809      $ 5,534  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

Historically, less than 30% of our home equity lines-of-credit that are one year or less from maturity actually reach the maturity date, and we anticipate this percentage will decline in future periods as our proactive approach to managing maturity risk continues to evolve.

Residential Mortgages Portfolio

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

Several government programs continued to impact the residential mortgage portfolio, including various refinance programs such as HARP and HAMP, which positively affected the availability of credit for the industry. During the period ended March 31, 2014, we closed $96 million in HARP residential mortgages. The HARP and HAMP residential mortgage loans are part of our residential mortgage portfolio or serviced for others.

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

Credit Quality

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

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

Credit quality performance in the 2014 first quarter reflected continued overall improvement. However, the level of NPA’s increased 4% to $365.3 million compared to the prior quarter, primarily attributable to the Camco Financial acquisition. The level of Consumer OREO increased over the prior quarter as there were relatively few sales in the first quarter. We expect the sales activity in the second quarter to be substantially stronger. NCOs decreased by $3.5 million or 7% in the quarter, primarily as a result of recovery levels in the CRE and home equity portfolios. Commercial criticized loans increased compared to the prior quarter, again driven by the impact of Camco Financial, and reflecting our continued focus on proactively identifying potential problem credits. There was no specific industry or region that drove the increase in the quarter. Commercial classified loans declined, reflecting the continued improvement across the portfolio. The ACL to total loans ratio declined to 1.56%, but our coverage ratios as demonstrated by the ACL to NAL ratio of 211% remained strong.

NPAs, NALs, AND TDRs

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

 

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NPAs and NALs

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

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

Of the $128.4 million of CRE and C&I-related NALs at March 31, 2014, $55.9 million, or 44%, represented loans that were less than 30 days past due, demonstrating our continued commitment to proactive credit risk management. With the exception of residential mortgage loans guaranteed by government organizations which continue to accrue interest, residential mortgage loans are placed on nonaccrual status at 150-days past due. First-lien home equity loans are placed on nonaccrual status at 150-days past due. Junior-lien home equity loans are placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien loan has been identified as nonaccrual. Automobile and other consumer loans are generally charged-off when the loan is 120-days past due.

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

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

Table 12—Nonaccrual Loans and Leases and Nonperforming Assets

 

     2014     2013  

(dollar amounts in thousands)

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

Nonaccrual loans and leases:

          

Commercial and industrial

   $ 57,053      $ 56,615      $ 68,034      $ 80,037      $ 80,928   

Commercial real estate

     71,344        73,417        80,295        93,643        110,803   

Automobile

     6,218        6,303        5,972        7,743        6,770   

Residential mortgage

     121,681        119,532        116,260        122,040        118,405   

Home equity

     70,862        66,189        62,545        60,083        63,405   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonaccrual loans and leases

     327,158        322,056        333,106        363,546        380,311   

Other real estate owned, net

          

Residential

     30,581        23,447        16,610        17,353        19,538   

Commercial

     5,110        4,217        12,544        3,713        5,601   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other real estate owned, net

     35,691        27,664        29,154        21,066        25,139   

Other nonperforming assets (1)

     2,440        2,440        12,000        12,087        10,045   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 365,289      $ 352,160      $ 374,260      $ 396,699      $ 415,495   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nonaccrual loans as a % of total loans and leases

     0.74 %     0.75 %     0.78 %     0.87 %     0.92 %

Nonperforming assets ratio (2)

     0.82        0.82        0.88        0.95        1.01   

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

     1.17        1.20        1.29        1.38        1.48   

 

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

The $13.1 million, or 4%, increase in NPAs compared with December 31, 2013, primarily reflected the impact of the acquisition of the Camco Financial portfolio:

 

   

$8.0 million, or 29%, increase in net OREO properties was primarily related to consumer OREO, reflecting limited sales in the first quarter and the addition of $3.0 million of properties from Camco Financial.

 

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$4.7 million, or 7%, increase in home equity NALs was related to the addition of Camco Financial. Additionally, while the number of nonaccrual home equity lines/loans is flat to slightly down, the NAL balances are increasing due to new NALs having a relatively higher balance than in prior periods, as a result of the improving home values.

 

   

$2.2 million, or 2%, increase in residential mortgage NALs, reflecting the addition of Camco Financial.

Partially offset by:

 

   

$2.1 million, or 3%, decline in CRE NALs, reflecting both NCO activity and problem credit resolutions, including borrower payments and payoffs partially resulting from successful workout strategies implemented by our commercial loan workout group.

TDR Loans

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

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

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

Table 13—Accruing and Nonaccruing Troubled Debt Restructured Loans

 

     2014      2013  

(dollar amounts in thousands)

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

Troubled debt restructured loans—accruing:

              

Commercial and industrial

   $ 102,970      $ 83,857      $ 85,687      $ 94,583      $ 90,642  

Commercial real estate

     210,876        204,668        204,597        184,372        192,167  

Automobile

     27,393        30,781        30,981        32,768        34,379  

Home equity

     202,044        188,266        153,591        135,759        162,087 (1)  

Residential mortgage

     284,194        305,059        300,809        293,933        288,041  

Other consumer

     1,727        1,041        959        3,383        2,514  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructured loans—accruing

     829,204        813,672        776,624        744,798        769,830  

Troubled debt restructured loans—nonaccruing:

              

Commercial and industrial

     7,197        7,291        8,643        14,541        14,970  

Commercial real estate

     27,972        23,981        22,695        26,118        26,588  

Automobile

     5,676        6,303        5,972        7,743        6,770  

Home equity

     20,992        20,715        11,434        10,227        11,235  

Residential mortgage

     84,441        82,879        77,525        80,563        84,317  

Other consumer

     120        —          —           —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructured loans—nonaccruing

     146,398        141,169        126,269        139,192        143,880  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructured loans

   $ 975,602      $ 954,841      $ 902,893      $ 883,990      $ 913,710  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Included $46,031 thousand incorrectly reflected as TDRs in the 2013 first quarter.

Our strategy is to structure commercial TDRs in a manner that avoids new concessions subsequent to the initial TDR terms. However, there are times when subsequent modifications are required, such as when the modified loan matures. Often the loans are performing in accordance with the TDR terms, and a new note is originated with similar modified terms. These loans are subjected to the normal underwriting standards and processes for other similar credit extensions, both new and existing. If the loan is not performing in accordance with the existing TDR terms, typically an individualized approach to repayment is established. In accordance with ASC 310-20-35, the refinanced note is evaluated to determine if it is considered a new loan or a continuation of the prior loan. A new loan is considered for removal of the TDR designation. A continuation of the prior note requires the continuation of the TDR designation, and because the refinanced note constitutes a new or amended debt instrument, it is included in our TDR activity table (below) as a new TDR and a restructured TDR removal during the period.

The types of concessions granted are consistent with those granted on new TDRs and include interest rate reductions, amortization or maturity date changes beyond what the collateral supports, and principal forgiveness based on the borrower’s specific needs at a point in time. Our policy does not limit the number of times a loan may be modified. A loan may be modified multiple times if it is considered to be in the best interest of both the borrower and us.

 

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

TDRs in the home equity and residential mortgage portfolio may continue to increase for a time as we continue to appropriately manage the portfolio. Any granted change in terms or conditions that are not readily available in the market for that borrower, requires the designation as a TDR.

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

Table 14—Troubled Debt Restructured Loan Activity

 

     2014     2013  

(dollar amounts in thousands)

   First     Fourth     Third     Second     First  

TDRs, beginning of period

   $ 954,841     $ 902,893     $ 883,990     $ 913,710     $ 875,625   

New TDRs

     219,656       169,383       161,812       115,955       164,407 (2)   

Payments

     (55,130     (46,974     (60,392     (39,818     (44,183

Charge-offs

     (10,774     (5,980     (10,439     (8,083     (5,395

Sales

     (14,169     (613     (2,999     (2,738     (4,814

Transfer to OREO

     (2,597     (2,609     (2,056     (2,453     (1,124

Restructured TDRs—accruing (1)

     (86,012     (51,709     (58,499     (46,987     (53,936

Restructured TDRs—nonaccruing (1)

     (23,038     (7,415     (6,163     (2,520     (10,674

Other

     (7,175     (2,135     (2,361     (43,076 ) (2)       (6,196
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TDRs, end of period

   $ 975,602     $ 954,841     $ 902,893     $ 883,990     $ 913,710   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents existing TDRs that were re-underwritten with new terms providing a concession. A corresponding amount is included in the New TDRs amount above.
(2) Included $46,031 thousand of home equity TDRs incorrectly reflected as new TDRs in the 2013 first quarter.

ACL

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

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

A provision for credit losses is recorded to adjust the ACL to the level we have determined to be appropriate to absorb credit losses inherent in our loan and lease portfolio. The provision for credit losses in the 2014 first quarter was $24.6 million, compared with $24.3 million in the prior quarter and $29.6 million in the year-ago quarter. (See Provision for Credit Losses discussion within Results of Operations section).

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

 

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

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

Table 15—Allocation of Allowance for Credit Losses (1)

 

     2014     2013  

(dollar amounts in thousands)

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

Commercial

                         

Commercial and industrial

   $ 266,979        41   $ 265,801        41   $ 262,048        41   $ 233,679        41   $ 238,098        42

Commercial real estate

     160,306        12       162,557        11       164,522        11       255,849        11       267,436        12  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial

     427,285        53       428,358        52       426,570        52       489,528        52       505,534        54  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Consumer

                         

Automobile

     25,178        16