UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

QUARTERLY PERIOD ENDED March 31, 2015

Commission File Number 1-34073

 

 

Huntington Bancshares Incorporated

 

 

 

Maryland   31-0724920

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

41 South High Street, Columbus, Ohio 43287

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 808,528,243 shares of Registrant’s common stock ($0.01 par value) outstanding on March 31, 2015.

 

 

 


Table of Contents

HUNTINGTON BANCSHARES INCORPORATED

INDEX

 

PART I. FINANCIAL INFORMATION   

Item 1. Financial Statements (Unaudited)

  
  

Condensed Consolidated Balance Sheets at March 31, 2015 and December 31, 2014

     55   
  

Condensed Consolidated Statements of Income for the three months ended March 31, 2015 and 2014

     56   
  

Condensed Consolidated Statements of Comprehensive Income for the three months ended March  31, 2015 and 2014

     57   
  

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2015 and 2014

     58   
  

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014

     59   
  

Notes to Unaudited Condensed Consolidated Financial Statements

     61   

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

  

  

Executive Overview

     7   
  

Discussion of Results of Operations

     9   
  

Risk Management and Capital:

  
  

Credit Risk

     18   
  

Market Risk

     30   
  

Liquidity Risk

     31   
  

Operational Risk

     35   
  

Compliance Risk

     37   
  

Capital

     37   
  

Fair Value

     41   
  

Business Segment Discussion

     42   
  

Additional Disclosures

     53   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     132   

Item 4. Controls and Procedures

     132   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     132   

Item 1A. Risk Factors

     132   

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

     133   

Item 6. Exhibits

     133   

Signatures

     135   

 

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Glossary of Acronyms and Terms

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

 

ABL    Asset Based Lending
ACL    Allowance for Credit Losses
AFCRE    Automobile Finance and Commercial Real Estate
AFS    Available-for-Sale
ALCO    Asset-Liability Management Committee
ALLL    Allowance for Loan and Lease Losses
ARM    Adjustable Rate Mortgage
ASC    Accounting Standards Codification
ASU    Accounting Standards Update
ATM    Automated Teller Machine
AULC    Allowance for Unfunded Loan Commitments
Basel III    Refers to the final rule issued by the FRB and OCC and published in the Federal Register on October 11, 2013
C&I    Commercial and Industrial
Camco Financial    Camco Financial Corp.
CCAR    Comprehensive Capital Analysis and Review
CDO    Collateralized Debt Obligations
CDs    Certificate of Deposit
CET1    Common equity tier 1 on a transitional Basel III basis
CFPB    Bureau of Consumer Financial Protection
CFTC    Commodity Futures Trading Commission
CMO    Collateralized Mortgage Obligations
CRE    Commercial Real Estate
Dodd-Frank Act    Dodd-Frank Wall Street Reform and Consumer Protection Act
DTA/DTL    Deferred Tax Asset/Deferred Tax Liability
EFT    Electronic Fund Transfer
EPS    Earnings Per Share
EVE    Economic Value of Equity
FASB    Financial Accounting Standards Board
Fannie Mae    (see FNMA)
FDIC    Federal Deposit Insurance Corporation
FDICIA    Federal Deposit Insurance Corporation Improvement Act of 1991
FHA    Federal Housing Administration
FHLB    Federal Home Loan Bank
FHLMC    Federal Home Loan Mortgage Corporation
FICO    Fair Isaac Corporation
FNMA    Federal National Mortgage Association
FRB    Federal Reserve Bank
Freddie Mac    (see FHLMC)
FTE    Fully-Taxable Equivalent
FTP    Funds Transfer Pricing
GAAP    Generally Accepted Accounting Principles in the United States of America
HAMP    Home Affordable Modification Program
HARP    Home Affordable Refinance Program

 

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HIP    Huntington Investment and Tax Savings Plan
HQLA    High Quality Liquid Asset
HTM    Held-to-Maturity
IRS    Internal Revenue Service
LCR    Liquidity Coverage Ratio
LIBOR    London Interbank Offered Rate
LGD    Loss-Given-Default
LIHTC    Low Income Housing Tax Credit
LTV    Loan to Value
Macquarie    Macquarie Equipment Finance, Inc. (U.S. operations)
MD&A    Management’s Discussion and Analysis of Financial Condition and Results of Operations
MSA    Metropolitan Statistical Area
MSR    Mortgage Servicing Rights
NAICS    North American Industry Classification System
NALs    Nonaccrual Loans
NCO    Net Charge-off
NII    Net Interest Income
NIM    Net Interest Margin
NCO    Net Charge-off
NIM    Net Interest Margin
NPA    Nonperforming Asset
N.R.    Not relevant. Denominator of calculation is a gain in the current period compared with a loss in the prior period, or vice-versa
OCC    Office of the Comptroller of the Currency
OCI    Other Comprehensive Income (Loss)
OCR    Optimal Customer Relationship
OLEM    Other Loans Especially Mentioned
OREO    Other Real Estate Owned
OTTI    Other-Than-Temporary Impairment
Plan    Huntington Bancshares Retirement Plan
Problem Loans    Includes nonaccrual loans and leases (Table 11), troubled debt restructured loans (Table 12), accruing loans and leases past due 90 days or more (aging analysis section of Footnote 3), and Criticized commercial loans (credit quality indicators section of Footnote 3).
RBHPCG    Regional Banking and The Huntington Private Client Group
RCSA    Risk and Control Self-Assessments
REIT    Real Estate Investment Trust
ROC    Risk Oversight Committee
RWA    Risk-Weighted Assets
SAD    Special Assets Division
SBA    Small Business Administration
SEC    Securities and Exchange Commission
SERP    Supplemental Executive Retirement Plan
SRIP    Supplemental Retirement Income Plan
SSFA    Simplified Supervisory Formula Approach
TCE    Tangible Common Equity
TDR    Troubled Debt Restructured Loan
U.S. Treasury    U.S. Department of the Treasury
UCS    Uniform Classification System

 

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UDAP

   Unfair or Deceptive Acts or Practices

UPB

   Unpaid Principal Balance

USDA

   U.S. Department of Agriculture

VIE

   Variable Interest Entity

XBRL

   eXtensible Business Reporting Language

 

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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 149 years of servicing the financial needs of our customers. Through our subsidiaries, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, insurance service programs, and other financial products and services. Our 733 branches are located in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. Selected financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office in Columbus, Ohio and a limited purpose office located in the Cayman Islands and another limited purpose office located in Hong Kong. Our foreign banking activities, in total or with any individual country, are not significant.

This MD&A provides information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows. The MD&A included in our 2014 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2014 Form 10-K. This MD&A should also be read in conjunction with the Unaudited Condensed Consolidated Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, and other information contained in this report.

Our discussion is divided into key segments:

 

   

Executive 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 2015 First Quarter Results

For the quarter, we reported net income of $165.9 million, or $0.19 per common share, compared with $149.1 million, or $0.17 per common share, in the year-ago quarter ( see Table 1 ).

Fully-taxable equivalent net interest income was $475.2 million for the quarter, up $31.9 million, or 7%, from the year-ago quarter. The results reflected a $6.2 billion, or 11%, increase in average earning assets, including a $4.4 billion, or 10%, increase in average loans and leases, as well as a $1.8 billion, or 16%, increase in average securities. The impact of these balance increases was partially offset by a 12 basis point decrease in the net interest margin. The primary items affecting the net interest margin were a 15 basis point negative impact from the mix and yield of earning assets and a 1 basis point reduction in the benefit from the impact of noninterest-bearing funds, partially offset by a 4 basis point reduction in funding costs.

The provision for credit losses decreased $4.0 million from the year-ago quarter to $20.6 million in the 2015 first quarter. NCOs decreased $18.6 million, or 43%, to $24.4 million. NCOs represented an annualized 0.20% of average loans and leases in the current quarter consistent with the prior quarter results, and down substantially from the 0.40% in the year-ago quarter. Residential and home equity NCOs continued to show a declining trend over the last five quarters. Commercial NCOs have been relatively consistent over the period with relatively low levels creating some quarter-to-quarter volatility.

Noninterest income decreased $16.9 million, or 7%, from the year-ago quarter. The year-over-year decrease primarily reflected the $17.0 million of securities gains realized in the 2014 first quarter compared to none in the current quarter. In addition, capital market fees increased $4.7 million, or 51%, primarily related to income from customer interest rate derivative products and underwriting fees. Electronic banking increased $3.8 million, or 16%, due to higher card related income and underlying customer growth. Service charges on deposit accounts decreased $2.4 million, or 4%, reflecting the decline from the late July 2014 implementation of changes in consumer products, partially offset by a 9% increase in consumer households and changing customer usage patterns.

Noninterest expense decreased $1.3 million, or less than 1%, from the year-ago quarter. Noninterest expense in the year-ago quarter included several Significant Items, which are further described in the “Discussion of Results of Operations” section. The results reflected a $15.0 million, or 29%, decrease in other expense (excluding the impact of Significant Items, other expenses decreased $4.6 million, or 11%), and a $3.6 million, or 26%, decrease in deposit and other insurance expense, primarily reflecting the benefit of $1.8 billion of bank-level debt issued over the past year. This was partially offset by a $15.4 million, or 6%, increase in personnel costs (excluding the impact of Significant Items, personnel costs increased $17.8 million, or 7%, primarily related to a $13.8 million increase in salaries reflecting a 1% increase in the number of full-time equivalent employees and a $4.0 million increase in benefits expense).

The tangible common equity to tangible assets ratio was 7.95% at March 31, 2015, down 68 basis points from a year ago. On a Basel III transitional basis, the regulatory common equity tier 1 (CET1) risk-based capital ratio was 9.51% at March 31, 2015, and the regulatory tier 1 risk-based capital ratio was 10.22%. On a Basel I basis, the tier 1 common risk-based capital ratio was 10.60% at March 31, 2014, and the regulatory tier 1 risk-based capital ratio was 11.95%. All capital ratios were impacted by the repurchase of 26.1 million common shares over the last four quarters.

Business Overview

General

Our general business objectives are: (1) grow net interest income and fee income, (2) deliver positive operating leverage, (3) increase primary relationships across all business segments, (4) continue to strengthen risk management and reduce volatility, and (5) maintain strong capital and liquidity positions.

Ongoing improvement in our expense control environment, continuing good core deposit growth, and strong mortgage and capital markets results were highlights for the quarter. In addition, we completed the successful close of our acquisition of Macquarie Equipment Finance, Inc. on March 31, 2015, and look forward to transitioning to the Huntington Technology Finance brand to align our enhanced capabilities with our combined customer base and prospects. Also in the quarter, we continued to expand within our core footprint via the launch of our previously announced 2015 in-store build out, enhancing our full-service branch network in a cost-efficient manner.

 

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On April 21, 2015, the board of directors approved two capital actions. First, the board declared a quarterly cash dividend on the Company’s common stock of $0.06 per common share. The dividend is payable July 1, 2015, to shareholders of record on June 17, 2015. Second, the board authorized the repurchase of up to $366 million of common shares over the five quarters through the 2016 second quarter. Both actions were proposed in the January 2015 CCAR capital plan, which received no objections from the Federal Reserve. Purchases of common stock may include open market purchases, privately negotiated transactions, and accelerated repurchase programs. During the 2015 first quarter, the Company repurchased 4.9 million common shares at an average price of $10.45 per share, which completed our previous repurchase authorization.

Economy

The automobile industry is expected to provide continued impetus for regional manufacturing growth and capital spending in 2015, offsetting slower anticipated growth in energy and non-transportation exports. Manufacturing employment growth and activity spurs employment growth directly in manufacturing and indirectly in service sectors as evidenced by the drop in unemployment rates during the recovery in our footprint states.

Home purchase prices are rising in our footprint states and the nation. In addition, office vacancy rates in our largest MSAs are down substantially during the economic recovery-to-date. Further, industrial vacancy rates in most of our largest footprint MSAs have been below the national average, reflecting generally healthy industrial real estate markets.

Legislative and Regulatory

Regulatory reforms continue to be adopted, including the 2015 first quarter implementation of the Basel III regulatory capital requirements.

Basel III Regulatory Capital Requirements —In 2013, the Federal Reserve voted to adopt final capital rules implementing Basel III requirements for U.S. Banking organizations, which were effective for us beginning January 1, 2015. The final rules establish an integrated regulatory capital framework and implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. Consistent with the international Basel framework, the final rule includes a new regulatory minimum ratio of common equity tier 1 capital to risk-weighted assets. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets and includes a minimum leverage ratio of 4%. The Basel III capital rules establish two methodologies for calculating risk-weighted assets, the advanced and standardized approaches. We are subject to the standardized approach for calculating risk-weighted assets. The implementation of the Basel III capital requirements is transitional and phases-in through the end of 2018.

Expectations – 2015

We remain committed to delivering solid results in a flat interest rate environment. We have built our budget around the current rate environment and our planned results are not dependent on a rate hike. While our customer activity levels, our pipelines and our balance sheet are strong, we will continue to be disciplined in growing our commercial real estate and C&I portfolios. We will continue disciplined execution of our strategic focus on investment in the business, controlled expenses and delivering full-year positive operating leverage.

On March 31, 2015, we completed our acquisition of Macquarie in a cash transaction valued at $457.8 million. Macquarie is the largest standalone, vendor independent provider of specialized technology financing with customer-centric asset management services in the United States. The acquisition gives us the ability to drive added growth to our national equipment finance business as well as additional health care and small business finance capabilities. We expect Macquarie, which added over 165 positions to our colleague base, to generate approximately $500 million in annual lease originations and approximately $75 million to $85 million in annualized revenue.

Excluding Significant Items and net MSR activity, we expect to deliver positive operating leverage in 2015, with and without the run rate impact of the Macquarie acquisition. Achieving annual positive operating leverage is a long-term strategic goal and we are committed to managing expenses in conjunction with our revenue outlook to achieve that goal. We expect noninterest expense growth of 2-4%, excluding Significant Items and the recurring expense related to the Macquarie acquisition.

Overall, asset quality metrics are expected to remain near current levels, although moderate quarterly volatility also is expected, given the absolute low level of problem assets and credit costs. We anticipate NCOs will remain within or below our long-term normalized range of 35 to 55 basis points.

The effective tax rate for 2015 is expected to be in the range of 24% to 27%.

 

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Table of Contents

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)

 

     2015     2014  

(dollar amounts in thousands, except per share amounts)

   First     Fourth     Third     Second     First  

Interest income

   $ 502,096      $ 507,625      $ 501,060      $ 495,322      $ 472,455   

Interest expense

     34,411        34,373        34,725        35,274        34,949   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     467,685        473,252        466,335        460,048        437,506   

Provision for credit losses

     20,591        2,494        24,480        29,385        24,630   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     447,094        470,758        441,855        430,663        412,876   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     62,220        67,408        69,118        72,633        64,582   

Trust services

     29,039        28,781        28,045        29,581        29,565   

Electronic banking

     27,398        27,993        27,275        26,491        23,642   

Mortgage banking income

     22,961        14,030        25,051        22,717        23,089   

Brokerage income

     15,500        16,050        17,155        17,905        17,167   

Insurance income

     15,895        16,252        16,729        15,996        16,496   

Bank owned life insurance income

     13,025        14,988        14,888        13,865        13,307   

Capital markets fees

     13,905        13,791        10,246        10,500        9,194   

Gain on sale of loans

     4,589        5,408        8,199        3,914        3,570   

Securities gains (losses)

     —          (104     198        490        16,970   

Other income

     27,091        28,681        30,445        35,975        30,903   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     231,623        233,278        247,349        250,067        248,485   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Personnel costs

     264,916        263,289        275,409        260,600        249,477   

Outside data processing and other services

     50,535        53,685        53,073        54,338        51,490   

Net occupancy

     31,020        31,565        34,405        28,673        33,433   

Equipment

     30,249        31,981        30,183        28,749        28,750   

Professional services

     12,727        15,665        13,763        17,896        12,231   

Marketing

     12,975        12,466        12,576        14,832        10,686   

Deposit and other insurance expense

     10,167        13,099        11,628        10,599        13,718   

Amortization of intangibles

     10,206        10,653        9,813        9,520        9,291   

Other expense

     36,062        50,868        39,468        33,429        51,045   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     458,857        483,271        480,318        458,636        460,121   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     219,860        220,765        208,886        222,094        201,240   

Provision for income taxes

     54,006        57,151        53,870        57,475        52,097   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 165,854      $ 163,614      $ 155,016      $ 164,619      $ 149,143   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends on preferred shares

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to common shares

   $ 157,889      $ 155,651      $ 147,052      $ 156,656      $ 141,179   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares—basic

     809,778        811,967        816,497        821,546        829,659   

Average common shares—diluted

     823,809        825,338        829,623        834,687        842,677   

Net income per common share—basic

   $ 0.19      $ 0.19      $ 0.18      $ 0.19      $ 0.17   

Net income per common share—diluted

     0.19        0.19        0.18        0.19        0.17   

Cash dividends declared per common share

     0.06        0.06        0.05        0.05        0.05   

Return on average total assets

     1.02     1.00     0.97     1.07     1.01

Return on average common shareholders’ equity

     10.6        10.3        9.9        10.8        9.9   

Return on average tangible common shareholders’ equity (2)

     12.2        11.9        11.4        12.4        11.4   

Net interest margin (3)

     3.15        3.18        3.20        3.28        3.27   

Efficiency ratio (4)

     63.5        66.2        65.3        62.7        66.4   

Effective tax rate

     24.6        25.9        25.8        25.9        25.9   

Revenue—FTE

          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   $ 467,685      $ 473,252      $ 466,335      $ 460,048      $ 437,506   

FTE adjustment

     7,560        7,522        7,506        6,637        5,885   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (3)

     475,245        480,774        473,841        466,685        443,391   

Noninterest income

     231,623        233,278        247,349        250,067        248,485   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue (3)

   $ 706,868      $ 714,052      $ 721,190      $ 716,752      $ 691,876   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1)  

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

(2)  

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

(3)  

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

(4)  

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

Significant Items

Definition of Significant Items

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

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

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

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

Significant Items Influencing Financial Performance Comparisons

Earnings comparisons were impacted by the Significant Items summarized below:

 

1. Franchise Repositioning Related Expense. During the 2014 fourth quarter, $8.6 million of franchise repositioning related expense was recorded for the consolidation of 26 branches and organizational actions. This resulted in a negative impact of $0.01 per common share.

 

2. Litigation Reserve. $11.9 million and $9.0 million of net additions to litigation reserves were recorded as other noninterest expense during the 2014 fourth quarter and 2014 first quarter, respectively. This resulted in a negative impact of $0.01 per common share in the 2014 fourth quarter and 2014 first quarter.

 

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

 

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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, 2015 (4)      December 31, 2014     March 31, 2014  

(dollar amounts in thousands, except per share amounts)

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

Net income

   $ 165,854          $ 163,614        $ 149,143     

Earnings per share, after-tax

      $ 0.19         $ 0.19        $ 0.17   

Significant Items—favorable (unfavorable) impact:

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

Franchise repositioning related expense

   $ —         $ —         $ (8,643   $ (0.01   $ —        $ —     

Net additions to litigation reserve

     —           —           (11,909     (0.01     (9,000     (0.01

Mergers and acquisitions, net

     —           —           —          —          (11,823     (0.01

 

(1)

Pretax.

(2)

Based on average outstanding diluted common shares.

(3)

After-tax.

(4)  

Quarter included $3.4 million of merger-related expense that was not a Significant Item for the quarter, but merger-related expense may be a Significant Item for the 2015 full year.

 

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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  
     2015     2014     1Q15 vs. 1Q14  

(dollar amounts in millions)

   First     Fourth     Third     Second     First     Amount     Percent  

Assets:

              

Interest-bearing deposits in banks

   $ 94      $ 85      $ 82      $ 91      $ 83      $ 11        13

Loans held for sale

     381        374        351        288        279        102        37   

Securities:

              

Available-for-sale and other securities:

              

Taxable

     7,664        7,291        6,935        6,662        6,240        1,424        23   

Tax-exempt

     1,874        1,684        1,620        1,290        1,115        759        68   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     9,538        8,975        8,555        7,952        7,355        2,183        30   

Trading account securities

     53        49        50        45        38        15        39   

Held-to-maturity securities—taxable

     3,347        3,435        3,556        3,677        3,783        (436     (12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     12,938        12,459        12,161        11,674        11,176        1,762        16   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (1)

              

Commercial:

              

Commercial and industrial

     19,116        18,880        18,581        18,262        17,631        1,485        8   

Commercial real estate:

              

Construction

     887        822        775        702        612        275        45   

Commercial

     4,275        4,262        4,188        4,345        4,289        (14     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     5,162        5,084        4,963        5,047        4,901        261        5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     24,278        23,964        23,544        23,309        22,532        1,746        8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

              

Automobile

     8,783        8,512        8,012        7,349        6,786        1,997        29   

Home equity

     8,484        8,452        8,412        8,376        8,340        144        2   

Residential mortgage

     5,810        5,751        5,747        5,608        5,379        431        8   

Other consumer

     425        413        398        382        386        39        10   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     23,502        23,128        22,569        21,715        20,891        2,611        12   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     47,780        47,092        46,113        45,024        43,423        4,357        10   

Allowance for loan and lease losses

     (612     (631     (633     (642     (649     37        (6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans and leases

     47,168        46,461        45,480        44,382        42,774        4,394        10   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     61,193        60,010        58,707        57,077        54,961        6,232        11   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and due from banks

     935        929        887        872        904        31        3   

Intangible assets

     593        602        583        591        535        58        11   

All other assets

     4,142        4,022        3,929        3,932        3,941        201        5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 66,251      $ 64,932      $ 63,473      $ 61,830      $ 59,692      $ 6,559        11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Shareholders’ Equity:

              

Deposits:

              

Demand deposits—noninterest-bearing

   $ 15,253      $ 15,179      $ 14,090      $ 13,466      $ 13,192      $ 2,061        16

Demand deposits—interest-bearing

     6,173        5,948        5,913        5,945        5,775        398        7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     21,426        21,127        20,003        19,411        18,967        2,459        13   

Money market deposits

     19,368        18,401        17,929        17,680        17,648        1,720        10   

Savings and other domestic deposits

     5,169        5,052        5,020        5,086        4,967        202        4   

Core certificates of deposit

     2,814        3,058        3,167        3,434        3,613        (799     (22
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     48,777        47,638        46,119        45,611        45,195        3,582        8   

Other domestic time deposits of $250,000 or more

     195        201        223        262        284        (89     (31

Brokered deposits and negotiable CDs

     2,600        2,434        2,262        2,070        1,782        818        46   

Deposits in foreign offices

     557        479        374        315        328        229        70   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     52,129        50,752        48,978        48,258        47,589        4,540        10   

Short-term borrowings

     1,882        2,682        3,192        2,788        2,372        (490     (21

Long-term debt

     4,374        3,956        3,968        3,523        2,513        1,861        74   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     43,132        42,211        42,048        41,103        39,282        3,850        10   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

All other liabilities

     1,450        1,168        1,043        1,033        1,035        415        40   

Shareholders’ equity

     6,416        6,374        6,292        6,228        6,183        233        4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 66,251      $ 64,932      $ 63,473      $ 61,830      $ 59,692      $ 6,559        11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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)  
     2015     2014  

Fully-taxable equivalent basis (1)

   First     Fourth     Third     Second     First  

Assets:

          

Interest-bearing deposits in banks

     0.18     0.23     0.19     0.04     0.03

Loans held for sale

     3.69        3.82        3.98        4.27        3.74   

Securities:

          

Available-for-sale and other securities:

          

Taxable

     2.50        2.61        2.48        2.52        2.47   

Tax-exempt

     3.05        3.26        3.02        3.15        3.03   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     2.61        2.73        2.59        2.63        2.55   

Trading account securities

     1.17        1.05        0.85        0.70        1.12   

Held-to-maturity securities—taxable

     2.47        2.45        2.45        2.46        2.47   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     2.57        2.65        2.54        2.57        2.52   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (3)

          

Commercial:

          

Commercial and industrial

     3.33        3.35        3.45        3.49        3.56   

Commercial real estate:

          

Construction

     3.81        4.30        4.38        4.29        3.99   

Commercial

     3.57        3.47        3.60        4.16        3.84   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     3.62        3.60        3.72        4.17        3.86   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     3.39        3.40        3.51        3.64        3.63   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

          

Automobile

     3.24        3.33        3.41        3.47        3.54   

Home equity

     4.03        4.05        4.07        4.12        4.12   

Residential mortgage

     3.75        3.84        3.78        3.77        3.78   

Other consumer

     8.20        7.68        7.31        7.34        6.82   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     3.74        3.80        3.82        3.87        3.89   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     3.56        3.60        3.66        3.75        3.75   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     3.38     3.41     3.44     3.53     3.53
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

          

Deposits:

          

Demand deposits—noninterest-bearing

     —       —       —       —       —  

Demand deposits—interest-bearing

     0.05        0.04        0.04        0.04        0.04   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     0.01        0.01        0.01        0.01        0.01   

Money market deposits

     0.21        0.22        0.23        0.24        0.25   

Savings and other domestic deposits

     0.15        0.16        0.16        0.17        0.20   

Core certificates of deposit

     0.76        0.75        0.74        0.81        0.94   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     0.22        0.23        0.23        0.25        0.28   

Other domestic time deposits of $250,000 or more

     0.42        0.43        0.44        0.43        0.41   

Brokered deposits and negotiable CDs

     0.17        0.18        0.20        0.24        0.28   

Deposits in foreign offices

     0.13        0.13        0.13        0.13        0.13   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     0.22        0.23        0.23        0.25        0.28   

Short-term borrowings

     0.12        0.12        0.11        0.10        0.09   

Long-term debt

     1.31        1.35        1.35        1.44        1.67   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     0.32     0.32     0.33     0.34     0.36
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest rate spread

     3.06     3.09     3.11     3.19     3.17

Impact of noninterest-bearing funds on margin

     0.09        0.09        0.09        0.09        0.10   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin

     3.15     3.18     3.20     3.28     3.27
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

FTE yields are calculated assuming a 35% tax rate.

(2)

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

(3)

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

 

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2015 First Quarter versus 2014 First Quarter

Fully-taxable equivalent net interest income increased $31.9 million, or 7%, from the 2014 first quarter. This reflected the benefit from the $6.2 billion, or 11%, increase in average earning assets partially offset by a 12 basis point reduction in the FTE NIM to 3.15%. Average earning asset growth included a $4.4 billion, or 10%, increase in average loans and leases and a $1.8 billion, or 16%, increase in average securities. The NIM contraction reflected a 15 basis point decrease related to the mix and yield of earning assets and 1 basis point reduction in benefit from the impact of noninterest-bearing funds, partially offset by the 4 basis point reduction in funding costs.

Average earning assets increased $6.2 billion, or 11%, from the year-ago quarter, driven by:

 

   

$2.0 billion, or 29%, increase in average Automobile loans, as the 2015 first quarter represented the fifth consecutive quarter of greater than $1.0 billion in automobile loan originations.

 

   

$1.8 billion, or 16%, increase in average securities, reflecting an increase of $1.8 billion of LCR Level 1 qualified securities.

 

   

$1.5 billion, or 8%, increase in average C&I loans and leases, primarily reflecting growth in trade finance in support of our middle market and corporate customers, asset finance, automobile dealer floorplan lending, and corporate banking.

 

   

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

While not affecting average balances, $1.0 billion of automobile loans were transferred to loans held-for-sale on March 31, 2015 in anticipation of a future loan securitization. In addition, on March 31, 2015, the Company completed the previously announced acquisition of Macquarie subsequently rebranded as Huntington Technology Finance. The acquisition included $0.8 billion of equipment finance leases.

Average total deposits increased $4.5 billion, or 10%, from the year-ago quarter, including a $3.6 billion, or 8%, increase in average total core deposits. The increase in total deposits included $1.0 billion of deposits acquired in the Camco and Bank of America branch acquisitions. Average total liabilities increased $6.3 billion, or 12%, from the year-ago quarter, reflecting:

 

   

$2.1 billion, or 16%, increase in noninterest-bearing deposits, reflecting the strategic focus on consumer checking account household and commercial checking account relationship growth.

 

   

$1.7 billion, or 10%, increase in money market deposits, reflecting consumer and commercial relationship growth as well as strong sales execution.

 

   

$1.9 billion, or 74%, increase in long-term borrowings, primarily reflecting a cost-effective method of funding incremental LCR-related securities growth including the issuance of $1.8 billion of bank-level senior debt over the past year. While not affecting average balances, the Macquarie acquisition included $0.5 billion of assumed debt.

 

   

$0.8 billion, or 46%, increase in brokered deposits and negotiable CDs, which were used to efficiently finance balance sheet growth while continuing to manage the overall cost of funds.

Partially offset by:

 

   

$0.8 billion, or 22%, decrease in average core certificates of deposit due to the strategic focus on changing the funding sources to no-cost demand deposits and lower-cost money market deposits.

2015 First Quarter versus 2014 Fourth Quarter

Compared to the 2014 fourth quarter, fully-taxable equivalent net interest income decreased $5.5 million, or 1% annualized. While average earning assets increased $1.2 billion, or 2%, sequentially, the 3 basis point decrease in the NIM coupled with two fewer days in the 2015 first quarter more than offset the benefit of the larger balance sheet.

 

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Table of Contents

Provision for Credit Losses

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

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

The provision for credit losses for the 2015 first quarter was $20.6 million compared with $2.5 million for the 2014 fourth quarter and $24.6 million for the 2014 first quarter. NCOs compared to the 2014 fourth quarter remained relatively stable. The 2015 first quarter provision for credit losses was impacted by the extension of our consumer loss emergence periods and increases to our reserve factors for high dollar value commercial credits, partially offset by our decision to no longer utilize separate methods to estimate economic risks inherent in our portfolios. (See Credit Quality discussion). Given the low level of the provision for credit losses and the uneven nature of commercial charge-offs and recoveries, some degree of volatility on a quarter-to-quarter basis is expected.

Noninterest Income

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

Table 5—Noninterest Income

 

     2015      2014      1Q15 vs 4Q14     1Q15 vs 1Q14  

(dollar amounts in thousands)

   First      Fourth     Third      Second      First      Amount     Percent     Amount     Percent  

Service charges on deposit accounts

   $ 62,220       $ 67,408      $ 69,118       $ 72,633       $ 64,582       $ (5,188     (8 )%    $ (2,362     (4 )% 

Trust services

     29,039         28,781        28,045         29,581         29,565         258        1        (526     (2

Electronic banking

     27,398         27,993        27,275         26,491         23,642         (595     (2     3,756        16   

Mortgage banking income

     22,961         14,030        25,051         22,717         23,089         8,931        64        (128     (1

Brokerage income

     15,500         16,050        17,155         17,905         17,167         (550     (3     (1,667     (10

Insurance income

     15,895         16,252        16,729         15,996         16,496         (357     (2     (601     (4

Bank owned life insurance income

     13,025         14,988        14,888         13,865         13,307         (1,963     (13     (282     (2

Capital markets fees

     13,905         13,791        10,246         10,500         9,194         114        1        4,711        51   

Gain on sale of loans

     4,589         5,408        8,199         3,914         3,570         (819     (15     1,019        29   

Securities gains (losses)

     —           (104     198         490         16,970         104        (100     (16,970     (100

Other income

     27,091         28,681        30,445         35,975         30,903         (1,590     (6     (3,812     (12
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 231,623       $ 233,278      $ 247,349       $ 250,067       $ 248,485       $ (1,655     (1 )%    $ (16,862     (7 )% 
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

2015 First Quarter versus 2014 First Quarter

Noninterest income decreased $16.9 million, or 7%, from the year-ago quarter. The year-over-year decrease primarily reflected the $17.0 million of securities gains realized in the 2014 first quarter compared to none in the current quarter. Other notable noninterest income comparisons with the year-ago quarter included:

 

   

$4.7 million, or 51%, increase in capital market fees primarily related to income from customer interest rate derivative products and underwriting fees.

 

   

$3.8 million, or 16%, increase in electronic banking due to higher card related income and underlying customer growth.

 

   

$2.4 million, or 4%, decrease in service charges on deposit accounts reflecting the decline from the late July 2014 implementation of changes in consumer products, partially offset by a 9% increase in consumer households and changing customer usage patterns.

2015 First Quarter versus 2014 Fourth Quarter

Noninterest income decreased $1.7 million, or 1%, from the 2014 fourth quarter, reflecting typical seasonality within service charges on deposit accounts, which decreased $5.2 million, or 8 %. This was offset by an $8.9 million, or 64%, increase in mortgage banking income, primarily driven by higher gain on sale margin, a higher percentage of loans originated for sale, and a 6% increase in origination volume.

 

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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 6—Noninterest Expense

 

     2015      2014      1Q15 vs 1Q14     1Q15 vs 4Q14  

(dollar amounts in thousands)

   First      Fourth      Third      Second      First      Amount     Percent     Amount     Percent  

Personnel costs

   $ 264,916       $ 263,289       $ 275,409       $ 260,600       $ 249,477       $ 15,439        6   $ 1,627        1

Outside data processing and other services

     50,535         53,685         53,073         54,338         51,490         (955     (2     (3,150     (6

Net occupancy

     31,020         31,565         34,405         28,673         33,433         (2,413     (7     (545     (2

Equipment

     30,249         31,981         30,183         28,749         28,750         1,499        5        (1,732     (5

Professional services

     12,727         15,665         13,763         17,896         12,231         496        4        (2,938     (19

Marketing

     12,975         12,466         12,576         14,832         10,686         2,289        21        509        4   

Deposit and other insurance expense

     10,167         13,099         11,628         10,599         13,718         (3,551     (26     (2,932     (22

Amortization of intangibles

     10,206         10,653         9,813         9,520         9,291         915        10        (447     (4

Other expense

     36,062         50,868         39,468         33,429         51,045         (14,983     (29     (14,806     (29
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

   $ 458,857       $ 483,271       $ 480,318       $ 458,636       $ 460,121       $ (1,264     —     $ (24,414     (5 )% 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Number of employees (average full-time equivalent)

     11,914         11,875         11,946         12,000         11,848         66        1        39        —     

Impacts of Significant Items:

 

     2015      2014  

(dollar amounts in thousands)

   First (1)      Fourth      First  

Personnel costs

   $ 1       $ 2,165       $ 2,341   

Outside data processing and other services

     51         306         4,291   

Net occupancy

     —           4,150         1,742   

Equipment

     —           2,003         134   

Professional services

     3,286         —           2,172   

Marketing

     1         14         530   

Other expense

     12         11,644         10,393   
  

 

 

    

 

 

    

 

 

 

Total noninterest expense adjustments

   $ 3,351       $ 20,282       $ 21,603   
  

 

 

    

 

 

    

 

 

 

Adjusted Noninterest Expense (Non-GAAP):

 

     2015      2014      1Q15 vs 1Q14     1Q15 vs 4Q14  

(dollar amounts in thousands)

   First (1)      Fourth      First      Amount     Percent     Amount     Percent  

Personnel costs

   $ 264,915       $ 261,124       $ 247,136       $ 17,779        7   $ 3,791        1

Outside data processing and other services

     50,484         53,379         47,199         3,285        7        (2,895     (5

Net occupancy

     31,020         27,415         31,691         (671     (2     3,605        13   

Equipment

     30,249         29,978         28,616         1,633        6        271        1   

Professional services

     9,441         15,665         10,059         (618     (6     (6,224     (40

Marketing

     12,974         12,452         10,156         2,818        28        522        4   

Deposit and other insurance expense

     10,167         13,099         13,718         (3,551     (26     (2,932     (22

Amortization of intangibles

     10,206         10,653         9,291         915        10        (447     (4

Other expense

     36,050         39,224         40,652         (4,602     (11     (3,174     (8
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total adjusted noninterest expense

   $ 455,506       $ 462,989       $ 438,518       $ 16,988        4   $ (7,483     (2 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  

Includes $3.4 million of merger-related expense that was not a Significant Item for the quarter, but may be a Significant Item for the 2015 full year.

 

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2015 First Quarter versus 2014 First Quarter

Reported noninterest expense decreased $1.3 million, or less than 1%, from the year-ago quarter. Excluding the impact of Significant Items, noninterest expense increased $17.0 million, or 4%, as we continued to invest in the growth of the franchise, including the Camco, Bank of America branch, and Macquarie acquisitions, as well as the ongoing expansion of our retail branch distribution through our in-store strategy, and investments in technology and data analytics. Changes in reported noninterest expense primarily reflect:

 

   

$15.0 million, or 29%, decrease in other expense. Excluding the impact of Significant Items, other expenses decreased $4.6 million, or 11%, primarily related to $3.0 million of goodwill impairment in the 2014 first quarter and a $2.0 million, or 40%, decrease in state franchise taxes and protective advances.

 

   

$3.6 million, or 26%, decrease in deposit and other insurance expense, primarily reflecting the benefit of $1.8 billion of bank-level debt issued over the past year.

Partially offset by

 

   

$15.4 million, or 6%, increase in personnel costs. Excluding the impact of Significant Items, personnel costs increased $17.8 million, or 7%, primarily related to a $13.8 million increase in salaries reflecting a 1% increase in the number of full-time equivalent employees and a $4.0 million increase in benefits expense.

2015 First Quarter versus 2014 Fourth Quarter

Reported noninterest expense decreased $24.4 million, or 5%, from the 2014 fourth quarter. Excluding the impact of Significant Items, noninterest expense decreased $7.5 million, or 2%. On a reported basis, other expense decreased $14.8 million, or 29%, largely reflecting the prior quarter’s $11.9 million net increase to litigation reserves. Other notable noninterest comparisons include a $3.1 million, or 6%, decrease in outside data processing and other services, a $2.9 million, or 19%, decrease in professional services, and a $2.9 million, or 22%, decrease in deposit and other insurance. Professional services during the 2015 first quarter included $3.3 million of expense related to the Macquarie acquisition.

Provision for Income Taxes

The provision for income taxes in the 2015 first quarter was $54.0 million. This compared with a provision for income taxes of $57.2 million in the 2014 fourth quarter and $52.1 million in the 2014 first quarter. All three quarters included the benefits from tax-exempt income, tax-advantaged investments, general business credits, and investments in qualified affordable housing projects. In prior periods, a valuation allowance was established against the capital loss carryforwards. The federal valuation allowance was based on the uncertainty of forecasted taxable income expected of the required character in order to utilize the capital loss carryforward. Based on current analysis of both positive and negative evidence and projected forecasted taxable income of the appropriate character, we believe it is more likely than not the capital loss carryforward deferred tax asset will be realized within the carryforward period. At March 31, 2015 there is no capital loss carryforward valuation allowance remaining. The net federal deferred tax asset was $54.7 million and the net state deferred tax asset was $43.7 million at March 31, 2015.

We file income tax returns with the IRS and various state, city, and foreign jurisdictions. Federal income tax audits have been completed for tax years through 2009. In the first quarter of 2013, the IRS began an examination of our 2010 and 2011 consolidated federal income tax returns. Certain proposed adjustments resulting from the IRS examination of our 2005 through 2009 tax returns have been settled with the IRS Appeals Office, subject to final approval by the Joint Committee on Taxation of the U.S. Congress. Various state and other jurisdictions remain open to examination, including Ohio, Kentucky, Indiana, Michigan, Pennsylvania, West Virginia, and Illinois.

RISK MANAGEMENT AND CAPITAL

We use a multi-faceted approach to risk governance. It begins with the board of directors defining our risk appetite as aggregate moderate-to-low. Risk awareness, identification and assessment, reporting, and active management are key elements in overall risk management. Controls include, among others, effective segregation of duties, access, authorization and reconciliation procedures, as well as staff education and a disciplined assessment process.

 

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

We believe that our primary risk exposures are credit, market, liquidity, operational, and compliance oriented. More information on risk can be found in the Risk Factors section included in Item 1A of our 2014 Form 10-K and subsequent filings with the SEC. The MD&A included in our 2014 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the Form 10-K. This MD&A should also be read in conjunction with the financial statements, notes and other information contained in this report. Our definition, philosophy, and approach to risk management have not materially changed from the discussion presented in the 2014 Form 10-K.

Credit Risk

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

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

Loan and Lease Credit Exposure Mix

At March 31, 2015, loans and leases totaled $47.7 billion, relatively unchanged from December 31, 2014. There was continued growth in the C&I portfolio, primarily as a result of an increase in equipment leases of $0.8 billion related to the acquisition of Macquarie. This was offset by a reduction in the auto portfolio. The reduction reflected a transfer of approximately $1.0 billion in automobile loans to loans held-for-sale in anticipation of a future loan securitization. The CRE portfolio remained relatively consistent, as a result of continued runoff offset by new production within the requirements associated with achieving an acceptable return, our internal concentration limits and increased competition for projects sponsored by high quality developers.

At March 31, 2015, commercial loans and leases totaled $25.2 billion and represented 53% of our total loans and lease credit exposure. Our commercial portfolio is diversified along product type, customer size, and geography within our footprint, and is comprised of the following ( see Commercial Credit discussion) .

C&I —C&I loans and leases are made to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or other projects. The majority of these borrowers are customers doing business within our geographic regions. C&I loans and leases are generally underwritten individually and secured with the assets of the company and/or the personal guarantee of the business owners. The financing of owner occupied facilities is considered a C&I loan even though there is improved real estate as collateral. This treatment is a result of the credit decision process, which focuses on cash flow from operations of the business to repay the debt. The operation, sale, rental, or refinancing of the real estate is not considered the primary repayment source for these types of loans. As we have expanded our C&I portfolio, we have developed a series of “vertical specialties” to ensure that new products or lending types are embedded within a structured, centralized Commercial Lending area with designated experienced credit officers. These specialties are comprised of either targeted industries (for example, Healthcare, Food & Agribusiness, Energy, etc) and/or lending disciplines (Equipment Finance, ABL, etc), all of which requires a high degree of expertise and oversight to effectively mitigate and monitor risk. As such, we have dedicated colleagues and teams focused on bringing value added expertise to these specialty clients.

 

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

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

Total consumer loans and leases were $22.5 billion at March 31, 2015, and represented 47% of our total loan and lease credit exposure. The consumer portfolio is comprised primarily of automobile loans, home equity loans and lines-of-credit, and residential mortgages (see Consumer Credit discussion) . The decrease from December 31, 2014, primarily relates to the transfer of automobile loans to loans held-for-sale as discussed above.

Automobile —Automobile loans are comprised primarily of loans made through automotive dealerships and include exposure in selected states outside of our primary banking markets. The exposure outside of our primary banking markets represents 20% of the total exposure, with no individual state representing more than 6%. Applications are underwritten utilizing an automated underwriting system that applies consistent policies and processes across the portfolio.

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

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

Other consumer —Primarily consists of consumer loans not secured by real estate, including personal unsecured loans, overdraft balances, and credit cards. We introduced a consumer credit card product during 2013, utilizing a centralized underwriting system with an initial focus on existing Huntington customers.

 

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

Table 7—Loan and Lease Portfolio Composition

 

     2015     2014  

(dollar amounts in millions)

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

Commercial:

                         

Commercial and industrial

   $ 20,109         42   $ 19,033         40   $ 18,791         40   $ 18,899         41   $ 18,046         41

Commercial real estate:

                         

Construction

     910         2        875         2        850         2        757         2        692         2   

Commercial

     4,157         9        4,322         9        4,141         9        4,233         9        4,339         10   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial real estate

     5,067         11        5,197         11        4,991         11        4,990         11        5,031         12   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial

     25,176         53        24,230         51        23,782         51        23,889         52        23,077         53   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Consumer:

                         

Automobile

     7,803         16        8,690         18        8,322         18        7,686         17        6,999         16   

Home equity

     8,492         18        8,491         17        8,436         18        8,405         18        8,373         19   

Residential mortgage

     5,795         12        5,831         12        5,788         12        5,707         12        5,542         12   

Other consumer

     430         1        414         2        395         1        393         1        363         —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer

     22,520         47        23,426         49        22,941         49        22,191         48        21,277         47   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans and leases

   $ 47,696         100   $ 47,656         100   $ 46,723         100   $ 46,080         100   $ 44,354         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

As shown in the table above, our loan portfolio is diversified by consumer and commercial credit. At the corporate level, we manage the credit exposure in part via a credit concentration policy. The policy designates specific loan types, collateral types, and loan structures to be formally tracked and assigned limits as a percentage of capital. C&I lending by NAICS categories, specific limits for CRE primary project types, loans secured by residential real estate, shared national credit exposure, and designated high risk loan definitions represent examples of specifically tracked components of our concentration management process. Currently there are no identified concentrations that exceed the established limit. Our concentration management process is approved by the Risk Oversight Committee of our Board and is one of the strategies utilized to ensure a high quality, well diversified portfolio that is consistent with our overall objective of maintaining an aggregate moderate-to-low risk profile.

The table below provides our total loan and lease portfolio segregated by the type of collateral securing the loan or lease. The changes in the collateral composition are consistent with the portfolio growth metrics, with increases noted in the residential and vehicle categories.

Table 8—Loan and Lease Portfolio by Collateral Type

 

     2015     2014  

(dollar amounts in millions)

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

Secured loans:

                        

Real estate—commercial

   $ 8,463        18   $ 8,631         18   $ 8,628         18   $ 8,617         19   $ 8,612         19

Real estate—consumer

     14,287        30        14,322         30        14,224         30        14,113         31        13,916         31   

Vehicles

     9,938 (1)       21        10,932         23        10,268         22        9,782         21        9,270         21   

Receivables/Inventory

     6,090        13        5,968         13        6,023         13        5,932         13        5,717         13   

Machinery/Equipment

     4,708 (2)       10        3,863         8        3,305         7        3,267         7        2,930         7   

Securities/Deposits

     956        2        964         2        1,232         3        1,349         3        1,064         2   

Other

     1,167        2        919         2        918         2        940         2        870         3   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total secured loans and leases

     45,609        96        45,599         96        44,598         95        44,000         96        42,379         96   

Unsecured loans and leases

     2,087        4        2,057         4        2,125         5        2,080         4        1,975         4   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans and leases

   $ 47,696        100   $ 47,656         100   $ 46,723         100   $ 46,080         100   $ 44,354         100
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Reflects the transfer of approximately $1.0 billion in automobile loans to loans held-for-sale.
(2) Reflects the addition of approximately $0.8 billion in equipment leases related to the acquisition of Macquarie.

 

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Commercial Credit

Refer to the “Commercial Credit” section of our 2014 Form 10-K for our commercial credit underwriting and on-going credit management processes.

C&I PORTFOLIO

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

CRE PORTFOLIO

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

Dedicated real estate professionals originate and manage the portfolio. The portfolio is diversified by project type and loan size, and this diversification represents a significant portion of the credit risk management strategies employed for this portfolio. Subsequent to the origination of the loan, the Credit Review group provides an independent review and assessment of the quality of the underwriting and risk of new loan originations.

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

Consumer Credit

Refer to the “Consumer Credit” section of our 2014 Form 10-K for our consumer credit underwriting and on-going credit management processes.

AUTOMOBILE PORTFOLIO

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

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

 

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RESIDENTIAL REAL ESTATE SECURED PORTFOLIOS

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

Table 9—Selected Home Equity and Residential Mortgage Portfolio Data

(dollar amounts in millions)

 

     Home Equity     Residential Mortgage  
     Secured by first-lien     Secured by junior-lien        
     03/31/15     12/31/14     03/31/15     12/31/14     03/31/15     12/31/14  

Ending balance

   $ 5,155      $ 5,129      $ 3,338      $ 3,362      $ 5,795      $ 5,831   

Portfolio weighted average LTV ratio (1)

     72     71     81     81     75     74

Portfolio weighted average FICO score (2)

     763        759        750        752        751        752   
     Home Equity     Residential Mortgage (3)  
     Secured by first-lien     Secured by junior-lien        
     Three Months Ended March 31,  
     2015     2014     2015     2014     2015     2014  

Originations

   $ 376      $ 300      $ 185      $ 163      $ 231      $ 198   

Origination weighted average LTV ratio (1)

     73     72     84     83     81     81

Origination weighted average FICO score (2)

     780        763        769        756        751        752   

 

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

Home Equity Portfolio

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

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

 

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The table below summarizes our home equity line-of-credit portfolio by maturity date based on the balloon structure described above:

Table 10—Maturity Schedule of Home Equity Line-of-Credit Portfolio

 

     March 31, 2015  

(dollar amounts in millions)

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

Secured by first-lien

   $ 20       $ 2       $ 1       $ 2       $ 2,931       $ 2,956   

Secured by junior-lien

     163         117         82         16         2,584         2,962   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity line-of-credit

   $ 183       $ 119       $ 83       $ 18       $ 5,515       $ 5,918   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The reduction in maturities presented in over 1-year categories is a result of our change to a product with a 20-year amortization period after 10-year draw period structure. Home equity lines-of-credit with balloon payment risk are essentially eliminated after 2015. The amounts maturing in more than four years primarily consist of exposure with a 20-year amortization period after the 10-year draw period.

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

Residential Mortgages Portfolio

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

Several government programs continued to impact the residential mortgage portfolio, including various refinance programs such as HARP and HAMP, which positively affected the availability of credit for the industry. During the three-month period ended March 31, 2015, we closed $62 million in HARP residential mortgages and $1.6 million in HAMP residential mortgages. The HARP and HAMP residential mortgage loans are part of our residential mortgage portfolio or serviced for others.

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

Credit Quality

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

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

Credit quality performance in the 2015 first quarter reflected continued strong performance in the net charge-offs and overall consumer performance metrics, as evidenced by recoveries in the CRE portfolio and lower losses across the consumer portfolio. This was partially offset by some deterioration in the C&I metrics. NPA’s increased 19% to $400.8 million at March 31, 2015, with the majority of the increase centered in one large C&I relationship. NCOs increased by $1.5 million or 6% from the prior quarter, as a result of a significant increase related to the same C&I relationship. Total criticized loans increased in the C&I segment for the fourth consecutive quarter. As a result of the overall continued credit quality improvement, the ACL to total loans ratio declined slightly by 2 basis points to 1.38%.

 

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NPAs, NALs, AND TDRs

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

NPAs and NALs

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

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

Of the $182.6 million of CRE and C&I-related NALs at March 31, 2015, $126.1 million, or 69%, represented loans that were less than 30-days past due, demonstrating our continued commitment to proactive credit risk management. With the exception of residential mortgage loans guaranteed by government organizations which continue to accrue interest, first-lien loans secured by residential mortgage collateral are placed on nonaccrual status at 150-days past due. Junior-lien home equity loans are placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien loan has been identified as nonaccrual. Automobile and other consumer loans are generally charged-off prior to the loan reaching 120-days past due.

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

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

Table 11—Nonaccrual Loans and Leases and Nonperforming Assets

 

     2015     2014  

(dollar amounts in thousands)

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

Nonaccrual loans and leases:

          

Commercial and industrial

   $ 133,363      $ 71,974      $ 90,265      $ 75,274      $ 57,053   

Commercial real estate

     49,263        48,523        59,812        65,398        71,344   

Automobile

     4,448        4,623        4,834        4,384        6,218   

Residential mortgage

     98,093        96,564        98,139        110,635        121,681   

Home equity

     79,246        78,560        72,715        69,266        70,862   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonaccrual loans and leases

     364,413        300,244        325,765        324,957        327,158   

Other real estate owned, net

          

Residential

     30,544        29,291        30,661        31,761        30,581   

Commercial

     3,407        5,748        5,609        2,934        5,110   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other real estate owned, net

     33,951        35,039        36,270        34,695        35,691   

Other nonperforming assets (1)

     2,440        2,440        2,440        2,440        2,440   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 400,804      $ 337,723      $ 364,475      $ 362,092      $ 365,289   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nonaccrual loans as a % of total loans and leases

     0.76     0.63     0.70     0.71     0.74

Nonperforming assets ratio (2)

     0.84        0.71        0.78        0.79        0.82   

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

     1.08        0.98        1.08        1.08        1.17   

 

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

 

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2015 First Quarter versus 2014 Fourth Quarter

The $63.1 million, or 19%, increase in NPAs compared with December 31, 2014, represents the net impact of increases in the commercial portfolio:

 

   

$61.4 million, or 85%, increase in C&I NALs, primarily reflecting the addition of one large C&I relationship to nonaccrual status. Given the absolute low level of problem credits in the portfolio, some volatility should be expected.

TDR Loans

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

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

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

Table 12—Accruing and Nonaccruing Troubled Debt Restructured Loans

 

     2015      2014  

(dollar amounts in thousands)

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

Troubled debt restructured loans—accruing:

              

Commercial and industrial

   $ 162,207       $ 116,331       $ 89,783       $ 90,604       $ 102,970   

Commercial real estate

     161,515         177,156         186,542         212,736         210,876   

Automobile

     25,876         26,060         31,480         31,833         27,393   

Home equity

     265,207         252,084         229,500         221,539         202,044   

Residential mortgage

     268,441         265,084         271,762         289,239         284,194   

Other consumer

     4,879         4,018         3,313         3,496         1,727   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructured loans—accruing

     888,125         840,733         812,380         849,447         829,204   

Troubled debt restructured loans—nonaccruing:

              

Commercial and industrial

     21,246         20,580         19,110         6,677         7,197   

Commercial real estate

     28,676         24,964         28,618         24,396         27,972   

Automobile

     4,283         4,552         4,817         4,287         5,676   

Home equity

     26,379         27,224         25,149         22,264         20,992   

Residential mortgage

     69,799         69,305         72,729         81,546         84,441   

Other consumer

     165         70         74         120         120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructured loans—nonaccruing

     150,548         146,695         150,497         139,290         146,398   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructured loans

   $ 1,038,673       $ 987,428       $ 962,877       $ 988,737       $ 975,602   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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

TDRs in the home equity and residential mortgage portfolio may continue to increase in the near term as we continue to appropriately manage the portfolio and work with our borrowers. Any granted change in terms or conditions that are not readily available in the market for that borrower, requires the designation as a TDR. There are no provisions for the removal of the TDR designation based on payment activity for consumer loans. A loan may be returned to accrual status when all contractually due interest and principal has been paid and the borrower demonstrates the financial capacity to continue to pay as agreed, with the risk of loss diminished.

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

Table 13—Troubled Debt Restructured Loan Activity

 

     2015     2014  

(dollar amounts in thousands)

   First     Fourth     Third     Second     First  

TDRs, beginning of period

   $ 987,428      $ 962,877      $ 988,737      $ 975,602      $ 954,841   

New TDRs

     209,376        137,397        126,238        184,025        219,656   

Payments

     (35,272     (51,908     (78,717     (66,530     (55,130

Charge-offs

     (8,364     (8,611     (10,631     (5,134     (10,774

Sales

     (5,148     (3,303     (1,951     (4,001     (14,169

Transfer to OREO

     (2,369     (2,978     (3,554     (3,539     (2,597

Restructured TDRs—accruing (1)

     (85,700     (26,350     (47,277     (83,586     (86,012

Restructured TDRs—nonaccruing (1)

     (20,849     (16,309     (2,212     (4,146     (23,038

Other

     (429     (3,387     (7,756     (3,954     (7,175
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TDRs, end of period

   $ 1,038,673      $ 987,428      $ 962,877      $ 988,737      $ 975,602   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

ACL

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

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

During the 2015 first quarter, we reviewed our existing commercial and consumer credit models and enhanced certain processes and methods of ACL estimation. During this review, we analyzed the loss emergence periods used for consumer receivables collectively evaluated for impairment and, as a result, extended our loss emergence periods for products within these portfolios. As part of these enhancements to our credit reserve process, we evaluated the methods used to separately estimate economic risks inherent in our portfolios and decided to no longer utilize these separate estimation techniques. Economic risks are incorporated in our loss estimates elsewhere in our reserve calculation. The enhancements made to our credit reserve processes during the quarter allow for increased segmentation and analysis of the estimated incurred losses within our loan portfolios. The net ACL impact of these enhancements was immaterial.

 

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We regularly evaluate the appropriateness of the ACL by performing on-going evaluations of the loan and lease portfolio, including such factors as the differing economic risks associated with each loan category, the financial condition of specific borrowers, the level of delinquent loans, the value of any collateral and, where applicable, the existence of any guarantees or other documented support. We evaluate the impact of changes in interest rates and overall economic conditions on the ability of borrowers to meet their financial obligations when quantifying our exposure to credit losses and assessing the appropriateness of our ACL at each reporting date. In addition to general economic conditions and the other factors described above, additional factors also considered include: the impact of increasing or decreasing residential real estate values; the diversification of CRE loans; the development of new or expanded Commercial business verticals such as healthcare, ABL, and energy, and the overall condition of the manufacturing industry. A provision for credit losses is recorded to adjust the ACL to the level we have determined to be appropriate to absorb credit losses inherent in our loan and lease portfolio.

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

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

Table 14—Allocation of Allowance for Credit Losses (1)

 

     2015     2014  

(dollar amounts in thousands)

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

Commercial

                         

Commercial and industrial

   $ 284,573         42   $ 286,995         40   $ 291,401         40   $ 278,512         41   $ 266,979         41

Commercial real estate

     100,752         11        102,839         11        115,472         11        137,346         11        160,306         12   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial

     385,325         53        389,834         51        406,873         51        415,858         52        427,285         53   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Consumer

                         

Automobile

     37,125         16        33,466         18        30,732         18        27,158         17        25,178         16   

Home equity

     110,280         18        96,413         18        100,375         18        105,943         18        113,177         19   

Residential mortgage

     55,380         12        47,211         12        52,658         12        47,191         12        39,068         12   

Other consumer

     17,016         1        38,272         1