UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED March 31, 2015
Commission File Number 1-34073
Huntington Bancshares Incorporated
Maryland | 31-0724920 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
41 South High Street, Columbus, Ohio 43287
Registrants telephone number (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
There were 808,528,243 shares of Registrants common stock ($0.01 par value) outstanding on March 31, 2015.
HUNTINGTON BANCSHARES INCORPORATED
INDEX
2
Glossary of Acronyms and Terms
The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:
ABL | Asset Based Lending | |
ACL | Allowance for Credit Losses | |
AFCRE | Automobile Finance and Commercial Real Estate | |
AFS | Available-for-Sale | |
ALCO | Asset-Liability Management Committee | |
ALLL | Allowance for Loan and Lease Losses | |
ARM | Adjustable Rate Mortgage | |
ASC | Accounting Standards Codification | |
ASU | Accounting Standards Update | |
ATM | Automated Teller Machine | |
AULC | Allowance for Unfunded Loan Commitments | |
Basel III | Refers to the final rule issued by the FRB and OCC and published in the Federal Register on October 11, 2013 | |
C&I | Commercial and Industrial | |
Camco Financial | Camco Financial Corp. | |
CCAR | Comprehensive Capital Analysis and Review | |
CDO | Collateralized Debt Obligations | |
CDs | Certificate of Deposit | |
CET1 | Common equity tier 1 on a transitional Basel III basis | |
CFPB | Bureau of Consumer Financial Protection | |
CFTC | Commodity Futures Trading Commission | |
CMO | Collateralized Mortgage Obligations | |
CRE | Commercial Real Estate | |
Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act | |
DTA/DTL | Deferred Tax Asset/Deferred Tax Liability | |
EFT | Electronic Fund Transfer | |
EPS | Earnings Per Share | |
EVE | Economic Value of Equity | |
FASB | Financial Accounting Standards Board | |
Fannie Mae | (see FNMA) | |
FDIC | Federal Deposit Insurance Corporation | |
FDICIA | Federal Deposit Insurance Corporation Improvement Act of 1991 | |
FHA | Federal Housing Administration | |
FHLB | Federal Home Loan Bank | |
FHLMC | Federal Home Loan Mortgage Corporation | |
FICO | Fair Isaac Corporation | |
FNMA | Federal National Mortgage Association | |
FRB | Federal Reserve Bank | |
Freddie Mac | (see FHLMC) | |
FTE | Fully-Taxable Equivalent | |
FTP | Funds Transfer Pricing | |
GAAP | Generally Accepted Accounting Principles in the United States of America | |
HAMP | Home Affordable Modification Program | |
HARP | Home Affordable Refinance Program |
3
HIP | Huntington Investment and Tax Savings Plan | |
HQLA | High Quality Liquid Asset | |
HTM | Held-to-Maturity | |
IRS | Internal Revenue Service | |
LCR | Liquidity Coverage Ratio | |
LIBOR | London Interbank Offered Rate | |
LGD | Loss-Given-Default | |
LIHTC | Low Income Housing Tax Credit | |
LTV | Loan to Value | |
Macquarie | Macquarie Equipment Finance, Inc. (U.S. operations) | |
MD&A | Managements Discussion and Analysis of Financial Condition and Results of Operations | |
MSA | Metropolitan Statistical Area | |
MSR | Mortgage Servicing Rights | |
NAICS | North American Industry Classification System | |
NALs | Nonaccrual Loans | |
NCO | Net Charge-off | |
NII | Net Interest Income | |
NIM | Net Interest Margin | |
NCO | Net Charge-off | |
NIM | Net Interest Margin | |
NPA | Nonperforming Asset | |
N.R. | Not relevant. Denominator of calculation is a gain in the current period compared with a loss in the prior period, or vice-versa | |
OCC | Office of the Comptroller of the Currency | |
OCI | Other Comprehensive Income (Loss) | |
OCR | Optimal Customer Relationship | |
OLEM | Other Loans Especially Mentioned | |
OREO | Other Real Estate Owned | |
OTTI | Other-Than-Temporary Impairment | |
Plan | Huntington Bancshares Retirement Plan | |
Problem Loans | Includes nonaccrual loans and leases (Table 11), troubled debt restructured loans (Table 12), accruing loans and leases past due 90 days or more (aging analysis section of Footnote 3), and Criticized commercial loans (credit quality indicators section of Footnote 3). | |
RBHPCG | Regional Banking and The Huntington Private Client Group | |
RCSA | Risk and Control Self-Assessments | |
REIT | Real Estate Investment Trust | |
ROC | Risk Oversight Committee | |
RWA | Risk-Weighted Assets | |
SAD | Special Assets Division | |
SBA | Small Business Administration | |
SEC | Securities and Exchange Commission | |
SERP | Supplemental Executive Retirement Plan | |
SRIP | Supplemental Retirement Income Plan | |
SSFA | Simplified Supervisory Formula Approach | |
TCE | Tangible Common Equity | |
TDR | Troubled Debt Restructured Loan | |
U.S. Treasury | U.S. Department of the Treasury | |
UCS | Uniform Classification System |
4
UDAP |
Unfair or Deceptive Acts or Practices | |
UPB |
Unpaid Principal Balance | |
USDA |
U.S. Department of Agriculture | |
VIE |
Variable Interest Entity | |
XBRL |
eXtensible Business Reporting Language |
5
When we refer to we, our, and us in this report, we mean Huntington Bancshares Incorporated and our consolidated subsidiaries, unless the context indicates that we refer only to the parent company, Huntington Bancshares Incorporated. When we refer to the Bank in this report, we mean our only bank subsidiary, The Huntington National Bank, and its subsidiaries.
Item 2: | Managements Discussion and Analysis of Financial Condition and Results of Operations |
INTRODUCTION
We are a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through the Bank, we have 149 years of servicing the financial needs of our customers. Through our subsidiaries, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, insurance service programs, and other financial products and services. Our 733 branches are located in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. Selected financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office in Columbus, Ohio and a limited purpose office located in the Cayman Islands and another limited purpose office located in Hong Kong. Our foreign banking activities, in total or with any individual country, are not significant.
This MD&A provides information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows. The MD&A included in our 2014 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2014 Form 10-K. This MD&A should also be read in conjunction with the Unaudited Condensed Consolidated Financial Statements, Notes to Unaudited Condensed Consolidated Financial Statements, and other information contained in this report.
Our discussion is divided into key segments:
| Executive OverviewProvides a summary of our current financial performance and business overview, including our thoughts on the impact of the economy, legislative and regulatory initiatives, and recent industry developments. This section also provides our outlook regarding our expectations for the next several quarters. |
| Discussion of Results of OperationsReviews financial performance from a consolidated Company perspective. It also includes a Significant Items section that summarizes key issues helpful for understanding performance trends. Key consolidated average balance sheet and income statement trends are also discussed in this section. |
| Risk Management and CapitalDiscusses credit, market, liquidity, operational, and compliance risks, including how these are managed, as well as performance trends. It also includes a discussion of liquidity policies, how we obtain funding, and related performance. In addition, there is a discussion of guarantees and / or commitments made for items such as standby letters of credit and commitments to sell loans, and a discussion that reviews the adequacy of capital, including regulatory capital requirements. |
| Business Segment DiscussionProvides an overview of financial performance for each of our major business segments and provides additional discussion of trends underlying consolidated financial performance. |
| Additional DisclosuresProvides comments on important matters including forward-looking statements, critical accounting policies and use of significant estimates, and recent accounting pronouncements and developments. |
A reading of each section is important to understand fully the nature of our financial performance and prospects.
6
Summary of 2015 First Quarter Results
For the quarter, we reported net income of $165.9 million, or $0.19 per common share, compared with $149.1 million, or $0.17 per common share, in the year-ago quarter (see Table 1).
Fully-taxable equivalent net interest income was $475.2 million for the quarter, up $31.9 million, or 7%, from the year-ago quarter. The results reflected a $6.2 billion, or 11%, increase in average earning assets, including a $4.4 billion, or 10%, increase in average loans and leases, as well as a $1.8 billion, or 16%, increase in average securities. The impact of these balance increases was partially offset by a 12 basis point decrease in the net interest margin. The primary items affecting the net interest margin were a 15 basis point negative impact from the mix and yield of earning assets and a 1 basis point reduction in the benefit from the impact of noninterest-bearing funds, partially offset by a 4 basis point reduction in funding costs.
The provision for credit losses decreased $4.0 million from the year-ago quarter to $20.6 million in the 2015 first quarter. NCOs decreased $18.6 million, or 43%, to $24.4 million. NCOs represented an annualized 0.20% of average loans and leases in the current quarter consistent with the prior quarter results, and down substantially from the 0.40% in the year-ago quarter. Residential and home equity NCOs continued to show a declining trend over the last five quarters. Commercial NCOs have been relatively consistent over the period with relatively low levels creating some quarter-to-quarter volatility.
Noninterest income decreased $16.9 million, or 7%, from the year-ago quarter. The year-over-year decrease primarily reflected the $17.0 million of securities gains realized in the 2014 first quarter compared to none in the current quarter. In addition, capital market fees increased $4.7 million, or 51%, primarily related to income from customer interest rate derivative products and underwriting fees. Electronic banking increased $3.8 million, or 16%, due to higher card related income and underlying customer growth. Service charges on deposit accounts decreased $2.4 million, or 4%, reflecting the decline from the late July 2014 implementation of changes in consumer products, partially offset by a 9% increase in consumer households and changing customer usage patterns.
Noninterest expense decreased $1.3 million, or less than 1%, from the year-ago quarter. Noninterest expense in the year-ago quarter included several Significant Items, which are further described in the Discussion of Results of Operations section. The results reflected a $15.0 million, or 29%, decrease in other expense (excluding the impact of Significant Items, other expenses decreased $4.6 million, or 11%), and a $3.6 million, or 26%, decrease in deposit and other insurance expense, primarily reflecting the benefit of $1.8 billion of bank-level debt issued over the past year. This was partially offset by a $15.4 million, or 6%, increase in personnel costs (excluding the impact of Significant Items, personnel costs increased $17.8 million, or 7%, primarily related to a $13.8 million increase in salaries reflecting a 1% increase in the number of full-time equivalent employees and a $4.0 million increase in benefits expense).
The tangible common equity to tangible assets ratio was 7.95% at March 31, 2015, down 68 basis points from a year ago. On a Basel III transitional basis, the regulatory common equity tier 1 (CET1) risk-based capital ratio was 9.51% at March 31, 2015, and the regulatory tier 1 risk-based capital ratio was 10.22%. On a Basel I basis, the tier 1 common risk-based capital ratio was 10.60% at March 31, 2014, and the regulatory tier 1 risk-based capital ratio was 11.95%. All capital ratios were impacted by the repurchase of 26.1 million common shares over the last four quarters.
Business Overview
General
Our general business objectives are: (1) grow net interest income and fee income, (2) deliver positive operating leverage, (3) increase primary relationships across all business segments, (4) continue to strengthen risk management and reduce volatility, and (5) maintain strong capital and liquidity positions.
Ongoing improvement in our expense control environment, continuing good core deposit growth, and strong mortgage and capital markets results were highlights for the quarter. In addition, we completed the successful close of our acquisition of Macquarie Equipment Finance, Inc. on March 31, 2015, and look forward to transitioning to the Huntington Technology Finance brand to align our enhanced capabilities with our combined customer base and prospects. Also in the quarter, we continued to expand within our core footprint via the launch of our previously announced 2015 in-store build out, enhancing our full-service branch network in a cost-efficient manner.
7
On April 21, 2015, the board of directors approved two capital actions. First, the board declared a quarterly cash dividend on the Companys common stock of $0.06 per common share. The dividend is payable July 1, 2015, to shareholders of record on June 17, 2015. Second, the board authorized the repurchase of up to $366 million of common shares over the five quarters through the 2016 second quarter. Both actions were proposed in the January 2015 CCAR capital plan, which received no objections from the Federal Reserve. Purchases of common stock may include open market purchases, privately negotiated transactions, and accelerated repurchase programs. During the 2015 first quarter, the Company repurchased 4.9 million common shares at an average price of $10.45 per share, which completed our previous repurchase authorization.
Economy
The automobile industry is expected to provide continued impetus for regional manufacturing growth and capital spending in 2015, offsetting slower anticipated growth in energy and non-transportation exports. Manufacturing employment growth and activity spurs employment growth directly in manufacturing and indirectly in service sectors as evidenced by the drop in unemployment rates during the recovery in our footprint states.
Home purchase prices are rising in our footprint states and the nation. In addition, office vacancy rates in our largest MSAs are down substantially during the economic recovery-to-date. Further, industrial vacancy rates in most of our largest footprint MSAs have been below the national average, reflecting generally healthy industrial real estate markets.
Legislative and Regulatory
Regulatory reforms continue to be adopted, including the 2015 first quarter implementation of the Basel III regulatory capital requirements.
Basel III Regulatory Capital RequirementsIn 2013, the Federal Reserve voted to adopt final capital rules implementing Basel III requirements for U.S. Banking organizations, which were effective for us beginning January 1, 2015. The final rules establish an integrated regulatory capital framework and implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. Consistent with the international Basel framework, the final rule includes a new regulatory minimum ratio of common equity tier 1 capital to risk-weighted assets. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets and includes a minimum leverage ratio of 4%. The Basel III capital rules establish two methodologies for calculating risk-weighted assets, the advanced and standardized approaches. We are subject to the standardized approach for calculating risk-weighted assets. The implementation of the Basel III capital requirements is transitional and phases-in through the end of 2018.
Expectations 2015
We remain committed to delivering solid results in a flat interest rate environment. We have built our budget around the current rate environment and our planned results are not dependent on a rate hike. While our customer activity levels, our pipelines and our balance sheet are strong, we will continue to be disciplined in growing our commercial real estate and C&I portfolios. We will continue disciplined execution of our strategic focus on investment in the business, controlled expenses and delivering full-year positive operating leverage.
On March 31, 2015, we completed our acquisition of Macquarie in a cash transaction valued at $457.8 million. Macquarie is the largest standalone, vendor independent provider of specialized technology financing with customer-centric asset management services in the United States. The acquisition gives us the ability to drive added growth to our national equipment finance business as well as additional health care and small business finance capabilities. We expect Macquarie, which added over 165 positions to our colleague base, to generate approximately $500 million in annual lease originations and approximately $75 million to $85 million in annualized revenue.
Excluding Significant Items and net MSR activity, we expect to deliver positive operating leverage in 2015, with and without the run rate impact of the Macquarie acquisition. Achieving annual positive operating leverage is a long-term strategic goal and we are committed to managing expenses in conjunction with our revenue outlook to achieve that goal. We expect noninterest expense growth of 2-4%, excluding Significant Items and the recurring expense related to the Macquarie acquisition.
Overall, asset quality metrics are expected to remain near current levels, although moderate quarterly volatility also is expected, given the absolute low level of problem assets and credit costs. We anticipate NCOs will remain within or below our long-term normalized range of 35 to 55 basis points.
The effective tax rate for 2015 is expected to be in the range of 24% to 27%.
8
DISCUSSION OF RESULTS OF OPERATIONS
This section provides a review of financial performance from a consolidated perspective. It also includes a Significant Items section that summarizes key issues important for a complete understanding of performance trends. Key Unaudited Condensed Consolidated Balance Sheet and Unaudited Condensed Statement of Income trends are discussed. All earnings per share data are reported on a diluted basis. For additional insight on financial performance, please read this section in conjunction with the Business Segment Discussion.
Table 1Selected Quarterly Income Statement Data (1)
2015 | 2014 | |||||||||||||||||||
(dollar amounts in thousands, except per share amounts) |
First | Fourth | Third | Second | First | |||||||||||||||
Interest income |
$ | 502,096 | $ | 507,625 | $ | 501,060 | $ | 495,322 | $ | 472,455 | ||||||||||
Interest expense |
34,411 | 34,373 | 34,725 | 35,274 | 34,949 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest income |
467,685 | 473,252 | 466,335 | 460,048 | 437,506 | |||||||||||||||
Provision for credit losses |
20,591 | 2,494 | 24,480 | 29,385 | 24,630 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest income after provision for credit losses |
447,094 | 470,758 | 441,855 | 430,663 | 412,876 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Service charges on deposit accounts |
62,220 | 67,408 | 69,118 | 72,633 | 64,582 | |||||||||||||||
Trust services |
29,039 | 28,781 | 28,045 | 29,581 | 29,565 | |||||||||||||||
Electronic banking |
27,398 | 27,993 | 27,275 | 26,491 | 23,642 | |||||||||||||||
Mortgage banking income |
22,961 | 14,030 | 25,051 | 22,717 | 23,089 | |||||||||||||||
Brokerage income |
15,500 | 16,050 | 17,155 | 17,905 | 17,167 | |||||||||||||||
Insurance income |
15,895 | 16,252 | 16,729 | 15,996 | 16,496 | |||||||||||||||
Bank owned life insurance income |
13,025 | 14,988 | 14,888 | 13,865 | 13,307 | |||||||||||||||
Capital markets fees |
13,905 | 13,791 | 10,246 | 10,500 | 9,194 | |||||||||||||||
Gain on sale of loans |
4,589 | 5,408 | 8,199 | 3,914 | 3,570 | |||||||||||||||
Securities gains (losses) |
| (104 | ) | 198 | 490 | 16,970 | ||||||||||||||
Other income |
27,091 | 28,681 | 30,445 | 35,975 | 30,903 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total noninterest income |
231,623 | 233,278 | 247,349 | 250,067 | 248,485 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Personnel costs |
264,916 | 263,289 | 275,409 | 260,600 | 249,477 | |||||||||||||||
Outside data processing and other services |
50,535 | 53,685 | 53,073 | 54,338 | 51,490 | |||||||||||||||
Net occupancy |
31,020 | 31,565 | 34,405 | 28,673 | 33,433 | |||||||||||||||
Equipment |
30,249 | 31,981 | 30,183 | 28,749 | 28,750 | |||||||||||||||
Professional services |
12,727 | 15,665 | 13,763 | 17,896 | 12,231 | |||||||||||||||
Marketing |
12,975 | 12,466 | 12,576 | 14,832 | 10,686 | |||||||||||||||
Deposit and other insurance expense |
10,167 | 13,099 | 11,628 | 10,599 | 13,718 | |||||||||||||||
Amortization of intangibles |
10,206 | 10,653 | 9,813 | 9,520 | 9,291 | |||||||||||||||
Other expense |
36,062 | 50,868 | 39,468 | 33,429 | 51,045 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total noninterest expense |
458,857 | 483,271 | 480,318 | 458,636 | 460,121 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income before income taxes |
219,860 | 220,765 | 208,886 | 222,094 | 201,240 | |||||||||||||||
Provision for income taxes |
54,006 | 57,151 | 53,870 | 57,475 | 52,097 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 165,854 | $ | 163,614 | $ | 155,016 | $ | 164,619 | $ | 149,143 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Dividends on preferred shares |
7,965 | 7,963 | 7,964 | 7,963 | 7,964 | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Net income applicable to common shares |
$ | 157,889 | $ | 155,651 | $ | 147,052 | $ | 156,656 | $ | 141,179 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Average common sharesbasic |
809,778 | 811,967 | 816,497 | 821,546 | 829,659 | |||||||||||||||
Average common sharesdiluted |
823,809 | 825,338 | 829,623 | 834,687 | 842,677 | |||||||||||||||
Net income per common sharebasic |
$ | 0.19 | $ | 0.19 | $ | 0.18 | $ | 0.19 | $ | 0.17 | ||||||||||
Net income per common sharediluted |
0.19 | 0.19 | 0.18 | 0.19 | 0.17 | |||||||||||||||
Cash dividends declared per common share |
0.06 | 0.06 | 0.05 | 0.05 | 0.05 | |||||||||||||||
Return on average total assets |
1.02 | % | 1.00 | % | 0.97 | % | 1.07 | % | 1.01 | % | ||||||||||
Return on average common shareholders equity |
10.6 | 10.3 | 9.9 | 10.8 | 9.9 | |||||||||||||||
Return on average tangible common shareholders equity (2) |
12.2 | 11.9 | 11.4 | 12.4 | 11.4 | |||||||||||||||
Net interest margin (3) |
3.15 | 3.18 | 3.20 | 3.28 | 3.27 | |||||||||||||||
Efficiency ratio (4) |
63.5 | 66.2 | 65.3 | 62.7 | 66.4 | |||||||||||||||
Effective tax rate |
24.6 | 25.9 | 25.8 | 25.9 | 25.9 | |||||||||||||||
RevenueFTE |
||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest income |
$ | 467,685 | $ | 473,252 | $ | 466,335 | $ | 460,048 | $ | 437,506 | ||||||||||
FTE adjustment |
7,560 | 7,522 | 7,506 | 6,637 | 5,885 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest income (3) |
475,245 | 480,774 | 473,841 | 466,685 | 443,391 | |||||||||||||||
Noninterest income |
231,623 | 233,278 | 247,349 | 250,067 | 248,485 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total revenue (3) |
$ | 706,868 | $ | 714,052 | $ | 721,190 | $ | 716,752 | $ | 691,876 | ||||||||||
|
|
|
|
|
|
|
|
|
|
9
(1) | Comparisons for presented periods are impacted by a number of factors. Refer to the Significant Items for additional discussion regarding these key factors. |
(2) | Net income excluding expense for amortization of intangibles for the period divided by average tangible common shareholders equity. Average tangible common shareholders equity equals average total common shareholders equity less average intangible assets and goodwill. Expense for amortization of intangibles and average intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate. |
(3) | On a fully-taxable equivalent (FTE) basis assuming a 35% tax rate. |
(4) | Noninterest expense less amortization of intangibles and goodwill impairment divided by the sum of FTE net interest income and noninterest income excluding securities gains. |
Significant Items
Definition of Significant Items
From time-to-time, revenue, expenses, or taxes are impacted by items judged by us to be outside of ordinary banking activities and / or by items that, while they may be associated with ordinary banking activities, are so unusually large that their outsized impact is believed by us at that time to be infrequent or short-term in nature. We refer to such items as Significant Items. Most often, these Significant Items result from factors originating outside the Company; e.g., regulatory actions / assessments, windfall gains, changes in accounting principles, one-time tax assessments / refunds, litigation actions, etc. In other cases, they may result from our decisions associated with significant corporate actions outside of the ordinary course of business; e.g., merger / restructuring charges, recapitalization actions, goodwill impairment, etc.
Even though certain revenue and expense items are naturally subject to more volatility than others due to changes in market and economic environment conditions, as a general rule volatility alone does not define a Significant Item. For example, changes in the provision for credit losses, gains / losses from investment activities, asset valuation writedowns, etc., reflect ordinary banking activities and are, therefore, typically excluded from consideration as a Significant Item.
We believe the disclosure of Significant Items provides a better understanding of our performance and trends to ascertain which of such items, if any, to include or exclude from an analysis of our performance; i.e., within the context of determining how that performance differed from expectations, as well as how, if at all, to adjust estimates of future performance accordingly. To this end, we adopted a practice of listing Significant Items in our external disclosure documents; e.g., earnings press releases, investor presentations, Forms 10-Q and 10-K.
Significant Items for any particular period are not intended to be a complete list of items that may materially impact current or future period performance.
Significant Items Influencing Financial Performance Comparisons
Earnings comparisons were impacted by the Significant Items summarized below:
1. | Franchise Repositioning Related Expense. During the 2014 fourth quarter, $8.6 million of franchise repositioning related expense was recorded for the consolidation of 26 branches and organizational actions. This resulted in a negative impact of $0.01 per common share. |
2. | Litigation Reserve. $11.9 million and $9.0 million of net additions to litigation reserves were recorded as other noninterest expense during the 2014 fourth quarter and 2014 first quarter, respectively. This resulted in a negative impact of $0.01 per common share in the 2014 fourth quarter and 2014 first quarter. |
3. | Merger and Acquisition. During the 2014 first quarter, $11.8 million of net noninterest expense was recorded related to the acquisition of Camco Financial. This resulted in a negative impact of $0.01 per common share. |
10
The following table reflects the earnings impact of the above-mentioned Significant Items for periods affected by this Results of Operations discussion:
Table 2Significant Items Influencing Earnings Performance Comparison
Three Months Ended | ||||||||||||||||||||||||
March 31, 2015 (4) | December 31, 2014 | March 31, 2014 | ||||||||||||||||||||||
(dollar amounts in thousands, except per share amounts) |
After-tax | EPS (2)(3) | After-tax | EPS (2)(3) | After-tax | EPS (2)(3) | ||||||||||||||||||
Net income |
$ | 165,854 | $ | 163,614 | $ | 149,143 | ||||||||||||||||||
Earnings per share, after-tax |
$ | 0.19 | $ | 0.19 | $ | 0.17 | ||||||||||||||||||
Significant Itemsfavorable (unfavorable) impact: |
Earnings (1) | EPS (2)(3) | Earnings (1) | EPS (2)(3) | Earnings (1) | EPS (2)(3) | ||||||||||||||||||
Franchise repositioning related expense |
$ | | $ | | $ | (8,643 | ) | $ | (0.01 | ) | $ | | $ | | ||||||||||
Net additions to litigation reserve |
| | (11,909 | ) | (0.01 | ) | (9,000 | ) | (0.01 | ) | ||||||||||||||
Mergers and acquisitions, net |
| | | | (11,823 | ) | (0.01 | ) |
(1) | Pretax. |
(2) | Based on average outstanding diluted common shares. |
(3) | After-tax. |
(4) | Quarter included $3.4 million of merger-related expense that was not a Significant Item for the quarter, but merger-related expense may be a Significant Item for the 2015 full year. |
11
Net Interest Income / Average Balance Sheet
The following tables detail the change in our average balance sheet and the net interest margin:
Table 3Consolidated Quarterly Average Balance Sheets
Average Balances | Change | |||||||||||||||||||||||||||
2015 | 2014 | 1Q15 vs. 1Q14 | ||||||||||||||||||||||||||
(dollar amounts in millions) |
First | Fourth | Third | Second | First | Amount | Percent | |||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||
Interest-bearing deposits in banks |
$ | 94 | $ | 85 | $ | 82 | $ | 91 | $ | 83 | $ | 11 | 13 | % | ||||||||||||||
Loans held for sale |
381 | 374 | 351 | 288 | 279 | 102 | 37 | |||||||||||||||||||||
Securities: |
||||||||||||||||||||||||||||
Available-for-sale and other securities: |
||||||||||||||||||||||||||||
Taxable |
7,664 | 7,291 | 6,935 | 6,662 | 6,240 | 1,424 | 23 | |||||||||||||||||||||
Tax-exempt |
1,874 | 1,684 | 1,620 | 1,290 | 1,115 | 759 | 68 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total available-for-sale and other securities |
9,538 | 8,975 | 8,555 | 7,952 | 7,355 | 2,183 | 30 | |||||||||||||||||||||
Trading account securities |
53 | 49 | 50 | 45 | 38 | 15 | 39 | |||||||||||||||||||||
Held-to-maturity securitiestaxable |
3,347 | 3,435 | 3,556 | 3,677 | 3,783 | (436 | ) | (12 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total securities |
12,938 | 12,459 | 12,161 | 11,674 | 11,176 | 1,762 | 16 | |||||||||||||||||||||
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|
|
|
|||||||||||||||
Loans and leases: (1) |
||||||||||||||||||||||||||||
Commercial: |
||||||||||||||||||||||||||||
Commercial and industrial |
19,116 | 18,880 | 18,581 | 18,262 | 17,631 | 1,485 | 8 | |||||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||
Construction |
887 | 822 | 775 | 702 | 612 | 275 | 45 | |||||||||||||||||||||
Commercial |
4,275 | 4,262 | 4,188 | 4,345 | 4,289 | (14 | ) | | ||||||||||||||||||||
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|
|
|
|
|
|||||||||||||||
Commercial real estate |
5,162 | 5,084 | 4,963 | 5,047 | 4,901 | 261 | 5 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial |
24,278 | 23,964 | 23,544 | 23,309 | 22,532 | 1,746 | 8 | |||||||||||||||||||||
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|
|
|
|
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|
|
|
|||||||||||||||
Consumer: |
||||||||||||||||||||||||||||
Automobile |
8,783 | 8,512 | 8,012 | 7,349 | 6,786 | 1,997 | 29 | |||||||||||||||||||||
Home equity |
8,484 | 8,452 | 8,412 | 8,376 | 8,340 | 144 | 2 | |||||||||||||||||||||
Residential mortgage |
5,810 | 5,751 | 5,747 | 5,608 | 5,379 | 431 | 8 | |||||||||||||||||||||
Other consumer |
425 | 413 | 398 | 382 | 386 | 39 | 10 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total consumer |
23,502 | 23,128 | 22,569 | 21,715 | 20,891 | 2,611 | 12 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total loans and leases |
47,780 | 47,092 | 46,113 | 45,024 | 43,423 | 4,357 | 10 | |||||||||||||||||||||
Allowance for loan and lease losses |
(612 | ) | (631 | ) | (633 | ) | (642 | ) | (649 | ) | 37 | (6 | ) | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net loans and leases |
47,168 | 46,461 | 45,480 | 44,382 | 42,774 | 4,394 | 10 | |||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total earning assets |
61,193 | 60,010 | 58,707 | 57,077 | 54,961 | 6,232 | 11 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
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|
|
|
|||||||||||||||
Cash and due from banks |
935 | 929 | 887 | 872 | 904 | 31 | 3 | |||||||||||||||||||||
Intangible assets |
593 | 602 | 583 | 591 | 535 | 58 | 11 | |||||||||||||||||||||
All other assets |
4,142 | 4,022 | 3,929 | 3,932 | 3,941 | 201 | 5 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total assets |
$ | 66,251 | $ | 64,932 | $ | 63,473 | $ | 61,830 | $ | 59,692 | $ | 6,559 | 11 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Liabilities and Shareholders Equity: |
||||||||||||||||||||||||||||
Deposits: |
||||||||||||||||||||||||||||
Demand depositsnoninterest-bearing |
$ | 15,253 | $ | 15,179 | $ | 14,090 | $ | 13,466 | $ | 13,192 | $ | 2,061 | 16 | % | ||||||||||||||
Demand depositsinterest-bearing |
6,173 | 5,948 | 5,913 | 5,945 | 5,775 | 398 | 7 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total demand deposits |
21,426 | 21,127 | 20,003 | 19,411 | 18,967 | 2,459 | 13 | |||||||||||||||||||||
Money market deposits |
19,368 | 18,401 | 17,929 | 17,680 | 17,648 | 1,720 | 10 | |||||||||||||||||||||
Savings and other domestic deposits |
5,169 | 5,052 | 5,020 | 5,086 | 4,967 | 202 | 4 | |||||||||||||||||||||
Core certificates of deposit |
2,814 | 3,058 | 3,167 | 3,434 | 3,613 | (799 | ) | (22 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total core deposits |
48,777 | 47,638 | 46,119 | 45,611 | 45,195 | 3,582 | 8 | |||||||||||||||||||||
Other domestic time deposits of $250,000 or more |
195 | 201 | 223 | 262 | 284 | (89 | ) | (31 | ) | |||||||||||||||||||
Brokered deposits and negotiable CDs |
2,600 | 2,434 | 2,262 | 2,070 | 1,782 | 818 | 46 | |||||||||||||||||||||
Deposits in foreign offices |
557 | 479 | 374 | 315 | 328 | 229 | 70 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total deposits |
52,129 | 50,752 | 48,978 | 48,258 | 47,589 | 4,540 | 10 | |||||||||||||||||||||
Short-term borrowings |
1,882 | 2,682 | 3,192 | 2,788 | 2,372 | (490 | ) | (21 | ) | |||||||||||||||||||
Long-term debt |
4,374 | 3,956 | 3,968 | 3,523 | 2,513 | 1,861 | 74 | |||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total interest-bearing liabilities |
43,132 | 42,211 | 42,048 | 41,103 | 39,282 | 3,850 | 10 | |||||||||||||||||||||
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|
|
|
|||||||||||||||
All other liabilities |
1,450 | 1,168 | 1,043 | 1,033 | 1,035 | 415 | 40 | |||||||||||||||||||||
Shareholders equity |
6,416 | 6,374 | 6,292 | 6,228 | 6,183 | 233 | 4 | |||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total liabilities and shareholders equity |
$ | 66,251 | $ | 64,932 | $ | 63,473 | $ | 61,830 | $ | 59,692 | $ | 6,559 | 11 | % | ||||||||||||||
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|
|
(1) | For purposes of this analysis, NALs are reflected in the average balances of loans. |
12
Table 4Consolidated Quarterly Net Interest Margin Analysis
Average Rates (2) | ||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||
Fully-taxable equivalent basis (1) |
First | Fourth | Third | Second | First | |||||||||||||||
Assets: |
||||||||||||||||||||
Interest-bearing deposits in banks |
0.18 | % | 0.23 | % | 0.19 | % | 0.04 | % | 0.03 | % | ||||||||||
Loans held for sale |
3.69 | 3.82 | 3.98 | 4.27 | 3.74 | |||||||||||||||
Securities: |
||||||||||||||||||||
Available-for-sale and other securities: |
||||||||||||||||||||
Taxable |
2.50 | 2.61 | 2.48 | 2.52 | 2.47 | |||||||||||||||
Tax-exempt |
3.05 | 3.26 | 3.02 | 3.15 | 3.03 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total available-for-sale and other securities |
2.61 | 2.73 | 2.59 | 2.63 | 2.55 | |||||||||||||||
Trading account securities |
1.17 | 1.05 | 0.85 | 0.70 | 1.12 | |||||||||||||||
Held-to-maturity securitiestaxable |
2.47 | 2.45 | 2.45 | 2.46 | 2.47 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total securities |
2.57 | 2.65 | 2.54 | 2.57 | 2.52 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans and leases: (3) |
||||||||||||||||||||
Commercial: |
||||||||||||||||||||
Commercial and industrial |
3.33 | 3.35 | 3.45 | 3.49 | 3.56 | |||||||||||||||
Commercial real estate: |
||||||||||||||||||||
Construction |
3.81 | 4.30 | 4.38 | 4.29 | 3.99 | |||||||||||||||
Commercial |
3.57 | 3.47 | 3.60 | 4.16 | 3.84 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial real estate |
3.62 | 3.60 | 3.72 | 4.17 | 3.86 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
3.39 | 3.40 | 3.51 | 3.64 | 3.63 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Consumer: |
||||||||||||||||||||
Automobile |
3.24 | 3.33 | 3.41 | 3.47 | 3.54 | |||||||||||||||
Home equity |
4.03 | 4.05 | 4.07 | 4.12 | 4.12 | |||||||||||||||
Residential mortgage |
3.75 | 3.84 | 3.78 | 3.77 | 3.78 | |||||||||||||||
Other consumer |
8.20 | 7.68 | 7.31 | 7.34 | 6.82 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer |
3.74 | 3.80 | 3.82 | 3.87 | 3.89 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans and leases |
3.56 | 3.60 | 3.66 | 3.75 | 3.75 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total earning assets |
3.38 | % | 3.41 | % | 3.44 | % | 3.53 | % | 3.53 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities: |
||||||||||||||||||||
Deposits: |
||||||||||||||||||||
Demand depositsnoninterest-bearing |
| % | | % | | % | | % | | % | ||||||||||
Demand depositsinterest-bearing |
0.05 | 0.04 | 0.04 | 0.04 | 0.04 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total demand deposits |
0.01 | 0.01 | 0.01 | 0.01 | 0.01 | |||||||||||||||
Money market deposits |
0.21 | 0.22 | 0.23 | 0.24 | 0.25 | |||||||||||||||
Savings and other domestic deposits |
0.15 | 0.16 | 0.16 | 0.17 | 0.20 | |||||||||||||||
Core certificates of deposit |
0.76 | 0.75 | 0.74 | 0.81 | 0.94 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total core deposits |
0.22 | 0.23 | 0.23 | 0.25 | 0.28 | |||||||||||||||
Other domestic time deposits of $250,000 or more |
0.42 | 0.43 | 0.44 | 0.43 | 0.41 | |||||||||||||||
Brokered deposits and negotiable CDs |
0.17 | 0.18 | 0.20 | 0.24 | 0.28 | |||||||||||||||
Deposits in foreign offices |
0.13 | 0.13 | 0.13 | 0.13 | 0.13 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total deposits |
0.22 | 0.23 | 0.23 | 0.25 | 0.28 | |||||||||||||||
Short-term borrowings |
0.12 | 0.12 | 0.11 | 0.10 | 0.09 | |||||||||||||||
Long-term debt |
1.31 | 1.35 | 1.35 | 1.44 | 1.67 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total interest-bearing liabilities |
0.32 | % | 0.32 | % | 0.33 | % | 0.34 | % | 0.36 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest rate spread |
3.06 | % | 3.09 | % | 3.11 | % | 3.19 | % | 3.17 | % | ||||||||||
Impact of noninterest-bearing funds on margin |
0.09 | 0.09 | 0.09 | 0.09 | 0.10 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest margin |
3.15 | % | 3.18 | % | 3.20 | % | 3.28 | % | 3.27 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | FTE yields are calculated assuming a 35% tax rate. |
(2) | Loan, lease, and deposit average rates include impact of applicable derivatives, non-deferrable fees, and amortized fees. |
(3) | For purposes of this analysis, NALs are reflected in the average balances of loans. |
13
2015 First Quarter versus 2014 First Quarter
Fully-taxable equivalent net interest income increased $31.9 million, or 7%, from the 2014 first quarter. This reflected the benefit from the $6.2 billion, or 11%, increase in average earning assets partially offset by a 12 basis point reduction in the FTE NIM to 3.15%. Average earning asset growth included a $4.4 billion, or 10%, increase in average loans and leases and a $1.8 billion, or 16%, increase in average securities. The NIM contraction reflected a 15 basis point decrease related to the mix and yield of earning assets and 1 basis point reduction in benefit from the impact of noninterest-bearing funds, partially offset by the 4 basis point reduction in funding costs.
Average earning assets increased $6.2 billion, or 11%, from the year-ago quarter, driven by:
| $2.0 billion, or 29%, increase in average Automobile loans, as the 2015 first quarter represented the fifth consecutive quarter of greater than $1.0 billion in automobile loan originations. |
| $1.8 billion, or 16%, increase in average securities, reflecting an increase of $1.8 billion of LCR Level 1 qualified securities. |
| $1.5 billion, or 8%, increase in average C&I loans and leases, primarily reflecting growth in trade finance in support of our middle market and corporate customers, asset finance, automobile dealer floorplan lending, and corporate banking. |
| $0.4 billion, or 8%, increase in average Residential mortgage loans as a result of the Camco acquisition in the year-ago quarter and a decrease in the rate of payoffs due to lower levels of refinancing. |
While not affecting average balances, $1.0 billion of automobile loans were transferred to loans held-for-sale on March 31, 2015 in anticipation of a future loan securitization. In addition, on March 31, 2015, the Company completed the previously announced acquisition of Macquarie subsequently rebranded as Huntington Technology Finance. The acquisition included $0.8 billion of equipment finance leases.
Average total deposits increased $4.5 billion, or 10%, from the year-ago quarter, including a $3.6 billion, or 8%, increase in average total core deposits. The increase in total deposits included $1.0 billion of deposits acquired in the Camco and Bank of America branch acquisitions. Average total liabilities increased $6.3 billion, or 12%, from the year-ago quarter, reflecting:
| $2.1 billion, or 16%, increase in noninterest-bearing deposits, reflecting the strategic focus on consumer checking account household and commercial checking account relationship growth. |
| $1.7 billion, or 10%, increase in money market deposits, reflecting consumer and commercial relationship growth as well as strong sales execution. |
| $1.9 billion, or 74%, increase in long-term borrowings, primarily reflecting a cost-effective method of funding incremental LCR-related securities growth including the issuance of $1.8 billion of bank-level senior debt over the past year. While not affecting average balances, the Macquarie acquisition included $0.5 billion of assumed debt. |
| $0.8 billion, or 46%, increase in brokered deposits and negotiable CDs, which were used to efficiently finance balance sheet growth while continuing to manage the overall cost of funds. |
Partially offset by:
| $0.8 billion, or 22%, decrease in average core certificates of deposit due to the strategic focus on changing the funding sources to no-cost demand deposits and lower-cost money market deposits. |
2015 First Quarter versus 2014 Fourth Quarter
Compared to the 2014 fourth quarter, fully-taxable equivalent net interest income decreased $5.5 million, or 1% annualized. While average earning assets increased $1.2 billion, or 2%, sequentially, the 3 basis point decrease in the NIM coupled with two fewer days in the 2015 first quarter more than offset the benefit of the larger balance sheet.
14
Provision for Credit Losses
(This section should be read in conjunction with the Credit Risk section.)
The provision for credit losses is the expense necessary to maintain the ALLL and the AULC at levels appropriate to absorb our estimate of credit losses in the loan and lease portfolio and the portfolio of unfunded loan commitments and letters-of-credit.
The provision for credit losses for the 2015 first quarter was $20.6 million compared with $2.5 million for the 2014 fourth quarter and $24.6 million for the 2014 first quarter. NCOs compared to the 2014 fourth quarter remained relatively stable. The 2015 first quarter provision for credit losses was impacted by the extension of our consumer loss emergence periods and increases to our reserve factors for high dollar value commercial credits, partially offset by our decision to no longer utilize separate methods to estimate economic risks inherent in our portfolios. (See Credit Quality discussion). Given the low level of the provision for credit losses and the uneven nature of commercial charge-offs and recoveries, some degree of volatility on a quarter-to-quarter basis is expected.
Noninterest Income
The following table reflects noninterest income for each of the past five quarters:
Table 5Noninterest Income
2015 | 2014 | 1Q15 vs 4Q14 | 1Q15 vs 1Q14 | |||||||||||||||||||||||||||||||||
(dollar amounts in thousands) |
First | Fourth | Third | Second | First | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||
Service charges on deposit accounts |
$ | 62,220 | $ | 67,408 | $ | 69,118 | $ | 72,633 | $ | 64,582 | $ | (5,188 | ) | (8 | )% | $ | (2,362 | ) | (4 | )% | ||||||||||||||||
Trust services |
29,039 | 28,781 | 28,045 | 29,581 | 29,565 | 258 | 1 | (526 | ) | (2 | ) | |||||||||||||||||||||||||
Electronic banking |
27,398 | 27,993 | 27,275 | 26,491 | 23,642 | (595 | ) | (2 | ) | 3,756 | 16 | |||||||||||||||||||||||||
Mortgage banking income |
22,961 | 14,030 | 25,051 | 22,717 | 23,089 | 8,931 | 64 | (128 | ) | (1 | ) | |||||||||||||||||||||||||
Brokerage income |
15,500 | 16,050 | 17,155 | 17,905 | 17,167 | (550 | ) | (3 | ) | (1,667 | ) | (10 | ) | |||||||||||||||||||||||
Insurance income |
15,895 | 16,252 | 16,729 | 15,996 | 16,496 | (357 | ) | (2 | ) | (601 | ) | (4 | ) | |||||||||||||||||||||||
Bank owned life insurance income |
13,025 | 14,988 | 14,888 | 13,865 | 13,307 | (1,963 | ) | (13 | ) | (282 | ) | (2 | ) | |||||||||||||||||||||||
Capital markets fees |
13,905 | 13,791 | 10,246 | 10,500 | 9,194 | 114 | 1 | 4,711 | 51 | |||||||||||||||||||||||||||
Gain on sale of loans |
4,589 | 5,408 | 8,199 | 3,914 | 3,570 | (819 | ) | (15 | ) | 1,019 | 29 | |||||||||||||||||||||||||
Securities gains (losses) |
| (104 | ) | 198 | 490 | 16,970 | 104 | (100 | ) | (16,970 | ) | (100 | ) | |||||||||||||||||||||||
Other income |
27,091 | 28,681 | 30,445 | 35,975 | 30,903 | (1,590 | ) | (6 | ) | (3,812 | ) | (12 | ) | |||||||||||||||||||||||
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|||||||||||||||||||
Total noninterest income |
$ | 231,623 | $ | 233,278 | $ | 247,349 | $ | 250,067 | $ | 248,485 | $ | (1,655 | ) | (1 | )% | $ | (16,862 | ) | (7 | )% | ||||||||||||||||
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2015 First Quarter versus 2014 First Quarter
Noninterest income decreased $16.9 million, or 7%, from the year-ago quarter. The year-over-year decrease primarily reflected the $17.0 million of securities gains realized in the 2014 first quarter compared to none in the current quarter. Other notable noninterest income comparisons with the year-ago quarter included:
| $4.7 million, or 51%, increase in capital market fees primarily related to income from customer interest rate derivative products and underwriting fees. |
| $3.8 million, or 16%, increase in electronic banking due to higher card related income and underlying customer growth. |
| $2.4 million, or 4%, decrease in service charges on deposit accounts reflecting the decline from the late July 2014 implementation of changes in consumer products, partially offset by a 9% increase in consumer households and changing customer usage patterns. |
2015 First Quarter versus 2014 Fourth Quarter
Noninterest income decreased $1.7 million, or 1%, from the 2014 fourth quarter, reflecting typical seasonality within service charges on deposit accounts, which decreased $5.2 million, or 8 %. This was offset by an $8.9 million, or 64%, increase in mortgage banking income, primarily driven by higher gain on sale margin, a higher percentage of loans originated for sale, and a 6% increase in origination volume.
15
Noninterest Expense
(This section should be read in conjunction with Significant Item 1, 2, and 3.)
The following table reflects noninterest expense for each of the past five quarters:
Table 6Noninterest Expense
2015 | 2014 | 1Q15 vs 1Q14 | 1Q15 vs 4Q14 | |||||||||||||||||||||||||||||||||
(dollar amounts in thousands) |
First | Fourth | Third | Second | First | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||
Personnel costs |
$ | 264,916 | $ | 263,289 | $ | 275,409 | $ | 260,600 | $ | 249,477 | $ | 15,439 | 6 | % | $ | 1,627 | 1 | % | ||||||||||||||||||
Outside data processing and other services |
50,535 | 53,685 | 53,073 | 54,338 | 51,490 | (955 | ) | (2 | ) | (3,150 | ) | (6 | ) | |||||||||||||||||||||||
Net occupancy |
31,020 | 31,565 | 34,405 | 28,673 | 33,433 | (2,413 | ) | (7 | ) | (545 | ) | (2 | ) | |||||||||||||||||||||||
Equipment |
30,249 | 31,981 | 30,183 | 28,749 | 28,750 | 1,499 | 5 | (1,732 | ) | (5 | ) | |||||||||||||||||||||||||
Professional services |
12,727 | 15,665 | 13,763 | 17,896 | 12,231 | 496 | 4 | (2,938 | ) | (19 | ) | |||||||||||||||||||||||||
Marketing |
12,975 | 12,466 | 12,576 | 14,832 | 10,686 | 2,289 | 21 | 509 | 4 | |||||||||||||||||||||||||||
Deposit and other insurance expense |
10,167 | 13,099 | 11,628 | 10,599 | 13,718 | (3,551 | ) | (26 | ) | (2,932 | ) | (22 | ) | |||||||||||||||||||||||
Amortization of intangibles |
10,206 | 10,653 | 9,813 | 9,520 | 9,291 | 915 | 10 | (447 | ) | (4 | ) | |||||||||||||||||||||||||
Other expense |
36,062 | 50,868 | 39,468 | 33,429 | 51,045 | (14,983 | ) | (29 | ) | (14,806 | ) | (29 | ) | |||||||||||||||||||||||
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Total noninterest expense |
$ | 458,857 | $ | 483,271 | $ | 480,318 | $ | 458,636 | $ | 460,121 | $ | (1,264 | ) | | % | $ | (24,414 | ) | (5 | )% | ||||||||||||||||
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Number of employees (average full-time equivalent) |
11,914 | 11,875 | 11,946 | 12,000 | 11,848 | 66 | 1 | 39 | |
Impacts of Significant Items:
2015 | 2014 | |||||||||||
(dollar amounts in thousands) |
First (1) | Fourth | First | |||||||||
Personnel costs |
$ | 1 | $ | 2,165 | $ | 2,341 | ||||||
Outside data processing and other services |
51 | 306 | 4,291 | |||||||||
Net occupancy |
| 4,150 | 1,742 | |||||||||
Equipment |
| 2,003 | 134 | |||||||||
Professional services |
3,286 | | 2,172 | |||||||||
Marketing |
1 | 14 | 530 | |||||||||
Other expense |
12 | 11,644 | 10,393 | |||||||||
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Total noninterest expense adjustments |
$ | 3,351 | $ | 20,282 | $ | 21,603 | ||||||
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Adjusted Noninterest Expense (Non-GAAP):
2015 | 2014 | 1Q15 vs 1Q14 | 1Q15 vs 4Q14 | |||||||||||||||||||||||||
(dollar amounts in thousands) |
First (1) | Fourth | First | Amount | Percent | Amount | Percent | |||||||||||||||||||||
Personnel costs |
$ | 264,915 | $ | 261,124 | $ | 247,136 | $ | 17,779 | 7 | % | $ | 3,791 | 1 | % | ||||||||||||||
Outside data processing and other services |
50,484 | 53,379 | 47,199 | 3,285 | 7 | (2,895 | ) | (5 | ) | |||||||||||||||||||
Net occupancy |
31,020 | 27,415 | 31,691 | (671 | ) | (2 | ) | 3,605 | 13 | |||||||||||||||||||
Equipment |
30,249 | 29,978 | 28,616 | 1,633 | 6 | 271 | 1 | |||||||||||||||||||||
Professional services |
9,441 | 15,665 | 10,059 | (618 | ) | (6 | ) | (6,224 | ) | (40 | ) | |||||||||||||||||
Marketing |
12,974 | 12,452 | 10,156 | 2,818 | 28 | 522 | 4 | |||||||||||||||||||||
Deposit and other insurance expense |
10,167 | 13,099 | 13,718 | (3,551 | ) | (26 | ) | (2,932 | ) | (22 | ) | |||||||||||||||||
Amortization of intangibles |
10,206 | 10,653 | 9,291 | 915 | 10 | (447 | ) | (4 | ) | |||||||||||||||||||
Other expense |
36,050 | 39,224 | 40,652 | (4,602 | ) | (11 | ) | (3,174 | ) | (8 | ) | |||||||||||||||||
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Total adjusted noninterest expense |
$ | 455,506 | $ | 462,989 | $ | 438,518 | $ | 16,988 | 4 | % | $ | (7,483 | ) | (2 | )% | |||||||||||||
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(1) | Includes $3.4 million of merger-related expense that was not a Significant Item for the quarter, but may be a Significant Item for the 2015 full year. |
16
2015 First Quarter versus 2014 First Quarter
Reported noninterest expense decreased $1.3 million, or less than 1%, from the year-ago quarter. Excluding the impact of Significant Items, noninterest expense increased $17.0 million, or 4%, as we continued to invest in the growth of the franchise, including the Camco, Bank of America branch, and Macquarie acquisitions, as well as the ongoing expansion of our retail branch distribution through our in-store strategy, and investments in technology and data analytics. Changes in reported noninterest expense primarily reflect:
| $15.0 million, or 29%, decrease in other expense. Excluding the impact of Significant Items, other expenses decreased $4.6 million, or 11%, primarily related to $3.0 million of goodwill impairment in the 2014 first quarter and a $2.0 million, or 40%, decrease in state franchise taxes and protective advances. |
| $3.6 million, or 26%, decrease in deposit and other insurance expense, primarily reflecting the benefit of $1.8 billion of bank-level debt issued over the past year. |
Partially offset by
| $15.4 million, or 6%, increase in personnel costs. Excluding the impact of Significant Items, personnel costs increased $17.8 million, or 7%, primarily related to a $13.8 million increase in salaries reflecting a 1% increase in the number of full-time equivalent employees and a $4.0 million increase in benefits expense. |
2015 First Quarter versus 2014 Fourth Quarter
Reported noninterest expense decreased $24.4 million, or 5%, from the 2014 fourth quarter. Excluding the impact of Significant Items, noninterest expense decreased $7.5 million, or 2%. On a reported basis, other expense decreased $14.8 million, or 29%, largely reflecting the prior quarters $11.9 million net increase to litigation reserves. Other notable noninterest comparisons include a $3.1 million, or 6%, decrease in outside data processing and other services, a $2.9 million, or 19%, decrease in professional services, and a $2.9 million, or 22%, decrease in deposit and other insurance. Professional services during the 2015 first quarter included $3.3 million of expense related to the Macquarie acquisition.
Provision for Income Taxes
The provision for income taxes in the 2015 first quarter was $54.0 million. This compared with a provision for income taxes of $57.2 million in the 2014 fourth quarter and $52.1 million in the 2014 first quarter. All three quarters included the benefits from tax-exempt income, tax-advantaged investments, general business credits, and investments in qualified affordable housing projects. In prior periods, a valuation allowance was established against the capital loss carryforwards. The federal valuation allowance was based on the uncertainty of forecasted taxable income expected of the required character in order to utilize the capital loss carryforward. Based on current analysis of both positive and negative evidence and projected forecasted taxable income of the appropriate character, we believe it is more likely than not the capital loss carryforward deferred tax asset will be realized within the carryforward period. At March 31, 2015 there is no capital loss carryforward valuation allowance remaining. The net federal deferred tax asset was $54.7 million and the net state deferred tax asset was $43.7 million at March 31, 2015.
We file income tax returns with the IRS and various state, city, and foreign jurisdictions. Federal income tax audits have been completed for tax years through 2009. In the first quarter of 2013, the IRS began an examination of our 2010 and 2011 consolidated federal income tax returns. Certain proposed adjustments resulting from the IRS examination of our 2005 through 2009 tax returns have been settled with the IRS Appeals Office, subject to final approval by the Joint Committee on Taxation of the U.S. Congress. Various state and other jurisdictions remain open to examination, including Ohio, Kentucky, Indiana, Michigan, Pennsylvania, West Virginia, and Illinois.
We use a multi-faceted approach to risk governance. It begins with the board of directors defining our risk appetite as aggregate moderate-to-low. Risk awareness, identification and assessment, reporting, and active management are key elements in overall risk management. Controls include, among others, effective segregation of duties, access, authorization and reconciliation procedures, as well as staff education and a disciplined assessment process.
17
We identify primary risks, and the sources of those risks, across the Company. We utilize Risk and Control Self-Assessments (RCSA) to identify exposure risks. Through this RCSA process, we continually assess the effectiveness of controls associated with the identified risks, regularly monitor risk profiles and material exposure to losses, and identify stress events and scenarios to which we may be exposed. Our chief risk officer is responsible for ensuring that appropriate systems of controls are in place for managing and monitoring risk across the Company. Potential risk concerns are shared with the Risk Management Committee, Risk Oversight Committee, and the board of directors, as appropriate. Our internal audit department performs on-going independent reviews of the risk management process and ensures the adequacy of documentation. The results of these reviews are regularly reported to the audit committee and board of directors. In addition, our Credit Review group performs ongoing independent testing of our loan portfolio, the results of which are regularly reviewed with our Risk Oversight Committee.
We believe that our primary risk exposures are credit, market, liquidity, operational, and compliance oriented. More information on risk can be found in the Risk Factors section included in Item 1A of our 2014 Form 10-K and subsequent filings with the SEC. The MD&A included in our 2014 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the Form 10-K. This MD&A should also be read in conjunction with the financial statements, notes and other information contained in this report. Our definition, philosophy, and approach to risk management have not materially changed from the discussion presented in the 2014 Form 10-K.
Credit risk is the risk of financial loss if a counterparty is not able to meet the agreed upon terms of the financial obligation. The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. We also have credit risk associated with our AFS and HTM securities portfolios (see Note 4 and Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements). We engage with other financial counterparties for a variety of purposes including investing, asset and liability management, mortgage banking, and trading activities. While there is credit risk associated with derivative activity, we believe this exposure is minimal.
We continue to focus on the identification, monitoring, and managing of our credit risk. In addition to the traditional credit risk mitigation strategies of credit policies and processes, market risk management activities, and portfolio diversification, we use additional quantitative measurement capabilities utilizing external data sources, enhanced use of modeling technology, and internal stress testing processes. Our portfolio management resources demonstrate our commitment to maintaining an aggregate moderate-to-low risk profile. In our efforts to continue to identify risk mitigation techniques, we have focused on product design features, origination policies, and treatment strategies for delinquent or stressed borrowers.
Loan and Lease Credit Exposure Mix
At March 31, 2015, loans and leases totaled $47.7 billion, relatively unchanged from December 31, 2014. There was continued growth in the C&I portfolio, primarily as a result of an increase in equipment leases of $0.8 billion related to the acquisition of Macquarie. This was offset by a reduction in the auto portfolio. The reduction reflected a transfer of approximately $1.0 billion in automobile loans to loans held-for-sale in anticipation of a future loan securitization. The CRE portfolio remained relatively consistent, as a result of continued runoff offset by new production within the requirements associated with achieving an acceptable return, our internal concentration limits and increased competition for projects sponsored by high quality developers.
At March 31, 2015, commercial loans and leases totaled $25.2 billion and represented 53% of our total loans and lease credit exposure. Our commercial portfolio is diversified along product type, customer size, and geography within our footprint, and is comprised of the following (see Commercial Credit discussion).
C&IC&I loans and leases are made to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or other projects. The majority of these borrowers are customers doing business within our geographic regions. C&I loans and leases are generally underwritten individually and secured with the assets of the company and/or the personal guarantee of the business owners. The financing of owner occupied facilities is considered a C&I loan even though there is improved real estate as collateral. This treatment is a result of the credit decision process, which focuses on cash flow from operations of the business to repay the debt. The operation, sale, rental, or refinancing of the real estate is not considered the primary repayment source for these types of loans. As we have expanded our C&I portfolio, we have developed a series of vertical specialties to ensure that new products or lending types are embedded within a structured, centralized Commercial Lending area with designated experienced credit officers. These specialties are comprised of either targeted industries (for example, Healthcare, Food & Agribusiness, Energy, etc) and/or lending disciplines (Equipment Finance, ABL, etc), all of which requires a high degree of expertise and oversight to effectively mitigate and monitor risk. As such, we have dedicated colleagues and teams focused on bringing value added expertise to these specialty clients.
18
CRECRE loans consist of loans to developers and REITs supporting income-producing or for-sale commercial real estate properties. We mitigate our risk on these loans by requiring collateral values that exceed the loan amount and underwriting the loan with projected cash flow in excess of the debt service requirement. These loans are made to finance properties such as apartment buildings, office and industrial buildings, and retail shopping centers, and are repaid through cash flows related to the operation, sale, or refinance of the property.
Construction CREConstruction CRE loans are loans to developers, companies, or individuals used for the construction of a commercial or residential property for which repayment will be generated by the sale or permanent financing of the property. Our construction CRE portfolio primarily consists of retail, multi family, office, and warehouse project types. Generally, these loans are for construction projects that have been presold or preleased, or have secured permanent financing, as well as loans to real estate companies with significant equity invested in each project. These loans are underwritten and managed by a specialized real estate lending group that actively monitors the construction phase and manages the loan disbursements according to the predetermined construction schedule.
Total consumer loans and leases were $22.5 billion at March 31, 2015, and represented 47% of our total loan and lease credit exposure. The consumer portfolio is comprised primarily of automobile loans, home equity loans and lines-of-credit, and residential mortgages (see Consumer Credit discussion). The decrease from December 31, 2014, primarily relates to the transfer of automobile loans to loans held-for-sale as discussed above.
AutomobileAutomobile loans are comprised primarily of loans made through automotive dealerships and include exposure in selected states outside of our primary banking markets. The exposure outside of our primary banking markets represents 20% of the total exposure, with no individual state representing more than 6%. Applications are underwritten utilizing an automated underwriting system that applies consistent policies and processes across the portfolio.
Home equityHome equity lending includes both home equity loans and lines-of-credit. This type of lending, which is secured by a first-lien or junior-lien on the borrowers residence, allows customers to borrow against the equity in their home or refinance existing mortgage debt. Products include closed-end loans which are generally fixed-rate with principal and interest payments, and variable-rate, interest-only lines-of-credit which do not require payment of principal during the 10-year revolving period. The home equity line of credit may convert to a 20-year amortizing structure at the end of the revolving period. Applications are underwritten centrally in conjunction with an automated underwriting system. The home equity underwriting criteria is based on minimum credit scores, debt-to-income ratios, and LTV ratios, with current collateral valuations.
Residential mortgageResidential mortgage loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15-year to 30-year term, and in most cases, are extended to borrowers to finance their primary residence. Applications are underwritten centrally using consistent credit policies and processes. All residential mortgage loan decisions utilize a full appraisal for collateral valuation. Huntington has not originated or acquired residential mortgages that allow negative amortization or allow the borrower multiple payment options.
Other consumerPrimarily consists of consumer loans not secured by real estate, including personal unsecured loans, overdraft balances, and credit cards. We introduced a consumer credit card product during 2013, utilizing a centralized underwriting system with an initial focus on existing Huntington customers.
19
The table below provides the composition of our total loan and lease portfolio:
Table 7Loan and Lease Portfolio Composition
2015 | 2014 | |||||||||||||||||||||||||||||||||||||||
(dollar amounts in millions) |
March 31, | December 31, | September 30, | June 30, | March 31, | |||||||||||||||||||||||||||||||||||
Commercial: |
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Commercial and industrial |
$ | 20,109 | 42 | % | $ | 19,033 | 40 | % | $ | 18,791 | 40 | % | $ | 18,899 | 41 | % | $ | 18,046 | 41 | % | ||||||||||||||||||||
Commercial real estate: |
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Construction |
910 | 2 | 875 | 2 | 850 | 2 | 757 | 2 | 692 | 2 | ||||||||||||||||||||||||||||||
Commercial |
4,157 | 9 | 4,322 | 9 | 4,141 | 9 | 4,233 | 9 | 4,339 | 10 | ||||||||||||||||||||||||||||||
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Total commercial real estate |
5,067 | 11 | 5,197 | 11 | 4,991 | 11 | 4,990 | 11 | 5,031 | 12 | ||||||||||||||||||||||||||||||
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Total commercial |
25,176 | 53 | 24,230 | 51 | 23,782 | 51 | 23,889 | 52 | 23,077 | 53 | ||||||||||||||||||||||||||||||
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Consumer: |
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Automobile |
7,803 | 16 | 8,690 | 18 | 8,322 | 18 | 7,686 | 17 | 6,999 | 16 | ||||||||||||||||||||||||||||||
Home equity |
8,492 | 18 | 8,491 | 17 | 8,436 | 18 | 8,405 | 18 | 8,373 | 19 | ||||||||||||||||||||||||||||||
Residential mortgage |
5,795 | 12 | 5,831 | 12 | 5,788 | 12 | 5,707 | 12 | 5,542 | 12 | ||||||||||||||||||||||||||||||
Other consumer |
430 | 1 | 414 | 2 | 395 | 1 | 393 | 1 | 363 | | ||||||||||||||||||||||||||||||
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Total consumer |
22,520 | 47 | 23,426 | 49 | 22,941 | 49 | 22,191 | 48 | 21,277 | 47 | ||||||||||||||||||||||||||||||
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Total loans and leases |
$ | 47,696 | 100 | % | $ | 47,656 | 100 | % | $ | 46,723 | 100 | % | $ | 46,080 | 100 | % | $ | 44,354 | 100 | % | ||||||||||||||||||||
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As shown in the table above, our loan portfolio is diversified by consumer and commercial credit. At the corporate level, we manage the credit exposure in part via a credit concentration policy. The policy designates specific loan types, collateral types, and loan structures to be formally tracked and assigned limits as a percentage of capital. C&I lending by NAICS categories, specific limits for CRE primary project types, loans secured by residential real estate, shared national credit exposure, and designated high risk loan definitions represent examples of specifically tracked components of our concentration management process. Currently there are no identified concentrations that exceed the established limit. Our concentration management process is approved by the Risk Oversight Committee of our Board and is one of the strategies utilized to ensure a high quality, well diversified portfolio that is consistent with our overall objective of maintaining an aggregate moderate-to-low risk profile.
The table below provides our total loan and lease portfolio segregated by the type of collateral securing the loan or lease. The changes in the collateral composition are consistent with the portfolio growth metrics, with increases noted in the residential and vehicle categories.
Table 8Loan and Lease Portfolio by Collateral Type
2015 | 2014 | |||||||||||||||||||||||||||||||||||||||
(dollar amounts in millions) |
March 31, | December 31, | September 30, | June 30, | March 31, | |||||||||||||||||||||||||||||||||||
Secured loans: |
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Real estatecommercial |
$ | 8,463 | 18 | % | $ | 8,631 | 18 | % | $ | 8,628 | 18 | % | $ | 8,617 | 19 | % | $ | 8,612 | 19 | % | ||||||||||||||||||||
Real estateconsumer |
14,287 | 30 | 14,322 | 30 | 14,224 | 30 | 14,113 | 31 | 13,916 | 31 | ||||||||||||||||||||||||||||||
Vehicles |
9,938 | (1) | 21 | 10,932 | 23 | 10,268 | 22 | 9,782 | 21 | 9,270 | 21 | |||||||||||||||||||||||||||||
Receivables/Inventory |
6,090 | 13 | 5,968 | 13 | 6,023 | 13 | 5,932 | 13 | 5,717 | 13 | ||||||||||||||||||||||||||||||
Machinery/Equipment |
4,708 | (2) | 10 | 3,863 | 8 | 3,305 | 7 | 3,267 | 7 | 2,930 | 7 | |||||||||||||||||||||||||||||
Securities/Deposits |
956 | 2 | 964 | 2 | 1,232 | 3 | 1,349 | 3 | 1,064 | 2 | ||||||||||||||||||||||||||||||
Other |
1,167 | 2 | 919 | 2 | 918 | 2 | 940 | 2 | 870 | 3 | ||||||||||||||||||||||||||||||
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Total secured loans and leases |
45,609 | 96 | 45,599 | 96 | 44,598 | 95 | 44,000 | 96 | 42,379 | 96 | ||||||||||||||||||||||||||||||
Unsecured loans and leases |
2,087 | 4 | 2,057 | 4 | 2,125 | 5 | 2,080 | 4 | 1,975 | 4 | ||||||||||||||||||||||||||||||
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Total loans and leases |
$ | 47,696 | 100 | % | $ | 47,656 | 100 | % | $ | 46,723 | 100 | % | $ | 46,080 | 100 | % | $ | 44,354 | 100 | % | ||||||||||||||||||||
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(1) | Reflects the transfer of approximately $1.0 billion in automobile loans to loans held-for-sale. |
(2) | Reflects the addition of approximately $0.8 billion in equipment leases related to the acquisition of Macquarie. |
20
Commercial Credit
Refer to the Commercial Credit section of our 2014 Form 10-K for our commercial credit underwriting and on-going credit management processes.
C&I PORTFOLIO
The C&I portfolio continues to have strong origination activity as evidenced by the growth over the past 12 months. The credit quality of the portfolio remains strong as we maintain a focus on high quality originations. Problem loans have trended downward over the last several years, reflecting a combination of proactive risk identification and effective workout strategies implemented by the SAD. However, over the past year, C&I Problem Loans have begun to increase as the portfolio has increased in size. We continue to maintain a proactive approach to identifying borrowers that may be facing financial difficulty in order to maximize the potential solutions.
CRE PORTFOLIO
We manage the risks inherent in this portfolio specific to CRE lending, focusing on the quality of the developer and the specifics associated with each project. Generally, we: (1) limit our loans to 80% of the appraised value of the commercial real estate at origination, (2) require net operating cash flows to be 125% of required interest and principal payments, and (3) if the commercial real estate is nonowner occupied, require that at least 50% of the space of the project be preleased. We actively monitor both geographic and project-type concentrations and performance metrics of all CRE loan types, with a focus on loans identified as higher risk based on the risk rating methodology. Both macro-level and loan-level stress-test scenarios based on existing and forecast market conditions are part of the on-going portfolio management process for the CRE portfolio.
Dedicated real estate professionals originate and manage the portfolio. The portfolio is diversified by project type and loan size, and this diversification represents a significant portion of the credit risk management strategies employed for this portfolio. Subsequent to the origination of the loan, the Credit Review group provides an independent review and assessment of the quality of the underwriting and risk of new loan originations.
Appraisal values are obtained in conjunction with all originations and renewals, and on an as needed basis, in compliance with regulatory requirements. Appraisals are obtained from approved vendors and are reviewed by an internal appraisal review group comprised of certified appraisers to ensure the quality of the valuation used in the underwriting process. We continue to perform on-going portfolio level reviews within the CRE portfolio. These reviews generate action plans based on occupancy levels or sales volume associated with the projects being reviewed. Property values are updated using appraisals on a regular basis to ensure appropriate decisions regarding the on-going management of the portfolio reflect the changing market conditions. This highly individualized process requires working closely with all of our borrowers, as well as an in-depth knowledge of CRE project lending and the market environment.
Consumer Credit
Refer to the Consumer Credit section of our 2014 Form 10-K for our consumer credit underwriting and on-going credit management processes.
AUTOMOBILE PORTFOLIO
Our strategy in the automobile portfolio continues to focus on high quality borrowers as measured by both FICO and internal custom scores, combined with appropriate LTVs, terms, and profitability. Our strategy and operational capabilities allow us to appropriately manage the origination quality across the entire portfolio, including our newer markets. Although increased origination volume and entering new markets can be associated with increased risk levels, we believe our disciplined strategy and operational processes significantly mitigate these risks.
We have continued to consistently execute our value proposition and take advantage of available market opportunities. Importantly, we have maintained our high credit quality standards while expanding the portfolio.
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RESIDENTIAL REAL ESTATE SECURED PORTFOLIOS
The properties securing our residential mortgage and home equity portfolios are primarily located within our geographic footprint. Huntington continues to support our local markets with consistent underwriting across all residential secured products. The residential-secured portfolio originations continue to be of high quality, with the majority of the negative credit impact coming from loans originated in 2006 and earlier. Our portfolio management strategies associated with our Home Savers group allow us to focus on effectively helping our customers with appropriate solutions for their specific circumstances.
Table 9Selected Home Equity and Residential Mortgage Portfolio Data
(dollar amounts in millions)
Home Equity | Residential Mortgage | |||||||||||||||||||||||
Secured by first-lien | Secured by junior-lien | |||||||||||||||||||||||
03/31/15 | 12/31/14 | 03/31/15 | 12/31/14 | 03/31/15 | 12/31/14 | |||||||||||||||||||
Ending balance |
$ | 5,155 | $ | 5,129 | $ | 3,338 | $ | 3,362 | $ | 5,795 | $ | 5,831 | ||||||||||||
Portfolio weighted average LTV ratio(1) |
72 | % | 71 | % | 81 | % | 81 | % | 75 | % | 74 | % | ||||||||||||
Portfolio weighted average FICO score(2) |
763 | 759 | 750 | 752 | 751 | 752 | ||||||||||||||||||
Home Equity | Residential Mortgage (3) | |||||||||||||||||||||||
Secured by first-lien | Secured by junior-lien | |||||||||||||||||||||||
Three Months Ended March 31, | ||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||
Originations |
$ | 376 | $ | 300 | $ | 185 | $ | 163 | $ | 231 | $ | 198 | ||||||||||||
Origination weighted average LTV ratio(1) |
73 | % | 72 | % | 84 | % | 83 | % | 81 | % | 81 | % | ||||||||||||
Origination weighted average FICO score(2) |
780 | 763 | 769 | 756 | 751 | 752 |
(1) | The LTV ratios for home equity loans and home equity lines-of-credit are cumulative and reflect the balance of any senior loans. LTV ratios reflect collateral values at the time of loan origination. |
(2) | Portfolio weighted average FICO scores reflect currently updated customer credit scores whereas origination weighted average FICO scores reflect the customer credit scores at the time of loan origination. |
(3) | Represents only owned-portfolio originations. |
Home Equity Portfolio
Within the home equity portfolio, the standard product is a 10-year interest-only draw period with a 20-year fully amortizing term at the end of the draw period. Prior to 2007, the standard product was a 10-year draw period with a balloon payment. In either case, after the 10-year draw period, the borrower must reapply, subject to full underwriting guidelines, to continue with the interest only revolving structure or begin repaying the debt in a term structure.
The principal and interest payment associated with the term structure will be higher than the interest-only payment, resulting in maturity risk. Our maturity risk can be segregated into two distinct segments: (1) home equity lines-of-credit underwritten with a balloon payment at maturity and (2) home equity lines-of-credit with an automatic conversion to a 20-year amortizing loan. We manage this risk based on both the actual maturity date of the line-of-credit structure and at the end of the 10-year draw period. This maturity risk is embedded in the portfolio which we address with proactive contact strategies beginning one year prior to maturity. In certain circumstances, our Home Saver group is able to provide payment and structure relief to borrowers experiencing significant financial hardship associated with the payment adjustment. Our existing home equity line-of-credit (HELOC) maturity strategy is consistent with all recent regulatory guidance.
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The table below summarizes our home equity line-of-credit portfolio by maturity date based on the balloon structure described above:
Table 10Maturity Schedule of Home Equity Line-of-Credit Portfolio
March 31, 2015 | ||||||||||||||||||||||||
(dollar amounts in millions) |
1 year or less | 1 to 2 years | 2 to 3 years | 3 to 4 years | More than 4 years |
Total | ||||||||||||||||||
Secured by first-lien |
$ | 20 | $ | 2 | $ | 1 | $ | 2 | $ | 2,931 | $ | 2,956 | ||||||||||||
Secured by junior-lien |
163 | 117 | 82 | 16 | 2,584 | 2,962 | ||||||||||||||||||
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Total home equity line-of-credit |
$ | 183 | $ | 119 | $ | 83 | $ | 18 | $ | 5,515 | $ | 5,918 | ||||||||||||
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The reduction in maturities presented in over 1-year categories is a result of our change to a product with a 20-year amortization period after 10-year draw period structure. Home equity lines-of-credit with balloon payment risk are essentially eliminated after 2015. The amounts maturing in more than four years primarily consist of exposure with a 20-year amortization period after the 10-year draw period.
Historically, less than 30% of our home equity lines-of-credit that are one year or less from maturity actually reach the maturity date.
Residential Mortgages Portfolio
Huntington underwrites all applications centrally, with a focus on higher quality borrowers. We do not originate residential mortgages that allow negative amortization or allow the borrower multiple payment options and have incorporated regulatory requirements and guidance into our underwriting process. All residential mortgages are originated based on a completed full appraisal during the credit underwriting process. We update values in compliance with applicable regulations to facilitate our portfolio management, as well as our workout and loss mitigation functions.
Several government programs continued to impact the residential mortgage portfolio, including various refinance programs such as HARP and HAMP, which positively affected the availability of credit for the industry. During the three-month period ended March 31, 2015, we closed $62 million in HARP residential mortgages and $1.6 million in HAMP residential mortgages. The HARP and HAMP residential mortgage loans are part of our residential mortgage portfolio or serviced for others.
We are subject to repurchase risk associated with residential mortgage loans sold in the secondary market. An appropriate level of reserve for representations and warranties related to residential mortgage loans sold has been established to address this repurchase risk inherent in the portfolio (see Operational Risk discussion).
Credit Quality
(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)
We believe the most meaningful way to assess overall credit quality performance is through an analysis of credit quality performance ratios. This approach forms the basis of most of the discussion in the sections immediately following: NPAs and NALs, TDRs, ACL, and NCOs. In addition, we utilize delinquency rates, risk distribution and migration patterns, and product segmentation in the analysis of our credit quality performance.
Credit quality performance in the 2015 first quarter reflected continued strong performance in the net charge-offs and overall consumer performance metrics, as evidenced by recoveries in the CRE portfolio and lower losses across the consumer portfolio. This was partially offset by some deterioration in the C&I metrics. NPAs increased 19% to $400.8 million at March 31, 2015, with the majority of the increase centered in one large C&I relationship. NCOs increased by $1.5 million or 6% from the prior quarter, as a result of a significant increase related to the same C&I relationship. Total criticized loans increased in the C&I segment for the fourth consecutive quarter. As a result of the overall continued credit quality improvement, the ACL to total loans ratio declined slightly by 2 basis points to 1.38%.
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NPAs, NALs, AND TDRs
(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)
NPAs and NALs
NPAs consist of (1) NALs, which represent loans and leases no longer accruing interest, (2) OREO properties, and (3) other NPAs. Any loan in our portfolio may be placed on nonaccrual status prior to the policies described below when collection of principal or interest is in doubt. Also, when a borrower with discharged non-reaffirmed debt in a Chapter 7 bankruptcy is identified and the loan is determined to be collateral dependent, the loan is placed on nonaccrual status.
C&I and CRE loans (except for purchased credit impaired loans) are placed on nonaccrual status at 90-days past due, or earlier if repayment of principal and interest is in doubt.
Of the $182.6 million of CRE and C&I-related NALs at March 31, 2015, $126.1 million, or 69%, represented loans that were less than 30-days past due, demonstrating our continued commitment to proactive credit risk management. With the exception of residential mortgage loans guaranteed by government organizations which continue to accrue interest, first-lien loans secured by residential mortgage collateral are placed on nonaccrual status at 150-days past due. Junior-lien home equity loans are placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien loan has been identified as nonaccrual. Automobile and other consumer loans are generally charged-off prior to the loan reaching 120-days past due.
When loans are placed on nonaccrual, accrued interest income is reversed with current year accruals charged to interest income and prior year amounts generally charged-off as a credit loss. When, in our judgment, the borrowers ability to make required interest and principal payments has resumed and collectability is no longer in doubt, the loan or lease could be returned to accrual status.
The following table reflects period-end NALs and NPAs detail for each of the last five quarters:
Table 11Nonaccrual Loans and Leases and Nonperforming Assets
2015 | 2014 | |||||||||||||||||||
(dollar amounts in thousands) |
March 31, | December 31, | September 30, | June 30, | March 31, | |||||||||||||||
Nonaccrual loans and leases: |
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Commercial and industrial |
$ | 133,363 | $ | 71,974 | $ | 90,265 | $ | 75,274 | $ | 57,053 | ||||||||||
Commercial real estate |
49,263 | 48,523 | 59,812 | 65,398 | 71,344 | |||||||||||||||
Automobile |
4,448 | 4,623 | 4,834 | 4,384 | 6,218 | |||||||||||||||
Residential mortgage |
98,093 | 96,564 | 98,139 | 110,635 | 121,681 | |||||||||||||||
Home equity |
79,246 | 78,560 | 72,715 | 69,266 | 70,862 | |||||||||||||||
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Total nonaccrual loans and leases |
364,413 | 300,244 | 325,765 | 324,957 | 327,158 | |||||||||||||||
Other real estate owned, net |
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Residential |
30,544 | 29,291 | 30,661 | 31,761 | 30,581 | |||||||||||||||
Commercial |
3,407 | 5,748 | 5,609 | 2,934 | 5,110 | |||||||||||||||
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Total other real estate owned, net |
33,951 | 35,039 | 36,270 | 34,695 | 35,691 | |||||||||||||||
Other nonperforming assets(1) |
2,440 | 2,440 | 2,440 | 2,440 | 2,440 | |||||||||||||||
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Total nonperforming assets |
$ | 400,804 | $ | 337,723 | $ | 364,475 | $ | 362,092 | $ | 365,289 | ||||||||||
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Nonaccrual loans as a % of total loans and leases |
0.76 | % | 0.63 | % | 0.70 | % | 0.71 | % | 0.74 | % | ||||||||||
Nonperforming assets ratio(2) |
0.84 | 0.71 | 0.78 | 0.79 | 0.82 | |||||||||||||||
(NPA+90days)/(Loan+OREO)(3) |
1.08 | 0.98 | 1.08 | 1.08 | 1.17 |
(1) | Other nonperforming assets includes certain impaired investment securities. |
(2) | This ratio is calculated as nonperforming assets divided by the sum of loans and leases, other nonperforming assets, and net other real estate owned. |
(3) | This ratio is calculated as the sum of nonperforming assets and total accruing loans and leases past due 90 days or more divided by the sum of loans and leases and net other real estate owned. |
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2015 First Quarter versus 2014 Fourth Quarter
The $63.1 million, or 19%, increase in NPAs compared with December 31, 2014, represents the net impact of increases in the commercial portfolio:
| $61.4 million, or 85%, increase in C&I NALs, primarily reflecting the addition of one large C&I relationship to nonaccrual status. Given the absolute low level of problem credits in the portfolio, some volatility should be expected. |
TDR Loans
(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)
TDRs are modified loans where a concession was provided to a borrower experiencing financial difficulties. TDRs can be classified as either accrual or nonaccrual loans. Nonaccrual TDRs are included in NALs whereas accruing TDRs are excluded from NALs, as it is probable that all contractual principal and interest due under the restructured terms will be collected. TDRs primarily reflect our loss mitigation efforts to proactively work with borrowers in financial difficulty or regulatory regulations regarding the treatment of certain bankruptcy filing situations.
The table below presents our accruing and nonaccruing TDRs at period-end for each of the past five quarters:
Table 12Accruing and Nonaccruing Troubled Debt Restructured Loans
2015 | 2014 | |||||||||||||||||||
(dollar amounts in thousands) |
March 31, | December 31, | September 30, | June 30, | March 31, | |||||||||||||||
Troubled debt restructured loansaccruing: |
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Commercial and industrial |
$ | 162,207 | $ | 116,331 | $ | 89,783 | $ | 90,604 | $ | 102,970 | ||||||||||
Commercial real estate |
161,515 | 177,156 | 186,542 | 212,736 | 210,876 | |||||||||||||||
Automobile |
25,876 | 26,060 | 31,480 | 31,833 | 27,393 | |||||||||||||||
Home equity |
265,207 | 252,084 | 229,500 | 221,539 | 202,044 | |||||||||||||||
Residential mortgage |
268,441 | 265,084 | 271,762 | 289,239 | 284,194 | |||||||||||||||
Other consumer |
4,879 | 4,018 | 3,313 | 3,496 | 1,727 | |||||||||||||||
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Total troubled debt restructured loansaccruing |
888,125 | 840,733 | 812,380 | 849,447 | 829,204 | |||||||||||||||
Troubled debt restructured loansnonaccruing: |
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Commercial and industrial |
21,246 | 20,580 | 19,110 | 6,677 | 7,197 | |||||||||||||||
Commercial real estate |
28,676 | 24,964 | 28,618 | 24,396 | 27,972 | |||||||||||||||
Automobile |
4,283 | 4,552 | 4,817 | 4,287 | 5,676 | |||||||||||||||
Home equity |
26,379 | 27,224 | 25,149 | 22,264 | 20,992 | |||||||||||||||
Residential mortgage |
69,799 | 69,305 | 72,729 | 81,546 | 84,441 | |||||||||||||||
Other consumer |
165 | 70 | 74 | 120 | 120 | |||||||||||||||
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Total troubled debt restructured loansnonaccruing |
150,548 | 146,695 | 150,497 | 139,290 | 146,398 | |||||||||||||||
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Total troubled debt restructured loans |
$ | 1,038,673 | $ | 987,428 | $ | 962,877 | $ | 988,737 | $ | 975,602 | ||||||||||
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Our strategy is to structure TDRs in a manner that avoids new concessions subsequent to the initial TDR terms. However, there are times when subsequent modifications are required, such as when the modified loan matures. Often the loans are performing in accordance with the TDR terms, and a new note is originated with similar modified terms. These loans are subjected to the normal underwriting standards and processes for other similar credit extensions, both new and existing. If the loan is not performing in accordance with the existing TDR terms, typically an individualized approach to repayment is established. In accordance with ASC 310-20-35, the refinanced note is evaluated to determine if it is considered a new loan or a continuation of the prior loan. A new loan is considered for removal of the TDR designation. A continuation of the prior note requires the continuation of the TDR designation, and because the refinanced note constitutes a new or amended debt instrument, it is included in our TDR activity table (below) as a new TDR and a restructured TDR removal during the period. The types of concessions granted are consistent with those granted on new TDRs and include interest rate reductions, amortization or maturity date changes beyond what the collateral supports, and principal forgiveness based on the borrowers specific needs at a point in time. Our policy does not limit the number of times a loan may be modified. A loan may be modified multiple times if it is considered to be in the best interest of both the borrower and Huntington.
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Commercial loans are not automatically considered to be accruing TDRs upon the granting of a new concession. If the loan is in accruing status and no loss is expected based on the modified terms, the modified TDR remains in accruing status. For loans that are on nonaccrual status before the modification, collection of both principal and interest must not be in doubt, and the borrower must be able to exhibit sufficient cash flows for at least a six-month period of time to service the debt in order to return to accruing status. This six-month period could extend before or after the restructure date.
TDRs in the home equity and residential mortgage portfolio may continue to increase in the near term as we continue to appropriately manage the portfolio and work with our borrowers. Any granted change in terms or conditions that are not readily available in the market for that borrower, requires the designation as a TDR. There are no provisions for the removal of the TDR designation based on payment activity for consumer loans. A loan may be returned to accrual status when all contractually due interest and principal has been paid and the borrower demonstrates the financial capacity to continue to pay as agreed, with the risk of loss diminished.
The following table reflects TDR activity for each of the past five quarters:
Table 13Troubled Debt Restructured Loan Activity
2015 | 2014 | |||||||||||||||||||
(dollar amounts in thousands) |
First | Fourth | Third | Second | First | |||||||||||||||
TDRs, beginning of period |
$ | 987,428 | $ | 962,877 | $ | 988,737 | $ | 975,602 | $ | 954,841 | ||||||||||
New TDRs |
209,376 | 137,397 | 126,238 | 184,025 | 219,656 | |||||||||||||||
Payments |
(35,272 | ) | (51,908 | ) | (78,717 | ) | (66,530 | ) | (55,130 | ) | ||||||||||
Charge-offs |
(8,364 | ) | (8,611 | ) | (10,631 | ) | (5,134 | ) | (10,774 | ) | ||||||||||
Sales |
(5,148 | ) | (3,303 | ) | (1,951 | ) | (4,001 | ) | (14,169 | ) | ||||||||||
Transfer to OREO |
(2,369 | ) | (2,978 | ) | (3,554 | ) | (3,539 | ) | (2,597 | ) | ||||||||||
Restructured TDRsaccruing(1) |
(85,700 | ) | (26,350 | ) | (47,277 | ) | (83,586 | ) | (86,012 | ) | ||||||||||
Restructured TDRsnonaccruing(1) |
(20,849 | ) | (16,309 | ) | (2,212 | ) | (4,146 | ) | (23,038 | ) | ||||||||||
Other |
(429 | ) | (3,387 | ) | (7,756 | ) | (3,954 | ) | (7,175 | ) | ||||||||||
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TDRs, end of period |
$ | 1,038,673 | $ | 987,428 | $ | 962,877 | $ | 988,737 | $ | 975,602 | ||||||||||
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(1) | Represents existing TDRs that were re-underwritten with new terms providing a concession. A corresponding amount is included in the New TDRs amount above. |
ACL
(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)
Our total credit reserve is comprised of two different components, both of which in our judgment are appropriate to absorb credit losses inherent in our loan and lease portfolio: the ALLL and the AULC. Combined, these reserves comprise the total ACL. Our Credit Administration group is responsible for developing the methodology, assumptions and estimates used in the calculation, as well as determining the appropriateness of the ACL. The ALLL represents the estimate of losses inherent in the loan portfolio at the reported date. Additions to the ALLL result from recording provision expense for loan losses or increased risk levels resulting from loan risk-rating downgrades, while reductions reflect charge-offs (net of recoveries), decreased risk levels resulting from loan risk-rating upgrades, or the sale of loans. The AULC is determined by applying the transaction reserve process to the unfunded portion of the loan exposures adjusted by an applicable funding expectation.
During the 2015 first quarter, we reviewed our existing commercial and consumer credit models and enhanced certain processes and methods of ACL estimation. During this review, we analyzed the loss emergence periods used for consumer receivables collectively evaluated for impairment and, as a result, extended our loss emergence periods for products within these portfolios. As part of these enhancements to our credit reserve process, we evaluated the methods used to separately estimate economic risks inherent in our portfolios and decided to no longer utilize these separate estimation techniques. Economic risks are incorporated in our loss estimates elsewhere in our reserve calculation. The enhancements made to our credit reserve processes during the quarter allow for increased segmentation and analysis of the estimated incurred losses within our loan portfolios. The net ACL impact of these enhancements was immaterial.
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We regularly evaluate the appropriateness of the ACL by performing on-going evaluations of the loan and lease portfolio, including such factors as the differing economic risks associated with each loan category, the financial condition of specific borrowers, the level of delinquent loans, the value of any collateral and, where applicable, the existence of any guarantees or other documented support. We evaluate the impact of changes in interest rates and overall economic conditions on the ability of borrowers to meet their financial obligations when quantifying our exposure to credit losses and assessing the appropriateness of our ACL at each reporting date. In addition to general economic conditions and the other factors described above, additional factors also considered include: the impact of increasing or decreasing residential real estate values; the diversification of CRE loans; the development of new or expanded Commercial business verticals such as healthcare, ABL, and energy, and the overall condition of the manufacturing industry. A provision for credit losses is recorded to adjust the ACL to the level we have determined to be appropriate to absorb credit losses inherent in our loan and lease portfolio.
Our ACL evaluation process includes the on-going assessment of credit quality metrics, and a comparison of certain ACL benchmarks to current performance. While the total ACL balance has declined in recent quarters, all of the relevant benchmarks remain strong.
The table below reflects the allocation of our ACL among our various loan categories during each of the past five quarters:
Table 14Allocation of Allowance for Credit Losses (1)
2015 | 2014 | |||||||||||||||||||||||||||||||||||||||
(dollar amounts in thousands) |
March 31, | December 31, | September 30, | June 30, | March 31, | |||||||||||||||||||||||||||||||||||
Commercial |
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Commercial and industrial |
$ | 284,573 | 42 | % | $ | 286,995 | 40 | % | $ | 291,401 | 40 | % | $ | 278,512 | 41 | % | $ | 266,979 | 41 | % | ||||||||||||||||||||
Commercial real estate |
100,752 | 11 | 102,839 | 11 | 115,472 | 11 | 137,346 | 11 | 160,306 | 12 | ||||||||||||||||||||||||||||||
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Total commercial |
385,325 | 53 | 389,834 | 51 | 406,873 | 51 | 415,858 | 52 | 427,285 | 53 | ||||||||||||||||||||||||||||||
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Consumer |
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Automobile |
37,125 | 16 | 33,466 | 18 | 30,732 | 18 | 27,158 | 17 | 25,178 | 16 | ||||||||||||||||||||||||||||||
Home equity |
110,280 | 18 | 96,413 | 18 | 100,375 | 18 | 105,943 | 18 | 113,177 | 19 | ||||||||||||||||||||||||||||||
Residential mortgage |
55,380 | 12 | 47,211 | 12 | 52,658 | 12 | 47,191 | 12 | 39,068 | 12 | ||||||||||||||||||||||||||||||
Other consumer |
17,016 | 1 | 38,272 | 1 | 40,398 | 1 | 38,951 | 1 | 27,210 | | ||||||||||||||||||||||||||||||
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Total consumer |
219,801 | 47 | 215,362 | 49 | 224,163 | 49 | 219,243 | 48 | 204,633 | 47 | ||||||||||||||||||||||||||||||
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Total allowance for loan and lease losses |
605,126 | 100 | % | 605,196 | 100 | % | 631,036 | 100 | % | 635,101 | 100 | % | 631,918 | 100 | % | |||||||||||||||||||||||||
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Allowance for unfunded loan commitments |
54,742 | 60,806 | 55,449 | 56,927 | 59,368 | |||||||||||||||||||||||||||||||||||
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Total allowance for credit losses |
$ | 659,868 | $ | 666,002 | $ | 686,485 | $ | 692,028 | $ | 691,286 | ||||||||||||||||||||||||||||||
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Total allowance for loan and leases losses as % of: |
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Total loans and leases |
1.27 | % | 1.27 | % | 1.35% | 1.38 | % | 1.42 | % | |||||||||||||||||||||||||||||||
Nonaccrual loans and leases |
166 | 202 | 194 | 195 | 193 | |||||||||||||||||||||||||||||||||||
Nonperforming assets |
151 | 179 | 173 | 175 | 174 | |||||||||||||||||||||||||||||||||||
Total allowance for credit losses as % of: |
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Total loans and leases |
1.38 | % | 1.40 | % | 1.47% | 1.50 | % | 1.56 | % | |||||||||||||||||||||||||||||||
Nonaccrual loans and leases |
181 | 222 | 211 | 213 | 211 | |||||||||||||||||||||||||||||||||||
Nonperforming assets |
165 | 197 | 188 | 191 | 191 |
(1) | Percentages represent the percentage of each loan and lease category to total loans and leases. |
2015 First Quarter versus 2014 Fourth Quarter
The $6.1 million, or 1%, decline in the ACL compared with December 31, 2014, was driven by:
| $21.3 million or 56% decline in the other consumer portfolio, primarily driven by our assessment of consumer overdraft reserve factors, lower consumer overdraft balances, and the impact of no longer utilizing separate methods to estimate economic risks inherent in our portfolios. |
27
| $2.4 million or 1% decline in the C&I portfolios. The decline was driven by the decision to no longer utilize separate methods to estimate economic risks inherent in our portfolio. However, the impact was largely offset by the increases to our reserve factors for high dollar value C&I credits. |
| $2.1 million or 2% decline in the CRE portfolio. The decline was driven by the decision to no longer utilize separate methods to estimate economic risks inherent in our portfolio. However, the impact was largely offset by the increases to our reserve factors for high dollar value CRE credits. |
Partially offset by:
| $13.9 million or 14% increase in the home equity portfolio. The increase was driven by the extension of loss emergence periods associated with our home equity products. It was partially offset by the impact of no longer utilizing separate methods to estimate economic risks inherent in our portfolio. |
| $8.2 million or 17% increase in the residential mortgage portfolio. The increase was driven by the extension of loss emergence periods associated with the residential mortgage products. It was partially offset by the impact of no longer utilizing separate methods to estimate economic risks inherent in our portfolio. |
| $3.7 million, or 11% increase in the automobile portfolio. The increase was driven by the extension of loss emergence periods associated with the automobile products. It was partially offset by the impact of no longer utilizing separate methods to estimate economic risks inherent in our portfolio. |
The ACL to total loans declined to 1.38% at March 31, 2015, compared to 1.40% at December 31, 2014. Management believes the decline in the ratio is appropriate given the continued improvement in the risk profile of our loan portfolio. Further, the continued focus on early identification of loans with changes in credit metrics and proactive action plans for these loans, originating high quality new loans and SAD resolutions, will contribute to maintaining our strong key credit quality metrics.
Given the combination of these noted positive and negative factors, we believe that our ACL is appropriate and its coverage level is reflective of the quality of our portfolio and the current operating environment.
NCOs
Any loan in any portfolio may be charged-off prior to the policies described below if a loss confirming event has occurred. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency and that asset is the sole source of repayment. Additionally, discharged, collateral dependent non-reaffirmed debt in Chapter 7 bankruptcy filings will result in a charge-off to estimated collateral value, less anticipated selling costs at the time of discharge.
C&I and CRE loans are either charged-off or written down to net realizable value at 90-days past due. Automobile loans and other consumer loans are charged-off at 120-days past due. First-lien and junior-lien home equity loans are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due and 120-days past due, respectively. Residential mortgages are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due.
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The following table reflects NCO detail for each of the last five quarters:
Table 15Quarterly Net Charge-off Analysis
2015 | 2014 | |||||||||||||||||||
(dollar amounts in thousands) |
First | Fourth | Third | Second | First | |||||||||||||||
Net charge-offs (recoveries) by loan and lease type: |
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Commercial: |
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Commercial and industrial |
$ | 11,403 | $ | 333 | $ | 12,587 | $ | 10,597 | $ | 8,606 | ||||||||||
Commercial real estate: |
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Construction |
(383 | ) | (1,747 | ) | 2,171 | (171 | ) | 918 | ||||||||||||
Commercial |
(3,629 | ) | 1,565 | (8,178 | ) | (2,020 | ) | (1,905 | ) | |||||||||||
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Commercial real estate |
(4,012 | ) | (182 | ) | (6,007 | ) | (2,191 | ) | (987 | ) | ||||||||||
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Total commercial |
7,391 | 151 | 6,580 | 8,406 | 7,619 | |||||||||||||||
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Consumer: |
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Automobile |
4,248 | 6,024 | 3,976 | 2,926 | 4,642 | |||||||||||||||
Home equity |
4,625 | 6,321 | 6,448 | 8,491 | 15,687 | |||||||||||||||
Residential mortgage |
2,816 | 3,059 | 5,428 | 3,406 | 7,859 | |||||||||||||||
Other consumer |
5,352 | 7,420 | 7,591 | 5,414 | 7,179 | |||||||||||||||
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Total consumer |
17,041 | 22,824 | 23,443 | 20,237 | 35,367 | |||||||||||||||
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Total net charge-offs |
$ | 24,432 | $ | 22,975 | $ | 30,023 | $ | 28,643 | $ | 42,986 | ||||||||||
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Net charge-offs (recoveries)annualized percentages: |
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Commercial: |
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Commercial and industrial |
0.24 | % | 0.01 | % | 0.27 | % | 0.23 | % | 0.20 | % | ||||||||||
Commercial real estate: |
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Construction |
(0.17 | ) | (0.85 | ) | 1.12 | (0.10 | ) | 0.60 | ||||||||||||
Commercial |
(0.34 | ) | 0.15 | (0.78 | ) | (0.19 | ) | (0.18 | ) | |||||||||||
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Commercial real estate |
(0.31 | ) | (0.01 | ) | (0.48 | ) | (0.17 | ) | (0.08 | ) | ||||||||||
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Total commercial |
0.12 | | 0.11 | 0.14 | 0.14 | |||||||||||||||
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Consumer: |
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Automobile |
0.19 | 0.28 | 0.20 | 0.16 | 0.27 | |||||||||||||||
Home equity |
0.22 | 0.30 | 0.31 | 0.41 | 0.75 | |||||||||||||||
Residential mortgage |
0.19 | 0.21 | 0.38 | 0.24 | 0.58 | |||||||||||||||
Other consumer |
5.03 | 7.20 | 7.61 | 5.66 | 7.44 | |||||||||||||||
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Total consumer |
0.29 | 0.39 | 0.42 | 0.37 | 0.68 | |||||||||||||||
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Net charge-offs as a % of average loans |
0.20 | % | 0.20 | % | 0.26 | % | 0.25 | % | 0.40 | % | ||||||||||
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In assessing NCO trends, it is helpful to understand the process of how commercial loans are treated as they deteriorate over time. The ALLL established is consistent with the level of risk associated with the original underwriting. As a part of our normal portfolio management process for commercial loans, the loan is periodically reviewed and the ALLL is increased or decreased based on the updated risk rating. In certain cases, the standard ALLL is determined to not be appropriate, and a specific reserve is established based on the projected cash flow or collateral value of the specific loan. Charge-offs, if necessary, are generally recognized in a period after the specific ALLL was established. If the previously established ALLL exceeds that necessary to satisfactorily resolve the problem loan, a reduction in the overall level of the ALLL could be recognized. Consumer loans are treated in much the same manner as commercial loans, with increasing reserve factors applied based on the risk characteristics of the loan, although specific reserves are not identified for consumer loans. In summary, if loan quality deteriorates, the typical credit sequence would be periods of reserve building, followed by periods of higher NCOs as the previously established ALLL is utilized. Additionally, an increase in the ALLL either precedes or is in conjunction with increases in NALs. When a loan is classified as NAL, it is evaluated for specific ALLL or charge-off. As a result, an increase in NALs does not necessarily result in an increase in the ALLL or an expectation of higher future NCOs.
All residential mortgage loans greater than 150-days past due are charged-down to the estimated value of the collateral, less anticipated selling costs. The remaining balance is in delinquent status until a modification can be completed, or the loan goes through the foreclosure process. For the home equity portfolio, virtually all of the defaults represent full charge-offs, as there is no remaining equity, creating a lower delinquency rate but a higher NCO impact.
29
2015 First Quarter versus 2014 Fourth Quarter
NCOs increased $1.5 million from the prior quarter to $24.4 million, primarily as a result of an increase in the C&I portfolio. This was partially offset by continued improvement in the consumer portfolios and the impact of recovery activity in the CRE portfolio. NCOs were an annualized 0.20% of average loans and leases in the current quarter, unchanged from 0.20% in the 2014 fourth quarter, and still below our long-term expectation of 0.35% - 0.55%. Given the low level of C&I and CRE NCOs, there will continue to be some volatility on a quarter-to-quarter comparison basis.
Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, foreign exchange rates, equity prices, and credit spreads. We have identified two primary sources of market risk: interest rate risk and price risk.
Interest Rate Risk
OVERVIEW
Huntington actively manages interest rate risk, as changes in market interest rates can have a significant impact on reported earnings. The interest rate risk process is designed to compare income simulations in market scenarios designed to alter the direction, magnitude, and speed of interest rate changes, as well as the slope of the yield curve. These scenarios are designed to illustrate the embedded optionality in the balance sheet from, among other things, faster or slower mortgage prepayments and changes in deposit mix.
INCOME SIMULATION AND ECONOMIC VALUE ANALYSIS
Interest rate risk measurement is calculated and reported to the ALCO monthly and ROC at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.
Huntington uses two approaches to model interest rate risk: Net Interest Income at Risk (NII at Risk) and Economic Value of Equity (EVE). Under NII at Risk, net interest income is modeled utilizing various assumptions for assets, liabilities, and derivative positions under various interest rate scenarios over a one-year time horizon. EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change. EVE is a period end measurement.
Table 16Net Interest Income at Risk
Net Interest Income at Risk (%) | ||||||||||||
Basis point change scenario |
-25 | +100 | +200 | |||||||||
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Board policy limits |
| -2.0 | % | -4.0 | % | |||||||
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March 31, 2015 |
-0.2 | % | 0.4 | % | 0.2 | % | ||||||
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December 31, 2014 |
-0.2 | % | 0.5 | % | 0.2 | % |
The NII at Risk results included in the table above reflect the analysis used monthly by management. It models gradual -25, +100 and +200 basis point parallel shifts in market interest rates, implied by the forward yield curve over the next one-year period. Due to the current low level of short-term interest rates, the analysis reflects a declining interest rate scenario of 25 basis points, the point at which many assets and liabilities reach zero percent.
Huntington is within board of director policy limits for the +100 and +200 basis point scenarios. There is no policy limit for the -25 basis point scenario. The NII at Risk reported at March 31, 2015, shows that Huntingtons earnings are not particularly sensitive to changes in interest rates over the next year. In recent periods, the amount of fixed rate assets, primarily indirect auto loans and securities, increased resulting in a reduction in asset sensitivity. This reduction is somewhat accentuated by our portfolio of mortgage-related loans and securities, whose expected maturities lengthen as rates rise. The reduced asset sensitivity for the +200 basis points scenario (relative to the +100 basis points scenario) relates to the modeled migration of money market accounts balances into CDs thereby shifting deposits from a variable rate to a fixed rate.
30
Table 17Economic Value of Equity at Risk
Economic Value of Equity at Risk (%) | ||||||||||||
Basis point change scenario |
-25 | +100 | +200 | |||||||||
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Board policy limits |
| -5.0 | % | -12.0 | % | |||||||
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March 31, 2015 |
-0.9 | % | 0.9 | % | -0.8 | % | ||||||
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December 31, 2014 |
-0.6 | % | 0.4 | % | -1.5 | % |
The EVE results included in the table above reflect the analysis used monthly by management. It models immediate -25, +100 and +200 basis point parallel shifts in market interest rates. Due to the current low level of short-term interest rates, the analysis reflects a declining interest rate scenario of 25 basis points, the point at which many assets and liabilities reach zero percent.
Huntington is within board of director policy limits for the +100 and +200 basis point scenarios. There is no policy limit for the -25 basis point scenario. The EVE reported at March 31, 2015 shows that as interest rates increase (decrease) immediately, the economic value of equity position will decrease (increase). When interest rates rise, fixed rate assets generally lose economic value; the longer the duration, the greater the value lost. The opposite is true when interest rates fall. The EVE at risk reported as of March 31, 2015 for the +200 basis points scenario shows a change to a less liability sensitive position compared with December 31, 2014. The primary factor contributing to this change was the impact of substantially lower interest rates.
MSRs
(This section should be read in conjunction with Note 6 of Notes to Unaudited Condensed Consolidated Financial Statements.)
At March 31, 2015 we had a total of $145.9 million of capitalized MSRs representing the right to service $15.6 billion in mortgage loans. Of this $145.9 million, $20.4 million was recorded using the fair value method and $125.5 million was recorded using the amortization method.
MSR fair values are sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be reduced by prepayments. Prepayments usually increase when mortgage interest rates decline and decrease when mortgage interest rates rise. We have employed strategies to reduce the risk of MSR fair value changes or impairment. However, volatile changes in interest rates can diminish the effectiveness of these economic hedges. We report MSR fair value adjustments net of hedge-related trading activity in the mortgage banking income category of noninterest income. Changes in fair value between reporting dates are recorded as an increase or a decrease in mortgage banking income.
MSRs recorded using the amortization method generally relate to loans originated with historically low interest rates, resulting in a lower probability of prepayments and, ultimately, impairment. MSR assets are included in accrued income and other assets in the Unaudited Condensed Consolidated Financial Statements.
Price Risk
Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value and are subject to fair value accounting. We have price risk from trading securities, securities owned by our broker-dealer subsidiaries, foreign exchange positions, equity investments, investments in securities backed by mortgage loans, and marketable equity securities held by our insurance subsidiaries. We have established loss limits on the trading portfolio, on the amount of foreign exchange exposure that can be maintained, and on the amount of marketable equity securities that can be held by the insurance subsidiaries.
Liquidity risk is the risk of loss due to the possibility that funds may not be available to satisfy current or future commitments. Please see the Liquidity Risk section in Item 1A of our 2014 Form 10-K for more details. In addition, the mix and maturity structure of Huntingtons balance sheet, the amount of on-hand cash, unencumbered securities, and the availability of contingent sources of funding can have an impact on Huntingtons ability to satisfy current or future funding commitments. We manage liquidity risk at both the Bank and the parent company.
31
The overall objective of liquidity risk management is to ensure that we can obtain cost-effective funding to meet current and future obligations, and can maintain sufficient levels of on-hand liquidity, under both normal business-as-usual and unanticipated stressed circumstances. The ALCO was appointed by the ROC to oversee liquidity risk management and the establishment of liquidity risk policies and limits. Contingency funding plans are in place, which measure forecasted sources and uses of funds under various scenarios in order to prepare for unexpected liquidity shortages. Liquidity risk is reviewed monthly for the Bank and the parent company, as well as its subsidiaries. In addition, liquidity working groups meet regularly to identify and monitor liquidity positions, provide policy guidance, review funding strategies, and oversee the adherence to, and maintenance of, the contingency funding plans.
Investment Securities Portfolio
The expected weighted average maturities of our AFS and HTM portfolios are significantly shorter than their contractual maturities as reflected in Note 4 and Note 5 of the Notes to Unaudited Condensed Consolidated Financial Statements. Particularly regarding the mortgage-backed securities and asset-backed securities, prepayments of principal and interest that historically occur in advance of scheduled maturities will shorten the expected life of these portfolios. The expected weighted average maturities, which take into account expected prepayments of principal and interest under existing interest rate conditions, are shown in the following table:
Table 18Expected Life of Investment Securities
March 31, 2015 | ||||||||||||||||
Available-for-Sale & Other Securities |
Held-to-Maturity Securities |
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(dollar amounts in thousands) |
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
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Under 1 year |
$ | 611,710 | $ | 602,320 | $ | | $ | | ||||||||
1 - 5 years |
4,556,655 | 4,640,888 | 1,292,493 | 1,303,243 | ||||||||||||
6 - 10 years |
3,700,868 | 3,732,346 | 1,979,893 | 2,007,877 | ||||||||||||
Over 10 years |
618,611 | 601,956 | 64,277 | 63,769 | ||||||||||||
Other securities |
344,136 | 344,889 | | | ||||||||||||
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Total |
$ | 9,831,980 | $ | 9,922,399 | $ | 3,336,663 | $ | 3,374,889 | ||||||||
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Bank Liquidity and Sources of Funding
Our primary sources of funding for the Bank are retail and commercial core deposits. At March 31, 2015, these core deposits funded 73% of total assets (104% of total loans). At March 31, 2015 and December 31, 2014, total core deposits represented 94% of total deposits. To the extent we are unable to obtain sufficient liquidity through core deposits, we may meet our liquidity needs through other sources, asset securitization, or sale. Other sources include non-core deposits, FHLB advances, and other wholesale debt instruments.
Demand deposit overdrafts that have been reclassified as loan balances were $15.1 million and $18.7 million at March 31, 2015 and December 31, 2014, respectively.
32
The following tables reflect deposit composition and short-term borrowings detail for each of the last five quarters:
Table 19Deposit Composition
2015 | 2014 | |||||||||||||||||||||||||||||||||||||||
(dollar amounts in millions) |
March 31, | December 31, | September 30, | June 30, | March 31, | |||||||||||||||||||||||||||||||||||
By Type: |
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Demand depositsnoninterest-bearing |
$ | 15,960 | 30 | % | $ | 15,393 | 30 | % | $ | 14,754 | 29 | % | $ | 14,151 | 29 | % | $ | 14,314 | 29 | % | ||||||||||||||||||||
Demand depositsinterest-bearing |
6,537 | 13 | 6,248 | 12 | 6,052 | 12 | 5,921 | 12 | 5,970 | 12 | ||||||||||||||||||||||||||||||
Money market deposits |
18,933 | 36 | 18,986 | 37 | 18,174 | 36 | 17,563 | 36 | 17,693 | 36 | ||||||||||||||||||||||||||||||
Savings and other domestic deposits |
5,288 | 10 | 5,048 | 10 | 5,038 | 10 | 5,036 | 10 | 5,115 | 10 | ||||||||||||||||||||||||||||||
Core certificates of deposit |
2,709 | 5 | 2,936 | 5 | 3,150 | 6 | 3,272 | 7 | 3,557 | 7 | ||||||||||||||||||||||||||||||
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Total core deposits: |
49,427 | 94 | 48,611 | 94 | 47,168 | 93 | 45,943 | 94 | 46,649 | 94 | ||||||||||||||||||||||||||||||
Other domestic deposits of $250,000 or more |
189 | | 198 | | 202 | 1 | 241 | | 289 | 1 | ||||||||||||||||||||||||||||||
Brokered deposits and negotiable CDs |
2,682 | 5 | 2,522 | 5 | 2,357 | 5 | 2,198 | 5 | 2,074 | 4 | ||||||||||||||||||||||||||||||
Deposits in foreign offices |
535 | 1 | 401 | 1 | 402 | 1 | 367 | 1 | 337 | 1 | ||||||||||||||||||||||||||||||
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Total deposits |
$ | 52,833 | 100 | % | $ | 51,732 | 100 | % | $ | 50,129 | 100 | % | $ | 48,749 | 100 | % | $ | 49,349 | 100 | % | ||||||||||||||||||||
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Total core deposits: |
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Commercial |
$ | 23,061 | 47 | % | $ | 22,725 | 47 | % | $ | 21,753 | 46 | % | $ | 20,629 | 45 | % | $ | 20,507 | 44 | % | ||||||||||||||||||||
Consumer |
26,366 | 53 | 25,886 | 53 | 25,415 | 54 | 25,314 | 55 | 26,142 | 56 | ||||||||||||||||||||||||||||||
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Total core deposits |
$ | 49,427 | 100 | % | $ | 48,611 | 100 | % | $ | 47,168 | 100 | % | $ | 45,943 | 100 | % | $ | 46,649 | 100 | % | ||||||||||||||||||||
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Table 20Federal Funds Purchased and Repurchase Agreements
2015 | 2014 | |||||||||||||||||||
(dollar amounts in millions) |
March 31, | December 31, | September 30, | June 30, | March 31, | |||||||||||||||
Balance at period-end |
||||||||||||||||||||
Federal Funds purchased and securities sold under agreements to repurchase |
$ | 1,112 | $ | 1,058 | $ | 1,491 | $ | 1,223 | $ | 1,342 | ||||||||||
Federal Home Loan Bank advances |
875 | 1,325 | 1,650 | 2,375 | 325 | |||||||||||||||
Other short-term borrowings |
20 | 14 | 40 | 29 | 56 | |||||||||||||||
Weighted average interest rate at period-end |
||||||||||||||||||||
Federal Funds purchased and securities sold under agreements to repurchase |
0.05 | % | 0.08 | % | 0.05 | % | 0.05 | % | 0.06 | % | ||||||||||
Federal Home Loan Bank advances |
0.09 | 0.15 | 0.22 | 0.15 | 0.22 | |||||||||||||||
Other short-term borrowings |
1.19 | 1.11 | 1.06 | 1.41 | 0.26 | |||||||||||||||
Maximum amount outstanding at month-end during the period |
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Federal Funds purchased and securities sold under agreements to repurchase |
$ | 1,120 | $ | 1,176 | $ | 1,491 | $ | 1,223 | $ | 1,342 | ||||||||||
Federal Home Loan Bank advances |
1,450 | 1,325 | 1,975 | 2,375 | 2,175 | |||||||||||||||
Other short-term borrowings |
43 | 26 | 40 | 29 | 56 | |||||||||||||||
Average amount outstanding during the period |
||||||||||||||||||||
Federal Funds purchased and securities sold under agreements to repurchase |
$ | 1,057 | $ | 1,089 | $ | 1,072 | $ | 910 | $ | 875 | ||||||||||
Federal Home Loan Bank advances |
796 | 1,569 | 2,101 | 1,848 | 1,490 | |||||||||||||||
Other short-term borrowings |
29 | 25 | 20 | 29 | 8 | |||||||||||||||
Weighted average interest rate during the period |
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Federal Funds purchased and securities sold under agreements to repurchase |
0.07 | % | 0.08 | % | 0.07 | % | 0.06 | % | 0.06 | % | ||||||||||
Federal Home Loan Bank advances |
0.10 | 0.17 | 0.29 | 0.09 | 0.05 | |||||||||||||||
Other short-term borrowings |
0.75 | 1.37 | 2.22 | 1.64 | 1.06 |
33
The Bank maintains borrowing capacity at the FHLB and the Federal Reserve Bank Discount Window. The Bank does not consider borrowing capacity from the Federal Reserve Bank Discount Window as a primary source of liquidity. Total loans and securities pledged to the Federal Reserve Discount Window and the FHLB are $18.4 billion and $18.0 billion at March 31, 2015 and December 31, 2014, respectively.
For information related to debt issuances that impact liquidity, please see Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements.
At March 31, 2015, total wholesale funding was $10.6 billion, an increase from $9.9 billion at December 31, 2014. The increase from prior year-end primarily relates to an increase in other long-term debt, partially offset by a decrease in FHLB advances and short-term borrowings.
Liquidity Coverage Ratio
On October 24, 2013, the U.S. banking regulators jointly issued a proposal that would implement a quantitative liquidity requirement consistent with the Liquidity Coverage Ratio (LCR) standard established by the Basel Committee on Banking Supervision. The LCR is designed to promote the short-term resilience of the liquidity risk profile of banks to which it applies.
On September 3, 2014, the U.S. banking regulators adopted a final LCR for internationally active banking organizations, generally those with $250 billion or more in total assets, and a Modified LCR rule for banking organizations, similar to Huntington, with $50 billion or more in total assets that are not internationally active banking organizations. The Modified LCR requires Huntington to maintain High Quality Liquid Assets (HQLA) to meet its net cash outflows over a prospective 30 calendar-day period, which takes into account the potential impact of idiosyncratic and market-wide shocks. The Modified LCR transition period begins on January 1, 2016, with Huntington required to maintain HQLA equal to 90 percent of the stated requirement. The ratio increases to 100 percent on January 1, 2017. Huntington expects to be compliant with the Modified LCR requirement within the transition periods established in the Modified LCR rule.
At March 31, 2015, we believe the Bank had sufficient liquidity to meet its cash flow obligations for the foreseeable future.
Parent Company Liquidity
The parent companys funding requirements consist primarily of dividends to shareholders, debt service, income taxes, operating expenses, funding of nonbank subsidiaries, repurchases of our stock, and acquisitions. The parent company obtains funding to meet obligations from dividends and interest received from the Bank, interest and dividends received from direct subsidiaries, net taxes collected from subsidiaries included in the federal consolidated tax return, fees for services provided to subsidiaries, and the issuance of debt securities.
At March 31, 2015 and December 31, 2014, the parent company had $0.9 billion and $0.7 billion, respectively, in cash and cash equivalents.
On April 21, 2015, the board of directors declared a quarterly common stock cash dividend of $0.06 per common share. The dividend is payable on July 1, 2015, to shareholders of record on June 17, 2015. Based on the current quarterly dividend of $0.06 per common share, cash demands required for common stock dividends are estimated to be approximately $48.5 million per quarter. On April 21, 2015, the board of directors declared a quarterly Series A and Series B Preferred Stock dividend payable on July 15, 2015 to shareholders of record on July 1, 2015. Based on the current dividend, cash demands required for Series A Preferred Stock are estimated to be approximately $7.7 million per quarter. Cash demands required for Series B Preferred Stock are expected to be approximately $0.3 million per quarter.
During the quarter, the Bank paid dividends of $334.0 million to the holding company. The Bank declared a dividend to the holding company of $147.0 million in the second quarter of 2015. To help meet any additional liquidity needs, we have an open-ended, automatic shelf registration statement filed and effective with the SEC, which permits us to issue an unspecified amount of debt or equity securities.
With the exception of the items discussed above, the parent company does not have any significant cash demands. It is our policy to keep operating cash on hand at the parent company to satisfy expected cash demands for at least the next 18 months. Considering the factors discussed above, and other analyses that we have performed, we believe the parent company has sufficient liquidity to meet its cash flow obligations for the foreseeable future.
34
Off-Balance Sheet Arrangements
In the normal course of business, we enter into various off-balance sheet arrangements. These arrangements include interest rate swaps, financial guarantees contained in standby letters-of-credit issued by the Bank, and commitments by the Bank to sell mortgage loans.
INTEREST RATE SWAPS
Balance sheet hedging activity is arranged to receive hedge accounting treatment and is classified as either fair value or cash flow hedges. Fair value hedges are purchased to convert deposits and long-term debt from fixed-rate obligations to floating rate. Cash flow hedges are also used to convert floating rate loans made to customers into fixed rate loans. See Note 16 for more information.
STANDBY LETTERS-OF-CREDIT
Standby letters-of-credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most of these arrangements mature within two years and are expected to expire without being drawn upon. Standby letters-of-credit are included in the determination of the amount of risk-based capital that the parent company and the Bank are required to hold. Through our credit process, we monitor the credit risks of outstanding standby letters-of-credit. When it is probable that a standby letter-of-credit will be drawn and not repaid in full, a loss is recognized in the provision for credit losses. See Note 18 for more information.
COMMITMENTS TO SELL LOANS
Activity related to our mortgage origination activity supports the hedging of the mortgage pricing commitments to customers and the secondary sale to third parties. In addition, we had commitments to sell residential real estate loans. These contracts mature in less than one year. See Note 18 for more information.
We do not believe that off-balance sheet arrangements will have a material impact on our liquidity or capital resources.
As with all companies, we are subject to operational risk. Operational risk is the risk of loss due to human error; inadequate or failed internal systems and controls, including the use of financial or other quantitative methodologies that may not adequately predict future results; violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards; and external influences such as market conditions, fraudulent activities, disasters, and security risks. We continuously strive to strengthen our system of internal controls to ensure compliance with laws, rules, and regulations, and to improve the oversight of our operational risk. We actively and continuously monitor cyber-attacks such as attempts related to online deception and loss of sensitive customer data. We evaluate internal systems, processes and controls to mitigate loss from cyber-attacks and, to date, have not experienced any material losses.
Our objective for managing cyber security risk is to avoid or minimize the impacts of external threat events or other efforts to penetrate our systems. We work to achieve this objective by hardening networks and systems against attack, and by diligently managing visibility and monitoring controls within our data and communications environment to recognize events and respond before the attacker has the opportunity to plan and execute on their own goals. To this end we employ a set of defense in-depth strategies, which include efforts to make Huntington less attractive as a target and less vulnerable to threats, while investing in threat analytic capabilities for rapid detection and response. Potential concerns related to cyber security may be escalated to our board-level Technology Committee, as appropriate. As a complement to the overall cyber security risk management, we utilize a number of internal training methods, both formally through mandatory courses and informally through written communications and other updates. Internal policies and procedures have been implemented to encourage the reporting of potential phishing attacks or other security risks. We also use third party services to test the effectiveness of our cyber security risk management framework, and any such third parties are required to comply with our policies regarding information security and confidentiality.
To mitigate operational risks, we have a senior management Operational Risk Committee and a senior management Legal, Regulatory, and Compliance Committee. The responsibilities of these committees, among other duties, include establishing and maintaining management information systems to monitor material risks and to identify potential concerns, risks, or trends that may have a significant impact and ensuring that recommendations are developed to address the identified issues. In addition, we have a senior management Model Risk Oversight Committee that is responsible for policies and procedures describing how model risk is evaluated and managed and the application of the governance process to implement these practices throughout the enterprise. These committees report any significant findings and recommendations to the Risk Management Committee. Potential concerns may be escalated to our ROC, as appropriate.
35
The goal of this framework is to implement effective operational risk techniques and strategies, minimize operational and fraud losses, minimize the impact of inadequately designed models and enhance our overall performance.
Representation and Warranty Reserve
We primarily conduct our mortgage loan sale and securitization activity with FNMA and FHLMC. In connection with these and other securitization transactions, we make certain representations and warranties that the loans meet certain criteria, such as collateral type and underwriting standards. We may be required to repurchase individual loans and / or indemnify these organizations against losses due to a loan not meeting the established criteria. We have a reserve for such losses and exposure, which is included in accrued expenses and other liabilities. The reserves are estimated based on historical and expected repurchase activity, average loss rates, and current economic trends. The level of mortgage loan repurchase losses depends upon economic factors, investor demand strategies and other external conditions containing a level of uncertainty and risk that may change over the life of the underlying loans. We currently do not have sufficient information to estimate the range of reasonably possible loss related to representation and warranty exposure.
The tables below reflect activity in the representations and warranties reserve:
Table 21Summary of Reserve for Representations and Warranties on Mortgage Loans Serviced for Others
2015 | 2014 | |||||||||||||||||||
(dollar amounts in thousands) |
First | Fourth | Third | Second | First | |||||||||||||||
Reserve for representations and warranties, beginning of period |
$ | 12,677 | $ | 13,816 | $ | 15,249 | $ | 17,094 | $ | 22,027 | ||||||||||
Reserve charges |
(1,359 | ) | (518 | ) | (499 | ) | (1,047 | ) | (6,132 | ) | ||||||||||
Provision for representations and warranties |
202 | (621 | ) | (934 | ) | (798 | ) | 1,199 | ||||||||||||
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Reserve for representations and warranties, end of period |
$ | 11,520 | $ | 12,677 | $ | 13,816 | $ | 15,249 | $ | 17,094 | ||||||||||
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Table 22Mortgage Loan Repurchase Statistics
2015 | 2014 | |||||||||||||||||||
(dollar amounts in thousands) |
First | Fourth | Third | Second | First | |||||||||||||||
Number of loans sold |
4,421 | 4,544 | 4,880 | 4,599 | 3,882 | |||||||||||||||
Amount of loans sold (UPB) |
$ | 651,161 | $ | 633,837 | $ | 660,133 | $ | 572,861 | $ | 487,822 | ||||||||||
Number of loans repurchased (1) |
32 | 19 | 18 | 33 | 89 | |||||||||||||||
Amount of loans repurchased (UPB) (1) |
$ | 3,883 | $ | 1,935 | $ | 2,224 | $ | 3,766 | $ | 10,557 | ||||||||||
Number of claims received |
60 | 33 | 38 | 43 | 35 | |||||||||||||||
Successful dispute rate (2) |
6 | % | 30 | % | 25 | % | 40 | % | 34 | % | ||||||||||
Number of make whole payments (3) |
11 | 7 | 4 | 20 | 91 | |||||||||||||||
Amount of make whole payments (3) |
$ | 625 | $ | 197 | $ | 119 | $ | 844 | $ | 5,693 | ||||||||||
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(1) | Loans repurchased are loans that fail to meet the purchasers terms. |
(2) | Successful disputes are a percent of close out requests. |
(3) | Make whole payments are payments to reimburse for losses on foreclosed properties. |
36
Financial institutions are subject to many laws, rules, and regulations at both the federal and state levels. In September 2014, for example, the Office of the Comptroller of the Currency issued its final rule formalizing its heightened expectations supervisory regime for the largest federally chartered depository institutions, including Huntington, to improve risk management and ensure boards can challenge decisions made by management. These broad-based laws, rules, and regulations include, but are not limited to, expectations relating to anti-money laundering, lending limits, client privacy, fair lending, prohibitions against unfair, deceptive or abusive acts or practices, protections for military members as they enter active duty, and community reinvestment. Additionally, the volume and complexity of recent regulatory changes have increased our overall compliance risk. As such, we utilize various resources to help ensure expectations are met, including a team of compliance experts dedicated to ensuring our conformance with all applicable laws, rules, and regulations. Our colleagues receive training for several broad-based laws and regulations including, but not limited to, anti-money laundering and customer privacy. Additionally, colleagues engaged in lending activities receive training for laws and regulations related to flood disaster protection, equal credit opportunity, fair lending, and / or other courses related to the extension of credit. We set a high standard of expectation for adherence to compliance management and seek to continuously enhance our performance.
Both regulatory capital and shareholders equity are managed at the Bank and on a consolidated basis. We have an active program for managing capital and maintain a comprehensive process for assessing the Companys overall capital adequacy. We believe our current levels of both regulatory capital and shareholders equity are adequate.
Regulatory Capital
Beginning in the 2015 first quarter, we became subject to the Basel III capital requirements including the standardized approach for calculating risk-weighted assets in accordance with subpart D of the final capital rule. The following table presents risk-weighted assets and other financial data necessary to calculate certain financial ratios, including the common equity tier 1 ratio on a Basel III basis, which we use to measure capital adequacy. The implementation of the Basel III capital requirements is transitional and phases-in from January 1, 2015 through the end of 2018.
The Basel III capital requirements emphasize common equity tier 1 capital, the most loss-absorbing form of capital, and implement strict eligibility criteria for regulatory capital instruments. Common equity tier 1 capital primarily includes common shareholders equity less certain deductions for goodwill and other intangibles net of related taxes, MSRs net of related taxes, that arise from tax loss and credit carryforwards. Tier 1 capital is primarily comprised of common equity tier 1 capital, perpetual preferred stock and certain qualifying capital instruments (TRUPS) that are subject to phase-out from tier 1 capital. Tier 2 capital primarily includes qualifying subordinated debt and qualifying ALLL.
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Table 23Capital Under Current Regulatory Standards (transitional Basel III basis)
2015 | ||||
(dollar amounts in millions) |
March 31, | |||
Common equity tier 1 risk-based capital ratio: |
||||
Total shareholders equity |
$ | 6,462 | ||
Regulatory capital adjustments: |
||||
Shareholders preferred equity |
(386 | ) | ||
Accumulated other comprehensive income offset |
161 | |||
Goodwill and other intangibles, net of taxes |
(700 | ) | ||
Deferred tax assets that arise from tax loss and credit carryforwards |
(36 | ) | ||
|
|
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Common equity tier 1 capital |
5,501 | |||
Additional tier 1 capital |
||||
Shareholders preferred equity |
386 | |||
Qualifying capital instruments subject to phase-out |
76 | |||
Other |
(53 | ) | ||
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|
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Tier 1 capital |
5,910 | |||
LTD and other tier 2 qualifying instruments |
648 | |||
Qualifying allowance for loan and lease losses |
660 | |||
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Tier 2 capital |
1,308 | |||
Total risk-based capital |
$ | 7,218 | ||
Risk-weighted assets (RWA) |
57,840 | |||
Common equity tier 1 risk-based capital ratio |
9.51 | % | ||
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Other regulatory capital data: |
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Tier 1 leverage ratio |
9.04 | % | ||
Tier 1 risk-based capital ratio |
10.22 | |||
Total risk-based capital ratio |
12.48 | |||
Tangible common equity / RWA ratio |
9.25 | |||
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Table 24Capital AdequacyNon-Regulatory
2015 | 2014 | |||||||||||||||||||
(dollar amounts in millions) |
March 31, | December 31, | September 30, | June 30, | March 31, | |||||||||||||||
Consolidated capital calculations: |
||||||||||||||||||||
Common shareholders equity |
$ | 6,076 | $ | 5,942 | $ | 5,898 | $ | 5,855 | $ | 5,790 | ||||||||||
Preferred shareholders equity |
386 | 386 | 386 | 386 | 386 | |||||||||||||||
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|
|
|
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Total shareholders equity |
6,462 | 6,328 | 6,284 | 6,241 | 6,176 | |||||||||||||||
Goodwill |
(678 | ) | (523 | ) | (523 | ) | (505 | ) | (505 | ) | ||||||||||
Other intangible assets |
(73 | ) | (75 | ) | (85 | ) | (81 | ) | (91 | ) | ||||||||||
Other intangible assets deferred tax liability (1) |
25 | 26 | 30 | 28 | 32 | |||||||||||||||
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Total tangible equity |
5,736 | 5,756 | 5,706 | 5,683 | 5,612 | |||||||||||||||
Preferred shareholders equity |
(386 | ) | (386 | ) | (386 | ) | (386 | ) | (386 | ) | ||||||||||
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|
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Total tangible common equity |
$ | 5,350 | $ | 5,370 | $ | 5,320 | $ | 5,297 | $ | 5,226 | ||||||||||
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|
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Total assets |
$ | 68,003 | $ | 66,298 | $ | 64,331 | $ | 63,797 | $ | 61,146 | ||||||||||
Goodwill |
(678 | ) | (523 | ) | (523 | ) | (505 | ) | (505 | ) | ||||||||||
Other intangible assets |
(73 | ) | (75 | ) | (85 | ) | (81 | ) | (91 | ) | ||||||||||
Other intangible assets deferred tax liability (1) |
25 | 26 | 30 | 28 | 32 | |||||||||||||||
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Total tangible assets |
$ | 67,277 | $ | 65,726 | $ | 63,753 | $ | 63,239 | $ | 60,582 | ||||||||||
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Tier 1 capital (2) |
$ | N.A. | $ | 6,266 | $ | 6,180 | $ | 6,132 | $ | 6,107 | ||||||||||
Preferred shareholders equity |
N.A. | (386 | ) | (386 | ) | (386 | ) | (386 | ) | |||||||||||
Trust preferred securities |
N.A. | (304 | ) | (304 | ) | (304 | ) | (304 | ) | |||||||||||
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Tier 1 common equity (2) |
$ | N.A. | $ | 5,576 | $ | 5,490 | $ | 5,442 | $ | 5,417 | ||||||||||
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Risk-weighted assets (RWA) (2) |
$ | N.A. | $ | 54,479 | $ | 53,239 | $ | 53,035 | $ | 51,120 | ||||||||||
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Tier 1 common equity / RWA ratio (2) |
N.A. | % | 10.23 | % | 10.31 | % | 10.26 | % | 10.60 | % | ||||||||||
Tangible equity / tangible asset ratio |
8.53 | 8.76 | 8.95 | 8.99 | 9.26 | |||||||||||||||
Tangible common equity / tangible asset ratio |
7.95 | 8.17 | 8.35 | 8.38 | 8.63 | |||||||||||||||
Tangible common equity / RWA ratio (2) |
N.A. | 9.86 | 9.99 | 9.99 | 10.22 |
(1) | Other intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate. |
(2) | Ratios are calculated on a Basel I basis. |
N.A. On January 1, 2015, we became subject to the Basel III capital requirements including the standardized approach for calculating risk-weighted assets in accordance with subpart D of the final capital rule.
39
The following table presents certain regulatory capital data at both the consolidated and Bank levels for each of the past five quarters:
Table 25Regulatory Capital Data (1)
Basel III | Basel I | |||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||
(dollar amounts in millions) |
March 31, | December 31, | September 30, | June 30, | March 31, | |||||||||||||||||
Total risk-weighted assets |
Consolidated | $ | 57,840 | $ | 54,479 | $ | 53,239 | $ | 53,035 | $ | 51,120 | |||||||||||
Bank | 57,752 | 54,387 | 53,132 | 53,005 | 51,021 | |||||||||||||||||
Common equity tier I risk-based capital |
Consolidated | 5,501 | N.A. | N.A. | N.A. | N.A. | ||||||||||||||||
Bank | 5,448 | N.A. | N.A. | N.A. | N.A. | |||||||||||||||||
Tier 1 risk-based capital |
Consolidated | 5,910 | 6,266 | 6,180 | 6,132 | 6,107 | ||||||||||||||||
Bank | 5,664 | 6,136 | 5,963 | 5,982 | 5,872 | |||||||||||||||||
Tier 2 risk-based capital |
Consolidated | 1,308 | 1,122 | 1,122 | 1,118 | 1,118 | ||||||||||||||||
Bank | 776 | 820 | 821 | 819 | 817 | |||||||||||||||||
Total risk-based capital |
Consolidated | 7,218 | 7,388 | 7,302 | 7,250 | 7,225 | ||||||||||||||||
Bank | 6,440 | 6,956 | 6,784 | 6,801 | 6,689 | |||||||||||||||||
Tier 1 leverage ratio |
Consolidated | 9.04 | % | 9.74 | % | 9.83 | % | 10.01 | % | 10.32 | % | |||||||||||
Bank | 8.67 | 9.56 | 9.49 | 9.78 | 9.96 | |||||||||||||||||
Common equity tier I risk-based capital ratio |
Consolidated | 9.51 | N.A. | N.A. | N.A. | N.A. | ||||||||||||||||
Bank | 9.43 | N.A. | N.A. | N.A. | N.A. | |||||||||||||||||
Tier 1 risk-based capital ratio |
Consolidated | 10.22 | 11.50 | 11.61 | 11.56 | 11.95 | ||||||||||||||||
Bank | 9.81 | 11.28 | 11.22 | 11.29 | 11.51 | |||||||||||||||||
Total risk-based capital ratio |
Consolidated | 12.48 | 13.56 | 13.72 | 13.67 | 14.13 | ||||||||||||||||
Bank | 11.15 | 12.79 | 12.77 | 12.83 | 13.11 |
(1) | On January 1, 2015, we became subject to the Basel III capital requirements including the standardized approach for calculating risk-weighted assets in accordance with subpart D of the final capital rule. Amounts presented prior to January 1, 2015 are subject to the Basel I capital requirements. |
At March 31, 2015, we maintained Basel III transitional capital ratios in excess of the well-capitalized standards established by the FRB. All capital ratios were impacted by the repurchase of 4.9 million common shares repurchased during the 2015 first quarter.
Shareholders Equity
We generate shareholders equity primarily through the retention of earnings, net of dividends. Other potential sources of shareholders equity include issuances of common and preferred stock. Our objective is to maintain capital at an amount commensurate with our risk profile and risk tolerance objectives, to meet both regulatory and market expectations, and to provide the flexibility needed for future growth and business opportunities. Shareholders equity totaled $6.5 billion at March 31, 2015, an increase of $0.2 billion when compared with December 31, 2014.
Dividends
We consider disciplined capital management as a key objective, with dividends representing one component. Our strong capital ratios and expectations for continued earnings growth positions us to continue to actively explore additional capital management opportunities.
On April 21, 2015, our board of directors declared a quarterly cash dividend of $0.06 per common share, payable on July 1, 2015. Also, cash dividends of $0.06 per share were declared on January 22, 2015.
On April 21, 2015, our board of directors also declared a quarterly cash dividend on our 8.50% Series A Non-Cumulative Perpetual Convertible Preferred Stock of $21.25 per share. The dividend is payable on July 15, 2015. Also, cash dividends of $21.25 per share were declared on January 22, 2015.
40
On April 21, 2015, our board of directors also declared a quarterly cash dividend on our Floating Rate Series B Non-Cumulative Perpetual Preferred Stock of $7.44 per share. The dividend is payable on July 15, 2015. Also, cash dividends of $7.38 per share were declared on January 22, 2015.
Share Repurchases
From time to time the board of directors authorizes the Company to repurchase shares of our common stock. Although we announce when the board of directors authorizes share repurchases, we typically do not give any public notice before we repurchase our shares. Future stock repurchases may be private or open-market repurchases, including block transactions, accelerated or delayed block transactions, forward transactions, and similar transactions. Various factors determine the amount and timing of our share repurchases, including our capital requirements, the number of shares we expect to issue for employee benefit plans and acquisitions, market conditions (including the trading price of our stock), and regulatory and legal considerations, including the FRBs response to our capital plan.
On March 11, 2015, Huntington announced that the Federal Reserve did not object to the proposed capital actions included in Huntingtons capital plan submitted to the Federal Reserve in January 2015. These actions included a 17% increase in the quarterly dividend per common share to $0.07, starting in the fourth quarter of 2015, and the potential repurchase of up to $366 million of common stock over the five-quarter period through the second quarter of 2016. During the 2015 first quarter, we repurchased 4.9 million shares, with a weighted average price of $10.45, which completed our prior share repurchase authorization. Purchases of common stock may include open market purchases, privately negotiated transactions, and accelerated repurchase programs.
Fair Value Measurements
The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. We estimate the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. We characterize active markets as those where transaction volumes are sufficient to provide objective pricing information, with reasonably narrow bid/ask spreads, and where received quoted prices do not vary widely. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. Inactive markets are characterized by low transaction volumes, price quotations that vary substantially among market participants, or in which minimal information is released publicly. When observable market prices do not exist, we estimate fair value primarily by using cash flow and other financial modeling methods. Our valuation methods consider factors such as liquidity and concentration concerns and, for the derivatives portfolio, counterparty credit risk. Other factors such as model assumptions, market dislocations, and unexpected correlations can affect estimates of fair value. Changes in these underlying factors, assumptions, or estimates in any of these areas could materially impact the amount of revenue or loss recorded.
The FASB ASC Topic 820, Fair Value Measurements, establishes a framework for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and establishes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the fair value measurement date. The three levels are defined as follows:
| Level 1 quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
| Level 3 inputs that are unobservable and significant to the fair value measurement. Financial instruments are considered Level 3 when values are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unobservable. |
At the end of each quarter, we assess the valuation hierarchy for each asset or liability measured. As necessary, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs at the measurement date. The fair values measured at each level of the fair value hierarchy, additional discussion regarding fair value measurements, and a brief description of how fair value is determined for categories that have unobservable inputs, can be found in Note 15 of the Notes to Unaudited Condensed Consolidated Financial Statements.
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Overview
Our business segments are based on our internally-aligned segment leadership structure, which is how we monitor results and assess performance. We have five major business segments: Retail and Business Banking, Commercial Banking, Automobile Finance and Commercial Real Estate (AFCRE), Regional Banking and The Huntington Private Client Group (RBHPCG), and Home Lending. A Treasury / Other function includes technology and operations, other unallocated assets, liabilities, revenue, and expense.
Business segment results are determined based upon our management reporting system, which assigns balance sheet and income statement items to each of the business segments. The process is designed around our organizational and management structure and, accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions.
Revenue Sharing
Revenue is recorded in the business segment responsible for the related product or service. Fee sharing is recorded to allocate portions of such revenue to other business segments involved in selling to, or providing service to, customers. Results of operations for the business segments reflect these fee sharing allocations.
Expense Allocation
The management accounting process that develops the business segment reporting utilizes various estimates and allocation methodologies to measure the performance of the business segments. Expenses are allocated to business segments using a two-phase approach. The first phase consists of measuring and assigning unit costs (activity-based costs) to activities related to product origination and servicing. These activity-based costs are then extended, based on volumes, with the resulting amount allocated to business segments that own the related products. The second phase consists of the allocation of overhead costs to all five business segments from Treasury / Other. We utilize a full-allocation methodology, where all Treasury / Other expenses, except reported Significant Items, and a small amount of other residual unallocated expenses, are allocated to the five business segments.
Funds Transfer Pricing (FTP)
We use an active and centralized FTP methodology to attribute appropriate income to the business segments. The intent of the FTP methodology is to transfer interest rate risk from the business segments by providing matched duration funding of assets and liabilities. The result is to centralize the financial impact, management, and reporting of interest rate risk in the Treasury / Other function where it can be centrally monitored and managed. The Treasury / Other function charges (credits) an internal cost of funds for assets held in (or pays for funding provided by) each business segment. The FTP rate is based on prevailing market interest rates for comparable duration assets (or liabilities).
Net Income by Business Segment
The segregation of net income by business segment for the quarters ended March 31, 2015, and March 31, 2014, is presented in the following table:
Table 26Net Income (Loss) by Business Segment
Three Months Ended March 31, | ||||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Retail and Business Banking |
$ | 52,699 | $ | 45,544 | ||||
Commercial Banking |
43,263 | 32,039 | ||||||
AFCRE |
42,277 | 41,286 | ||||||
RBHPCG |
2,275 | 6,637 | ||||||
Home Lending |
(4,677 | ) | (8,919 | ) | ||||
Treasury/Other |
30,017 | 32,556 | ||||||
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Total net income |
$ | 165,854 | $ | 149,143 | ||||
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Treasury / Other
The Treasury / Other function includes revenue and expense related to assets, liabilities, and equity not directly assigned or allocated to one of the five business segments. Other assets include investment securities and bank owned life insurance. The financial impact associated with our FTP methodology, as described above, is also included.
Net interest income includes the impact of administering our investment securities portfolios and the net impact of derivatives used to hedge interest rate sensitivity. Noninterest income includes miscellaneous fee income not allocated to other business segments, such as bank owned life insurance income and any investment security and trading asset gains or losses. Noninterest expense includes certain corporate administrative, merger, and other miscellaneous expenses not allocated to other business segments. The provision for income taxes for the business segments is calculated at a statutory 35% tax rate, though our overall effective tax rate is lower. As a result, Treasury / Other reflects a credit for income taxes representing the difference between the lower actual effective tax rate and the statutory tax rate used to allocate income taxes to the business segments.
Optimal Customer Relationship (OCR)
Our OCR strategy is focused on building and deepening relationships with our customers through superior interactions, product penetration, and quality of service. We will deliver high-quality customer and prospect interactions through a fully integrated sales culture which will include all partners necessary to deliver a total Huntington solution. The quality of our relationships will lead to our ability to be the primary bank for our customers, yielding quality, annuitized revenue and profitable share of customers overall financial services. We believe our relationship oriented approach will drive a competitive advantage through our local market delivery channels.
CONSUMER OCR PERFORMANCE
For consumer OCR performance there are three key performance metrics: (1) the number of checking account households, (2) the number of product penetration per consumer checking household, and (3) the revenue generated from the consumer households of all business segments.
The growth in consumer checking account number of households is a result of both new sales of checking accounts and improved retention of existing checking account households. The overall objective is to grow the number of households, along with an increase in product penetration.
We use the checking account as a measure since it typically represents the primary banking relationship product. We count additional services by type, not number, of services. For example, a household that has one checking account and one mortgage, we count as having two services. A household with four checking accounts, we count as having one service. The household relationship utilizing 6+ services is viewed to be more profitable and loyal. The overall objective, therefore, is to decrease the percentage of 1-5 services per consumer checking account household, while increasing the percentage of those with 6+ services.
The following table presents consumer checking account household OCR metrics:
Table 27Consumer Checking Household OCR Cross-sell Report
2015 | 2014 | |||||||||||||||||||
First | Fourth | Third | Second | First | ||||||||||||||||
Number of households (2) (3) |
1,475,241 | 1,454,402 | 1,453,584 | 1,391,406 | 1,359,158 | |||||||||||||||
Product Penetration by Number of Services (1) |
||||||||||||||||||||
1 Service |
2.8 | % | 2.8 | % | 3.3 | % | 3.0 | % | 3.0 | % | ||||||||||
2-3 Services |
17.3 | 17.9 | 18.4 | 18.4 | 18.8 | |||||||||||||||
4-5 Services |
29.7 | 29.9 | 29.6 | 29.9 | 30.2 | |||||||||||||||
6+ Services |
50.2 | 49.4 | 48.7 | 48.7 | 48.0 | |||||||||||||||
Total revenue (in millions) |
$ | 260.5 | $ | 260.5 | $ | 260.0 | $ | 256.6 | $ | 239.9 | ||||||||||
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(1) | The definitions and measurements used in our OCR process are periodically reviewed and updated prospectively. |
(2) | On March 1, 2014, Huntington acquired 9,904 Camco households. |
(3) | On September 12, 2014, Huntington acquired 37,939 Bank of America households. |
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Our emphasis on cross-sell, coupled with customers being attracted to the benefits offered through our Fair Play banking philosophy with programs such as 24-Hour Grace® on overdrafts and Asterisk-Free Checking, are having a positive effect. The percent of consumer households with 6 or more product services at the end of the 2015 first quarter was 50.2%, up from 48.0% from the year-ago quarter due to increased product sales and services provided.
COMMERCIAL OCR PERFORMANCE
For commercial OCR performance, there are three key performance metrics: (1) the number of commercial relationships, (2) the number of services penetration per commercial relationship, and (3) the revenue generated. Commercial relationships include relationships from all business segments.
The growth in the number of commercial relationships is a result of both new sales of checking accounts and improved retention of existing commercial accounts. The overall objective is to grow the number of relationships, along with an increase in product service distribution.
The commercial relationship is defined as a business banking or commercial banking customer with a checking account relationship. We use this metric because we believe that the checking account anchors a business relationship and creates the opportunity to increase our cross-sell activity. Multiple sales of the same type of service are counted as one service, the same as consumer.
The following table presents commercial relationship OCR metrics:
Table 28Commercial Relationship OCR Cross-sell Report
2015 | 2014 | |||||||||||||||||||
First | Fourth | Third | Second | First | ||||||||||||||||
Commercial Relationships (1) |
166,710 | 164,726 | 164,079 | 159,290 | 159,973 | |||||||||||||||
Product Penetration by Number of Services (2) |
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1 Service |
15.3 | % | 15.7 | % | 16.6 | % | 16.9 | % | 19.4 | % | ||||||||||
2-3 Services |
42.0 | 42.4 | 42.2 | 41.8 | 41.1 | |||||||||||||||
4+ Services |
42.7 | 41.9 | 41.2 | 41.3 | 39.5 | |||||||||||||||
Total revenue (in millions) |
$ | 216.9 | $ | 212.8 | $ | 213.1 | $ | 211.8$ | 213.3 | |||||||||||
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(1) | Checking account required. |
(2) | The definitions and measurements used in our OCR process are periodically reviewed and updated prospectively. |
By focusing on targeted relationships, we are able to achieve higher product service penetration among our commercial relationships and leverage these relationships to generate a deeper share of wallet. The percent of commercial relationships with 4 or more product services at the end of the 2015 first quarter was 42.7%, up from 39.5% from the year-ago quarter. Total commercial relationship revenue for the 2015 first quarter was $216.9 million, up $3.6 million, or 2%, from the year-ago quarter.
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Table 29Average Loans/Leases and Deposits by Business Segment
Three Months Ended March 31, 2015 | ||||||||||||||||||||||||||||
(dollar amounts in millions) |
Retail and Business Banking |
Commercial Banking |
AFCRE | RBHPCG | Home Lending |
Treasury / Other |
TOTAL | |||||||||||||||||||||
Average Loans/Leases |
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Commercial and industrial |
$ | 3,958 | $ | 11,814 | $ | 2,608 | $ | 635 | $ | | $ | 101 | $ | 19,116 | ||||||||||||||
Commercial real estate |
328 | 322 | 4,368 | 145 | | (1 | ) | 5,162 | ||||||||||||||||||||
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Total commercial |
4,286 | 12,136 | 6,976 | 780 | | 100 | 24,278 | |||||||||||||||||||||
Automobile |
| | 8,783 | | | | 8,783 | |||||||||||||||||||||
Home equity |
7,619 | | 1 | 713 | 165 | (14 | ) | 8,484 | ||||||||||||||||||||
Residential mortgage |
1,240 | | | 1,385 | 3,184 | 1 | 5,810 | |||||||||||||||||||||
Other consumer |
379 | 3 | 19 | 11 | 9 | 4 | 425 | |||||||||||||||||||||
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Total consumer |
9,238 | 3 | 8,803 | 2,109 | 3,358 | (9 | ) | 23,502 | ||||||||||||||||||||
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Total loans and leases |
$ | 13,524 | $ | 12,139 | $ | 15,779 | $ | 2,889 | $ | 3,358 | $ | 91 | $ | 47,780 | ||||||||||||||
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Average Deposits |
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Demand depositsnoninterest-bearing |
$ | 6,747 | $ | 5,363 | $ | 892 | $ | 1,636 | $ | 317 | $ | 298 | $ | 15,253 | ||||||||||||||
Demand depositsinterest-bearing |
4,936 | 795 | 69 | 353 | | 20 | 6,173 | |||||||||||||||||||||
Money market deposits |
10,165 | 4,302 | 256 | 4,635 | | 10 | 19,368 | |||||||||||||||||||||
Savings and other domestic deposits |
5,012 | 75 | 6 | 74 | 3 | (1 | ) | 5,169 | ||||||||||||||||||||
Core certificates of deposit |
2,768 | 9 | 1 | 35 | | 1 | 2,814 | |||||||||||||||||||||
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Total core deposits |
29,628 | 10,544 | 1,224 | 6,733 | 320 | 328 | 48,777 | |||||||||||||||||||||
Other deposits |
98 | 595 | 152 | 3 | 1 | 2,503 | 3,352 | |||||||||||||||||||||
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Total deposits |
$ | 29,726 | $ | 11,139 | $ | 1,376 | $ | 6,736 | $ | 321 | $ | 2,831 | $ | 52,129 | ||||||||||||||
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Three Months Ended March 31, 2014 | ||||||||||||||||||||||||||||
(dollar amounts in millions) |
Retail and Business Banking |
Commercial Banking |
AFCRE | RBHPCG | Home Lending |
Treasury / Other |
TOTAL | |||||||||||||||||||||
Average Loans/Leases |
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Commercial and industrial |
$ | 3,569 | $ | 10,963 | $ | 2,412 | $ | 613 | $ | | $ | 74 | $ | 17,631 | ||||||||||||||
Commercial real estate |
365 | 300 | 4,035 | 202 | | (1 | ) | 4,901 | ||||||||||||||||||||
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Total commercial |
3,934 | 11,263 | 6,447 | 815 | | 73 | 22,532 | |||||||||||||||||||||
Automobile |
| | 6,788 | | | (2 | ) | 6,786 | ||||||||||||||||||||
Home equity |
7,457 | 2 | 1 | 735 | 167 | (22 | ) | 8,340 | ||||||||||||||||||||
Residential mortgage |
1,089 | | | 1,281 | 3,010 | (1 | ) | 5,379 | ||||||||||||||||||||
Other consumer |
349 | 4 | 35 | 12 | 22 | (36 | ) | 386 | ||||||||||||||||||||
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Total consumer |
8,895 | 6 | 6,824 | 2,028 | 3,199 | (61 | ) | 20,891 | ||||||||||||||||||||
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Total loans and leases |
$ | 12,829 | $ | 11,269 | $ | 13,271 | $ | 2,843 | $ | 3,199 | $ | 12 | $ | 43,423 | ||||||||||||||
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Average Deposits |
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Demand depositsnoninterest-bearing |
$ | 5,696 | $ | 4,608 | $ | 700 | $ | 1,663 | $ | 257 | $ | 268 | $ | 13,192 | ||||||||||||||
Demand depositsinterest-bearing |
4,687 | 695 | 64 | 317 | | 12 | 5,775 | |||||||||||||||||||||
Money market deposits |
9,800 | 3,788 | 258 | 3,794 | | 8 | 17,648 | |||||||||||||||||||||
Savings and other domestic deposits |
4,800 | 85 | 5 | 79 | | (2 | ) | 4,967 | ||||||||||||||||||||
Core certificates of deposit |
3,546 | 15 | 1 | 50 | | 1 | 3,613 | |||||||||||||||||||||
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Total core deposits |
28,529 | 9,191 | 1,028 | 5,903 | 257 | 287 | 45,195 | |||||||||||||||||||||
Other deposits |
104 | 906 | 77 | 3 | | 1,304 | 2,394 | |||||||||||||||||||||
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Total deposits |
$ | 28,633 | $ | 10,097 | $ | 1,105 | $ | 5,906 | $ | 257 | $ | 1,591 | $ | 47,589 | ||||||||||||||
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Retail and Business Banking
Table 30Key Performance Indicators for Retail and Business Banking
Three Months Ended March 31, | Change | |||||||||||||||
(dollar amounts in thousands unless otherwise noted) |
2015 | 2014 | Amount | Percent | ||||||||||||
Net interest income |
$ | 248,650 | $ | 219,841 | $ | 28,809 | 13 | % | ||||||||
Provision for credit losses |
7,152 | 7,460 | (308 | ) | (4 | ) | ||||||||||
Noninterest income |
95,759 | 92,962 | 2,797 | 3 | ||||||||||||
Noninterest expense |
256,182 | 235,275 | 20,907 | 9 | ||||||||||||
Provision for income taxes |
28,376 | 24,524 | 3,852 | 16 | ||||||||||||
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Net income |
$ | 52,699 | $ | 45,544 | $ | 7,155 | 16 | % | ||||||||
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Number of employees (average full-time equivalent) |
5,209 | 5,122 | 87 | 2 | % | |||||||||||
Total average assets (in millions) |
$ | 15,456 | $ | 14,536 | $ | 920 | 6 | |||||||||
Total average loans/leases (in millions) |
13,524 | 12,829 | 695 | 5 | ||||||||||||
Total average deposits (in millions) |
29,726 | 28,633 | 1,093 | 4 | ||||||||||||
Net interest margin |
3.46 | % | 3.15 | % | 0.31 | % | 10 | |||||||||
NCOs |
$ | 13,151 | $ | 23,968 | $ | (10,817 | ) | (45 | ) | |||||||
NCOs as a % of average loans and leases |
0.39 | % | 0.75 | % | (0.36 | )% | (48 | ) | ||||||||
Return on average common equity |
16.8 | 14.1 | 2.7 | 19 |
2015 First Three Months vs. 2014 First Three Months
Retail and Business Banking reported net income of $52.7 million in the first three-month period of 2015. This was an increase of $7.2 million, or 16%, compared to the year-ago period. The increase in net income reflected a combination of factors described below.
The increase in net interest income from the year-ago period reflected:
| $0.7 billion, or 5%, increase in average loans combined with a 12 basis point increase in loan spreads, primarily as a result of a reduction in the funds transfer price rates assigned to loans and improved effective rates. |
| $1.1 billion, or 4%, increase in average deposits combined with a 22 basis point increase in deposit spreads, primarily as a result of an increase in the funds transfer price rates assigned to deposits and lower effective rates. |
The decrease in the provision for credit losses from the year-ago period reflected:
| A $10.8 million, or 45%, decrease in NCOs, offset by enhancements made to the ACL estimation process. |
The increase in total average loans and leases from the year-ago period reflected:
| $352 million, or 9%, increase in commercial loans due to the impact of the Camco acquisition and core growth. |
| $343 million, or 4%, increase in consumer loans, primarily due to growth in home equity lines of credit, credit card, and residential mortgages, as well as the impact of the Camco acquisition. |
The increase in total average deposits from the year-ago period reflected:
| $1 billion in deposit growth from the Camco acquisition in the 2014 first quarter and the Bank of America branch acquisition in the 2014 third quarter. |
| $177 million deposit growth from our In-store branch network. |
46
The increase in noninterest income from the year-ago period reflected:
| $3.8 million, or 16%, increase in electronic banking income, primarily due to higher transaction volumes and an increase in the number of households. |
| $1.4 million, or 54%, increase in mortgage banking income, primarily driven by increased referrals to Home Lending due to an improved mortgage refinance market in the 2015 first quarter compared to 2014. |
Partially offset by:
| $2.5 million, or 5%, decrease in service charges on deposit accounts, primarily reflecting the decline from the late July 2014 implementation of changes in consumer products partially offset by an increase in consumer households and changing customer usage patterns. |
The increase in noninterest expense from the year-ago period reflected:
| $12.2 million, or 12%, increase in other noninterest expense, primarily reflecting an increase in allocated overhead expense and additional expense related to the Bank of America branch and the Camco acquisitions. |
| $3.8 million, or 5%, increase in personnel costs, primarily due to the Bank of America branch acquisition in the 2014 third quarter and the Camco acquisition in the 2014 first quarter. The increase also reflects additional cost from increased employee benefit expense and annual merit salary adjustments. |
| $2.8 million, or 29%, increase in marketing, primarily due to the timing of direct mail campaigns in 2015. |
| $1.6 million, or 17%, increase in outside data processing and other services expense, mainly the result of transaction volumes associated with debit and credit card activity. |
47
Commercial Banking
Table 31Key Performance Indicators for Commercial Banking
Three Months Ended March 31, | Change | |||||||||||||||
(dollar amounts in thousands unless otherwise noted) |
2015 | 2014 | Amount | Percent | ||||||||||||
Net interest income |
$ | 74,918 | $ | 70,943 | $ | 3,975 | 6 | % | ||||||||
Provision for credit losses |
6,835 | 11,547 | (4,712 | ) | (41 | ) | ||||||||||
Noninterest income |
54,893 | 50,316 | 4,577 | 9 | ||||||||||||
Noninterest expense |
56,417 | 60,421 | (4,004 | ) | (7 | ) | ||||||||||
Provision for income taxes |
23,296 | 17,252 | 6,044 | 35 | ||||||||||||
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Net income |
$ | 43,263 | $ | 32,039 | $ | 11,224 | 35 | % | ||||||||
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Number of employees (average full-time equivalent) |
1,016 | 1,044 | (28 | ) | (3 | )% | ||||||||||
Total average assets (in millions) |
$ | 14,979 | $ | 13,109 | $ | 1,870 | 14 | |||||||||
Total average loans/leases (in millions) |
12,139 | 11,269 | 870 | 8 | ||||||||||||
Total average deposits (in millions) |
11,139 | 10,097 | 1,042 | 10 | ||||||||||||
Net interest margin |
2.40 | % | 2.56 | % | (0.16 | )% | (6 | ) | ||||||||
NCOs |
$ | 14,370 | $ | 2,458 | $ | 11,912 | 485 | |||||||||
NCOs as a % of average loans and leases |
0.47 | % | 0.09 | % | 0.38 | % | 422 | |||||||||
Return on average common equity |
14.8 | 9.4 | 5.4 | 57 |
2015 First Three Months vs. 2014 First Three Months
Commercial Banking reported net income of $43.3 million in the first three-month period of 2015. This was an increase of $11.2 million, or 35%, compared to the year-ago period. The increase in net income reflected a combination of factors described below.
The increase in net interest income from the year-ago period reflected:
| $0.9 billion, or 8%, increase in average loans/leases. |
| $0.8 billion, or 130%, increase in average available-for-sale securities, primarily related to direct purchase municipal instruments. |
| $1.0 billion, or 10%, increase in average deposits. |
Partially offset by:
| 16 basis point decrease in the net interest margin, due to a 12 basis point decrease in the mix and yield on earning assets, and a 4 basis point increase in the mix and yield on total interest-bearing liabilities primarily related to a decrease in fund transfer price rates assigned to deposits. |
The decrease in the provision for credit losses from the year-ago period reflected:
| Enhancements made to the ACL estimation process, partially offset by an $11.9 million increase in NCOs. |
The increase in total average assets from the year-ago period reflected:
| $0.8 billion, or 28%, increase in the specialty verticals loan and bond financing portfolio, driven primarily by $0.6 billion, or 190%, increase in the international loan portfolio consisting of discounted bankers acceptances and foreign insured receivables, and $0.2 billion, or 10%, increase in the Healthcare loan and bond financing portfolio due to a strategic focus on the banking needs of the healthcare industry, specifically targeting alternate site real estate, seniors real estate, medical technology, community hospitals, metro hospitals, and health care services. |
| $0.6 billion, or 17%, increase in the Asset Finance loan and bond financing portfolio, which primarily reflected our focus on developing vertical strategies in public capital, business aircraft, rail industry, lender finance, and syndications. |
48
| $0.3 billion, or 14%, increase in the Corporate Banking loan portfolio due to establishing relationships with targeted prospects within our footprint. |
The increase in total average deposits from the year-ago period reflected:
| $1.4 billion, or 15%, increase in core deposits, which primarily reflected a $0.8 billion, or 16%, increase in noninterest-bearing demand deposits. Middle market accounts, such as not-for-profit universities and healthcare, contributed $1.1 billion of the balance growth, while large corporate accounts contributed $0.3 billion. |
Partially offset by:
| $0.3 billion, or 34%, decrease in non-core deposits. |
The increase in noninterest income from the year-ago period reflected:
| $2.1 million, or 30%, increase in commitment and other loan related fees. |
| $1.4 million, or 12%, increase in service charges on deposit accounts and other treasury management related revenue, primarily due to a new commercial card product implemented in late 2013, as well as strong core cash management growth. |
| $1.1 million, or 12%, increase in capital market fees attributed to a $0.7 million, or 365%, increase in commodities revenue, $0.3 million, or 7%, increase in institutional brokerage revenue, and a $0.2 million, or 9%, increase in foreign exchange revenue. |
The decrease in noninterest expense from the year-ago period reflected:
| $4.8 million, or 48%, decrease in allocated overhead expense. |
Partially offset by:
| $1.2 million, or 3%, increase in personnel expense, primarily reflecting a 2% increase in base salaries and benefits, as well as an 11% increase in incentives attributed to growth in fee income products. |
49
Automobile Finance and Commercial Real Estate
Table 32Key Performance Indicators for Automobile Finance and Commercial Real Estate
Three Months Ended March 31, | Change | |||||||||||||||
(dollar amounts in thousands unless otherwise noted) |
2015 | 2014 | Amount | Percent | ||||||||||||
Net interest income |
$ | 95,162 | $ | 88,580 | $ | 6,582 | 7 | % | ||||||||
Reduction in allowance for credit losses |
(1,383 | ) | (8,608 | ) | (7,225 | ) | (84 | ) | ||||||||
Noninterest income |
4,675 | 4,493 | 182 | 4 | ||||||||||||
Noninterest expense |
36,178 | 38,164 | (1,986 | ) | (5 | ) | ||||||||||
Provision for income taxes |
22,765 | 22,231 | 534 | 2 | ||||||||||||
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Net income |
$ | 42,277 | $ | 41,286 | $ | 991 | 2 | % | ||||||||
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Number of employees (average full-time equivalent) |
289 | 270 | 19 | 7 | % | |||||||||||
Total average assets (in millions) |
$ | 16,632 | $ | 13,587 | $ | 3,045 | 22 | |||||||||
Total average loans/leases (in millions) |
15,779 | 13,271 | 2,508 | 19 | ||||||||||||
Total average deposits (in millions) |
1,376 | 1,105 | 271 | 25 | ||||||||||||
Net interest margin |
2.40 | % | 2.65 | % | (0.25 | )% | (9 | ) | ||||||||
NCOs |
$ | (5,373 | ) | $ | 4,890 | $ | 10,263 | N.R. | ||||||||
NCOs as a % of average loans and leases |
(0.14 | )% | 0.15 | % | (0.29 | )% | N.R. | |||||||||
Return on average common equity |
25.0 | 28.2 | (3.2 | ) | (11 | ) |
N.R.Not relevant.
2015 First Three Months vs. 2014 First Three Months
AFCRE reported net income of $42.3 million in the first three-month period of 2015. This was an increase of $1.0 million, or 2%, compared to the year-ago period. The increase in net income reflected a combination of factors described below.
The increase in net interest income from the year-ago period reflected:
| $2.0 billion, or 29%, increase in average automobile loans, primarily due to continued strong origination volume which has exceeded $1.0 billion for each of the last 5 quarters. |
Partially offset by:
| 25 basis point decrease in the net interest margin, primarily due to a 20 basis point reduction in loan spreads. This decline primarily reflects the impact of competitive pricing pressures. |
The decrease in the reduction in allowance for credit losses from the year-ago period reflected:
| Less improvement in credit quality than what was experienced in the year-ago quarter, enhancements made to the ACL estimation process, partially offset by lower NCOs. |
The decrease in noninterest expense from the year-ago period reflected:
| $3.0 million, or 11%, decrease in other noninterest expense, primarily due to a $1.5 million decrease in allocated expenses, generally reflecting improved efficiencies and cost allocation methodologies. |
Partially offset by:
| $0.7 million, or 10%, increase in personnel costs, primarily due to a higher number of employees, resulting from community development activities. |
| $0.3 million, or 16%, increase in deposit and other insurance. |
50
Regional Banking and The Huntington Private Client Group
Table 33Key Performance Indicators for Regional Banking and The Huntington Private Client Group
Three Months Ended March 31, | Change | |||||||||||||||
(dollar amounts in thousands unless otherwise noted) |
2015 | 2014 | Amount | Percent | ||||||||||||
Net interest income |
$ | 26,805 | $ | 25,438 | $ | 1,367 | 5 | % | ||||||||
Provision for credit losses |
2,645 | 2,319 | 326 | 14 | ||||||||||||
Noninterest income |
40,475 | 43,114 | (2,639 | ) | (6 | ) | ||||||||||
Noninterest expense |
61,135 | 56,022 | 5,113 | 9 | ||||||||||||
Provision for income taxes |
1,225 | 3,574 | (2,349 | ) | (66 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 2,275 | $ | 6,637 | $ | (4,362 | ) | (66 | )% | |||||||
|
|
|
|
|
|
|
|
|||||||||
Number of employees (average full-time equivalent) |
1,023 | 1,046 | (23 | ) | (2 | )% | ||||||||||
Total average assets (in millions) |
$ | 3,329 | $ | 3,778 | $ | (449 | ) | (12 | ) | |||||||
Total average loans/leases (in millions) |
2,889 | 2,843 | 46 | 2 | ||||||||||||
Total average deposits (in millions) |
6,736 | 5,906 | 830 | 14 | ||||||||||||
Net interest margin |
1.63 | % | 1.81 | % | (0.18 | )% | (10 | ) | ||||||||
NCOs |
$ | 885 | $ | 3,252 | $ | (2,367 | ) | (73 | ) | |||||||
NCOs as a % of average loans and leases |
0.12 | % | 0.46 | % | (0.34 | )% | (74 | ) | ||||||||
Return on average common equity |
2.8 | 5.3 | (2.5 | ) | (47 | ) | ||||||||||
Total assets under management (in billions)eop |
$ | 15.0 | $ | 16.5 | $ | (1.5 | ) | (9 | ) | |||||||
Total trust assets (in billions)eop |
87.2 | 81.6 | 5.6 | 7 |
eop - End of Period.
2015 First Three Months vs. 2014 First Three Months
RBHPCG reported net income of $2.3 million in the first three-month period of 2015. This was a decrease of $4.4 million, or 66%, compared to the year-ago period. The decrease in net income reflected a combination of factors described below.
The increase in net interest income from the year-ago period reflected:
| $0.8 billion, or 14%, increase in average deposits, primarily due to growth in commercial money market deposits. |
The increase in the provision for credit losses from the year-ago period reflected:
| Enhancements made to the ACL process, partially offset by a $2.4 million, or 73%, decrease in NCOs. |
The decrease in noninterest income from the year-ago period reflected:
| $1.3 million, or 12%, decrease in brokerage income, primarily due to a sales shift from packaged products to fee-based products resulting in lower initial revenue due to a shift from up-front transaction fees to recurring fees. |
| $0.5 million, or 2%, decrease in trust services income, primarily due to a decrease in total assets under management which reflects a decrease in proprietary mutual funds. |
The increase in noninterest expense from the year-ago period reflected:
| $5.0 million, or 42%, increase in other noninterest expense, primarily due to increased allocated product costs and increased personnel costs. |
51
Home Lending
Table 34Key Performance Indicators for Home Lending
Three Months Ended March 31, | Change | |||||||||||||||
(dollar amounts in thousands unless otherwise noted) |
2015 | 2014 | Amount | Percent | ||||||||||||
Net interest income |
$ | 15,277 | $ | 13,028 | $ | 2,249 | 17 | % | ||||||||
Provision for credit losses |
5,342 | 11,912 | (6,570 | ) | (55 | ) | ||||||||||
Noninterest income |
18,658 | 20,286 | (1,628 | ) | (8 | ) | ||||||||||
Noninterest expense |
35,789 | 35,123 | 666 | 2 | ||||||||||||
Provision for income taxes |
(2,519 | ) | (4,802 | ) | (2,283 | ) | (48 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | (4,677 | ) | $ | (8,919 | ) | $ | 4,242 | 48 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Number of employees (average full-time equivalent) |
925 | 982 | (57 | ) | (6 | )% | ||||||||||
Total average assets (in millions) |
$ | 3,896 | $ | 3,688 | $ | 208 | 6 | |||||||||
Total average loans/leases (in millions) |
3,358 | 3,199 | 159 | 5 | ||||||||||||
Total average deposits (in millions) |
321 | 257 | 64 | 25 | ||||||||||||
Net interest margin |
1.67 | % | 1.52 | % | 0.15 | % | 10 | |||||||||
NCOs |
$ | 1,399 | $ | 8,418 | $ | (7,019 | ) | (83 | ) | |||||||
NCOs as a % of average loans and leases |
0.17 | % | 1.05 | % | (0.88 | )% | (84 | ) | ||||||||
Return on average common equity |
(11.2 | ) | (20.8 | ) | 9.6 | (46 | ) | |||||||||
Mortgage banking origination volume (in millions) |
$ | 980 | $ | 657 | $ | 323 | 49 |
2015 First Three Months vs. 2014 First Three Months
Home Lending reported a net loss of $4.7 million in the first three-month period of 2015 compared to a net loss of $8.9 million in the year-ago period. Home Lending supports the origination and servicing of mortgage loans across all segments. The decrease in net loss reflected a combination of factors described below.
The increase in net interest income from the year-ago period reflected:
| 15 basis point increase in the net interest margin, primarily due to a 9 basis point increase in loan spreads on loans held for sale driven by higher yields. |
| $0.2 billion, or 5%, increase in average loans. |
The decrease in provision for credit losses reflected:
| A $7.0 million, or 83%, decrease in NCOs, partially offset by enhancements made to the ACL estimation process. |
The decrease in noninterest income from the year-ago period reflected:
| $1.7 million, or 9%, decrease in mortgage banking income, primarily related to the net loss on MSR hedging activity, partially offset by the impact of higher origination volume. |
The increase in noninterest expense from the year-ago period reflected:
| $2.8 million, or 15%, increase in personnel costs, primarily due to commission expense related to higher origination volume. |
Partially offset by:
| $2.4 million, or 25%, decrease in other noninterest expense, primarily due to the goodwill impairment realized in the 2014 first quarter. |
52
Forward-Looking Statements
This report, including MD&A, contains certain forward-looking statements, including certain plans, expectations, goals, projections, and statements, which are subject to numerous assumptions, risks, and uncertainties. Statements that do not describe historical or current facts, including statements about beliefs and expectations, are forward-looking statements. Forward-looking statements may be identified by words such as expect, anticipate, believe, intend, estimate, plan, target, goal, or similar expressions, or future or conditional verbs such as will, may, might, should, would, could, or similar variations. The forward-looking statements are intended to be subject to the safe harbor provided by Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995.
While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those contained or implied in the forward-looking statements: (1) worsening of credit quality performance due to a number of factors such as the underlying value of collateral that could prove less valuable than otherwise assumed and assumed cash flows may be worse than expected, (2) changes in general economic, political, or industry conditions, uncertainty in U.S. fiscal and monetary policy, including the interest rate policies of the Federal Reserve Board, volatility and disruptions in global capital and credit markets, (3) movements in interest rates, (4) competitive pressures on product pricing and services, (5) success, impact, and timing of our business strategies, including market acceptance of any new products or services implementing our Fair Play banking philosophy, (6) changes in accounting policies and principles and the accuracy of our assumptions and estimates used to prepare our financial statements, (7) extended disruption of vital infrastructure, (8) the final outcome of significant litigation, (9) the nature, extent, timing, and results of governmental actions, examinations, reviews, reforms, regulations, and interpretations, including those related to the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III regulatory capital reforms, as well as those involving the OCC, Federal Reserve, FDIC, and CFPB, and (10) the outcome of judicial and regulatory decisions regarding practices in the residential mortgage industry, including among other things the processes followed for foreclosing residential mortgages. Additional factors that could cause results to differ materially from those described above can be found in our 2014 Annual Report on Form 10-K and documents subsequently filed by us with the Securities and Exchange Commission.
All forward-looking statements speak only as of the date they are made and are based on information available at that time. We assume no obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance on such statements.
Non-Regulatory Capital Ratios
In addition to capital ratios defined by banking regulators, the Company considers various other measures when evaluating capital utilization and adequacy, including:
| Tangible common equity to tangible assets, |
| Tier 1 common equity to risk-weighted assets using Basel I definitions, and |
| Tangible common equity to risk-weighted assets using Basel I and Basel III definitions. |
These non-regulatory capital ratios are viewed by management as useful additional methods of reflecting the level of capital available to withstand unexpected market conditions. Additionally, presentation of these ratios allows readers to compare the Companys capitalization to other financial services companies. These ratios differ from capital ratios defined by banking regulators principally in that the numerator excludes preferred securities, the nature and extent of which varies among different financial services companies. These ratios are not defined in Generally Accepted Accounting Principles (GAAP) or federal banking regulations. As a result, these non-regulatory capital ratios disclosed by the Company are considered non-GAAP financial measures.
Because there are no standardized definitions for these non-regulatory capital ratios, the Companys calculation methods may differ from those used by other financial services companies. Also, there may be limits in the usefulness of these measures to investors. As a result, the Company encourages readers to consider the consolidated financial statements and other financial information contained in this Form 10-Q in their entirety, and not to rely on any single financial measure.
53
Risk Factors
Information on risk is discussed in the Risk Factors section included in Item 1A of our 2014 Form 10-K. Additional information regarding risk factors can also be found in the Risk Management and Capital discussion of this report.
Critical Accounting Policies and Use of Significant Estimates
Our financial statements are prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to establish critical accounting policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in our financial statements. Note 1 of Notes to Consolidated Financial Statements included in our December 31, 2014 Form 10-K, as supplemented by this report, lists significant accounting policies we use in the development and presentation of our financial statements. This MD&A, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors necessary for an understanding and evaluation of our company, financial position, results of operations, and cash flows.
An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements if a different amount within a range of estimates were used or if estimates changed from period to period. Estimates are made under facts and circumstances at a point in time, and changes in those facts and circumstances could produce results that significantly differ from when those estimates were made.
Our most significant accounting estimates relate to our ACL, income taxes and deferred tax assets, and fair value measurements of investment securities, goodwill, pension, and other real estate owned. These significant accounting estimates and their related application are discussed in our December 31, 2014 Form 10-K.
Recent Accounting Pronouncements and Developments
Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements discusses new accounting pronouncements adopted during 2015 and the expected impact of accounting pronouncements recently issued but not yet required to be adopted. To the extent the adoption of new accounting standards materially affect financial condition, results of operations, or liquidity, the impacts are discussed in the applicable section of this MD&A and the Notes to Unaudited Condensed Consolidated Financial Statements.
54
Huntington Bancshares Incorporated
Condensed Consolidated Balance Sheets
(Unaudited)
2015 | 2014 | |||||||
(dollar amounts in thousands, except number of shares) |
March 31, | December 31, | ||||||
Assets |
||||||||
Cash and due from banks |
$ | 899,876 | $ | 1,220,565 | ||||
Interest-bearing deposits in banks |
74,030 | 64,559 | ||||||
Trading account securities |
47,626 | 42,191 | ||||||
Loans held for sale (includes $478,864 and $354,888 respectively, measured at fair value) (1) |
1,620,552 | 416,327 | ||||||
Available-for-sale and other securities |
9,922,399 | 9,384,670 | ||||||
Held-to-maturity securities |
3,336,663 | 3,379,905 | ||||||
Loans and leases (includes $43,655 and $50,617 respectively, measured at fair value) (1) |
47,695,632 | 47,655,726 | ||||||
Allowance for loan and lease losses |
(605,126 | ) | (605,196 | ) | ||||
|
|
|
|
|||||
Net loans and leases |
47,090,506 | 47,050,530 | ||||||
|
|
|
|
|||||
Bank owned life insurance |
1,725,388 | 1,718,436 | ||||||
Premises and equipment |
607,263 | 616,407 | ||||||
Goodwill |
678,369 | 522,541 | ||||||
Other intangible assets |
72,665 | 74,671 | ||||||
Accrued income and other assets |
1,927,324 | 1,807,208 | ||||||
|
|
|
|
|||||
Total assets |
$ | 68,002,661 | $ | 66,298,010 | ||||
|
|
|
|
|||||
Liabilities and shareholders equity |
||||||||
Liabilities |
||||||||
Deposits |
$ | 52,832,695 | $ | 51,732,151 | ||||
Short-term borrowings |
2,007,236 | 2,397,101 | ||||||
Long-term debt |
5,158,836 | 4,335,962 | ||||||
Accrued expenses and other liabilities |
1,541,940 | 1,504,626 | ||||||
|
|
|
|
|||||
Total liabilities |
61,540,707 | 59,969,840 | ||||||
|
|
|
|
|||||
Shareholders equity |
||||||||
Preferred stockauthorized 6,617,808 shares: |
||||||||
Series A, 8.50% fixed rate, non-cumulative perpetual convertible preferred stock, par value of $0.01, and liquidation value per share of $1,000 |
362,507 | 362,507 | ||||||
Series B, floating rate, non-voting, non-cumulative perpetual preferred stock, par value of $0.01, and liquidation value per share of $1,000 |
23,785 | 23,785 | ||||||
Common stock |
8,102 | 8,131 | ||||||
Capital surplus |
7,185,766 | 7,221,745 | ||||||
Less treasury shares, at cost |
(13,849 | ) | (13,382 | ) | ||||
Accumulated other comprehensive loss |
(160,832 | ) | (222,292 | ) | ||||
Retained (deficit) earnings |
(943,525 | ) | (1,052,324 | ) | ||||
|
|
|
|
|||||
Total shareholders equity |
6,461,954 | 6,328,170 | ||||||
|
|
|
|
|||||
Total liabilities and shareholders equity |
$ | 68,002,661 | $ | 66,298,010 | ||||
|
|
|
|
|||||
Common shares authorized (par value of $0.01) |
1,500,000,000 | 1,500,000,000 | ||||||
Common shares issued |
810,249,377 | 813,136,321 | ||||||
Common shares outstanding |
808,528,243 | 811,454,676 | ||||||
Treasury shares outstanding |
1,721,134 | 1,681,645 | ||||||
Preferred shares issued |
1,967,071 | 1,967,071 | ||||||
Preferred shares outstanding |
398,007 | 398,007 |
(1) | Amounts represent loans for which Huntington has elected the fair value option. |
See Notes to Unaudited Condensed Consolidated Financial Statements
55
Huntington Bancshares Incorporated
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended March 31, |
||||||||
(dollar amounts in thousands, except per share amounts) |
2015 | 2014 | ||||||
Interest and fee income: |
||||||||
Loans and leases |
$ | 420,614 | $ | 402,508 | ||||
Available-for-sale and other securities |
||||||||
Taxable |
47,856 | 38,456 | ||||||
Tax-exempt |
9,287 | 5,485 | ||||||
Held-to-maturity securitiestaxable |
20,667 | 23,320 | ||||||
Other |
3,672 | 2,686 | ||||||
|
|
|
|
|||||
Total interest income |
502,096 | 472,455 | ||||||
|
|
|
|
|||||
Interest expense: |
||||||||
Deposits |
19,567 | 23,938 | ||||||
Short-term borrowings |
542 | 522 | ||||||
Federal Home Loan Bank advances |
377 | 81 | ||||||
Subordinated notes and other long-term debt |
13,925 | 10,408 | ||||||
|
|
|
|
|||||
Total interest expense |
34,411 | 34,949 | ||||||
|
|
|
|
|||||
Net interest income |
467,685 | 437,506 | ||||||
Provision for credit losses |
20,591 | 24,630 | ||||||
|
|
|
|
|||||
Net interest income after provision for credit losses |
447,094 | 412,876 | ||||||
|
|
|
|
|||||
Service charges on deposit accounts |
62,220 | 64,582 | ||||||
Trust services |
29,039 | 29,565 | ||||||
Electronic banking |
27,398 | 23,642 | ||||||
Mortgage banking income |
22,961 | 23,089 | ||||||
Brokerage income |
15,500 | 17,167 | ||||||
Insurance income |
15,895 | 16,496 | ||||||
Bank owned life insurance income |
13,025 | 13,307 | ||||||
Capital markets fees |
13,905 | 9,194 | ||||||
Gain on sale of loans |
4,589 | 3,570 | ||||||
Net gains on sales of securities |
| 16,970 | ||||||
Other noninterest income |
27,091 | 30,903 | ||||||
|
|
|
|
|||||
Total noninterest income |
231,623 | 248,485 | ||||||
|
|
|
|
|||||
Personnel costs |
264,916 | 249,477 | ||||||
Outside data processing and other services |
50,535 | 51,490 | ||||||
Net occupancy |
31,020 | 33,433 | ||||||
Equipment |
30,249 | 28,750 | ||||||
Professional services |
12,727 | 12,231 | ||||||
Marketing |
12,975 | 10,686 | ||||||
Deposit and other insurance expense |
10,167 | 13,718 | ||||||
Amortization of intangibles |
10,206 | 9,291 | ||||||
Other noninterest expense |
36,062 | 51,045 | ||||||
|
|
|
|
|||||
Total noninterest expense |
458,857 | 460,121 | ||||||
|
|
|
|
|||||
Income before income taxes |
219,860 | 201,240 | ||||||
Provision for income taxes |
54,006 | 52,097 | ||||||
|
|
|
|
|||||
Net income |
165,854 | 149,143 | ||||||
Dividends on preferred shares |
7,965 | 7,964 | ||||||
|
|
|
|
|||||
Net income applicable to common shares |
$ | 157,889 | $ | 141,179 | ||||
|
|
|
|
|||||
Average common sharesbasic |
809,778 | 829,659 | ||||||
Average common sharesdiluted |
823,809 | 842,677 | ||||||
Per common share: |
||||||||
Net incomebasic |
$ | 0.19 | $ | 0.17 | ||||
Net incomediluted |
0.19 | 0.17 | ||||||
Cash dividends declared |
0.06 | 0.05 | ||||||
OTTI losses for the periods presented: |
||||||||
Total OTTI losses |
$ | | $ | | ||||
Noncredit-related portion of loss recognized in OCI |
| | ||||||
|
|
|
|
|||||
Impairment losses recognized in earnings on available-for-sale securities |
$ | | $ | | ||||
|
|
|
|
See Notes to Unaudited Condensed Consolidated Financial Statements
56
Huntington Bancshares Incorporated
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended March 31, |
||||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Net income |
$ | 165,854 | $ | 149,143 | ||||
Other comprehensive income, net of tax: |
||||||||
Unrealized gains on available-for-sale and other securities: |
||||||||
Non-credit-related impairment recoveries on debt securities not expected to be sold |
3,390 | 4,789 | ||||||
Unrealized net gains (losses) on available-for-sale and other securities arising during the period, net of reclassification for net realized gains |
38,953 | 6,953 | ||||||
|
|
|
|
|||||
Total unrealized gains (losses) on available-for-sale and other securities |
42,343 | 11,742 | ||||||
Unrealized gains (losses) on cash flow hedging derivatives |
18,214 | (57 | ) | |||||
Change in accumulated unrealized losses for pension and other post-retirement obligations |
903 | 577 | ||||||
|
|
|
|
|||||
Other comprehensive income (loss), net of tax |
61,460 | 12,262 | ||||||
|
|
|
|
|||||
Comprehensive income |
$ | 227,314 | $ | 161,405 | ||||
|
|
|
|
See Notes to Unaudited Condensed Consolidated Financial Statements
57
Huntington Bancshares Incorporated
Condensed Consolidated Statements of Changes in Shareholders Equity
(Unaudited)
Preferred Stock | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
Series B | Other | Retained | ||||||||||||||||||||||||||||||||||||||||||||||
(All amounts in thousands, | Series A | Floating Rate | Common Stock | Capital | Treasury Stock | Comprehensive | Earnings | |||||||||||||||||||||||||||||||||||||||||
except for per share amounts) | Shares | Amount | Shares | Amount | Shares | Amount | Surplus | Shares | Amount | Loss | (Deficit) | Total | ||||||||||||||||||||||||||||||||||||
Three Months Ended March 31, 2014 |
||||||||||||||||||||||||||||||||||||||||||||||||
Balance, beginning of period |
363 | $ | 362,507 | 35 | $ | 23,785 | 832,217 | $ | 8,322 | $ | 7,398,515 | (1,331 | ) | $ | (9,643 | ) | $ | (214,009 | ) | $ | (1,470,154 | ) | $ | 6,099,323 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Cumulative effect of change in accounting principle for low income housing tax credits, net of tax of $65,556 |
(9,169 | ) | (9,169 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Balance, beginning of periodas adjusted |
363 | 362,507 | 35 | 23,785 | 832,217 | 8,322 | 7,398,515 | (1,331 | ) | (9,643 | ) | (214,009 | ) | (1,479,323 | ) | 6,090,154 | ||||||||||||||||||||||||||||||||
Net income |
149,143 | 149,143 | ||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) |
12,262 | 12,262 | ||||||||||||||||||||||||||||||||||||||||||||||
Shares issued pursuant to acquisition |
8,670 | 87 | 91,577 | 91,664 | ||||||||||||||||||||||||||||||||||||||||||||
Shares issued to HIP |
276 | 3 | 2,594 | 2,597 | ||||||||||||||||||||||||||||||||||||||||||||
Repurchase of common stock |
(14,571 | ) | (146 | ) | (135,991 | ) | (136,137 | ) | ||||||||||||||||||||||||||||||||||||||||
Cash dividends declared: |
||||||||||||||||||||||||||||||||||||||||||||||||
Common ($0.05 per share) |
(41,377 | ) | (41,377 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Preferred Series A ($21.25 per share) |
(7,703 | ) | (7,703 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Preferred Series B ($7.35 per share) |
(261 | ) | (261 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Recognition of the fair value of share-based compensation |
9,418 | 9,418 | ||||||||||||||||||||||||||||||||||||||||||||||
Other share-based compensation activity |
2,380 | 24 | 6,405 | (331 | ) | 6,098 | ||||||||||||||||||||||||||||||||||||||||||
Other |
(494 | ) | 113 | 850 | 20 | 376 | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Balance, end of period |
363 | $ | 362,507 | 35 | $ | 23,785 | 828,972 | $ | 8,290 | $ | 7,372,024 | (1,218 | ) | $ | (8,793 | ) | $ | (201,747 | ) | $ | (1,379,832 | ) | $ | 6,176,234 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Three Months Ended March 31, 2015 |
||||||||||||||||||||||||||||||||||||||||||||||||
Balance, beginning of period |
363 | $ | 362,507 | 35 | $ | 23,785 | 813,136 | $ | 8,131 | $ | 7,221,745 | (1,682 | ) | $ | (13,382 | ) | $ | (222,292 | ) | $ | (1,052,324 | ) | $ | 6,328,170 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Net income |
165,854 | 165,854 | ||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) |
61,460 | 61,460 | ||||||||||||||||||||||||||||||||||||||||||||||
Repurchases of common stock |
(4,949 | ) | (49 | ) | (51,658 | ) | (51,707 | ) | ||||||||||||||||||||||||||||||||||||||||
Cash dividends declared: |
||||||||||||||||||||||||||||||||||||||||||||||||
Common ($0.06 per share) |
(48,524 | ) | (48,524 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Preferred Series A ($21.25 per share) |
(7,703 | ) | (7,703 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Preferred Series B ($7.38 per share) |
(262 | ) | (262 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Recognition of the fair value of share-based compensation |
11,095 | 11,095 | ||||||||||||||||||||||||||||||||||||||||||||||
Other share-based compensation activity |
2,051 | 20 | 4,512 | (554 | ) | 3,978 | ||||||||||||||||||||||||||||||||||||||||||
Other |
11 | | 72 | (39 | ) | (467 | ) | (12 | ) | (407 | ) | |||||||||||||||||||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Balance, end of period |
363 | $ | 362,507 | 35 | $ | 23,785 | 810,249 | $ | 8,102 | $ | 7,185,766 | (1,721 | ) | $ | (13,849 | ) | $ | (160,832 | ) | $ | (943,525 | ) | $ | 6,461,954 | ||||||||||||||||||||||||
|
|
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|
|
See Notes to Unaudited Condensed Consolidated Financial Statements
58
Huntington Bancshares Incorporated
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, |
||||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Operating activities |
||||||||
Net income |
$ | 165,854 | $ | 149,143 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Impairment of goodwill |
| 3,000 | ||||||
Provision for credit losses |
20,591 | 24,630 | ||||||
Depreciation and amortization |
95,664 | 82,015 | ||||||
Share-based compensation expense |
11,095 | 9,418 | ||||||
Change in deferred income taxes |
(14,467 | ) | (17,054 | ) | ||||
Originations of loans held for sale |
(843,057 | ) | (461,764 | ) | ||||
Principal payments on and proceeds from loans held for sale |
653,775 | 447,907 | ||||||
Gain on sale of loans |
(4,589 | ) | (4,890 | ) | ||||
Net gain on sales of securities |
| (16,970 | ) | |||||
Net change in: |
||||||||
Trading account securities |
(5,435 | ) | (4,866 | ) | ||||
Accrued income and other assets |
(58,226 | ) | (21,970 | ) | ||||
Accrued expense and other liabilities |
(30,674 | ) | (32,635 | ) | ||||
Other, net |
(8,788 | ) | | |||||
|
|
|
|
|||||
Net cash provided by (used for) operating activities |
(18,257 | ) | 155,964 | |||||
|
|
|
|
|||||
Investing activities |
||||||||
Change in interest bearing deposits in banks |
(9,471 | ) | (14,188 | ) | ||||
Cash paid for acquisition of a business, net of cash received |
(457,836 | ) | (13,452 | ) | ||||
Proceeds from: |
||||||||
Maturities and calls of available-for-sale and other securities |
397,406 | 265,286 | ||||||
Maturities of held-to-maturity securities |
124,631 | 100,965 | ||||||
Sales of available-for-sale and other securities |
| 1,063,118 | ||||||
Purchases of available-for-sale and other securities |
(878,256 | ) | (1,655,751 | ) | ||||
Purchases of held-to-maturity securities |
(82,557 | ) | | |||||
Net proceeds from sales of loans |
89,347 | 58,847 | ||||||
Net loan and lease activity, excluding sales and purchases |
(332,637 | ) | (718,861 | ) | ||||
Proceeds from sale of operating lease assets |
| 287 | ||||||
Purchases of premises and equipment |
(13,094 | ) | (10,613 | ) | ||||
Proceeds from sales of other real estate |
8,857 | 6,261 | ||||||
Purchases of loans and leases |
(16,474 | ) | (40,121 | ) | ||||
Other, net |
1,278 | 1,704 | ||||||
|
|
|
|
|||||
Net cash provided by (used for) investing activities |
(1,168,806 | ) | (956,518 | ) | ||||
|
|
|
|
|||||
Financing activities |
||||||||
Increase (decrease) in deposits |
1,081,204 | 1,284,940 | ||||||
Increase (decrease) in short-term borrowings |
(357,831 | ) | 1,161,892 | |||||
Proceeds from issuance of long-term debt |
995,610 | 500,000 | ||||||
Maturity/redemption of long-term debt |
(750,076 | ) | (1,998,699 | ) | ||||
Dividends paid on preferred stock |
(7,965 | ) | (7,964 | ) | ||||
Dividends paid on common stock |
(48,738 | ) | (41,146 | ) | ||||
Repurchases of common stock |
(51,707 | ) | (136,137 | ) | ||||
Proceeds from stock options exercised |
3,800 | 3,516 | ||||||
Net proceeds from issuance of common stock |
| 2,597 | ||||||
Other, net |
2,077 | 3,687 | ||||||
|
|
|
|
|||||
Net cash provided by (used for) financing activities |
866,374 | 772,686 | ||||||
|
|
|
|
|||||
Increase (decrease) in cash and cash equivalents |
(320,689 | ) | (27,868 | ) | ||||
Cash and cash equivalents at beginning of period |
1,220,565 | 1,001,132 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of period |
$ | 899,876 | $ | 973,264 | ||||
|
|
|
|
59
Supplemental disclosures: |
||||||||
Income taxes paid (refunded) |
$ | 353 | $ | 114 | ||||
Interest paid |
26,672 | 35,341 | ||||||
Non-cash activities |
||||||||
Loans transferred to held-for-sale from portfolio |
1,091,451 | | ||||||
Loans transferred to portfolio from held-for-sale |
1,257 | 46,619 | ||||||
Transfer of loans to OREO |
6,575 | | ||||||
Dividends accrued, paid in subsequent quarter |
54,049 | 48,019 |
See Notes to Unaudited Condensed Consolidated Financial Statements.
60
Huntington Bancshares Incorporated
Notes to Unaudited Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying Unaudited Condensed Consolidated Financial Statements of Huntington reflect all adjustments consisting of normal recurring accruals which are, in the opinion of Management, necessary for a fair presentation of the consolidated financial position, the results of operations, and cash flows for the periods presented. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. These Unaudited Condensed Consolidated Financial Statements have been prepared according to the rules and regulations of the SEC and, therefore, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted. The Notes to Consolidated Financial Statements appearing in Huntingtons 2014 Form 10-K, which include descriptions of significant accounting policies, as updated by the information contained in this report, should be read in conjunction with these interim financial statements.
For statement of cash flows purposes, cash and cash equivalents are defined as the sum of Cash and due from banks which includes amounts on deposit with the Federal Reserve and Federal funds sold and securities purchased under resale agreements.
In conjunction with applicable accounting standards, all material subsequent events have been either recognized in the Unaudited Condensed Consolidated Financial Statements or disclosed in the Notes to Unaudited Condensed Consolidated Financial Statements.
2. ACCOUNTING STANDARDS UPDATE
ASU 2014-04Receivables (Topic 310): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The ASU clarifies that an in substance repossession or foreclosure occurs upon either the creditor obtaining legal title to the residential real estate property or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments were effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The amendment did not have a material to Huntingtons Unaudited Condensed Consolidated Financial Statements.
ASU 2014-09Revenue from Contracts with Customers (Topic 606): The amendments in ASU 2014-09 supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The general principle of the amendments require an entity to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance sets forth a five step approach to be utilized for revenue recognition. The amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The FASB is currently considering a one-year deferral for implementation of this new guidance. Management is currently assessing the impact to Huntingtons Unaudited Condensed Consolidated Financial Statements.
ASU 2014-11Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in the ASU require repurchase-to-maturity transactions to be recorded and accounted for as secured borrowings. Amendments to Topic 860 also require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (i.e., a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement, as well as additional required disclosures. The accounting amendments and disclosures are effective for interim and annual periods beginning after December 15, 2014. The disclosures for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings are required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The amendments did not have a material impact to Huntingtons Unaudited Condensed Consolidated Financial Statements.
ASU 2014-12CompensationStock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments require that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. Specifically, if the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Management is currently assessing the impact to Huntingtons Unaudited Condensed Consolidated Financial Statements.
61
ASU 2014-14ReceivablesTroubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. The amendments require a mortgage loan to be derecognized and a separate receivable to be recognized upon foreclosure if the loan has a government guarantee that is non-separable from the loan before foreclosure, the creditor has the ability and intent to convey the real estate property to the guarantor, and any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Additionally, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor upon foreclosure. The amendments were effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. The amendments did not have a material impact to Huntingtons Unaudited Condensed Consolidated Financial Statements.
ASU 2015-02Consolidation (Topic 810)Amendments to the Consolidation Analysis. The amendment applies to entities in all industries and provides a new scope exception for registered money market funds and similar unregistered money market funds. It also makes targeted amendments to the current consolidation guidance and ends the deferral granted to investment companies from applying the variable interest entity accounting guidance. The amendments are effective for annual periods beginning after December 15, 2015. Management is currently assessing the impact to Huntingtons Unaudited Condensed Consolidated Financial Statements
ASU 2015-03Imputation of Interest (Topic 835): Simplifying the Presentation of Debt Issuance Costs. This ASU was issued to simplify presentation of debt issuance costs. The amendments in this ASU require debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Huntington has elected early adoption. The amendment did not have a material impact on Huntingtons Unaudited Condensed Consolidated Financial Statements.
3. LOANS / LEASES AND ALLOWANCE FOR CREDIT LOSSES
Loans and leases for which Huntington has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are classified in the Unaudited Condensed Consolidated Balance Sheets as loans and leases. Except for loans which are accounted for at fair value, loans and leases are carried at the principal amount outstanding, net of unamortized deferred loan origination fees and costs and net of unearned income. At March 31, 2015, and December 31, 2014, the aggregate amount of these net unamortized deferred loan origination fees and net unearned income was $166.1 million and $178.7 million, respectively.
Loan and Lease Portfolio Composition
The following table provides a detailed listing of Huntingtons loan and lease portfolio at March 31, 2015 and December 31, 2014:
March 31, | December 31, | |||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Loans and leases: |
||||||||
Commercial and industrial |
$ | 20,108,742 | $ | 19,033,146 | ||||
Commercial real estate |
5,067,024 | 5,197,403 | ||||||
Automobile |
7,802,542 | 8,689,902 | ||||||
Home equity |
8,492,460 | 8,490,915 | ||||||
Residential mortgage |
5,794,707 | 5,830,609 | ||||||
Other consumer |
430,157 | 413,751 | ||||||
|
|
|
|
|||||
Loans and leases |
47,695,632 | 47,655,726 | ||||||
|
|
|
|
|||||
Allowance for loan and lease losses |
(605,126 | ) | (605,196 | ) | ||||
|
|
|
|
|||||
Net loans and leases |
$ | 47,090,506 | $ | 47,050,530 | ||||
|
|
|
|
62
As shown in the table above, the primary loan and lease portfolios are: C&I, CRE, automobile, home equity, residential mortgage, and other consumer. For ACL purposes, these portfolios are further disaggregated into classes. The classes within each portfolio are as follows:
Portfolio |
Class | |
Commercial and industrial | Owner occupied | |
Purchased credit-impaired | ||
Other commercial and industrial | ||
Commercial real estate | Retail properties | |
Multi family | ||
Office | ||
Industrial and warehouse | ||
Purchased credit-impaired | ||
Other commercial real estate | ||
Automobile | NA (1) | |
Home equity | Secured by first-lien | |
Secured by junior-lien | ||
Residential mortgage | Residential mortgage | |
Purchased credit-impaired | ||
Other consumer | Other consumer | |
Purchased credit-impaired |
(1) | Not applicable. The automobile loan portfolio is not further segregated into classes. |
Macquarie acquisition
On March 31, 2015, Huntington completed its acquisition of Michigan-based Macquarie. Lease receivables with a fair value of $838.6 million, including a lease residual value of approximately $200 million, were transferred to Huntington. These leases were recorded at fair value. The fair values for the leases were estimated using discounted cash flow analyses using interest rates currently being offered for leases with similar terms (Level 3), and reflected an estimate of credit and other risk associated with the leases.
Camco Financial acquisition
On March 1, 2014, Huntington completed its acquisition of Camco Financial. Loans with a fair value of $559.4 million were transferred to Huntington.
Fidelity Bank acquisition
On March 30, 2012, Huntington acquired the loans of Fidelity Bank located in Dearborn, Michigan from the FDIC. Under the agreement, loans with a fair value of $523.9 million were acquired by Huntington.
Purchased Credit-Impaired Loans
Purchased loans with evidence of deterioration in credit quality since origination for which it is probable at acquisition that we will be unable to collect all contractually required payments are considered to be credit impaired. Purchased credit-impaired loans are initially recorded at fair value, which is estimated by discounting the cash flows expected to be collected at the acquisition date. Because the estimate of expected cash flows reflects an estimate of future credit losses expected to be incurred over the life of the loans, an allowance for credit losses is not recorded at the acquisition date. The excess of cash flows expected at acquisition over the estimated fair value, referred to as the accretable yield, is recognized in interest income over the remaining life of the loan, or pool of loans, on a level-yield basis. The difference between the contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. A subsequent decrease in the estimate of cash flows expected to be received on purchased credit-impaired loans generally results in the recognition of an allowance for credit losses. Subsequent increases in cash flows result in reversal of any nonaccretable difference (or allowance for loan and lease losses to the extent any has been recorded) with a positive impact on interest income subsequently recognized. The measurement of cash flows involves assumptions and judgments for interest rates, prepayments, default rates, loss severity, and collateral values. All of these factors are inherently subjective and significant changes in the cash flow estimates over the life of the loan can result.
63
The following table presents a rollforward of the accretable yield for purchased credit impaired loans by acquisition for the three-month and three-month periods ended March 31, 2015 and 2014:
Three Months Ended March 31, 2015 |
||||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Fidelity Bank |
||||||||
Balance, beginning of period |
$ | 19,388 | $ | 27,995 | ||||
Accretion |
(2,874 | ) | (4,004 | ) | ||||
Reclassification from nonaccretable difference |
3,677 | 767 | ||||||
|
|
|
|
|||||
Balance, end of period |
$ | 20,191 | $ | 24,758 | ||||
|
|
|
|
|||||
Camco Financial |
||||||||
Balance, beginning of period |
$ | 824 | $ | | ||||
Impact of acquisition/purchase on March 1, 2014 |
| 143 | ||||||
Accretion |
(336 | ) | (9 | ) | ||||
Reclassification from nonaccretable difference |
391 | | ||||||
|
|
|
|
|||||
Balance, end of period |
$ | 879 | $ | 134 | ||||
|
|
|
|
The allowance for loan losses recorded on the purchased credit-impaired loan portfolio at March 31, 2015 and December 31, 2014 was $2.4 million and $4.1 million, respectively. The following table reflects the ending and unpaid balances of all contractually required payments and carrying amounts of the acquired loans by acquisition at March 31, 2015 and December 31, 2014:
March 31, 2015 | December 31, 2014 | |||||||||||||||
(dollar amounts in thousands) |
Ending Balance |
Unpaid Balance |
Ending Balance |
Unpaid Balance |
||||||||||||
Fidelity Bank |
||||||||||||||||
Commercial and industrial |
$ | 20,522 | $ | 31,120 | $ | 22,405 | $ | 33,622 | ||||||||
Commercial real estate |
33,547 | 81,590 | 36,663 | 87,250 | ||||||||||||
Residential mortgage |
2,168 | 3,053 | 1,912 | 3,096 | ||||||||||||
Other consumer |
51 | 119 | 51 | 123 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 56,288 | $ | 115,882 | $ | 61,031 | $ | 124,091 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Camco Financial |
||||||||||||||||
Commercial and industrial |
$ | 856 | $ | 1,674 | $ | 823 | $ | 1,685 | ||||||||
Commercial real estate |
1,797 | 2,624 | 1,708 | 3,826 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 2,653 | $ | 4,298 | $ | 2,531 | $ | 5,511 | ||||||||
|
|
|
|
|
|
|
|
64
Loan Purchases and Sales
The following table summarizes portfolio loan purchase and sale activity for the three-month periods ended March 31, 2015 and 2014. The table below excludes mortgage loans originated for sale.
(dollar amounts in thousands) | Commercial and Industrial |
Commercial Real Estate |
Automobile | Home Equity |
Residential Mortgage |
Other Consumer |
Total | |||||||||||||||||||||
Portfolio loans and leases purchased during the: |
||||||||||||||||||||||||||||
Three-month period ended March 31, 2015 |
$ | 12,591 | $ | | $ | | $ | | $ | 31,634 | $ | | $ | 44,225 | ||||||||||||||
Three-month period ended March 31, 2014 |
$ | 40,121 | $ | | $ | | $ | | $ | | $ | | $ | 40,121 | ||||||||||||||
Portfolio loans and leases sold or transferred to loans held for sale during the: |
||||||||||||||||||||||||||||
Three-month period ended March 31, 2015 |
$ | 85,700 | $ | | $ | 1,061,859 | (1) | $ | | $ | | $ | | $ | 1,147,559 | |||||||||||||
Three-month period ended March 31, 2014 |
$ | 54,258 | $ | 39 | $ | | $ | | $ | | $ | | $ | 54,297 |
(1) | Reflects the transfer of approximately $1.0 billion in automobile loans to loans held-for-sale at March 31, 2015. |
NALs and Past Due Loans
Loans are considered past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due date.
Any loan in any portfolio may be placed on nonaccrual status prior to the policies described below when collection of principal or interest is in doubt. When a borrower with debt is discharged in a Chapter 7 bankruptcy and not reaffirmed by the borrower, the loan is determined to be collateral dependent and placed on nonaccrual status.
All classes within the C&I and CRE portfolios (except for purchased credit-impaired loans) are placed on nonaccrual status at 90-days past due. Residential mortgage loans are placed on nonaccrual status at 150-days past due, with the exception of residential mortgages guaranteed by government organizations which continue to accrue interest at the rate guaranteed by the government agency. First-lien home equity loans are placed on nonaccrual status at 150-days past due. Junior-lien home equity loans are placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien loan has been identified as nonaccrual. Automobile and other consumer loans are generally charged-off when the loan is 120-days past due.
For all classes within all loan portfolios, when a loan is placed on nonaccrual status, any accrued interest income is reversed with current year accruals charged to interest income, and prior year amounts charged-off as a credit loss.
For all classes within all loan portfolios, cash receipts received on NALs are applied entirely against principal until the loan or lease has been collected in full, after which time any additional cash receipts are recognized as interest income. However, for secured non-reaffirmed debt in a Chapter 7 bankruptcy, payments are applied to principal and interest when the borrower has demonstrated a capacity to continue payment of the debt and collection of the debt is reasonably assured. For unsecured non-reaffirmed debt in a Chapter 7 bankruptcy where the carrying value has been fully charged-off, payments are recorded as loan recoveries.
Regarding all classes within the C&I and CRE portfolios, the determination of a borrowers ability to make the required principal and interest payments is based on an examination of the borrowers current financial statements, industry, management capabilities, and other qualitative measures. For all classes within the consumer loan portfolio, the determination of a borrowers ability to make the required principal and interest payments is based on multiple factors, including number of days past due and, in some instances, an evaluation of the borrowers financial condition. When, in Managements judgment, the borrowers ability to make required principal and interest payments resumes and collectability is no longer in doubt, the loan or lease is returned to accrual status. For these loans that have been returned to accrual status, cash receipts are applied according to the contractual terms of the loan.
65
The following table presents NALs by loan class at March 31, 2015 and December 31, 2014:
March 31, | December 31, | |||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Commercial and industrial: |
||||||||
Owner occupied |
$ | 43,540 | $ | 41,285 | ||||
Other commercial and industrial |
89,823 | 30,689 | ||||||
|
|
|
|
|||||
Total commercial and industrial |
$ | 133,363 | $ | 71,974 | ||||
Commercial real estate: |
||||||||
Retail properties |
$ | 25,863 | $ | 21,385 | ||||
Multi family |
7,107 | 9,743 | ||||||
Office |
7,193 | 7,707 | ||||||
Industrial and warehouse |
2,195 | 3,928 | ||||||
Other commercial real estate |
6,905 | 5,760 | ||||||
|
|
|
|
|||||
Total commercial real estate |
$ | 49,263 | $ | 48,523 | ||||
Automobile |
$ | 4,448 | $ | 4,623 | ||||
Home equity: |
||||||||
Secured by first-lien |
$ | 44,101 | $ | 46,938 | ||||
Secured by junior-lien |
35,145 | 31,622 | ||||||
|
|
|
|
|||||
Total home equity |
$ | 79,246 | $ | 78,560 | ||||
Residential mortgage |
$ | 98,093 | $ | 96,564 | ||||
Other consumer |
$ | | $ | | ||||
|
|
|
|
|||||
Total nonaccrual loans |
$ | 364,413 | $ | 300,244 | ||||
|
|
|
|
66
The following table presents an aging analysis of loans and leases, including past due loans, by loan class at March 31, 2015 and December 31, 2014: (1)
March 31, 2015 |
||||||||||||||||||||||||||||
Past Due | Total Loans and Leases |
90 or more days past due |
||||||||||||||||||||||||||
(dollar amounts in thousands) | 30-59 Days | 60-89 Days | 90 or more days | Total | Current | and accruing | ||||||||||||||||||||||
Commercial and industrial: |
||||||||||||||||||||||||||||
Owner occupied |
$ | 8,174 | $ | 3,016 | $ | 16,749 | $ | 27,939 | $ | 4,161,964 | $ | 4,189,903 | $ | | ||||||||||||||
Purchased credit-impaired |
879 | 10 | 3,861 | 4,750 | 16,628 | 21,378 | 3,861 | (3) | ||||||||||||||||||||
Other commercial and industrial |
25,176 | 2,315 | 11,427 | 38,918 | 15,858,543 | 15,897,461 | 2,074 | (2) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial and industrial |
$ | 34,229 | $ | 5,341 | $ | 32,037 | $ | 71,607 | $ | 20,037,135 | $ | 20,108,742 | $ | 5,935 | ||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||
Retail properties |
$ | 126 | $ | 23 | $ | 10,497 | $ | 10,646 | $ | 1,345,248 | $ | 1,355,894 | $ | | ||||||||||||||
Multi family |
1,068 | 630 | 4,063 | 5,761 | 1,023,952 | 1,029,713 | | |||||||||||||||||||||
Office |
780 | 405 | 1,240 | 2,425 | 945,988 | 948,413 | | |||||||||||||||||||||
Industrial and warehouse |
616 | 15 | 1,503 | 2,134 | 513,087 | 515,221 | | |||||||||||||||||||||
Purchased credit-impaired |
1,318 | 409 | 16,351 | 18,078 | 17,266 | 35,344 | 16,351 | (3) | ||||||||||||||||||||
Other commercial real estate |
384 | 117 | 5,249 | 5,750 | 1,176,689 | 1,182,439 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial real estate |
$ | 4,292 | $ | 1,599 | $ | 38,903 | $ | 44,794 | $ | 5,022,230 | $ | 5,067,024 | $ | 16,351 | ||||||||||||||
Automobile |
$ | 43,061 | $ | 6,971 | $ | 4,910 | $ | 54,942 | $ | 7,747,600 | $ | 7,802,542 | $ | 4,746 | ||||||||||||||
Home equity: |
||||||||||||||||||||||||||||
Secured by first-lien |
$ | 14,382 | $ | 6,352 | $ | 31,197 | $ | 51,931 | $ | 5,102,806 | $ | 5,154,737 | $ | 4,367 | ||||||||||||||
Secured by junior-lien |
19,414 | 10,463 | 7,033 | 36,910 | 3,300,813 | 3,337,723 | 6,765 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total home equity |
$ | 33,796 | $ | 16,815 | $ | 38,230 | $ | 88,841 | $ | 8,403,619 | $ | 8,492,460 | $ | 11,132 | ||||||||||||||
Residential mortgage: |
||||||||||||||||||||||||||||
Residential mortgage |
$ | 92,277 | $ | 37,179 | $ | 126,469 | $ | 255,925 | $ | 5,536,614 | $ | 5,792,539 | $ | 74,044 | ||||||||||||||
Purchased credit-impaired |
| | | | 2,168 | 2,168 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total residential mortgage |
$ | 92,277 | $ | 37,179 | $ | 126,469 | $ | 255,925 | $ | 5,538,782 | $ | 5,794,707 | $ | 74,044 | (4) | |||||||||||||
Other consumer: |
||||||||||||||||||||||||||||
Other consumer |
$ | 4,255 | $ | 1,032 | $ | 728 | $ | 6,015 | $ | 424,091 | $ | 430,106 | $ | 727 | ||||||||||||||
Purchased credit-impaired |
| | | | 51 | 51 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total other consumer |
$ | 4,255 | $ | 1,032 | $ | 728 | $ | 6,015 | $ | 424,142 | $ | 430,157 | $ | 727 | ||||||||||||||
Total loans and leases |
$ | 211,910 | $ | 68,937 | $ | 241,277 | $ | 522,124 | $ | 47,173,508 | $ | 47,695,632 | $ | 112,935 |
67
December 31, 2014 |
||||||||||||||||||||||||||||
90 or more | ||||||||||||||||||||||||||||
Past Due | Total Loans | days past due | ||||||||||||||||||||||||||
(dollar amounts in thousands) | 30-59 Days | 60-89 Days | 90 or more days | Total | Current | and Leases | and accruing | |||||||||||||||||||||
Commercial and industrial: |
||||||||||||||||||||||||||||
Owner occupied |
$ | 5,232 | $ | 2,981 | $ | 18,222 | $ | 26,435 | $ | 4,228,440 | $ | 4,254,875 | $ | | ||||||||||||||
Purchased credit-impaired |
846 | | 4,937 | 5,783 | 17,445 | 23,228 | 4,937 | |||||||||||||||||||||
Other commercial and industrial |
15,330 | 1,536 | 9,101 | 25,967 | 14,729,076 | 14,755,043 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial and industrial |
$ | 21,408 | $ | 4,517 | $ | 32,260 | $ | 58,185 | $ | 18,974,961 | $ | 19,033,146 | $ | 4,937 | (3) | |||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||
Retail properties |
$ | 7,866 | $ | | $ | 4,021 | $ | 11,887 | $ | 1,345,859 | $ | 1,357,746 | $ | | ||||||||||||||
Multi family |
1,517 | 312 | 3,337 | 5,166 | 1,085,250 | 1,090,416 | | |||||||||||||||||||||
Office |
464 | 1,167 | 4,415 | 6,046 | 974,257 | 980,303 | | |||||||||||||||||||||
Industrial and warehouse |
688 | | 2,649 | 3,337 | 510,064 | 513,401 | | |||||||||||||||||||||
Purchased credit-impaired |
89 | 289 | 18,793 | 19,171 | 19,200 | 38,371 | 18,793 | |||||||||||||||||||||
Other commercial real estate |
847 | 1,281 | 3,966 | 6,094 | 1,211,072 | 1,217,166 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial real estate |
$ | 11,471 | $ | 3,049 | $ | 37,181 | $ | 51,701 | $ | 5,145,702 | $ | 5,197,403 | $ | 18,793 | (3) | |||||||||||||
Automobile |
$ | 56,272 | $ | 10,427 | $ | 5,963 | $ | 72,662 | $ | 8,617,240 | $ | 8,689,902 | $ | 5,703 | ||||||||||||||
Home equity |
||||||||||||||||||||||||||||
Secured by first-lien |
$ | 15,036 | $ | 8,085 | $ | 33,014 | $ | 56,135 | $ | 5,072,669 | $ | 5,128,804 | $ | 4,471 | ||||||||||||||
Secured by junior-lien |
22,473 | 12,297 | 33,406 | 68,176 | 3,293,935 | 3,362,111 | 7,688 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total home equity |
$ | 37,509 | $ | 20,382 | $ | 66,420 | $ | 124,311 | $ | 8,366,604 | $ | 8,490,915 | $ | 12,159 | ||||||||||||||
Residential mortgage |
||||||||||||||||||||||||||||
Residential mortgage |
$ | 102,702 | $ | 42,009 | $ | 139,379 | $ | 284,090 | $ | 5,544,607 | $ | 5,828,697 | $ | 88,052 | ||||||||||||||
Purchased credit-impaired |
| | | | 1,912 | 1,912 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total residential mortgage |
$ | 102,702 | $ | 42,009 | $ | 139,379 | $ | 284,090 | $ | 5,546,519 | $ | 5,830,609 | $ | 88,052 | (5) | |||||||||||||
Other consumer |
||||||||||||||||||||||||||||
Other consumer |
$ | 5,491 | $ | 1,086 | $ | 837 | $ | 7,414 | $ | 406,286 | $ | 413,700 | $ | 837 | ||||||||||||||
Purchased credit-impaired |
| | | | 51 | 51 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total other consumer |
$ | 5,491 | $ | 1,086 | $ | 837 | $ | 7,414 | $ | 406,337 | $ | 413,751 | $ | 837 | ||||||||||||||
Total loans and leases |
$ | 234,853 | $ | 81,470 | $ | 282,040 | $ | 598,363 | $ | 47,057,363 | $ | 47,655,726 | $ | 130,481 |
(1) | NALs are included in this aging analysis based on the loans past due status. |
(2) | Amounts include leases acquired with the acquisition of Macquarie at March 31, 2015. |
(3) | Amounts represent accruing purchased impaired loans related to acquisitions. Under the applicable accounting guidance (ASC 310-30), the loans were recorded at fair value upon acquisition and remain in accruing status. |
(4) | Includes $53,010 thousand guaranteed by the U.S. government. |
(5) | Includes $55,012 thousand guaranteed by the U.S. government. |
68
Allowance for Credit Losses
Huntington maintains two reserves, both of which reflect Managements judgment regarding the appropriate level necessary to absorb credit losses inherent in our loan and lease portfolio: the ALLL and the AULC. Combined, these reserves comprise the total ACL. The determination of the ACL requires significant estimates, including the timing and amounts of expected future cash flows on impaired loans and leases, consideration of current economic conditions, and historical loss experience pertaining to pools of homogeneous loans and leases, all of which may be susceptible to change.
The appropriateness of the ACL is based on Managements current judgments about the credit quality of the loan portfolio. These judgments consider 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. Further, Management evaluates 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 segments such as healthcare, ABL, and energy, and the overall condition of the manufacturing industry. Also, the ACL determination includes the on-going assessment of credit quality metrics, and a comparison of certain ACL benchmarks to current performance. Managements determinations regarding the appropriateness of the ACL are reviewed and approved by the Companys board of directors.
The ALLL consists of two components: (1) the transaction reserve, which includes a loan level allocation, specific reserves related to loans considered to be impaired, and loans involved in troubled debt restructurings, and (2) the general reserve. The transaction reserve component includes both (1) an estimate of loss based on pools of commercial and consumer loans and leases with similar characteristics and (2) an estimate of loss based on an impairment review of each impaired C&I and CRE loan greater than $1.0 million. For the C&I and CRE portfolios, the estimate of loss based on pools of loans and leases with similar characteristics is made by applying a PD factor and a LGD factor to each individual loan based on a regularly updated loan grade, using a standardized loan grading system. The PD factor and an LGD factor are determined for each loan grade using statistical models based on historical performance data. The PD factor considers on-going reviews of the financial performance of the specific borrower, including cash flow, debt-service coverage ratio, earnings power, debt level, and equity position, in conjunction with an assessment of the borrowers industry and future prospects. The LGD factor considers analysis of the type of collateral and the relative LTV ratio. These reserve factors are developed based on credit migration models that track historical movements of loans between loan ratings over time and a combination of long-term average loss experience of our own portfolio and external industry data using a 24-month emergence period.
In the case of more homogeneous portfolios, such as automobile loans, home equity loans, and residential mortgage loans, the determination of the transaction reserve also incorporates PD and LGD factors. The estimate of loss is based on pools of loans and leases with similar characteristics. The PD factor considers current credit scores unless the account is delinquent, in which case a higher PD factor is used. The credit score provides a basis for understanding the borrowers past and current payment performance, and this information is used to estimate expected losses over the emergence period. The performance of first-lien loans ahead of our junior-lien loans is available to use as part of our updated score process. The LGD factor considers analysis of the type of collateral and the relative LTV ratio. Credit scores, models, analyses, and other factors used to determine both the PD and LGD factors are updated frequently to capture the recent behavioral characteristics of the subject portfolios, as well as any changes in loss mitigation or credit origination strategies, and adjustments to the reserve factors are made as required. Models utilized in the ALLL estimation process are subject to the Companys model validation policies.
The general reserve consists of our risk-profile reserve components, which includes items unique to our structure, policies, processes, and portfolio composition, as well as qualitative measurements and assessments of the loan portfolios including, but not limited to, management quality, concentrations, portfolio composition, industry comparisons, and internal review functions.
The estimate for the AULC is determined using the same procedures and methodologies as used for the ALLL. The loss factors used in the AULC are the same as the loss factors used in the ALLL while also considering a historical utilization of unused commitments. The AULC is reflected in accrued expenses and other liabilities in the Unaudited Condensed Consolidated Balance Sheet.
The ACL is increased through a provision for credit losses that is charged to earnings, based on Managements quarterly evaluation of the factors previously mentioned, and is reduced by charge-offs, net of recoveries, and the ACL associated with securitized or sold loans.
69
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.
The following table presents ALLL and AULC activity by portfolio segment for the three-month periods ended March 31, 2015 and 2014:
(dollar amounts in thousands) | Commercial and Industrial |
Commercial Real Estate |
Automobile | Home Equity |
Residential Mortgage |
Other Consumer |
Total | |||||||||||||||||||||
Three-month period ended March 31, 2015: |
||||||||||||||||||||||||||||
ALLL balance, beginning of period |
$ | 286,995 | $ | 102,839 | $ | 33,466 | $ | 96,413 | $ | 47,211 | $ | 38,272 | $ | 605,196 | ||||||||||||||
Loan charge-offs |
(24,612 | ) | (2,013 | ) | (8,103 | ) | (8,586 | ) | (4,863 | ) | (6,898 | ) | (55,075 | ) | ||||||||||||||
Recoveries of loans previously charged-off |
13,209 | 6,025 | 3,855 | 3,961 | 2,047 | 1,546 | 30,643 | |||||||||||||||||||||
Provision (reduction in allowance) for loan and lease losses |
8,981 | (6,099 | ) | 10,200 | 18,492 | 10,985 | (15,904 | ) | 26,655 | |||||||||||||||||||
Allowance for loans sold or transferred to loans held for sale |
| | (2,293 | ) | | | | (2,293 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
ALLL balance, end of period |
$ | 284,573 | $ | 100,752 | $ | 37,125 | $ | 110,280 | $ | 55,380 | $ | 17,016 | $ | 605,126 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
AULC balance, beginning of period |
$ | 48,988 | $ | 6,041 | $ | | $ | 1,924 | $ | 8 | $ | 3,845 | $ | 60,806 | ||||||||||||||
Provision for unfunded loan commitments and letters of credit |
(6,673 | ) | (510 | ) | | 715 | 1 | 403 | (6,064 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
AULC balance, end of period |
$ | 42,315 | $ | 5,531 | $ | | $ | 2,639 | $ | 9 | $ | 4,248 | $ | 54,742 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
ACL balance, end of period |
$ | 326,888 | $ | 106,283 | $ | 37,125 | $ | 112,919 | $ | 55,389 | $ | 21,264 | $ | 659,868 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands) | Commercial and Industrial |
Commercial Real Estate |
Automobile | Home Equity |
Residential Mortgage |
Other Consumer |
Total | |||||||||||||||||||||
Three-month period ended March 31, 2014: |
||||||||||||||||||||||||||||
ALLL balance, beginning of period |
$ | 265,801 | $ | 162,557 | $ | 31,053 | $ | 111,131 | $ | 39,577 | $ | 37,751 | $ | 647,870 | ||||||||||||||
Loan charge-offs |
(16,337 | ) | (10,110 | ) | (8,044 | ) | (21,059 | ) | (8,986 | ) | (8,475 | ) | (73,011 | ) | ||||||||||||||
Recoveries of loans previously charged-off |
7,731 | 11,097 | 3,402 | 5,372 | 1,127 | 1,296 | 30,025 | |||||||||||||||||||||
Provision for loan and lease losses |
9,784 | (3,238 | ) | (1,233 | ) | 17,733 | 7,350 | (2,235 | ) | 28,161 | ||||||||||||||||||
Allowance for loans sold or transferred to loans held for sale |
| | | | | (1,127 | ) | (1,127 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
ALLL balance, end of period |
$ | 266,979 | $ | 160,306 | $ | 25,178 | $ | 113,177 | $ | 39,068 | $ | 27,210 | $ | 631,918 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
AULC balance, beginning of period |
$ | 49,596 | $ | 9,891 | $ | | $ | 1,763 | $ | 9 | $ | 1,640 | $ | 62,899 | ||||||||||||||
Provision for unfunded loan commitments and letters of credit |
(3,280 | ) | (764 | ) | | 28 | (1 | ) | 486 | (3,531 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
AULC balance, end of period |
$ | 46,316 | $ | 9,127 | $ | | $ | 1,791 | $ | 8 | $ | 2,126 | $ | 59,368 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
ACL balance, end of period |
$ | 313,295 | $ | 169,433 | $ | 25,178 | $ | 114,968 | $ | 39,076 | $ | 29,336 | $ | 691,286 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
Any loan in any portfolio may be charged-off prior to the policies described below if a loss confirming event has occurred. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency and that asset is the sole source of repayment. Additionally, discharged, collateral dependent non-reaffirmed debt in Chapter 7 bankruptcy filings will result in a charge-off to estimated collateral value, less anticipated selling costs.
C&I and CRE loans are either charged-off or written down to net realizable value at 90-days past due. Automobile loans and other consumer loans are charged-off at 120-days past due. First-lien and junior-lien home equity loans are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due and 120-days past due, respectively. Residential mortgages are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due.
Credit Quality Indicators
To facilitate the monitoring of credit quality for C&I and CRE loans, and for purposes of determining an appropriate ACL level for these loans, Huntington utilizes the following categories of credit grades:
Pass - Higher quality loans that do not fit any of the other categories described below.
OLEM - The credit risk may be relatively minor yet represent a risk given certain specific circumstances. If the potential weaknesses are not monitored or mitigated, the loan may weaken or the collateral may be inadequate to protect Huntingtons position in the future. For these reasons, Huntington considers the loans to be potential problem loans.
Substandard - Inadequately protected loans by the borrowers ability to repay, equity, and/or the collateral pledged to secure the loan. These loans have identified weaknesses that could hinder normal repayment or collection of the debt. It is likely Huntington will sustain some loss if any identified weaknesses are not mitigated.
Doubtful - Loans that have all of the weaknesses inherent in those loans classified as Substandard, with the added elements of the full collection of the loan is improbable and that the possibility of loss is high.
The categories above, which are derived from standard regulatory rating definitions, are assigned upon initial approval of the loan or lease and subsequently updated as appropriate.
Commercial loans categorized as OLEM, Substandard, or Doubtful are considered Criticized loans. Commercial loans categorized as Substandard or Doubtful are also considered Classified loans.
For all classes within all consumer loan portfolios, each loan is assigned a specific PD factor that is partially based on the borrowers most recent credit bureau score, which we update quarterly. A credit bureau score is a credit score developed by Fair Isaac Corporation based on data provided by the credit bureaus. The credit bureau score is widely accepted as the standard measure of consumer credit risk used by lenders, regulators, rating agencies, and consumers. The higher the credit bureau score, the higher likelihood of repayment and therefore, an indicator of higher credit quality.
Huntington assesses the risk in the loan portfolio by utilizing numerous risk characteristics. The classifications described above, and also presented in the table below, represent one of those characteristics that are closely monitored in the overall credit risk management processes.
71
The following table presents each loan and lease class by credit quality indicator at March 31, 2015 and December 31, 2014:
March 31, 2015 | ||||||||||||||||||||
Credit Risk Profile by UCS classification | ||||||||||||||||||||
(dollar amounts in thousands) | Pass | OLEM | Substandard | Doubtful | Total | |||||||||||||||
Commercial and industrial: |
||||||||||||||||||||
Owner occupied |
$ | 3,863,529 | $ | 140,076 | $ | 183,947 | $ | 2,351 | $ | 4,189,903 | ||||||||||
Purchased credit-impaired |
3,863 | 679 | 16,646 | 190 | 21,378 | |||||||||||||||
Other commercial and industrial |
15,036,890 | 358,359 | 499,354 | 2,858 | 15,897,461 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial and industrial |
$ | 18,904,282 | $ | 499,114 | $ | 699,947 | $ | 5,399 | $ | 20,108,742 | ||||||||||
Commercial real estate: |
||||||||||||||||||||
Retail properties |
$ | 1,282,684 | $ | 8,824 | $ | 63,828 | $ | 558 | $ | 1,355,894 | ||||||||||
Multi family |
987,543 | 11,143 | 29,525 | 1,502 | 1,029,713 | |||||||||||||||
Office |
847,635 | 50,513 | 48,210 | 2,055 | 948,413 | |||||||||||||||
Industrial and warehouse |
498,941 | 277 | 15,720 | 283 | 515,221 | |||||||||||||||
Purchased credit-impaired |
6,404 | 854 | 26,291 | 1,795 | 35,344 | |||||||||||||||
Other commercial real estate |
1,138,062 | 7,387 | 35,956 | 1,034 | 1,182,439 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial real estate |
$ | 4,761,269 | $ | 78,998 | $ | 219,530 | $ | 7,227 | $ | 5,067,024 | ||||||||||
Credit Risk Profile by FICO score (1) | ||||||||||||||||||||
750+ | 650-749 | <650 | Other (2) | Total | ||||||||||||||||
Automobile |
$ | 3,535,817 | $ | 2,985,426 | $ | 1,062,789 | $ | 218,510 | $ | 7,802,542 | ||||||||||
Home equity: |
||||||||||||||||||||
Secured by first-lien |
$ | 3,314,292 | $ | 1,461,774 | $ | 290,562 | $ | 88,109 | $ | 5,154,737 | ||||||||||
Secured by junior-lien |
1,834,445 | 1,091,570 | 364,519 | 47,189 | 3,337,723 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total home equity |
$ | 5,148,737 | $ | 2,553,344 | $ | 655,081 | $ | 135,298 | $ | 8,492,460 | ||||||||||
Residential mortgage: |
||||||||||||||||||||
Residential mortgage |
$ | 3,368,487 | $ | 1,740,335 | $ | 639,632 | $ | 44,085 | $ | 5,792,539 | ||||||||||
Purchased credit-impaired |
636 | 1,219 | 313 | | 2,168 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total residential mortgage |
$ | 3,369,123 | $ | 1,741,554 | $ | 639,945 | $ | 44,085 | $ | 5,794,707 | ||||||||||
Other consumer: |
||||||||||||||||||||
Other consumer |
$ | 196,239 | $ | 196,102 | $ | 29,047 | $ | 8,718 | $ | 430,106 | ||||||||||
Purchased credit-impaired |
| 51 | | | 51 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other consumer |
$ | 196,239 | $ | 196,153 | $ | 29,047 | $ | 8,718 | $ | 430,157 | ||||||||||
December 31, 2014 | ||||||||||||||||||||
Credit Risk Profile by UCS classification | ||||||||||||||||||||
(dollar amounts in thousands) | Pass | OLEM | Substandard | Doubtful | Total | |||||||||||||||
Commercial and industrial: |
||||||||||||||||||||
Owner occupied |
$ | 3,959,046 | $ | 117,637 | $ | 175,767 | $ | 2,425 | $ | 4,254,875 | ||||||||||
Purchased credit-impaired |
3,915 | 741 | 14,901 | 3,671 | 23,228 | |||||||||||||||
Other commercial and industrial |
13,925,334 | 386,666 | 440,036 | 3,007 | 14,755,043 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial and industrial |
$ | 17,888,295 | $ | 505,044 | $ | 630,704 | $ | 9,103 | $ | 19,033,146 | ||||||||||
Commercial real estate: |
||||||||||||||||||||
Retail properties |
$ | 1,279,064 | $ | 10,204 | $ | 67,911 | $ | 567 | $ | 1,357,746 | ||||||||||
Multi family |
1,044,521 | 12,608 | 32,322 | 965 | 1,090,416 | |||||||||||||||
Office |
902,474 | 33,107 | 42,578 | 2,144 | 980,303 | |||||||||||||||
Industrial and warehouse |
487,454 | 7,877 | 17,781 | 289 | 513,401 | |||||||||||||||
Purchased credit-impaired |
6,914 | 803 | 25,460 | 5,194 | 38,371 | |||||||||||||||
Other commercial real estate |
1,166,293 | 9,635 | 40,019 | 1,219 | 1,217,166 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial real estate |
$ | 4,886,720 | $ | 74,234 | $ | 226,071 | $ | 10,378 | $ | 5,197,403 |
72
Credit Risk Profile by FICO score (1) | ||||||||||||||||||||
750+ | 650-749 | <650 | Other (2) | Total | ||||||||||||||||
Automobile |
$ | 4,165,811 | $ | 3,249,141 | $ | 1,028,381 | $ | 246,569 | $ | 8,689,902 | ||||||||||
Home equity: |
||||||||||||||||||||
Secured by first-lien |
$ | 3,255,088 | $ | 1,426,191 | $ | 283,152 | $ | 164,373 | $ | 5,128,804 | ||||||||||
Secured by junior-lien |
1,832,663 | 1,095,332 | 348,825 | 85,291 | 3,362,111 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total home equity |
$ | 5,087,751 | $ | 2,521,523 | $ | 631,977 | $ | 249,664 | $ | 8,490,915 | ||||||||||
Residential mortgage |
||||||||||||||||||||
Residential mortgage |
$ | 3,285,310 | $ | 1,785,137 | $ | 666,562 | $ | 91,688 | $ | 5,828,697 | ||||||||||
Purchased credit-impaired |
594 | 1,135 | 183 | | 1,912 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total residential mortgage |
$ | 3,285,904 | $ | 1,786,272 | $ | 666,745 | $ | 91,688 | $ | 5,830,609 | ||||||||||
Other consumer |
||||||||||||||||||||
Other consumer |
$ | 195,128 | $ | 187,781 | $ | 30,582 | $ | 209 | $ | 413,700 | ||||||||||
Purchased credit-impaired |
| 51 | | | 51 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other consumer |
$ | 195,128 | $ | 187,832 | $ | 30,582 | $ | 209 | $ | 413,751 |
(1) | Reflects currently updated customer credit scores. |
(2) | Reflects deferred fees and costs, loans in process, loans to legal entities, etc. |
Impaired Loans
For all classes within the C&I and CRE portfolios, all loans with an outstanding balance of $1.0 million or greater are considered for individual evaluation on a quarterly basis for impairment. Generally, consumer loans within any class are not individually evaluated on a regular basis for impairment. All TDRs, regardless of the outstanding balance amount, are also considered to be impaired. Loans acquired with evidence of deterioration of credit quality since origination for which it is probable at acquisition that all contractually required payments will not be collected are also considered to be impaired.
Once a loan has been identified for an assessment of impairment, the loan is considered impaired when, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. This determination requires significant judgment and use of estimates, and the eventual outcome may differ significantly from those estimates.
When a loan in any class has been determined to be impaired, the amount of the impairment is measured using the present value of expected future cash flows discounted at the loans effective interest rate or, as a practical expedient, the observable market price of the loan, or the fair value of the collateral, less anticipated selling costs, if the loan is collateral dependent. When the present value of expected future cash flows is used, the effective interest rate is the original contractual interest rate of the loan adjusted for any premium or discount. A specific reserve is established as a component of the ALLL when a commercial loan has been determined to be impaired. Subsequent to the initial measurement of impairment, if there is a significant change to the impaired loans expected future cash flows, or if actual cash flows are significantly different from the cash flows previously estimated, Huntington recalculates the impairment and appropriately adjusts the specific reserve. Similarly, if Huntington measures impairment based on the observable market price of an impaired loan or the fair value of the collateral of an impaired collateral dependent loan, Huntington will adjust the specific reserve. The consumer portfolios are assessed on a pooled basis using a discounted cash flow basis.
When a loan within any class is impaired, the accrual of interest income is discontinued unless the receipt of principal and interest is no longer in doubt. Interest income on TDRs is accrued when all principal and interest is expected to be collected under the post-modification terms. Cash receipts received on nonaccruing impaired loans within any class are generally applied entirely against principal until the loan has been collected in full, after which time any additional cash receipts are recognized as interest income. Cash receipts received on accruing impaired loans within any class are applied in the same manner as accruing loans that are not considered impaired.
73
The following tables present the balance of the ALLL attributable to loans by portfolio segment individually and collectively evaluated for impairment and the related loan and lease balance at March 31, 2015 and December 31, 2014:
(dollar amounts in thousands) |
Commercial and Industrial |
Commercial Real Estate |
Automobile | Home Equity |
Residential Mortgage |
Other Consumer |
Total | |||||||||||||||||||||
ALLL at March 31, 2015: |
||||||||||||||||||||||||||||
Portion of ALLL balance: |
||||||||||||||||||||||||||||
Attributable to purchased credit-impaired loans |
$ | 2,103 | $ | | $ | | $ | | $ | 7 | $ | 259 | $ | 2,369 | ||||||||||||||
Attributable to loans individually evaluated for impairment |
18,475 | 21,175 | 1,588 | 29,921 | 13,596 | 107 | 84,862 | |||||||||||||||||||||
Attributable to loans collectively evaluated for impairment |
263,995 | 79,577 | 35,537 | 80,359 | 41,777 | 16,650 | 517,895 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total ALLL balance |
$ | 284,573 | $ | 100,752 | $ | 37,125 | $ | 110,280 | $ | 55,380 | $ | 17,016 | $ | 605,126 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Loan and Lease Ending Balances at March 31, 2015: |
||||||||||||||||||||||||||||
Portion of loan and lease ending balance: |
||||||||||||||||||||||||||||
Attributable to purchased credit-impaired loans |
$ | 21,378 | $ | 35,344 | $ | | $ | | $ | 2,168 | $ | 51 | $ | 58,941 | ||||||||||||||
Individually evaluated for impairment |
320,088 | 205,452 | 30,159 | 323,416 | 373,709 | 5,045 | 1,257,869 | |||||||||||||||||||||
Collectively evaluated for impairment |
19,767,276 | 4,826,228 | 7,772,383 | 8,169,044 | 5,418,830 | 425,061 | 46,378,822 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total loans and leases evaluated for impairment |
$ | 20,108,742 | $ | 5,067,024 | $ | 7,802,542 | $ | 8,492,460 | $ | 5,794,707 | $ | 430,157 | $ | 47,695,632 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
(dollar amounts in thousands) |
Commercial and Industrial |
Commercial Real Estate |
Automobile | Home Equity |
Residential Mortgage |
Other Consumer |
Total | |||||||||||||||||||||
ALLL at December 31, 2014 |
||||||||||||||||||||||||||||
Portion of ALLL balance: |
||||||||||||||||||||||||||||
Attributable to purchased credit-impaired loans |
$ | 3,846 | $ | | $ | | $ | | $ | 8 | $ | 245 | $ | 4,099 | ||||||||||||||
Attributable to loans individually evaluated for impairment |
11,049 | 18,887 | 1,531 | 26,027 | 16,535 | 214 | 74,243 | |||||||||||||||||||||
Attributable to loans collectively evaluated for impairment |
272,100 | 83,952 | 31,935 | 70,386 | 30,668 | 37,813 | 526,854 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total ALLL balance: |
$ | 286,995 | $ | 102,839 | $ | 33,466 | $ | 96,413 | $ | 47,211 | $ | 38,272 | $ | 605,196 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Loan and Lease Ending Balances at December 31, 2014 |
||||||||||||||||||||||||||||
Portion of loan and lease ending balances: |
||||||||||||||||||||||||||||
Attributable to purchased credit-impaired loans |
$ | 23,228 | $ | 38,371 | $ | | $ | | $ | 1,912 | $ | 51 | $ | 63,562 | ||||||||||||||
Individually evaluated for impairment |
216,993 | 217,262 | 30,612 | 310,446 | 369,577 | 4,088 | 1,148,978 | |||||||||||||||||||||
Collectively evaluated for impairment |
18,792,925 | 4,941,770 | 8,659,290 | 8,180,469 | 5,459,120 | 409,612 | 46,443,186 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total loans and leases evaluated for impairment |
$ | 19,033,146 | $ | 5,197,403 | $ | 8,689,902 | $ | 8,490,915 | $ | 5,830,609 | $ | 413,751 | $ | 47,655,726 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
The following tables present by class the ending, unpaid principal balance, and the related ALLL, along with the average balance and interest income recognized only for loans and leases individually evaluated for impairment and purchased credit-impaired loans: (1), (2)
March 31, 2015 | Three Months Ended March 31, 2015 |
|||||||||||||||||||
(dollar amounts in thousands) |
Ending Balance |
Unpaid Principal Balance (5) |
Related Allowance |
Average Balance |
Interest Income Recognized |
|||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||
Commercial and industrial: |
||||||||||||||||||||
Owner occupied |
$ | 9,893 | $ | 10,551 | $ | | $ | 12,264 | $ | 74 | ||||||||||
Purchased credit-impaired |
| | | | | |||||||||||||||
Other commercial and industrial |
73,861 | 91,609 | | 41,552 | 338 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial and industrial |
$ | 83,754 | $ | 102,160 | $ | | $ | 53,816 | $ | 412 | ||||||||||
Commercial real estate: |
||||||||||||||||||||
Retail properties |
$ | 49,892 | $ | 79,980 | $ | | $ | 57,556 | $ | 496 | ||||||||||
Multi family |
| | | | | |||||||||||||||
Office |
2,793 | 5,967 | | 1,680 | 31 | |||||||||||||||
Industrial and warehouse |
| | | 526 | 7 | |||||||||||||||
Purchased credit-impaired |
35,344 | 84,214 | | 36,857 | 1,925 | |||||||||||||||
Other commercial real estate |
1,484 | 2,119 | | 4,354 | 46 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial real estate |
$ | 89,513 | $ | 172,280 | $ | | $ | 100,973 | $ | 2,505 | ||||||||||
Automobile |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Home equity: |
||||||||||||||||||||
Secured by first-lien |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Secured by junior-lien |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total home equity |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Residential mortgage: |
||||||||||||||||||||
Residential mortgage |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Purchased credit-impaired |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total residential mortgage |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Other consumer |
||||||||||||||||||||
Other consumer |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Purchased credit-impaired |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other consumer |
$ | | $ | | $ | | $ | | $ | |
75
With an allowance recorded: |
||||||||||||||||||||
Commercial and industrial: (3) |
||||||||||||||||||||
Owner occupied |
$ | 62,926 | $ | 76,673 | $ | 4,642 | $ | 50,705 | $ | 440 | ||||||||||
Purchased credit-impaired |
21,378 | 32,794 | 2,103 | 22,303 | 1,164 | |||||||||||||||
Other commercial and industrial |
173,408 | 192,178 | 13,833 | 148,098 | 1,036 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial and industrial |
$ | 257,712 | $ | 301,645 | $ | 20,578 | $ | 221,106 | $ | 2,640 | ||||||||||
Commercial real estate: (4) |
||||||||||||||||||||
Retail properties |
$ | 47,628 | $ | 51,976 | $ | 6,681 | $ | 40,572 | $ | 363 | ||||||||||
Multi family |
16,173 | 22,365 | 2,506 | 15,625 | 170 | |||||||||||||||
Office |
48,423 | 53,794 | 7,524 | 50,628 | 563 | |||||||||||||||
Industrial and warehouse |
7,167 | 10,764 | 543 | 7,949 | 82 | |||||||||||||||
Purchased credit-impaired |
| | | | | |||||||||||||||
Other commercial real estate |
31,892 | 38,911 | 3,921 | 29,605 | 354 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial real estate |
$ | 151,283 | $ | 177,810 | $ | 21,175 | $ | 144,379 | $ | 1,532 | ||||||||||
Automobile |
$ | 30,159 | $ | 30,328 | $ | 1,588 | $ | 30,385 | $ | 561 | ||||||||||
Home equity: |
||||||||||||||||||||
Secured by first-lien |
$ | 147,524 | $ | 153,314 | $ | 10,635 | $ | 146,545 | $ | 1,584 | ||||||||||
Secured by junior-lien |
175,892 | 209,537 | 19,286 | 170,386 | 1,985 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total home equity |
$ | 323,416 | $ | 362,851 | $ | 29,921 | $ | 316,931 | $ | 3,569 | ||||||||||
Residential mortgage (6): |
||||||||||||||||||||
Residential mortgage |
$ | 373,709 | $ | 418,661 | $ | 13,596 | $ | 371,643 | $ | 3,122 | ||||||||||
Purchased credit-impaired |
2,168 | 3,053 | 7 | 2,040 | 3 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total residential mortgage |
$ | 375,877 | $ | 421,714 | $ | 13,603 | $ | 373,683 | $ | 3,125 | ||||||||||
Other consumer: |
||||||||||||||||||||
Other consumer |
$ | 5,045 | $ | 5,045 | $ | 107 | $ | 4,566 | $ | 62 | ||||||||||
Purchased credit-impaired |
51 | 118 | 259 | 51 | 118 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other consumer |
$ | 5,096 | $ | 5,163 | $ | 366 | $ | 4,617 | $ | 180 |
76
December 31, 2014 | Three Months Ended March 31, 2014 |
|||||||||||||||||||
(dollar amounts in thousands) |
Ending Balance |
Unpaid Principal Balance (5) |
Related Allowance |
Average Balance |
Interest Income Recognized |
|||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||
Commercial and industrial: |
||||||||||||||||||||
Owner occupied |
$ | 13,536 | $ | 13,536 | $ | | $ | 4,906 | $ | 49 | ||||||||||
Purchased credit-impaired |
| | | | | |||||||||||||||
Other commercial and industrial |
24,309 | 26,858 | | 7,610 | 97 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial and industrial |
$ | 37,845 | $ | 40,394 | $ | | $ | 12,516 | $ | 146 | ||||||||||
Commercial real estate: |
||||||||||||||||||||
Retail properties |
$ | 61,915 | $ | 91,627 | $ | | $ | 54,290 | $ | 605 | ||||||||||
Multi family |
| | | | | |||||||||||||||
Office |
1,130 | 3,574 | | 6,406 | 189 | |||||||||||||||
Industrial and warehouse |
3,447 | 3,506 | | 9,087 | 108 | |||||||||||||||
Purchased credit-impaired |
38,371 | 91,075 | | 79,396 | 2,666 | |||||||||||||||
Other commercial real estate |
6,608 | 6,815 | | 5,827 | 57 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial real estate |
$ | 111,471 | $ | 196,597 | $ | | $ | 155,006 | $ | 3,625 | ||||||||||
Automobile |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Home equity: |
||||||||||||||||||||
Secured by first-lien |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Secured by junior-lien |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total home equity |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Residential mortgage: |
||||||||||||||||||||
Residential mortgage |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Purchased credit-impaired |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total residential mortgage |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Other consumer |
||||||||||||||||||||
Other consumer |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Purchased credit-impaired |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other consumer |
$ | | $ | | $ | | $ | | $ | |
77
With an allowance recorded: |
||||||||||||||||||||
Commercial and industrial: (3) |
||||||||||||||||||||
Owner occupied |
$ | 44,869 | $ | 53,639 | $ | 4,220 | $ | 39,229 | $ | 399 | ||||||||||
Purchased credit-impaired |
23,228 | 35,307 | 3,846 | 35,961 | 1,265 | |||||||||||||||
Other commercial and industrial |
134,279 | 162,908 | 6,829 | 51,532 | 592 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial and industrial |
$ | 202,376 | $ | 251,854 | $ | 14,895 | $ | 126,722 | $ | 2,256 | ||||||||||
Commercial real estate: (4) |
||||||||||||||||||||
Retail properties |
$ | 37,081 | $ | 38,397 | $ | 3,536 | $ | 68,637 | $ | 577 | ||||||||||
Multi family |
17,277 | 23,725 | 2,339 | 14,739 | 152 | |||||||||||||||
Office |
52,953 | 56,268 | 8,399 | 51,189 | 536 | |||||||||||||||
Industrial and warehouse |
8,888 | 10,396 | 720 | 9,196 | 48 | |||||||||||||||
Purchased credit-impaired |
| | | | | |||||||||||||||
Other commercial real estate |
27,963 | 33,472 | 3,893 | 44,090 | 474 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial real estate |
$ | 144,162 | $ | 162,258 | $ | 18,887 | $ | 187,851 | $ | 1,787 | ||||||||||
Automobile |
$ | 30,612 | $ | 32,483 | $ | 1,531 | $ | 35,076 | $ | 683 | ||||||||||
Home equity: |
||||||||||||||||||||
Secured by first-lien |
$ | 145,566 | $ | 157,978 | $ | 8,296 | $ | 112,420 | $ | 1,239 | ||||||||||
Secured by junior-lien |
164,880 | 208,118 | 17,731 | 103,589 | 1,314 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total home equity |
$ | 310,446 | $ | 366,096 | $ | 26,027 | $ | 216,009 | $ | 2,553 | ||||||||||
Residential mortgage (6): |
||||||||||||||||||||
Residential mortgage |
$ | 369,577 | $ | 415,280 | $ | 16,535 | $ | 378,287 | $ | 2,864 | ||||||||||
Purchased credit-impaired |
1,912 | 3,096 | 8 | 2,378 | 78 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total residential mortgage |
$ | 371,489 | $ | 418,376 | $ | 16,543 | $ | 380,665 | $ | 2,942 | ||||||||||
Other consumer: |
||||||||||||||||||||
Other consumer |
$ | 4,088 | $ | 4,209 | $ | 214 | $ | 1,444 | $ | 33 | ||||||||||
Purchased credit-impaired |
51 | 123 | 245 | 128 | 4 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other consumer |
$ | 4,139 | $ | 4,332 | $ | 459 | $ | 1,572 | $ | 37 |
(1) | These tables do not include loans fully charged-off. |
(2) | All automobile, home equity, residential mortgage, and other consumer impaired loans included in these tables are considered impaired due to their status as a TDR. |
(3) | At March 31, 2015, $70,957 thousand of the $257,712 thousand commercial and industrial loans with an allowance recorded were considered impaired due to their status as a TDR. At December 31, 2014, $62,737 thousand of the $202,376 thousand commercial and industrial loans with an allowance recorded were considered impaired due to their status as a TDR. |
(4) | At March 31, 2015, $29,126 thousand of the $151,283 thousand commercial real estate loans with an allowance recorded were considered impaired due to their status as a TDR. At December 31, 2014, $27,423 thousand of the $144,162 thousand commercial real estate loans with an allowance recorded were considered impaired due to their status as a TDR. |
(5) | The differences between the ending balance and unpaid principal balance amounts represent partial charge-offs. |
(6) | At March 31, 2015, $31,238 thousand of the $375,877 thousand residential mortgages loans with an allowance recorded were guaranteed by the U.S. government. At December 31, 2014, $24,470 thousand of the $371,489 thousand residential mortgage loans with an allowance recorded were guaranteed by the U.S. government. |
78
TDR Loans
TDRs are modified loans where a concession was provided to a borrower experiencing financial difficulties. Loan modifications are considered TDRs when the concessions provided are not available to the borrower through either normal channels or other sources. However, not all loan modifications are TDRs.
TDR Concession Types
The Companys standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrowers specific circumstances at a point in time. All commercial TDRs are reviewed and approved by our SAD. The types of concessions provided to borrowers include:
| Interest rate reduction: A reduction of the stated interest rate to a nonmarket rate for the remaining original life of the debt. |
| Amortization or maturity date change beyond what the collateral supports, including any of the following: |
(1) | Lengthens the amortization period of the amortized principal beyond market terms. This concession reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven. |
(2) | Reduces the amount of loan principal to be amortized and increases the amount of the balloon payment at the end of the term of the loan. This concession also reduces the minimum monthly payment. Principal is generally not forgiven. |
(3) | Extends the maturity date or dates of the debt beyond what the collateral supports. This concession generally applies to loans without a balloon payment at the end of the term of the loan. |
| Chapter 7 bankruptcy: A bankruptcy courts discharge of a borrowers debt is considered a concession when the borrower does not reaffirm the discharged debt. |
| Other: A concession that is not categorized as one of the concessions described above. These concessions include, but are not limited to: principal forgiveness, collateral concessions, covenant concessions, and reduction of accrued interest. |
Principal forgiveness may result from any TDR modification of any concession type. However, the aggregate amount of principal forgiven as a result of loans modified as TDRs during the three-month and three-month periods ended March 31, 2015 and 2014, was not significant.
Following is a description of TDRs by the different loan types:
Commercial loan TDRs Commercial accruing TDRs often result from loans receiving a concession with terms that are not considered a market transaction to Huntington. The TDR remains in accruing status as long as the customer is less than 90-days past due on payments per the restructured loan terms and no loss is expected.
Commercial nonaccrual TDRs result from either: (1) an accruing commercial TDR being placed on nonaccrual status, or (2) a workout where an existing commercial NAL is restructured and a concession was given. At times, these workouts restructure the NAL so that two or more new notes are created. The primary note is underwritten based upon our normal underwriting standards and is sized so projected cash flows are sufficient to repay contractual principal and interest. The terms on the secondary note(s) vary by situation, and may include notes that defer principal and interest payments until after the primary note is repaid. Creating two or more notes often allows the borrower to continue a project or weather a temporary economic downturn and allows Huntington to right-size a loan based upon the current expectations for a borrowers or projects performance.
Our strategy involving TDR borrowers includes working with these borrowers to allow them to refinance elsewhere, as well as allow them time to improve their financial position and remain our customer through refinancing their notes according to market terms and conditions in the future. A subsequent refinancing or modification of a loan may occur when either the loan matures according to the terms of the TDR-modified agreement or the borrower requests a change to the loan agreements. At that time, the loan is evaluated to determine if it is creditworthy. It is subjected to the normal underwriting standards and processes for other similar credit extensions, both new and existing. 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, whereas a continuation of the prior note requires a continuation of the TDR designation. In order for a TDR designation to be removed, the borrower must no longer be experiencing financial difficulties and the terms of the refinanced loan must not represent a concession.
79
Residential Mortgage loan TDRs Residential mortgage TDRs represent loan modifications associated with traditional first-lien mortgage loans in which a concession has been provided to the borrower. The primary concessions given to residential mortgage borrowers are amortization or maturity date changes and interest rate reductions. Residential mortgages identified as TDRs involve borrowers unable to refinance their mortgages through the Companys normal mortgage origination channels or through other independent sources. Some, but not all, of the loans may be delinquent.
Automobile, Home Equity, and Other Consumer loan TDRs The Company may make similar interest rate, term, and principal concessions as with residential mortgage loan TDRs.
TDR Impact on Credit Quality
Huntingtons ALLL is largely determined by updated risk ratings assigned to commercial loans, updated borrower credit scores on consumer loans, and borrower delinquency history in both the commercial and consumer portfolios. These updated risk ratings and credit scores consider the default history of the borrower, including payment redefaults. As such, the provision for credit losses is impacted primarily by changes in borrower payment performance rather than the TDR classification. 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.
Our TDRs may include multiple concessions and the disclosure classifications are presented based on the primary concession provided to the borrower. The majority of our concessions for the C&I and CRE portfolios are the extension of the maturity date coupled with an increase in the interest rate. In these instances, the primary concession is the maturity date extension.
TDR concessions may also result in the reduction of the ALLL within the C&I and CRE portfolios. This reduction is derived from payments and the resulting application of the reserve calculation within the ALLL. The transaction reserve for non-TDR C&I and CRE loans is calculated based upon several estimated probability factors, such as PD and LGD, both of which were previously discussed. Upon the occurrence of a TDR in our C&I and CRE portfolios, the reserve is measured based on discounted expected cash flows or collateral value, less anticipated selling costs, of the modified loan in accordance with ASC 310-10. The resulting TDR ALLL calculation often results in a lower ALLL amount because (1) the discounted expected cash flows or collateral value, less anticipated selling costs, indicate a lower estimated loss, (2) if the modification includes a rate increase, the discounting of the cash flows on the modified loan, using the pre-modification interest rate, exceeds the carrying value of the loan, or (3) payments may occur as part of the modification. The ALLL for C&I and CRE loans may increase as a result of the modification, as the discounted cash flow analysis may indicate additional reserves are required.
TDR concessions on consumer loans may increase the ALLL. The concessions made to these borrowers often include interest rate reductions, and therefore, the TDR ALLL calculation results in a greater ALLL compared with the non-TDR calculation as the reserve is measured based on the estimation of the discounted expected cash flows or collateral value, less anticipated selling costs, on the modified loan in accordance with ASC 310-10. The resulting TDR ALLL calculation often results in a higher ALLL amount because (1) the discounted expected cash flows or collateral value, less anticipated selling costs, indicate a higher estimated loss or, (2) due to the rate decrease, the discounting of the cash flows on the modified loan, using the pre-modification interest rate, indicates a reduction in the expected cash flows or collateral value, less anticipated selling costs. In certain instances, the ALLL may decrease as a result of payments made in connection with the modification.
Commercial loan TDRs In instances where the bank substantiates that it will collect its outstanding balance in full, the note is considered for return to accrual status upon the borrower sustaining sufficient cash flows for a six-month period of time. This six-month period could extend before or after the restructure date. If a charge-off was taken as part of the restructuring, any interest or principal payments received on that note are applied to first reduce the banks outstanding book balance and then to recoveries of charged-off principal, unpaid interest, and/or fee expenses while the TDR is in nonaccrual status.
Residential Mortgage, Automobile, Home Equity, and Other Consumer loan TDRs Modified loans identified as TDRs are aggregated into pools for analysis. Cash flows and weighted average interest rates are used to calculate impairment at the pooled-loan level. Once the loans are aggregated into the pool, they continue to be classified as TDRs until contractually repaid or charged-off.
Residential mortgage loans not guaranteed by a U.S. government agency such as the FHA, VA, and the USDA, including TDR loans, are reported as accrual or nonaccrual based upon delinquency status. Nonaccrual TDRs are those that are greater than 150-days contractually past due. Loans guaranteed by U.S. government organizations continue to accrue interest upon delinquency.
80
The following tables present by class and by the reason for the modification, the number of contracts, post-modification outstanding balance, and the financial effects of the modification for the three-month periods ended March 31, 2015 and 2014:
New Troubled Debt Restructurings During The Three-Month Period Ended (1) | ||||||||||||||||||||||||
March 31, 2015 | March 31, 2014 | |||||||||||||||||||||||
(dollar amounts in thousands) |
Number of Contracts |
Post-modification Outstanding Ending Balance |
Financial effects of modification (2) |
Number of Contracts |
Post-modification Outstanding Ending Balance |
Financial effects of modification (2) |
||||||||||||||||||
C&IOwner occupied: |
||||||||||||||||||||||||
Interest rate reduction |
1 | $ | 46 | $ | (1 | ) | 6 | $ | 924 | $ | (1 | ) | ||||||||||||
Amortization or maturity date change |
46 | 10,461 | (174 | ) | 18 | 4,609 | 4 | |||||||||||||||||
Other |
3 | 613 | (29 | ) | 2 | 840 | (1 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total C&IOwner occupied |
50 | $ | 11,120 | $ | (204 | ) | 26 | $ | 6,373 | $ | 2 | |||||||||||||
C&IOther commercial and industrial: |
||||||||||||||||||||||||
Interest rate reduction |
1 | $ | 30 | $ | | 10 | $ | 27,994 | $ | (147 | ) | |||||||||||||
Amortization or maturity date change |
117 | 80,376 | 814 | 54 | 32,600 | 937 | ||||||||||||||||||
Other |
5 | 28,388 | (430 | ) | 4 | 4,366 | 23 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total C&IOther commercial and industrial |
123 | $ | 108,794 | $ | 384 | 68 | $ | 64,960 | $ | 813 | ||||||||||||||
CRERetail properties: |
||||||||||||||||||||||||
Interest rate reduction |
1 | $ | 1,657 | $ | (11 | ) | 3 | $ | 11,105 | $ | 421 | |||||||||||||
Amortization or maturity date change |
11 | 4,577 | (199 | ) | 5 | 12,238 | 52 | |||||||||||||||||
Other |
| | | 6 | 9,897 | (91 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total CRERetail properties |
12 | $ | 6,234 | $ | (210 | ) | 14 | $ | 33,240 | $ | 382 | |||||||||||||
CREMulti family: |
||||||||||||||||||||||||
Interest rate reduction |
| $ | | $ | | 10 | $ | 645 | $ | | ||||||||||||||
Amortization or maturity date change |
19 | 5,045 | (1 | ) | 4 | 203 | (1 | ) | ||||||||||||||||
Other |
| | | 2 | 323 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total CREMulti family |
19 | $ | 5,045 | $ | (1 | ) | 16 | $ | 1,171 | $ | (1 | ) | ||||||||||||
CREOffice: |
||||||||||||||||||||||||
Interest rate reduction |
| $ | | $ | | 2 | $ | 120 | $ | (1 | ) | |||||||||||||
Amortization or maturity date change |
5 | 26,085 | (31 | ) | 4 | 3,132 | | |||||||||||||||||
Other |
| | | 1 | 10,784 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total CREOffice |
5 | $ | 26,085 | $ | (31 | ) | 7 | $ | 14,036 | $ | (1 | ) | ||||||||||||
CREIndustrial and warehouse: |
||||||||||||||||||||||||
Interest rate reduction |
| $ | | $ | | 2 | $ | 4,046 | $ | | ||||||||||||||
Amortization or maturity date change |
1 | 226 | | 3 | 1,173 | (4 | ) | |||||||||||||||||
Other |
| | | 1 | 977 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total CREIndustrial and Warehouse |
1 | $ | 226 | $ | | 6 | $ | 6,196 | $ | (4 | ) |
81
CREOther commercial real estate: |
||||||||||||||||||||||||
Interest rate reduction |
| $ | | $ | | 4 | $ | 4,304 | $ | 7 | ||||||||||||||
Amortization or maturity date change |
7 | 3,659 | 10 | 21 | 46,536 | 126 | ||||||||||||||||||
Other |
1 | 152 | | 2 | 928 | (1 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total CREOther commercial real estate |
8 | $ | 3,811 | $ | 10 | 27 | $ | 51,768 | $ | 132 | ||||||||||||||
Automobile: |
||||||||||||||||||||||||
Interest rate reduction |
13 | $ | 19 | $ | 1 | 1 | $ | 2 | $ | | ||||||||||||||
Amortization or maturity date change |
496 | 3,352 | 158 | 206 | 1,349 | (7 | ) | |||||||||||||||||
Chapter 7 bankruptcy |
144 | 1,223 | 100 | 180 | 1,361 | (26 | ) | |||||||||||||||||
Other |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Automobile |
653 | $ | 4,594 | $ | 259 | 387 | $ | 2,712 | $ | (33 | ) | |||||||||||||
Residential mortgage: |
||||||||||||||||||||||||
Interest rate reduction |
5 | $ | 476 | $ | (4 | ) | 8 | $ | 788 | $ | 18 | |||||||||||||
Amortization or maturity date change |
123 | 13,858 | (121 | ) | 68 | 8,018 | 103 | |||||||||||||||||
Chapter 7 bankruptcy |
34 | 4,176 | (124 | ) | 85 | 9,007 | 282 | |||||||||||||||||
Other |
6 | 708 | | 1 | 105 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Residential mortgage |
168 | $ | 19,218 | $ | (249 | ) | 162 | $ | 17,918 | $ | 403 | |||||||||||||
First-lien home equity: |
||||||||||||||||||||||||
Interest rate reduction |
10 | $ | 1,419 | $ | 26 | 50 | $ | 3,808 | $ | 191 | ||||||||||||||
Amortization or maturity date change |
49 | 3,611 | (303 | ) | 40 | 2,590 | (426 | ) | ||||||||||||||||
Chapter 7 bankruptcy |
26 | 1,585 | 80 | 21 | 1,389 | 3 | ||||||||||||||||||
Other |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total First-lien home equity |
85 | $ | 6,615 | $ | (197 | ) | 111 | $ | 7,787 | $ | (232 | ) | ||||||||||||
Junior-lien home equity: |
||||||||||||||||||||||||
Interest rate reduction |
4 | $ | 251 | $ | 15 | 87 | $ | 2,867 | $ | (50 | ) | |||||||||||||
Amortization or maturity date change |
347 | 16,507 | (2,936 | ) | 241 | 9,660 | (1,852 | ) | ||||||||||||||||
Chapter 7 bankruptcy |
51 | 775 | 887 | 59 | 925 | 536 | ||||||||||||||||||
Other |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Junior-lien home equity |
402 | $ | 17,533 | $ | (2,034 | ) | 387 | $ | 13,452 | $ | (1,366 | ) | ||||||||||||
Other consumer: |
||||||||||||||||||||||||
Interest rate reduction |
| $ | | $ | | | $ | | $ | | ||||||||||||||
Amortization or maturity date change |
4 | 95 | 4 | 4 | 20 | | ||||||||||||||||||
Chapter 7 bankruptcy |
2 | 6 | 1 | 3 | 23 | (1 | ) | |||||||||||||||||
Other |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Other consumer |
6 | $ | 101 | $ | 5 | 7 | $ | 43 | $ | (1 | ) | |||||||||||||
Total new troubled debt restructurings |
1,532 | $ | 209,376 | $ | (2,268 | ) | 1,218 | $ | 219,656 | $ | 94 |
(1) | TDRs may include multiple concessions and the disclosure classifications are based on the primary concession provided to the borrower. |
(2) | Amounts represent the financial impact via provision for loan and lease losses as a result of the modification. |
82
Any loan within any portfolio or class is considered as payment redefaulted at 90-days past due.
The following tables present TDRs that have defaulted within one year of modification during the three-month periods ended March 31, 2015 and 2014:
Troubled Debt Restructurings That Have Redefaulted (1) | ||||||||||||||||
Within One Year Of Modification During The Three Months Ended | ||||||||||||||||
March 31, 2015 | March 31, 2014 | |||||||||||||||
Number of | Ending | Number of | Ending | |||||||||||||
(dollar amounts in thousands) |
Contracts | Balance | Contracts | Balance | ||||||||||||
C&IOwner occupied: |
||||||||||||||||
Interest rate reduction |
| $ | | | $ | | ||||||||||
Amortization or maturity date change |
1 | 149 | | | ||||||||||||
Other |
| | 1 | 230 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total C&IOwner occupied |
1 | $ | 149 | 1 | $ | 230 | ||||||||||
C&IOther commercial and industrial: |
||||||||||||||||
Interest rate reduction |
| $ | | | $ | | ||||||||||
Amortization or maturity date change |
2 | 114 | 4 | 324 | ||||||||||||
Other |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total C&IOther commercial and industrial |
2 | $ | 114 | 4 | $ | 324 | ||||||||||
CRERetail Properties: |
||||||||||||||||
Interest rate reduction |
| $ | | | $ | | ||||||||||
Amortization or maturity date change |
| | | | ||||||||||||
Other |
1 | 6,482 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total CRERetail properties |
1 | $ | 6,482 | | $ | | ||||||||||
CREMulti family: |
||||||||||||||||
Interest rate reduction |
| $ | | | $ | | ||||||||||
Amortization or maturity date change |
| | | | ||||||||||||
Other |
3 | 769 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total CREMulti family |
3 | $ | 769 | | $ | | ||||||||||
CREOffice: |
||||||||||||||||
Interest rate reduction |
| $ | | | $ | | ||||||||||
Amortization or maturity date change |
| | | | ||||||||||||
Other |
1 | 996 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total CREOffice |
1 | $ | 996 | | $ | | ||||||||||
CREIndustrial and Warehouse: |
||||||||||||||||
Interest rate reduction |
| $ | | | $ | | ||||||||||
Amortization or maturity date change |
| | | | ||||||||||||
Other |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total CREIndustrial and Warehouse |
| $ | | | $ | | ||||||||||
CREOther commercial real estate: |
||||||||||||||||
Interest rate reduction |
| $ | | | $ | | ||||||||||
Amortization or maturity date change |
| | 1 | 561 | ||||||||||||
Other |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total CREOther commercial real estate |
| $ | | 1 | $ | 561 |
83
Automobile: |
||||||||||||||||
Interest rate reduction |
| $ | | | $ | | ||||||||||
Amortization or maturity date change |
6 | 110 | 19 | 104 | ||||||||||||
Chapter 7 bankruptcy |
7 | 50 | 13 | 70 | ||||||||||||
Other |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Automobile |
13 | $ | 160 | 32 | $ | 174 | ||||||||||
Residential mortgage: |
||||||||||||||||
Interest rate reduction |
1 | $ | 61 | 2 | $ | | ||||||||||
Amortization or maturity date change |
16 | 1,776 | 29 | 3 | ||||||||||||
Chapter 7 bankruptcy |
2 | 250 | 15 | 2 | ||||||||||||
Other |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Residential mortgage |
19 | $ | 2,087 | 46 | $ | 5 | ||||||||||
First-lien home equity: |
||||||||||||||||
Interest rate reduction |
1 | $ | 155 | 1 | $ | 113 | ||||||||||
Amortization or maturity date change |
2 | 78 | 4 | 615 | ||||||||||||
Chapter 7 bankruptcy |
19 | 1,723 | 3 | 201 | ||||||||||||
Other |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total First-lien home equity |
22 | $ | 1,956 | 8 | $ | 929 | ||||||||||
Junior-lien home equity: |
||||||||||||||||
Interest rate reduction |
1 | $ | 37 | | $ | | ||||||||||
Amortization or maturity date change |
12 | 459 | 6 | 330 | ||||||||||||
Chapter 7 bankruptcy |
9 | 214 | 16 | 570 | ||||||||||||
Other |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Junior-lien home equity |
22 | $ | 710 | 22 | $ | 900 | ||||||||||
Other consumer: |
||||||||||||||||
Interest rate reduction |
| $ | | | $ | | ||||||||||
Amortization or maturity date change |
| | | | ||||||||||||
Chapter 7 bankruptcy |
| | | | ||||||||||||
Other |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Other consumer |
| $ | | | $ | | ||||||||||
Total troubled debt restructurings with subsequent redefault |
84 | $ | 13,423 | 114 | $ | 3,123 |
(1) | Subsequent redefault is defined as a payment redefault within 12 months of the restructuring date. Payment redefault is defined as 90-days past due for any loan within any portfolio or class. Any loan may be considered to be in payment redefault prior to the guidelines noted above when collection of principal or interest is in doubt. |
Pledged Loans and Leases
At March 31, 2015, the Bank has access to the Federal Reserves discount window and advances from the FHLB Cincinnati. As of March 31, 2015, these borrowings and advances are secured by $18.4 billion of loans and securities.
On March 31, 2015, Huntington completed its acquisition Macquarie. Huntington assumed $254.8 million of debt associated with two securitizations. The debt is secured by $297.6 million of leases held by the trusts.
84
4. AVAILABLE-FOR-SALE AND OTHER SECURITIES
Listed below are the contractual maturities (under 1 year, 1-5 years, 6-10 years, and over 10 years) of available-for-sale and other securities at March 31, 2015 and December 31, 2014:
March 31, 2015 | December 31, 2014 | |||||||||||||||
(dollar amounts in thousands) |
Amortized Cost |
Fair Value | Amortized Cost |
Fair Value | ||||||||||||
U.S. Treasury: |
||||||||||||||||
Under 1 year |
$ | 5,835 | $ | 5,835 | $ | | $ | | ||||||||
1-5 years |
5,440 | 5,520 | 5,435 | 5,452 | ||||||||||||
6-10 years |
| | | | ||||||||||||
Over 10 years |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total U.S. Treasury |
11,275 | 11,355 | 5,435 | 5,452 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Federal agencies: mortgage-backed securities: |
||||||||||||||||
Under 1 year |
36,620 | 36,734 | 47,023 | 47,190 | ||||||||||||
1-5 years |
209,862 | 214,102 | 216,775 | 221,078 | ||||||||||||
6-10 years |
180,422 | 183,552 | 184,576 | 186,938 | ||||||||||||
Over 10 years |
5,263,901 | 5,349,284 | 4,825,525 | 4,867,495 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Federal agencies: mortgage-backed securities |
5,690,805 | 5,783,672 | 5,273,899 | 5,322,701 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other agencies: |
||||||||||||||||
Under 1 year |
32,248 | 32,328 | 33,047 | 33,237 | ||||||||||||
1-5 years |
9,071 | 9,555 | 9,122 | 9,575 | ||||||||||||
6-10 years |
119,696 | 122,886 | 103,530 | 105,019 | ||||||||||||
Over 10 years |
181,131 | 185,646 | 204,016 | 203,712 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other agencies |
342,146 | 350,415 | 349,715 | 351,543 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total U.S. Treasury, Federal agency, and other agency securities |
6,044,226 | 6,145,442 | 5,629,049 | 5,679,696 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Municipal securities: |
||||||||||||||||
Under 1 year |
277,551 | 271,172 | 256,399 | 255,835 | ||||||||||||
1-5 years |
322,135 | 326,618 | 269,385 | 274,003 | ||||||||||||
6-10 years |
996,655 | 1,004,624 | 938,780 | 945,954 | ||||||||||||
Over 10 years |
445,189 | 463,791 | 376,747 | 392,777 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total municipal securities |
2,041,530 | 2,066,205 | 1,841,311 | 1,868,569 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Private-label CMO: |
||||||||||||||||
Under 1 year |
| | | | ||||||||||||
1-5 years |
| | | | ||||||||||||
6-10 years |
1,195 | 1,245 | 1,314 | 1,371 | ||||||||||||
Over 10 years |
40,847 | 39,009 | 42,416 | 40,555 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total private-label CMO |
42,042 | 40,254 | 43,730 | 41,926 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Asset-backed securities: |
||||||||||||||||
Under 1 year |
| | | | ||||||||||||
1-5 years |
165,319 | 166,277 | 228,852 | 229,364 | ||||||||||||
6-10 years |
123,591 | 124,807 | 144,163 | 144,193 | ||||||||||||
Over 10 years |
589,189 | 540,999 | 641,984 | 582,441 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total asset-backed securities |
878,099 | 832,083 | 1,014,999 | 955,998 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Corporate debt: |
||||||||||||||||
Under 1 year |
38,801 | 39,075 | 18,767 | 18,953 | ||||||||||||
1-5 years |
313,507 | 324,116 | 314,773 | 323,503 | ||||||||||||
6-10 years |
125,689 | 126,429 | 145,611 | 143,720 | ||||||||||||
Over 10 years |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total corporate debt |
477,997 | 489,620 | 479,151 | 486,176 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other: |
||||||||||||||||
Under 1 year |
| | 250 | 250 | ||||||||||||
1-5 years |
3,950 | 3,906 | 3,150 | 3,066 | ||||||||||||
6-10 years |
| | | | ||||||||||||
Over 10 years |
| | | | ||||||||||||
Non-marketable equity securities |
331,770 | 331,771 | 331,559 | 331,559 | ||||||||||||
Mutual funds |
11,830 | 11,843 | 16,151 | 16,161 | ||||||||||||
Marketable equity securities |
536 | 1,275 | 536 | 1,269 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other |
348,086 | 348,795 | 351,646 | 352,305 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available-for-sale and other securities |
$ | 9,831,980 | $ | 9,922,399 | $ | 9,359,886 | $ | 9,384,670 | ||||||||
|
|
|
|
|
|
|
|
85
Non-marketable equity securities at March 31, 2015 and December 31, 2014 include $157.0 million of stock issued by the FHLB of Cincinnati, and $174.7 million and $174.5 million, respectively, of Federal Reserve Bank stock. Non-marketable equity securities are recorded at amortized cost.
The following tables provide amortized cost, fair value, and gross unrealized gains and losses recognized in OCI by investment category at March 31, 2015 and December 31, 2014:
Unrealized | ||||||||||||||||
(dollar amounts in thousands) |
Amortized Cost |
Gross Gains |
Gross Losses |
Fair Value | ||||||||||||
March 31, 2015 |
||||||||||||||||
U.S. Treasury |
$ | 11,275 | $ | 80 | $ | | $ | 11,355 | ||||||||
Federal agencies: |
||||||||||||||||
Mortgage-backed securities |
5,690,805 | 100,113 | (7,246 | ) | 5,783,672 | |||||||||||
Other agencies |
342,146 | 8,270 | (1 | ) | 350,415 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total U.S. Treasury, Federal agency securities |
6,044,226 | 108,463 | (7,247 | ) | 6,145,442 | |||||||||||
Municipal securities |
2,041,530 | 40,512 | (15,837 | ) | 2,066,205 | |||||||||||
Private-label CMO |
42,042 | 1,116 | (2,904 | ) | 40,254 | |||||||||||
Asset-backed securities |
878,099 | 4,626 | (50,642 | ) | 832,083 | |||||||||||
Corporate debt |
477,997 | 12,167 | (544 | ) | 489,620 | |||||||||||
Other securities |
348,086 | 753 | (44 | ) | 348,795 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available-for-sale and other securities |
$ | 9,831,980 | $ | 167,637 | $ | (77,218 | ) | $ | 9,922,399 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Unrealized | ||||||||||||||||
(dollar amounts in thousands) |
Amortized Cost |
Gross Gains |
Gross Losses |
Fair Value | ||||||||||||
December 31, 2014 |
||||||||||||||||
U.S. Treasury |
$ | 5,435 | $ | 17 | $ | | $ | 5,452 | ||||||||
Federal agencies: |
||||||||||||||||
Mortgage-backed securities |
5,273,899 | 63,906 | (15,104 | ) | 5,322,701 | |||||||||||
Other agencies |
349,715 | 2,871 | (1,043 | ) | 351,543 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total U.S. Treasury, Federal agency securities |
5,629,049 | 66,794 | (16,147 | ) | 5,679,696 | |||||||||||
Municipal securities |
1,841,311 | 37,398 | (10,140 | ) | 1,868,569 | |||||||||||
Private-label CMO |
43,730 | 1,116 | (2,920 | ) | 41,926 | |||||||||||
Asset-backed securities |
1,014,999 | 2,061 | (61,062 | ) | 955,998 | |||||||||||
Corporate debt |
479,151 | 9,442 | (2,417 | ) | 486,176 | |||||||||||
Other securities |
351,646 | 743 | (84 | ) | 352,305 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available-for-sale and other securities |
$ | 9,359,886 | $ | 117,554 | $ | (92,770 | ) | $ | 9,384,670 | |||||||
|
|
|
|
|
|
|
|
At March 31, 2015, the carrying value of investment securities pledged to secure public and trust deposits, trading account liabilities, U.S. Treasury demand notes, and security repurchase agreements totaled $3.7 billion. There were no securities of a single issuer, which are not governmental or government-sponsored, that exceeded 10% of shareholders equity at March 31, 2015.
86
The following tables provide detail on investment securities with unrealized losses aggregated by investment category and the length of time the individual securities have been in a continuous loss position, at March 31, 2015 and December 31, 2014:
Less than 12 Months | Over 12 Months | Total | ||||||||||||||||||||||
(dollar amounts in thousands) |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
||||||||||||||||||
March 31, 2015 |
||||||||||||||||||||||||
Federal agencies: |
||||||||||||||||||||||||
Mortgage-backed securities |
183,977 | (630 | ) | 310,854 | (6,616 | ) | 494,831 | (7,246 | ) | |||||||||||||||
Other agencies |
600 | (1 | ) | | | 600 | (1 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Federal agency securities |
184,577 | (631 | ) | 310,854 | (6,616 | ) | 495,431 | (7,247 | ) | |||||||||||||||
Municipal securities |
610,486 | (14,089 | ) | 57,696 | (1,748 | ) | 668,182 | (15,837 | ) | |||||||||||||||
Private-label CMO |
| | 22,491 | (2,904 | ) | 22,491 | (2,904 | ) | ||||||||||||||||
Asset-backed securities |
61,741 | (125 | ) | 278,236 | (50,517 | ) | 339,977 | (50,642 | ) | |||||||||||||||
Corporate debt |
31,556 | (28 | ) | 22,224 | (516 | ) | 53,780 | (544 | ) | |||||||||||||||
Other securities |
773 | (27 | ) | 1,483 | (17 | ) | 2,256 | (44 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired securities |
$ | 889,133 | $ | (14,900 | ) | $ | 692,984 | $ | (62,318 | ) | $ | 1,582,117 | $ | (77,218 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Less than 12 Months | Over 12 Months | Total | ||||||||||||||||||||||
(dollar amounts in thousands) |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
||||||||||||||||||
December 31, 2014 |
||||||||||||||||||||||||
Federal agencies: |
||||||||||||||||||||||||
Mortgage-backed securities |
501,858 | (1,909 | ) | 527,280 | (13,195 | ) | 1,029,138 | (15,104 | ) | |||||||||||||||
Other agencies |
159,708 | (1,020 | ) | 1,281 | (23 | ) | 160,989 | (1,043 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Federal agency securities |
661,566 | (2,929 | ) | 528,561 | (13,218 | ) | 1,190,127 | (16,147 | ) | |||||||||||||||
Municipal securities |
568,619 | (9,127 | ) | 96,426 | (1,013 | ) | 665,045 | (10,140 | ) | |||||||||||||||
Private-label CMO |
| | 22,650 | (2,920 | ) | 22,650 | (2,920 | ) | ||||||||||||||||
Asset-backed securities |
157,613 | (641 | ) | 325,691 | (60,421 | ) | 483,304 | (61,062 | ) | |||||||||||||||
Corporate debt |
49,562 | (252 | ) | 88,398 | (2,165 | ) | 137,960 | (2,417 | ) | |||||||||||||||
Other securities |
| | 1,416 | (84 | ) | 1,416 | (84 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired securities |
$ | 1,437,360 | $ | (12,949 | ) | $ | 1,063,142 | $ | (79,821 | ) | $ | 2,500,502 | $ | (92,770 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following table is a summary of realized securities gains and losses for the three-month periods ended March 31, 2015 and 2014:
Three Months Ended | ||||||||
March 31, | ||||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Gross gains on sales of securities |
$ | | $ | 16,990 | ||||
Gross (losses) on sales of securities |
| (20 | ) | |||||
|
|
|
|
|||||
Net gain on sales of securities |
$ | | $ | 16,970 | ||||
|
|
|
|
Collateralized Debt Obligations and Private-Label CMO Securities
Our highest risk segments of our investment portfolio are the trust preferred CDO and 2003-2006 vintage private-label CMO portfolios. Of the $40.3 million of the private-label CMO securities reported at fair value at March 31, 2015, approximately $20.1 million are rated below investment grade. The CDOs are in the asset-backed securities portfolio. These segments are in run off, and we have not purchased these types of securities since 2008. The performance of the underlying securities in each of these segments reflects the deterioration of CDO issuers and 2003-2006 non-agency mortgages. Each of these securities in these two segments is subjected to a rigorous review of its projected cash flows. These reviews are supported with analysis from independent third parties.
87
The fair values of the private label CMO and CDO assets have been impacted by various market conditions. The unrealized losses were primarily the result of wider liquidity spreads on asset-backed securities and increased market volatility on non-agency mortgage that are collateralized by certain mortgage loans. In addition, the expected average lives of the asset-backed securities backed by trust-preferred securities have been extended, due to changes in the expectations of when the underlying securities would be repaid. The contractual terms and / or cash flows of the investments do not permit the issuer to settle the securities at a price less than the amortized cost. Huntington does not intend to sell, nor does it believe it will be required to sell these securities until the amortized cost is recovered, which may be maturity and; therefore, does not consider them to be other-than-temporarily impaired at March 31, 2015.
The following table summarizes the relevant characteristics of our CDO securities portfolio, which are included in asset-backed securities, at March 31, 2015. Each security is part of a pool of issuers and supports a more senior tranche of securities except for the MM Comm III securities which are the most senior class.
Collateralized Debt Obligation Data
March 31, 2015
(dollar amounts in thousands)
Actual | ||||||||||||||||||||||||||||||||||||
Deferrals | Expected | |||||||||||||||||||||||||||||||||||
and | Defaults | |||||||||||||||||||||||||||||||||||
# of Issuers | Defaults | as a % of | ||||||||||||||||||||||||||||||||||
Lowest | Currently | as a % of | Remaining | |||||||||||||||||||||||||||||||||
Deal Name |
Par Value | Amortized Cost |
Fair Value |
Unrealized Loss (2) |
Credit Rating (3) |
Performing/ Remaining (4) |
Original Collateral |
Performing Collateral |
Excess Subordination (5) |
|||||||||||||||||||||||||||
Alesco II (1) |
$ | 41,646 | $ | 28,636 | $ | 18,383 | $ | (10,253 | ) | C | 29/32 | 8 | % | 7 | % | | % | |||||||||||||||||||
ICONS |
19,801 | 19,801 | 15,767 | (4,034 | ) | BB | 19/21 | 7 | 16 | 56 | ||||||||||||||||||||||||||
MM Comm III |
5,584 | 5,335 | 4,369 | (966 | ) | BB | 5/9 | 5 | 9 | 28 | ||||||||||||||||||||||||||
Pre TSL IX (1) |
5,000 | 3,955 | 2,662 | (1,293 | ) | C | 28/40 | 19 | 9 | 4 | ||||||||||||||||||||||||||
Pre TSL XI (1) |
25,000 | 20,517 | 13,595 | (6,922 | ) | C | 42/55 | 16 | 9 | 9 | ||||||||||||||||||||||||||
Pre TSL XIII (1) |
27,530 | 20,127 | 13,952 | (6,175 | ) | C | 41/56 | 21 | 21 | 6 | ||||||||||||||||||||||||||
Reg Diversified (1) |
25,500 | 6,287 | 1,591 | (4,696 | ) | D | 25/41 | 34 | 7 | | ||||||||||||||||||||||||||
Soloso (1) |
12,500 | 2,440 | 468 | (1,972 | ) | C | 36/60 | 29 | 19 | | ||||||||||||||||||||||||||
Tropic III |
31,000 | 31,000 | 18,368 | (12,632 | ) | CCC+ | 30/40 | 19 | 8 | 39 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Total at March 31, 2015 |
$ | 193,561 | $ | 138,098 | $ | 89,155 | $ | (48,943 | ) | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Total at December 31, 2014 |
$ | 193,597 | $ | 139,194 | $ | 82,738 | $ | (56,456 | ) | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
(1) | Security was determined to have OTTI. As such, the book value is net of recorded credit impairment. |
(2) | These securities have been in a continuous loss position for longer than 12 months. |
(3) | For purposes of comparability, the lowest credit rating expressed is equivalent to Fitch ratings even where the lowest rating is based on another nationally recognized credit rating agency. |
(4) | Includes both banks and/or insurance companies. |
(5) | Excess subordination percentage represents the additional defaults in excess of both current and projected defaults that the CDO can absorb before the bond experiences credit impairment. Excess subordinated percentage is calculated by (a) determining what percentage of defaults a deal can experience before the bond has credit impairment, and (b) subtracting from this default breakage percentage both total current and expected future default percentages. |
Security Impairment
Huntington evaluated OTTI on the debt security types listed below.
Private-label CMO securities are collateralized by first-lien residential mortgage loans. The securities are valued by a third party pricing specialist using a discounted cash flow approach and proprietary pricing model. The model uses inputs such as estimated prepayment speeds, losses, recoveries, default rates that are implied by the underlying performance of collateral in the structure or similar structures, discount rates that are implied by market prices for similar securities, collateral structure types, and house price depreciation / appreciation rates that are based upon macroeconomic forecasts.
88
Collateralized Debt Obligations are backed by a pool of debt securities issued by financial institutions. The collateral generally consists of trust-preferred securities and subordinated debt securities issued by banks, bank holding companies, and insurance companies. A full cash flow analysis is used to estimate fair values and assess impairment for each security within this portfolio. A third party pricing specialist with direct industry experience in pooled-trust-preferred security evaluations is engaged to provide assistance estimating the fair value and expected cash flows on this portfolio. The full cash flow analysis is completed by evaluating the relevant credit and structural aspects of each pooled-trust-preferred security in the portfolio, including collateral performance projections for each piece of collateral in the security and terms of the securitys structure. The credit review includes an analysis of profitability, credit quality, operating efficiency, leverage, and liquidity using available financial and regulatory information for each underlying collateral issuer. The analysis also includes a review of historical industry default data, current/near term operating conditions, and the impact of macroeconomic and regulatory changes. Using the results of our analysis, we estimate appropriate default and recovery probabilities for each piece of collateral then estimate the expected cash flows for each security. The cumulative probability of default ranges from a low of 1.9% to 100%.
Many collateral issuers have the option of deferring interest payments on their debt for up to five years. For issuers who are deferring interest, assumptions are made regarding the issuers ability to resume interest payments and make the required principal payment at maturity; the cumulative probability of default for these issuers currently ranges from 31% to 100%, and a 10% recovery assumption. The fair value of each security is obtained by discounting the expected cash flows at a market discount rate, ranging from LIBOR plus 3.0% to LIBOR plus 13.0% as of March 31, 2015. The market discount rate is determined by reference to yields observed in the market for similarly rated collateralized debt obligations, specifically high-yield collateralized loan obligations. The relatively high market discount rate is reflective of the uncertainty of the cash flows and illiquid nature of these securities. The large differential between the fair value and amortized cost of some of the securities reflects the high market discount rate and the expectation that the majority of the cash flows will not be received until near the final maturity of the security (the final maturities range from 2032 to 2035).
On December 10, 2013, the Federal Reserve, the OCC, the FDIC, the CFTC and the SEC issued final rules to implement the Volcker Rule contained in section 619 of the Dodd-Frank Act, generally to become effective on July 21, 2015. The Volcker Rule prohibits an insured depository institution and its affiliates (referred to as banking entities) from: (i) engaging in proprietary trading and (ii) investing in or sponsoring certain types of funds (covered funds) subject to certain limited exceptions. These prohibitions impact the ability of U.S. banking entities to provide investment management products and services that are competitive with nonbanking firms generally and with non-U.S. banking organizations in overseas markets. The rule also effectively prohibits short-term trading strategies by any U.S. banking entity if those strategies involve instruments other than those specifically permitted for trading.
On January 14, 2014, the five federal agencies approved an interim final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities from the investment prohibitions of section 619 of the Volcker Rule. Under the interim final rule, the agencies permit the retention of an interest in or sponsorship of covered funds by banking entities if certain qualifications are met. In addition, the agencies released a non-exclusive list of issuers that meet the requirements of the interim final rule. At March 31, 2015, we had investments in nine different pools of trust preferred securities. Eight of our pools are included in the list of non-exclusive issuers. We have analyzed the ICONS pool which was not included on the list and believe that it is more likely than not that we would not be required to sell and will be able to hold the security to recovery under the final Volcker Rule regulations.
For the three-month periods ended March 31, 2015 and 2014, there were no OTTI losses recognized in the Unaudited Condensed Consolidated Statements of Income for securities evaluated for impairment as described above. The OTTI recognized in other comprehensive income on debt securities held by Huntington at March 31, 2015 and 2014 is $30.9 million.
As of March 31, 2015, Management has evaluated all other investment securities with unrealized losses and all non-marketable securities for impairment and concluded no additional OTTI is required.
89
5. HELD-TO-MATURITY SECURITIES
These are debt securities that Huntington has the intent and ability to hold until maturity. The debt securities are carried at amortized cost and adjusted for amortization of premiums and accretion of discounts using the interest method.
Listed below are the contractual maturities (under 1 year, 1-5 years, 6-10 years, and over 10 years) of held-to-maturity securities at March 31, 2015 and December 31, 2014:
March 31, 2015 | December 31, 2014 | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
(dollar amounts in thousands) |
Cost | Value | Cost | Value | ||||||||||||
Federal agencies: mortgage-backed securities: |
||||||||||||||||
Under 1 year |
$ | | $ | | $ | | $ | | ||||||||
1-5 years |
| | | | ||||||||||||
6-10 years |
24,901 | 24,517 | 24,901 | 24,263 | ||||||||||||
Over 10 years |
3,017,912 | 3,053,362 | 3,136,460 | 3,140,194 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Federal agencies: mortgage-backed securities |
3,042,813 | 3,077,879 | 3,161,361 | 3,164,457 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other agencies: |
||||||||||||||||
Under 1 year |
| | | | ||||||||||||
1-5 years |
| | | | ||||||||||||
6-10 years |
78,053 | 80,031 | 54,010 | 54,843 | ||||||||||||
Over 10 years |
208,091 | 209,698 | 156,553 | 155,821 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other agencies |
286,144 | 289,729 | 210,563 | 210,664 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total U.S. Government backed agencies |
3,328,957 | 3,367,608 | 3,371,924 | 3,375,121 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Municipal securities: |
||||||||||||||||
Under 1 year |
| | | | ||||||||||||
1-5 years |
| | | | ||||||||||||
6-10 years |
| | | | ||||||||||||
Over 10 years |
7,706 | 7,281 | 7,981 | 7,594 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total municipal securities |
7,706 | 7,281 | 7,981 | 7,594 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total held-to-maturity securities |
$ | 3,336,663 | $ | 3,374,889 | $ | 3,379,905 | $ | 3,382,715 | ||||||||
|
|
|
|
|
|
|
|
The following table provides amortized cost, gross unrealized gains and losses, and fair value by investment category at March 31, 2015 and December 31, 2014:
Unrealized | ||||||||||||||||
(dollar amounts in thousands) |
Amortized Cost |
Gross Gains |
Gross Losses |
Fair Value | ||||||||||||
March 31, 2015 |
||||||||||||||||
Federal Agencies: |
||||||||||||||||
Mortgage-backed securities |
$ | 3,042,813 | $ | 43,058 | $ | (7,992 | ) | $ | 3,077,879 | |||||||
Other agencies |
286,144 | 4,065 | (480 | ) | 289,729 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total U.S. Government backed agencies |
3,328,957 | 47,123 | (8,472 | ) | 3,367,608 | |||||||||||
Municipal securities |
7,706 | | (425 | ) | 7,281 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total held-to-maturity securities |
$ | 3,336,663 | $ | 47,123 | $ | (8,897 | ) | $ | 3,374,889 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Unrealized | ||||||||||||||||
(dollar amounts in thousands) |
Amortized Cost |
Gross Gains |
Gross Losses |
Fair Value | ||||||||||||
December 31, 2014 |
||||||||||||||||
Federal Agencies: |
||||||||||||||||
Mortgage-backed securities |
$ | 3,161,361 | $ | 24,832 | $ | (21,736 | ) | $ | 3,164,457 | |||||||
Other agencies |
210,563 | 1,251 | (1,150 | ) | 210,664 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total U.S. Government backed agencies |
3,371,924 | 26,083 | (22,886 | ) | 3,375,121 | |||||||||||
Municipal securities |
7,981 | | (387 | ) | 7,594 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total held-to-maturity securities |
$ | 3,379,905 | $ | 26,083 | $ | (23,273 | ) | $ | 3,382,715 | |||||||
|
|
|
|
|
|
|
|
90
The following tables provide detail on held-to-maturity securities with unrealized losses aggregated by investment category and the length of time the individual securities have been in a continuous loss position, at March 31, 2015 and December 31, 2014:
Less than 12 Months | Over 12 Months | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
(dollar amounts in thousands) |
Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
March 31, 2015 |
||||||||||||||||||||||||
Federal Agencies: |
||||||||||||||||||||||||
Mortgage-backed securities |
$ | 130,027 | $ | (748 | ) | $ | 414,559 | $ | (7,244 | ) | $ | 544,586 | $ | (7,992 | ) | |||||||||
Other agencies |
63,134 | (346 | ) | 22,023 | (134 | ) | 85,157 | (480 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total U.S. Government backed securities |
193,161 | (1,094 | ) | 436,582 | (7,378 | ) | 629,743 | (8,472 | ) | |||||||||||||||
Municipal securities |
| | 7,281 | (425 | ) | 7,281 | (425 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired securities |
$ | 193,161 | $ | (1,094 | ) | $ | 443,863 | $ | (7,803 | ) | $ | 637,024 | $ | (8,897 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Less than 12 Months | Over 12 Months | Total | ||||||||||||||||||||||
(dollar amounts in thousands) |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||
December 31, 2014 |
||||||||||||||||||||||||
Federal Agencies: |
||||||||||||||||||||||||
Mortgage-backed securities |
$ | 707,934 | $ | (5,550 | ) | $ | 622,026 | $ | (16,186 | ) | $ | 1,329,960 | $ | (21,736 | ) | |||||||||
Other agencies |
36,956 | (198 | ) | 71,731 | (952 | ) | 108,687 | (1,150 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total U.S. Government backed securities |
744,890 | (5,748 | ) | 693,757 | (17,138 | ) | 1,438,647 | (22,886 | ) | |||||||||||||||
Municipal securities |
7,594 | (387 | ) | | | 7,594 | (387 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired securities |
$ | 752,484 | $ | (6,135 | ) | $ | 693,757 | $ | (17,138 | ) | $ | 1,446,241 | $ | (23,273 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Security Impairment
Huntington evaluates the held-to-maturity securities portfolio on a quarterly basis for impairment. Impairment would exist when the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis at the balance sheet date. Under these circumstances, any impairment would be recognized in earnings. As of March 31, 2015, Management has evaluated held-to-maturity securities with unrealized losses for impairment and concluded no OTTI is required.
6. LOAN SALES AND SECURITIZATIONS
Residential Mortgage Loans
The following table summarizes activity relating to residential mortgage loans sold with servicing retained for the three-month periods ended March 31, 2015 and 2014:
Three Months Ended March 31, |
||||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Residential mortgage loans sold with servicing retained |
$ | 630,683 | $ | 481,837 | ||||
Pretax gains resulting from above loan sales (1) |
14,862 | 12,076 |
(1) | Recorded in mortgage banking income. |
91
A MSR is established only when the servicing is contractually separated from the underlying mortgage loans by sale or securitization of the loans with servicing rights retained. At initial recognition, the MSR asset is established at its fair value using assumptions consistent with assumptions used to estimate the fair value of existing MSRs. At the time of initial capitalization, MSRs may be recorded using either the fair value method or the amortization method. The election of the fair value method or amortization method is made at the time each servicing class is established. Subsequently, servicing rights are accounted for based on the methodology chosen for each respective servicing class. Any increase or decrease in the fair value of MSRs carried under the fair value method, as well as amortization or impairment of MSRs recorded using the amortization method, during the period is recorded as an increase or decrease in mortgage banking income, which is reflected in noninterest income in the Unaudited Condensed Consolidated Statements of Income.
The following tables summarize the changes in MSRs recorded using either the fair value method or the amortization method for the three-month periods ended March 31, 2015 and 2014:
Fair Value Method: |
Three Months Ended March 31, |
|||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Fair value, beginning of period |
$ | 22,786 | $ | 34,236 | ||||
Change in fair value during the period due to: |
||||||||
Time decay (1) |
(339 | ) | (725 | ) | ||||
Payoffs (2) |
(818 | ) | (1,915 | ) | ||||
Changes in valuation inputs or assumptions (3) |
(1,174 | ) | (968 | ) | ||||
|
|
|
|
|||||
Fair value, end of period: |
$ | 20,455 | $ | 30,628 | ||||
|
|
|
|
|||||
Weighted-average life (years) |
4.7 | 4.1 | ||||||
|
|
|
|
(1) | Represents decrease in value due to passage of time, including the impact from both regularly scheduled loan principal payments and partial loan paydowns. |
(2) | Represents decrease in value associated with loans that paid off during the period. |
(3) | Represents change in value resulting primarily from market-driven changes in interest rates and prepayment speeds. |
Amortization Method: |
Three Months Ended March 31, |
|||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Carrying value, beginning of period |
$ | 132,813 | $ | 128,064 | ||||
New servicing assets created |
6,454 | 5,053 | ||||||
Servicing assets acquired |
| 3,505 | ||||||
Impairment (charge) / recovery |
(7,990 | ) | (629 | ) | ||||
Amortization and other |
(5,823 | ) | (3,342 | ) | ||||
|
|
|
|
|||||
Carrying value, end of period |
$ | 125,454 | $ | 132,651 | ||||
|
|
|
|
|||||
Fair value, end of period |
$ | 125,691 | $ | 144,694 | ||||
|
|
|
|
|||||
Weighted-average life (years) |
5.7 | 6.5 | ||||||
|
|
|
|
MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs occur, the precise terms and conditions are typically not readily available. Therefore, the fair value of MSRs is estimated using a discounted future cash flow model. The model considers portfolio characteristics, contractually specified servicing fees and assumptions related to prepayments, delinquency rates, late charges, other ancillary revenues, costs to service, and other economic factors. Changes in the assumptions used may have a significant impact on the valuation of MSRs.
MSR values are very sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be greatly impacted by the level of prepayments. Huntington hedges the value of certain MSRs against changes in value attributable to changes in interest rates using a combination of derivative instruments and trading securities.
92
For MSRs under the fair value method, a summary of key assumptions and the sensitivity of the MSR value at March 31, 2015 and December 31, 2014, to changes in these assumptions follows:
March 31, 2015 | December 31, 2014 | |||||||||||||||||||||||
Decline in fair value due to | Decline in fair value due to | |||||||||||||||||||||||
(dollar amounts in thousands) |
Actual | 10% adverse change |
20% adverse change |
Actual | 10% adverse change |
20% adverse change |
||||||||||||||||||
Constant prepayment rate (annualized) |
15.20 | % | $ | (1,046 | ) | $ | (2,002 | ) | 15.60 | % | $ | (1,176 | ) | $ | (2,248 | ) | ||||||||
Spread over forward interest rate swap rates |
641 bps | (625 | ) | (1,214 | ) | 546 bps | (699 | ) | (1,355 | ) |
For MSRs under the amortization method, a summary of key assumptions and the sensitivity of the MSR value at March 31, 2015 and December 31, 2014, to changes in these assumptions follows:
March 31, 2015 | December 31, 2014 | |||||||||||||||||||||||
Decline in fair value due to | Decline in fair value due to | |||||||||||||||||||||||
(dollar amounts in thousands) |
Actual | 10% adverse change |
20% adverse change |
Actual | 10% adverse change |
20% adverse change |
||||||||||||||||||
Constant prepayment rate (annualized) |
11.90 | % | $ | (5,135 | ) | $ | (9,860 | ) | 11.40 | % | $ | (5,289 | ) | $ | (10,164 | ) | ||||||||
Spread over forward interest rate swap rates |
928 bps | (3,957 | ) | (7,663 | ) | 856 bps | (4,343 | ) | (8,403 | ) |
Total servicing, late and other ancillary fees, net of amortization of capitalized servicing assets included in mortgage banking income amounted to $3.9 million and $5.0 million for the three-month periods ended March 31, 2015 and 2014, respectively. The unpaid principal balance of residential mortgage loans serviced for third parties was $15.6 billion and $15.6 billion at March 31, 2015 and December 31, 2014, respectively.
Automobile Loans and Leases
Huntington has retained servicing responsibilities on sold automobile loans and receives annual servicing fees and other ancillary fees on the outstanding loan balances. Automobile loan servicing rights are accounted for using the amortization method. A servicing asset is established at fair value at the time of the sale. The servicing asset is then amortized against servicing income. Impairment, if any, is recognized when carrying value exceeds the fair value as determined by calculating the present value of expected net future cash flows. The primary risk characteristic for measuring servicing assets is payoff rates of the underlying loan pools. Valuation calculations rely on the predicted payoff assumption and, if actual payoff is quicker than expected, then future value would be impaired.
Changes in the carrying value of automobile loan servicing rights for the three-month periods ended March 31, 2015 and 2014, and the fair value at the end of each period were as follows:
Three Months Ended March 31, |
||||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Carrying value, beginning of period |
$ | 6,898 | $ | 17,672 | ||||
New servicing assets created |
| | ||||||
Amortization and other |
(1,835 | ) | (3,315 | ) | ||||
|
|
|
|
|||||
Carrying value, end of period |
$ | 5,063 | $ | 14,357 | ||||
|
|
|
|
|||||
Fair value, end of period |
$ | 5,155 | $ | 14,357 | ||||
|
|
|
|
|||||
Weighted-average life (years) |
2.4 | 3.2 | ||||||
|
|
|
|
93
A summary of key assumptions and the sensitivity of the automobile loan servicing rights value to changes in these assumptions at March 31, 2015 and December 31, 2014 follows:
March 31, 2015 | December 31, 2014 | |||||||||||||||||||||||
Decline in fair value due to | Decline in fair value due to | |||||||||||||||||||||||
(dollar amounts in thousands) |
Actual | 10% adverse change |
20% adverse change |
Actual | 10% adverse change |
20% adverse change |
||||||||||||||||||
Constant prepayment rate (annualized) |
15.60 | % | $ | (98 | ) | $ | (287 | ) | 14.62 | % | $ | (305 | ) | $ | (496 | ) | ||||||||
Spread over forward interest rate swap rates |
500 bps | (1 | ) | (3 | ) | 500 bps | (2 | ) | (4 | ) |
Servicing income, net of amortization of capitalized servicing assets and impairment, amounted to $1.4 million and $2.1 million for the three-month periods ending March 31, 2015, and 2014, respectively. The unpaid principal balance of automobile loans serviced for third parties was $697.2 million and $837.7 million at March 31, 2015 and December 31, 2014, respectively.
Small Business Association (SBA) Portfolio
The following table summarizes activity relating to SBA loans sold with servicing retained for the three-month periods ended March 31, 2015 and 2014:
Three Months Ended | ||||||||
March 31, | ||||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
SBA loans sold with servicing retained |
$ | 42,401 | $ | 40,871 | ||||
Pretax gains resulting from above loan sales (1) |
3,574 | 4,375 |
(1) | Recorded in gain on sale of loans. |
Huntington has retained servicing responsibilities on sold SBA loans and receives annual servicing fees on the outstanding loan balances. SBA loan servicing rights are accounted for using the amortization method. A servicing asset is established at fair value at the time of the sale using a discounted future cash flow model. The servicing asset is then amortized against servicing income. Impairment, if any, is recognized when carrying value exceeds the fair value as determined by calculating the present value of expected net future cash flows.
The following tables summarize the changes in the carrying value of the servicing asset for the three-month periods ended March 31, 2015 and 2014, and the fair value at the end of each period were as follows:
Three Months Ended March 31, |
||||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Carrying value, beginning of period |
$ | 18,536 | $ | 16,865 | ||||
New servicing assets created |
1,457 | 1,335 | ||||||
Amortization and other |
(2,046 | ) | (1,172 | ) | ||||
|
|
|
|
|||||
Carrying value, end of period |
$ | 17,947 | $ | 17,028 | ||||
|
|
|
|
|||||
Fair value, end of period |
$ | 19,436 | $ | 17,028 | ||||
|
|
|
|
|||||
Weighted-average life (years) |
3.3 | 3.5 | ||||||
|
|
|
|
A summary of key assumptions and the sensitivity of the SBA loan servicing rights value to changes in these assumptions at March 31, 2015 and December 31, 2014 follows:
March 31, 2015 | December 31, 2014 | |||||||||||||||||||||||
Decline in fair value due to | Decline in fair value due to | |||||||||||||||||||||||
(dollar amounts in thousands) |
Actual | 10% adverse change |
20% adverse change |
Actual | 10% adverse change |
20% adverse change |
||||||||||||||||||
Constant prepayment rate (annualized) |
7.80 | % | $ | (281 | ) | $ | (558 | ) | 5.60 | % | $ | (211 | ) | $ | (419 | ) | ||||||||
Discount rate |
1,500 bps | (521 | ) | (1,020 | ) | 1,500 bps | (563 | ) | (1,102 | ) |
94
Servicing income, net of amortization of capitalized servicing assets, amounted to $2.0 million and $1.7 million for the three-month periods ending March 31, 2015, and 2014, respectively. The unpaid principal balance of SBA loans serviced for third parties was $889.8 million and $898.0 million at March 31, 2015 and December 31, 2014, respectively.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Business segments are based on segment leadership structure, which reflects how segment performance is monitored and assessed. We have five major business segments: Retail and Business Banking, Commercial Banking, Automobile Finance and Commercial Real Estate (AFCRE), Regional Banking and The Huntington Private Client Group (RBHPCG), and Home Lending. A Treasury / Other function includes, along with technology and operations, other unallocated assets, liabilities, revenue, and expense.
A rollforward of goodwill by business segment for the first three-month period of 2015 is presented in the table below:
(dollar amounts in thousands) |
Retail & Business Banking |
Commercial Banking |
AFCRE | RBHPCG |
|
Treasury/ Other |
Huntington Consolidated |
|||||||||||||||||||||
Balance, beginning of period |
$ | 368,097 | $ | 59,594 | $ | | $ | 90,012 | $ | $ | 4,838 | $ | 522,541 | |||||||||||||||
Goodwill acquired during the period |
| 155,828 | | | | 155,828 | ||||||||||||||||||||||
Adjustments |
| | | | | | ||||||||||||||||||||||
Impairment |
| | | | | | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance, end of period |
$ | 368,097 | $ | 215,422 | $ | | $ | 90,012 | $ | $ | 4,838 | $ | 678,369 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the 2015 first quarter, Huntington completed the acquisition of Macquarie and recorded $155.8 million of goodwill and $8.2 million of other intangible assets. For additional information on the acquisition, see Business Combinations footnote.
Goodwill is not amortized but is evaluated for impairment on an annual basis at October 1 of each year or whenever events or changes in circumstances indicate the carrying value may not be recoverable. As a result of the 2014 first quarter reorganization in our reported business segments, goodwill was reallocated among the business segments. Immediately following the reallocation, impairment of $3.0 million was recorded in the Home Lending reporting segment.
At March 31, 2015 and December 31, 2014, Huntingtons other intangible assets consisted of the following:
(dollar amounts in thousands) |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Value |
|||||||||
March 31, 2015 |
||||||||||||
Core deposit intangible |
$ | 400,058 | $ | (374,940 | ) | $ | 25,118 | |||||
Customer relationship |
116,120 | (68,696 | ) | 47,424 | ||||||||
Other |
25,164 | (25,041 | ) | 123 | ||||||||
|
|
|
|
|
|
|||||||
Total other intangible assets |
$ | 541,342 | $ | (468,677 | ) | $ | 72,665 | |||||
|
|
|
|
|
|
|||||||
December 31, 2014 |
||||||||||||
Core deposit intangible |
$ | 400,058 | $ | (366,907 | ) | $ | 33,151 | |||||
Customer relationship |
107,920 | (66,534 | ) | 41,386 | ||||||||
Other |
25,164 | (25,030 | ) | 134 | ||||||||
|
|
|
|
|
|
|||||||
Total other intangible assets |
$ | 533,142 | $ | (458,471 | ) | $ | 74,671 | |||||
|
|
|
|
|
|
95
The estimated amortization expense of other intangible assets for the remainder of 2015 and the next five years is as follows:
(dollar amounts in thousands) |
Amortization Expense |
|||
2015 |
$ | 17,724 | ||
2016 |
14,316 | |||
2017 |
12,908 | |||
2018 |
11,135 | |||
2019 |
9,825 | |||
2020 |
3,076 |
8. LONG-TERM DEBT
Effective March 31, 2015, Huntington completed its acquisition of Macquarie. As part of the acquisition, Huntington assumed $293.4 million of non-recourse debt with various financial institutions and maturity dates. The effective interest rate on the non-recourse debt is 3.24%. Huntington also assumed $254.8 million of debt associated with two securitizations. The securitization debt has various classes and associated maturity dates and has an effective interest rate of 1.70%.
In February 2015, the Bank issued $500.0 million of senior notes at 99.860% of face value. The senior bank note issuances mature on February 26, 2018 and have a fixed coupon rate of 1.70%. Also, in February 2015, the Bank issued $500.0 million of senior notes at 99.874% of face value. The senior bank note issuances mature on April 1, 2020 and have a fixed coupon rate of 2.40%. Both senior note issuances may be redeemed one month prior to the maturity date at 100% of principal plus accrued and unpaid interest.
96
9. OTHER COMPREHENSIVE INCOME
The components of other comprehensive income for the three-month periods ended March 31, 2015 and 2014, were as follows:
Three Months Ended | ||||||||||||
March 31, 2015 | ||||||||||||
Tax (Expense) | ||||||||||||
(dollar amounts in thousands) |
Pretax | Benefit | After-tax | |||||||||
Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold |
$ | 5,245 | $ | (1,855 | ) | $ | 3,390 | |||||
Unrealized holding gains (losses) on available-for-sale debt securities arising during the period |
60,503 | (21,477 | ) | 39,026 | ||||||||
Less: Reclassification adjustment for net losses (gains) included in net income |
(121 | ) | 42 | (79 | ) | |||||||
|
|
|
|
|
|
|||||||
Net change in unrealized holding gains (losses) on available-for-sale debt securities |
65,627 | (23,290 | ) | 42,337 | ||||||||
|
|
|
|
|
|
|||||||
Net change in unrealized holding gains (losses) on available-for-sale equity securities |
9 | (3 | ) | 6 | ||||||||
Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period |
28,144 | (9,850 | ) | 18,294 | ||||||||
Less: Reclassification adjustment for net (gains) losses included in net income |
(123 | ) | 43 | (80 | ) | |||||||
|
|
|
|
|
|
|||||||
Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships |
28,021 | (9,807 | ) | 18,214 | ||||||||
|
|
|
|
|
|
|||||||
Net change in pension and other post-retirement obligations |
1,389 | (486 | ) | 903 | ||||||||
|
|
|
|
|
|
|||||||
Total other comprehensive income (loss) |
$ | 95,046 | $ | (33,586 | ) | $ | 61,460 | |||||
|
|
|
|
|
|
|||||||
Three Months Ended | ||||||||||||
March 31, 2014 | ||||||||||||
Tax (Expense) | ||||||||||||
(dollar amounts in thousands) |
Pretax | Benefit | After-tax | |||||||||
Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold |
$ | 7,408 | $ | (2,619 | ) | $ | 4,789 | |||||
Unrealized holding gains (losses) on available-for-sale debt securities arising during the period |
26,245 | (9,332 | ) | 16,913 | ||||||||
Less: Reclassification adjustment for net losses (gains) included in net income |
(15,375 | ) | 5,381 | (9,994 | ) | |||||||
|
|
|
|
|
|
|||||||
Net change in unrealized holding gains (losses) on available-for-sale debt securities |
18,278 | (6,570 | ) | 11,708 | ||||||||
|
|
|
|
|
|
|||||||
Net change in unrealized holding gains (losses) on available-for-sale equity securities |
53 | (19 | ) | 34 | ||||||||
Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period |
2,805 | (982 | ) | 1,823 | ||||||||
Less: Reclassification adjustment for net (gains) losses included in net income |
(2,892 | ) | 1,012 | (1,880 | ) | |||||||
|
|
|
|
|
|
|||||||
Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships |
(87 | ) | 30 | (57 | ) | |||||||
|
|
|
|
|
|
|||||||
Net change in pension and other post-retirement obligations |
888 | (311 | ) | 577 | ||||||||
|
|
|
|
|
|
|||||||
Total other comprehensive income (loss) |
$ | 19,132 | $ | (6,870 | ) | $ | 12,262 | |||||
|
|
|
|
|
|
97
The following table presents activity in accumulated other comprehensive income (loss), net of tax, for the three-month periods ended March 31, 2015 and 2014:
(dollar amounts in thousands) |
Unrealized gains and (losses) on debt securities (1) |
Unrealized gains and (losses) on equity securities |
Unrealized gains and (losses) on cash flow hedging derivatives |
Unrealized gains (losses) for pension and other post- retirement obligations |
Total | |||||||||||||||
Balance, December 31, 2013 |
$ | (39,234 | ) | $ | 292 | $ | (18,844 | ) | $ | (156,223 | ) | $ | (214,009 | ) | ||||||
Other comprehensive income before reclassifications |
21,702 | 34 | 1,823 | | 23,559 | |||||||||||||||
Amounts reclassified from accumulated OCI to earnings |
(9,994 | ) | | (1,880 | ) | 577 | (11,297 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Period change |
11,708 | 34 | (57 | ) | 577 | 12,262 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance, March 31, 2014 |
$ | (27,526 | ) | $ | 326 | $ | (18,901 | ) | $ | (155,646 | ) | $ | (201,747 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance, December 31, 2014 |
$ | 15,137 | $ | 484 | $ | (12,233 | ) | $ | (225,680 | ) | $ | (222,292 | ) | |||||||
Other comprehensive income before reclassifications |
42,416 | 6 | 18,294 | | 60,716 | |||||||||||||||
Amounts reclassified from accumulated OCI to earnings |
(79 | ) | | (80 | ) | 903 | 744 | |||||||||||||
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|
|||||||||||
Period change |
42,337 | 6 | 18,214 | 903 | 61,460 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance, March 31, 2015 |
$ | 57,474 | $ | 490 | $ | 5,981 | $ | (224,777 | ) | $ | (160,832 | ) | ||||||||
|
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|
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|
|
|
(1) | Amounts at March 31, 2015 and December 31, 2014 include $0.9 million and $0.8 million, respectively, of net unrealized losses on securities transferred from the available-for-sale securities portfolio to the held-to-maturity securities portfolio. The net unrealized gains will be recognized in earnings over the remaining life of the security using the effective interest method. |
98
The following table presents the reclassification adjustments out of accumulated OCI included in net income and the impacted line items as listed on the Unaudited Condensed Consolidated Statements of Income for the three-month periods ended March 31, 2015 and 2014:
Reclassifications out of accumulated OCI | ||||||||||
Amounts | Location of net gain (loss) | |||||||||
reclassified from | reclassified from accumulated | |||||||||
Accumulated OCI components |
accumulated OCI | OCI into earnings | ||||||||
Three | Three | |||||||||
Months Ended | Months Ended | |||||||||
(dollar amounts in thousands) |
March 31, 2015 | March 31, 2014 | ||||||||
Gains (losses) on debt securities: |
||||||||||
Amortization of unrealized gains (losses) |
$ | 121 | $ | 175 | Interest income - held-to-maturity securities - taxable | |||||
Realized gain (loss) on sale of securities |
| 15,200 | Noninterest income - net gains (losses) on sale of securities | |||||||
|
|
|
|
|||||||
121 | 15,375 | Total before tax | ||||||||
(42 | ) | (5,381 | ) | Tax (expense) benefit | ||||||
|
|
|
|
|||||||
$ | 79 | $ | 9,994 | Net of tax | ||||||
|
|
|
|
|||||||
Gains (losses) on cash flow hedging relationships: |
|
|||||||||
Interest rate contracts |
$ | 133 | $ | 2,892 | Interest income - loans and leases | |||||
Interest rate contracts |
(10 | ) | | Noninterest income - other income | ||||||
|
|
|
|
|||||||
123 | 2,892 | Total before tax | ||||||||
(43 | ) | (1,012 | ) | Tax (expense) benefit | ||||||
|
|
|
|
|||||||
$ | 80 | $ | 1,880 | Net of tax | ||||||
|
|
|
|
|||||||
Amortization of defined benefit pension and post-retirement items: | ||||||||||
Actuarial gains (losses) |
$ | (1,389 | ) | $ | (888 | ) | Noninterest expense - personnel costs | |||
|
|
|
|
|||||||
(1,389 | ) | (888 | ) | Total before tax | ||||||
486 | 311 | Tax (expense) benefit | ||||||||
|
|
|
|
|||||||
$ | (903 | ) | $ | (577 | ) | Net of tax | ||||
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10. SHAREHOLDERS EQUITY
2015 Share Repurchase Program
On March 11, 2015, Huntington announced that the Federal Reserve did not object to the proposed capital actions included in Huntingtons capital plan submitted to the Federal Reserve in January 2015. These actions included a potential repurchase of up to $366 million of common stock from the second quarter of 2015 through the second quarter of 2016. Purchases of common stock may include open market purchases, privately negotiated transactions, and accelerated repurchase programs. Huntingtons board of directors authorized a share repurchase program consistent with Huntingtons capital plan. This program replaced the previously authorized share repurchase program authorized by Huntingtons board of directors in 2014.
2014 Share Repurchase Program
During the three-month period ended March 31, 2015, Huntington repurchased a total of 4.9 million shares at a weighted average share price of $10.45, which completes our previous authorization.
On March 26, 2014, Huntington announced that the Federal Reserve did not object to the proposed capital actions included in Huntingtons capital plan submitted to the Federal Reserve in January of 2014. These actions include a potential repurchase of up to $250 million of common stock through the first quarter of 2015. Huntingtons board of directors authorized a share repurchase program consistent with Huntingtons capital plan. This program replaced the previously authorized share repurchase program authorized by Huntingtons board of directors in 2013.
99
2013 Share Repurchase Program
During the three-month period ended March 31, 2014, Huntington repurchased a total of 14.6 million shares at a weighted average share price of $9.32.
11. EARNINGS PER SHARE
Basic earnings per share is the amount of earnings (adjusted for dividends declared on preferred stock) available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issued for stock options, restricted stock units and awards, distributions from deferred compensation plans, and the conversion of the Companys convertible preferred. Potentially dilutive common shares are excluded from the computation of diluted earnings per share in periods in which the effect would be antidilutive. For diluted earnings per share, net income available to common shares can be affected by the conversion of the Companys convertible preferred stock. Where the effect of this conversion would be dilutive, net income available to common shareholders is adjusted by the associated preferred dividends and deemed dividend. The calculation of basic and diluted earnings per share for the three-month periods ended March 31, 2015 and 2014, was as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
(dollar amounts in thousands, except per share amounts) | 2015 | 2014 | ||||||
Basic earnings per common share: |
||||||||
Net income |
$ | 165,854 | $ | 149,143 | ||||
Preferred stock dividends |
(7,965 | ) | (7,964 | ) | ||||
|
|
|
|
|||||
Net income available to common shareholders |
$ | 157,889 | $ | 141,179 | ||||
Average common shares issued and outstanding |
809,778 | 829,659 | ||||||
Basic earnings per common share |
$ | 0.19 | $ | 0.17 | ||||
Diluted earnings per common share: |
||||||||
Net income available to common shareholders |
$ | 157,889 | $ | 141,179 | ||||
Effect of assumed preferred stock conversion |
| | ||||||
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|
|
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Net income applicable to diluted earnings per share |
$ | 157,889 | $ | 141,179 | ||||
Average common shares issued and outstanding |
809,778 | 829,659 | ||||||
Dilutive potential common shares: |
||||||||
Stock options and restricted stock units and awards |
12,126 | 11,456 | ||||||
Shares held in deferred compensation plans |
1,706 | 1,256 | ||||||
Other |
199 | 306 | ||||||
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|
|||||
Dilutive potential common shares: |
14,031 | 13,018 | ||||||
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|
|
|||||
Total diluted average common shares issued and outstanding |
823,809 | 842,677 | ||||||
Diluted earnings per common share |
$ | 0.19 | $ | 0.17 |
For the three-month periods ended March 31, 2015 and 2014, approximately 1.6 million and 2.2 million, respectively, of options to purchase shares of common stock were not included in the computation of diluted earnings per share because the effect would be antidilutive.
12. SHARE-BASED COMPENSATION
Huntington sponsors nonqualified and incentive share based compensation plans. These plans provide for the granting of stock options and other awards to officers, directors, and other employees. Compensation costs are included in personnel costs on the Unaudited Condensed Consolidated Statements of Income. Stock options are granted with an exercise price at the closing market price on the date of the grant. Options granted typically vest ratably over four years or when other conditions are met. Stock options, which represented a portion of our grant values, have no intrinsic value until the stock price increases. All options granted have a term of seven years.
100
2015 Long-Term Incentive Plan
In April 2015, shareholders approved the Huntington Bancshares Incorporated 2015 Long-Term Incentive Plan (the Plan). Shares remaining under the 2012 Plan have been incorporated into the 2015 Plan and reduced the full number of shares covered by all awards. Accordingly, the total number of shares available for awards under the 2015 Plan is 30.0 million shares. Huntington issues shares to fulfill stock option exercises and restricted stock unit and award vesting from available authorized common shares. At March 31, 2015, the Company believes there are adequate authorized common shares to satisfy anticipated stock option exercises and restricted stock unit and award vesting in 2015.
2012 Long-Term Incentive Plan
In 2012, shareholders approved the Huntington Bancshares Incorporated 2012 Long-Term Incentive Plan (the 2012 Plan) which authorized 51.0 million shares for future grants. The 2012 Plan was superseded effective April 23, 2015. At March 31, 2015, 13.7 million shares from the 2012 Plan were available for future grants.
Huntington uses the Black-Scholes option pricing model to value options in determining our share-based compensation expense. Forfeitures are estimated at the date of grant based on historical rates, and updated as necessary, and reduce the compensation expense recognized. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. The expected dividend yield is based on the dividend rate and stock price at the date of the grant. Expected volatility is based on the estimated volatility of Huntingtons stock over the expected term of the option.
The following table illustrates total share-based compensation expense and related tax benefit for the three-month periods ended March 31, 2015 and 2014:
Three Months Ended | ||||||||
March 31, | ||||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Share-based compensation expense |
$ | 11,095 | $ | 9,418 | ||||
Tax benefit |
3,851 | 3,163 |
Huntingtons stock option activity and related information for the three-month period ended March 31, 2015, was as follows:
Weighted- | ||||||||||||||||
Weighted- | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinsic | ||||||||||||||
(amounts in thousands, except years and per share amounts) |
Options | Price | Life (Years) | Value | ||||||||||||
Outstanding at January 1, 2015 |
19,619 | $ | 6.99 | | | |||||||||||
Granted |
| | | | ||||||||||||
Exercised |
(723 | ) | 6.24 | | | |||||||||||
Forfeited/expired |
(319 | ) | 21.07 | | | |||||||||||
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|
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|
|
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Outstanding at March 31, 2015 |
18,577 | $ | 6.78 | 3.7 | $ | 82,290 | ||||||||||
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Expected to vest at March 31, 2015 (1) |
4,960 | $ | 7.65 | 5.1 | $ | 16,852 | ||||||||||
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Exercisable at March 31, 2015 |
13,244 | $ | 6.42 | 3.1 | $ | 64,339 | ||||||||||
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|
|
(1) | The number of options expected to vest includes an estimate of 373 thousand shares expected to be forfeited. |
The aggregate intrinsic value represents the amount by which the fair value of underlying stock exceeds the in-the-money option exercise price. For the three-month periods ended March 31, 2015 and 2014, cash received for the exercises of stock options was $4.5 million and $6.7 million, respectively. The tax benefit realized from stock option exercises was $0.7 million and $0.3 million for each respective period.
Huntington also grants restricted stock, restricted stock units, performance share units and other stock-based awards. Restricted stock units and awards are issued at no cost to the recipient, and can be settled only in shares at the end of the vesting period. Restricted stock awards provide the holder with full voting rights and cash dividends during the vesting period. Restricted stock units do not provide the holder with voting rights or cash dividends during the vesting period, but do accrue a dividend equivalent that is paid upon vesting, and are subject to certain service restrictions. Performance share units are payable contingent upon Huntington achieving certain predefined performance objectives over the three-year measurement period. The fair value of these awards is the closing market price of Huntingtons common stock on the date of award.
101
The weighted-average grant date fair value of nonvested shares granted for the three-month periods ended March 31, 2015 and 2014, were $10.69 and $9.13, respectively. The total fair value of awards vested was $10.8 million and $9.6 million during the three-month periods ended March 31, 2015, and 2014, respectively. As of March 31, 2015, the total unrecognized compensation cost related to nonvested awards was $65.4 million with a weighted-average expense recognition period of 2.4 years.
The following table summarizes the status of Huntingtons restricted stock units, performance share units, and restricted stock awards as of March 31, 2015, and activity for the three-month period ended March 31, 2015:
Weighted- | Weighted- | Weighted- | ||||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||||
Restricted | Grant Date | Restricted | Grant Date | Performance | Grant Date | |||||||||||||||||||
Stock | Fair Value | Stock | Fair Value | Share | Fair Value | |||||||||||||||||||
(amounts in thousands, except per share amounts) |
Awards | Per Share | Units | Per Share | Units | Per Share | ||||||||||||||||||
Nonvested at January 1, 2015 |
12 | $ | 9.53 | 11,904 | $ | 7.79 | 2,579 | $ | 7.76 | |||||||||||||||
Granted |
| | 1,274 | 10.69 | | | ||||||||||||||||||
Vested |
(3 | ) | 9.53 | (1,442 | ) | 7.49 | | | ||||||||||||||||
Forfeited |
| | (66 | ) | 7.84 | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Nonvested at March 31, 2015 |
9 | $ | 9.53 | 11,670 | $ | 8.14 | 2,579 | $ | 7.76 | |||||||||||||||
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13. BENEFIT PLANS
Huntington sponsors the Plan, a non-contributory defined benefit pension plan covering substantially all employees hired or rehired prior to January 1, 2010. The Plan, which was modified in 2013 and no longer accrues service benefits to participants, provides benefits based upon length of service and compensation levels. The funding policy of Huntington is to contribute an annual amount that is at least equal to the minimum funding requirements but not more than the amount deductible under the Internal Revenue Code. There is no required minimum contribution for 2015. During the 2013 third quarter, the board of directors approved, and management communicated, a curtailment of the Companys pension plan effective December 31, 2013. In addition, Huntington has an unfunded defined benefit post-retirement plan that provides certain healthcare and life insurance benefits to retired employees who have attained the age of 55 and have at least 10 years of vesting service under this plan. For additional information on benefit plans, see the Benefit Plan footnote in our 2014 Form 10-K.
On January 1, 2015, Huntington terminated the Company sponsored retiree health care plan for Medicare eligible retirees and their dependents. Instead, Huntington partnered with a third party to assist the retirees and their dependents in selecting individual policies from a variety of carriers on a private exchange. This plan amendment resulted in a measurement of the liability at the approval date. The result of the measurement was a $5.2 million reduction of the liability and increase in accumulated other comprehensive income during the 2014 third quarter. It also resulted in a reduction of expense over the estimated life of plan participants.
The following table shows the components of net periodic benefit expense of the Plan and the Post-Retirement Benefit Plan:
Pension Benefits | Post Retirement Benefits | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
(dollar amounts in thousands) |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Service cost (1) |
$ | 457 | $ | 435 | $ | | $ | | ||||||||
Interest cost |
7,985 | 8,100 | 141 | 259 | ||||||||||||
Expected return on plan assets |
(11,043 | ) | (11,446 | ) | | | ||||||||||
Amortization of prior service cost |
| | (492 | ) | (339 | ) | ||||||||||
Amortization of gain |
1,982 | 1,442 | (116 | ) | (144 | ) | ||||||||||
Settlements |
2,550 | 2,500 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Benefit expense |
$ | 1,931 | $ | 1,031 | $ | (467 | ) | $ | (224 | ) | ||||||
|
|
|
|
|
|
|
|
(1) | Since no participants will be earning benefits after December 31, 2013, the 2014 and 2015 service cost represents only administrative expenses. |
102
The Bank, as trustee, held all Plan assets at March 31, 2015 and December 31, 2014. The Plan assets consisted of the following investments:
Fair Value | ||||||||||||||||
(dollar amounts in thousands) |
March 31, 2015 | December 31, 2014 | ||||||||||||||
Cash equivalents: |
||||||||||||||||
Huntington fundsmoney market |
$ | 5,387 | 1 | % | $ | 16,136 | 2 | % | ||||||||
Fixed income: |
||||||||||||||||
Corporate obligations |
223,489 | 34 | 218,077 | 33 | ||||||||||||
U.S. government obligations |
62,162 | 9 | 62,627 | 10 | ||||||||||||
Mutual fundsfixed income |
37,118 | 6 | 34,761 | 5 | ||||||||||||
U.S. government agencies |
7,630 | 1 | 7,445 | 1 | ||||||||||||
Equities: |
||||||||||||||||
Mutual fundsequities |
153,288 | 23 | 147,191 | 23 | ||||||||||||
Other common stock |
121,035 | 18 | 118,970 | 18 | ||||||||||||
Huntington funds |
37,794 | 6 | 37,920 | 6 | ||||||||||||
Exchange traded funds |
7,017 | 1 | 6,840 | 1 | ||||||||||||
Limited partnerships |
3,843 | 1 | 3,046 | 1 | ||||||||||||
|
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|
|
|
|
|
|
|||||||||
Fair value of plan assets |
$ | 658,763 | 100 | % | $ | 653,013 | 100 | % | ||||||||
|
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|
|
Investments of the Plan are accounted for at cost on the trade date and are reported at fair value. All of the Plans investments at March 31, 2015, are classified as Level 1 within the fair value hierarchy, except for corporate obligations, U.S. government obligations, and U.S. government agencies, which are classified as Level 2, and limited partnerships, which are classified as Level 3. In general, investments of the Plan are exposed to various risks, such as interest rate risk, credit risk, and overall market volatility. Due to the level of risk associated with certain investments, it is reasonably possible changes in the values of investments will occur in the near term and such changes could materially affect the amounts reported in the Plan assets.
The investment objective of the Plan is to maximize the return on Plan assets over a long time period, while meeting the Plan obligations. At March 31, 2015, Plan assets were invested 49% in equity investments, 50% in bonds, and 1% in cash with an average duration of 12.65 years on bond investments. The estimated life of benefit obligations was 12.8 years. Although it may fluctuate with market conditions, Management has targeted a long-term allocation of Plan assets of 20% to 50% in equity investments and 80% to 50% in bond investments. The allocation of Plan assets between equity investments and fixed income investments will change from time to time with the allocation to fixed income investments increasing as the funding level increases.
Huntington also sponsors other nonqualified retirement plans, the most significant being the SERP and the SRIP. The SERP provides certain former officers and directors, and the SRIP provides certain current and former officers and directors of Huntington and its subsidiaries with defined pension benefits in excess of limits imposed by federal tax law. During the 2013 third quarter, the board of directors approved, and management communicated, a curtailment of the Companys SRIP plan effective December 31, 2013.
Huntington has a defined contribution plan that is available to eligible employees. Huntington matches participant contributions, up to the first 4% of base pay contributed to the Plan. For 2014, a discretionary profit-sharing contribution equal to 1% of eligible participants 2014 base pay was awarded.
The following table shows the costs of providing the SERP, SRIP, and defined contribution plans:
Three Months Ended March 31, |
||||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
SERP & SRIP |
$ | 578 | $ | 475 | ||||
Defined contribution plan |
7,445 | 6,105 | ||||||
|
|
|
|
|||||
Benefit cost |
$ | 8,023 | $ | 6,580 | ||||
|
|
|
|
103
14. INCOME TAXES
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 $52.1 million in the 2014 first quarter. These amounts 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.
Uncertain Tax Positions
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state. city, and foreign jurisdictions. Federal income tax audits have been completed 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.
Huntington accounts for uncertainties in income taxes in accordance with ASC 740, Income Taxes. At March 31, 2015, Huntington had gross unrecognized tax benefits of $24.3 million in income tax liability related to uncertain tax positions. Total interest accrued on the unrecognized tax benefits was $0.3 million as of March 31, 2015. This compared with gross unrecognized tax benefits of $1.2 million at December 31, 2014 and $2.8 million at March 31, 2014, and total interest accrued of $0.2 million at December 31, 2014 and $0.1 million at March 31, 2014. Huntington recognizes interest and penalties on income tax assessments or income tax refunds in the financial statements as a component of provision for income taxes. Due to the complexities of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. It is reasonably possible that the liability for gross unrecognized tax benefits could decrease by $23.1 million during the next 12 months due to the completion of tax authority examinations.
15. FAIR VALUES OF ASSETS AND LIABILITIES
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A three-level valuation hierarchy was established for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instruments categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Transfers in and out of Level 1, 2, or 3 are recorded at fair value at the beginning of the reporting period.
Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Mortgage loans held for sale
Huntington elected to apply the fair value option for mortgage loans originated with the intent to sell which are included in loans held for sale. Mortgage loans held for sale are classified as Level 2 and are estimated using security prices for similar product types.
104
Available-for-sale securities and trading account securities
Securities accounted for at fair value include both the available-for-sale and trading portfolios. Huntington uses prices obtained from third party pricing services and recent trades to determine the fair value of securities. AFS and trading securities are classified as Level 1 using quoted market prices (unadjusted) in active markets for identical securities that Huntington has the ability to access at the measurement date. Less than 1% of the positions in these portfolios are Level 1, and consist of U.S. Treasury securities and money market mutual funds. When quoted market prices are not available, fair values are classified as Level 2 using quoted prices for similar assets in active markets, quoted prices of identical or similar assets in markets that are not active, and inputs that are observable for the asset, either directly or indirectly, for substantially the full term of the financial instrument. 81% of the positions in these portfolios are Level 2, and consist of U.S. Government and agency debt securities, agency mortgage backed securities, asset-backed securities, municipal securities and other securities. For both Level 1 and Level 2 securities, management uses various methods and techniques to corroborate prices obtained from the pricing service, including reference to dealer or other market quotes, and by reviewing valuations of comparable instruments. If relevant market prices are limited or unavailable, valuations may require significant management judgment or estimation to determine fair value, in which case the fair values are classified as Level 3. 18% of our positions are Level 3, and consist of private-label CMO securities, CDO-preferred CDO securities and municipal securities. A significant change in the unobservable inputs for these securities may result in a significant change in the ending fair value measurement of these securities.
The municipal securities portion that is classified as Level 3 uses significant estimates to determine the fair value of these securities which results in greater subjectivity. The fair value is determined by utilizing third-party valuation services. The third party service provider reviews credit worthiness, prevailing market rates, analysis of similar securities, and projected cash flows. The third-party service provider also incorporates industry and general economic conditions into their analysis. Huntington evaluates the analysis provided for reasonableness.
The private label CMO and CDO-preferred securities portfolios are classified as Level 3 and as such use significant estimates to determine the fair value of these securities which results in greater subjectivity. The private label CMO securities portfolios are subjected to a monthly review of the projected cash flows, while the cash flows of the CDO-preferred securities portfolio are reviewed quarterly. These reviews are supported with analysis from independent third parties, and are used as a basis for impairment analysis.
Private-label CMO securities are collateralized by first-lien residential mortgage loans. The securities valuation methodology incorporates values obtained from a third party pricing specialist using a discounted cash flow approach and a proprietary pricing model and includes assumptions management believes market participants would use to value the securities under current market conditions. The model uses inputs such as estimated prepayment speeds, losses, recoveries, default rates that are implied by the underlying performance of collateral in the structure or similar structures, house price depreciation / appreciation rates that are based upon macroeconomic forecasts and discount rates that are implied by market prices for similar securities with similar collateral structures.
CDO-preferred securities are CDOs backed by a pool of debt securities issued by financial institutions. The collateral generally consists of trust-preferred securities and subordinated debt securities issued by banks, bank holding companies, and insurance companies. A full cash flow analysis is used to estimate fair values and assess impairment for each security within this portfolio. We engage a third party pricing specialist with direct industry experience in CDO-preferred securities valuations to provide assistance in estimating the fair value and expected cash flows for each security in this portfolio. The PD of each issuer and the market discount rate are the most significant inputs in determining fair value. Management evaluates the PD assumptions provided by the third party pricing specialist by comparing the current PD to the assumptions used the previous quarter, actual defaults and deferrals in the current period, and trend data on certain financial ratios of the issuers. Huntington also evaluates the assumptions related to discount rates. Relying on cash flows is necessary because there was a lack of observable transactions in the market and many of the original sponsors or dealers for these securities are no longer able to provide a fair value.
Huntington utilizes the same processes to determine the fair value of investment securities classified as held-to-maturity for impairment evaluation purposes.
Automobile loans
Effective January 1, 2010, Huntington consolidated an automobile loan securitization that previously had been accounted for as an off-balance sheet transaction. As a result, Huntington elected to account for these automobile loan receivables at fair value. The automobile loan receivables are classified as Level 3. The key assumptions used to determine the fair value of the automobile loan receivables included projections of expected losses and prepayment of the underlying loans in the portfolio and a market assumption of interest rate spreads. Certain interest rates are available from similarly traded securities while other interest rates are developed internally based on similar asset-backed security transactions in the market. During the first quarter of 2014, Huntington cancelled the 2009 and 2006 Automobile Trust. Huntington continues to report the associated automobile loan receivables at fair value due to its 2010 election.
105
MSRs
MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. Huntington determines the fair value of MSRs using an income approach model based upon our month-end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs, and changes in valuation inputs and assumptions. Servicing brokers and other sources of information (e.g. discussion with other mortgage servicers and industry surveys) are used to obtain information on market practice and assumptions. On at least a quarterly basis, third party marks are obtained from at least one service broker. Huntington reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. Any recommended change in assumptions and / or inputs are presented for review to the Mortgage Price Risk Subcommittee for final approval.
Derivatives
Derivatives classified as Level 2 consist of foreign exchange and commodity contracts, which are valued using exchange traded swaps and futures market data. In addition, Level 2 includes interest rate contracts, which are valued using a discounted cash flow method that incorporates current market interest rates. Level 2 also includes exchange traded options and forward commitments to deliver mortgage-backed securities, which are valued using quoted prices.
Derivatives classified as Level 3 consist primarily of interest rate lock agreements related to mortgage loan commitments. The determination of fair value includes assumptions related to the likelihood that a commitment will ultimately result in a closed loan, which is a significant unobservable assumption. A significant increase or decrease in the external market price would result in a significantly higher or lower fair value measurement.
Assets and Liabilities measured at fair value on a recurring basis
Assets and liabilities measured at fair value on a recurring basis at March 31, 2015 and December 31, 2014 are summarized below:
Fair Value Measurements at Reporting Date Using | Netting | Balance at | ||||||||||||||||||
(dollar amounts in thousands) |
Level 1 | Level 2 | Level 3 | Adjustments (1) | March 31, 2015 | |||||||||||||||
Assets |
||||||||||||||||||||
Loans held for sale |
$ | | $ | 478,864 | $ | | $ | | $ | 478,864 | ||||||||||
Loans held for investment |
| 37,160 | | | 37,160 | |||||||||||||||
Trading account securities: |
||||||||||||||||||||
U.S. Treasury securities |
| | | | | |||||||||||||||
Federal agencies: Mortgage-backed |
| | | | | |||||||||||||||
Federal agencies: Other agencies |
| 7,152 | | | 7,152 | |||||||||||||||
Municipal securities |
| 5,184 | | | 5,184 | |||||||||||||||
Other securities |
32,787 | 2,503 | | | 35,290 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
32,787 | 14,839 | | | 47,626 | ||||||||||||||||
Available-for-sale and other securities: |
||||||||||||||||||||
U.S. Treasury securities |
11,355 | | | | 11,355 | |||||||||||||||
Federal agencies: Mortgage-backed |
| 5,783,672 | | | 5,783,672 | |||||||||||||||
Federal agencies: Other agencies |
| 350,415 | | | 350,415 | |||||||||||||||
Municipal securities |
| 430,397 | 1,635,808 | | 2,066,205 | |||||||||||||||
Private-label CMO |
| 10,182 | 30,072 | | 40,254 | |||||||||||||||
Asset-backed securities |
| 742,928 | 89,155 | | 832,083 | |||||||||||||||
Corporate debt |
| 489,621 | | | 489,621 | |||||||||||||||
Other securities |
13,118 | 3,906 | | | 17,024 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
24,473 | 7,811,121 | 1,755,035 | | 9,590,629 | ||||||||||||||||
Automobile loans |
| | 6,495 | | 6,495 | |||||||||||||||
MSRs |
| | 20,455 | | 20,455 | |||||||||||||||
Derivative assets |
| 570,103 | 8,472 | (133,231 | ) | 445,344 | ||||||||||||||
Liabilities |
||||||||||||||||||||
Derivative liabilities |
| 395,937 | 647 | (46,843 | ) | 349,741 | ||||||||||||||
Short-term borrowings |
| 4,046 | | | 4,046 |
106
Fair Value Measurements at Reporting Date Using | Netting | Balance at | ||||||||||||||||||
(dollar amounts in thousands) |
Level 1 | Level 2 | Level 3 | Adjustments (1) | December 31, 2014 | |||||||||||||||
Assets |
||||||||||||||||||||
Loans held for sale |
$ | | $ | 354,888 | $ | | $ | | $ | 354,888 | ||||||||||
Loans held for investment |
| 40,027 | | | 40,027 | |||||||||||||||
Trading account securities: |
||||||||||||||||||||
U.S. Treasury securities |
| | | | | |||||||||||||||
Federal agencies: Mortgage-backed |
| | | | | |||||||||||||||
Federal agencies: Other agencies |
| 2,857 | | | 2,857 | |||||||||||||||
Municipal securities |
| 5,098 | | | 5,098 | |||||||||||||||
Other securities |
33,121 | 1,115 | | | 34,236 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
33,121 | 9,070 | | | 42,191 | ||||||||||||||||
Available-for-sale and other securities: |
||||||||||||||||||||
U.S. Treasury securities |
5,452 | | | | 5,452 | |||||||||||||||
Federal agencies: Mortgage-backed |
| 5,322,701 | | | 5,322,701 | |||||||||||||||
Federal agencies: Other agencies |
| 351,543 | | | 351,543 | |||||||||||||||
Municipal securities |
| 450,976 | 1,417,593 | | 1,868,569 | |||||||||||||||
Private-label CMO |
| 11,462 | 30,464 | | 41,926 | |||||||||||||||
Asset-backed securities |
| 873,260 | 82,738 | | 955,998 | |||||||||||||||
Corporate debt |
| 486,176 | | | 486,176 | |||||||||||||||
Other securities |
17,430 | 3,316 | | | 20,746 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
22,882 | 7,499,434 | 1,530,795 | | 9,053,111 | ||||||||||||||||
Automobile loans |
| | 10,590 | | 10,590 | |||||||||||||||
MSRs |
| | 22,786 | | 22,786 | |||||||||||||||
Derivative assets |
| 449,775 | 4,064 | (101,197 | ) | 352,642 | ||||||||||||||
Liabilities |
||||||||||||||||||||
Derivative liabilities |
| 335,524 | 704 | (51,973 | ) | 284,255 | ||||||||||||||
Short-term borrowings |
| 2,295 | | | 2,295 |
(1) | Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions and cash collateral held or placed with the same counterparties. |
107
The tables below present a rollforward of the balance sheet amounts for the three-month periods ended March 31, 2015 and 2014, for financial instruments measured on a recurring basis and classified as Level 3. The classification of an item as Level 3 is based on the significance of the unobservable inputs to the overall fair value measurement. However, Level 3 measurements may also include observable components of value that can be validated externally. Accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.
Level 3 Fair Value Measurements Three Months Ended March 31, 2015 |
||||||||||||||||||||||||
Available-for-sale securities | ||||||||||||||||||||||||
(dollar amounts in thousands) |
MSRs | Derivative instruments |
Municipal securities |
Private- label CMO |
Asset- backed securities |
Automobile loans |
||||||||||||||||||
Opening balance |
$ | 22,786 | $ | 3,360 | $ | 1,417,593 | $ | 30,464 | $ | 82,738 | $ | 10,590 | ||||||||||||
Transfers into Level 3 |
| | | | | | ||||||||||||||||||
Transfers out of Level 3 |
| | | | | | ||||||||||||||||||
Total gains/losses for the period: |
||||||||||||||||||||||||
Included in earnings |
(2,331 | ) | 5,001 | | 16 | | (213 | ) | ||||||||||||||||
Included in OCI |
| | (3,992 | ) | 18 | 7,511 | | |||||||||||||||||
Purchases/originations |
| | 242,997 | | | | ||||||||||||||||||
Sales |
| | | | | | ||||||||||||||||||
Repayments |
| | | | | (3,882 | ) | |||||||||||||||||
Issues |
| | | | | | ||||||||||||||||||
Settlements |
| (536 | ) | (20,790 | ) | (426 | ) | (1,094 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Closing balance |
$ | 20,455 | $ | 7,825 | $ | 1,635,808 | $ | 30,072 | $ | 89,155 | $ | 6,495 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at end of the reporting date |
$ | (2,331 | ) | $ | 4,465 | $ | (3,992 | ) | $ | 18 | $ | 7,511 | $ | (213 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Level 3 Fair Value Measurements Three Months Ended March 31, 2014 |
| ||||||||||||||||||||||
Available-for-sale securities | ||||||||||||||||||||||||
(dollar amounts in thousands) |
MSRs | Derivative instruments |
Municipal securities |
Private- label CMO |
Asset- backed securities |
Automobile loans |
||||||||||||||||||
Opening balance |
$ | 34,236 | $ | 2,390 | $ | 654,537 | $ | 32,140 | $ | 107,419 | $ | 52,286 | ||||||||||||
Transfers into Level 3 |
| | | | | | ||||||||||||||||||
Transfers out of Level 3 |
| | | | | | ||||||||||||||||||
Total gains/losses for the period: |
||||||||||||||||||||||||
Included in earnings |
(3,608 | ) | 1,675 | | 9 | 22 | (251 | ) | ||||||||||||||||
Included in OCI |
| | 7,272 | 252 | 11,543 | | ||||||||||||||||||
Purchases/originations |
| | 80,185 | | | | ||||||||||||||||||
Sales |
| | | | | | ||||||||||||||||||
Repayments |
| | | | | (14,767 | ) | |||||||||||||||||
Issues |
| | | | | | ||||||||||||||||||
Settlements |
| (365 | ) | (7,616 | ) | (504 | ) | (9,015 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Closing balance |
$ | 30,628 | $ | 3,700 | $ | 734,378 | $ | 31,897 | $ | 109,969 | $ | 37,268 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at end of the reporting date |
$ | (3,608 | ) | $ | 1,675 | $ | 7,272 | $ | 252 | $ | 11,543 | $ | (251 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
108
The table below summarizes the classification of gains and losses due to changes in fair value, recorded in earnings for Level 3 assets and liabilities for the three-month periods ended March 31, 2015 and 2014:
Level 3 Fair Value Measurements Three Months Ended March 31, 2015 |
||||||||||||||||||||||||
Available-for-sale securities | ||||||||||||||||||||||||
(dollar amounts in thousands) |
MSRs | Derivative instruments |
Municipal securities |
Private- label CMO |
Asset- backed securities |
Automobile loans |
||||||||||||||||||
Classification of gains and losses in earnings: |
||||||||||||||||||||||||
Mortgage banking income |
$ | (2,331 | ) | $ | 5,001 | $ | | $ | | $ | | $ | | |||||||||||
Securities gains (losses) |
| | | | | | ||||||||||||||||||
Interest and fee income |
| | | 16 | | (213 | ) | |||||||||||||||||
Noninterest income |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | (2,331 | ) | $ | 5,001 | $ | | $ | 16 | $ | | $ | (213 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Level 3 Fair Value Measurements Three Months Ended March 31, 2014 |
||||||||||||||||||||||||
Available-for-sale securities | ||||||||||||||||||||||||
(dollar amounts in thousands) |
MSRs | Derivative instruments |
Municipal securities |
Private- label CMO |
Asset- backed securities |
Automobile loans |
||||||||||||||||||
Classification of gains and losses in earnings: |
||||||||||||||||||||||||
Mortgage banking income |
$ | (3,608 | ) | $ | 1,675 | $ | | $ | | $ | | $ | | |||||||||||
Securities gains (losses) |
| | | | | | ||||||||||||||||||
Interest and fee income |
| | | 9 | 22 | (332 | ) | |||||||||||||||||
Noninterest income |
| | | | | 81 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | (3,608 | ) | $ | 1,675 | $ | | $ | 9 | $ | 22 | $ | (251 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities under the fair value option
The following table presents the fair value and aggregate principal balance of certain assets and liabilities under the fair value option:
March 31, 2015 | December 31, 2014 | |||||||||||||||||||||||
(dollar amounts in thousands) |
Fair value carrying amount |
Aggregate unpaid principal |
Difference | Fair value carrying Amount |
Aggregate unpaid principal |
Difference | ||||||||||||||||||
Assets |
||||||||||||||||||||||||
Loans held for sale |
$ | 478,864 | $ | 461,518 | $ | 17,346 | $ | 354,888 | $ | 340,070 | $ | 14,818 | ||||||||||||
Loans held for investment |
37,160 | 38,004 | (844 | ) | 40,027 | 40,938 | (911 | ) | ||||||||||||||||
Automobile loans |
6,495 | 6,140 | 355 | 10,590 | 10,022 | 568 |
109
The following tables present the net gains (losses) from fair value changes, including net gains (losses) associated with instrument specific credit risk for the three-month periods ended March 31, 2015 and 2014:
Net gains (losses) from fair value changes |
||||||||
Three Months Ended March 31, |
||||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Assets |
||||||||
Loans held for sale |
$ | 1,001 | $ | 3,151 | ||||
Automobile loans |
(213 | ) | (251 | ) |
Gains (losses) included in fair value changes associated with instrument specific credit risk |
||||||||
Three Months Ended March 31, |
||||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Assets |
||||||||
Automobile loans |
$ | 66 | $ | 323 |
Assets and Liabilities measured at fair value on a nonrecurring basis
Certain assets and liabilities may be required to be measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition. These assets and liabilities are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. At March 31, 2015, assets measured at fair value on a nonrecurring basis were as follows:
Fair Value Measurements Using | ||||||||||||||||||||
(dollar amounts in thousands) |
Fair Value at March 31, 2015 |
Quoted Prices In Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Other Unobservable Inputs (Level 3) |
Total Gains/(Losses) For the Three Months Ended March 31, 2015 |
|||||||||||||||
MSRs |
$ | 125,691 | | | $ | 125,691 | $ | (7,990 | ) | |||||||||||
Impaired loans |
89,043 | $ | | | 89,043 | (24,742 | ) | |||||||||||||
Other real estate owned |
33,951 | | | 33,951 | 1,833 |
Periodically, Huntington records nonrecurring adjustments of collateral-dependent loans measured for impairment when establishing the ACL. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Appraisals are generally obtained to support the fair value of the collateral and incorporate measures such as recent sales prices for comparable properties and cost of construction. In cases where the carrying value exceeds the fair value of the collateral less cost to sell, an impairment charge is recognized.
Other real estate owned properties are included in accrued income and other assets and valued based on appraisals and third party price opinions, less estimated selling costs.
110
Significant unobservable inputs for assets and liabilities measured at fair value on a recurring and nonrecurring basis
The table below presents quantitative information about the significant unobservable inputs for assets and liabilities measured at fair value on a recurring and nonrecurring basis at March 31, 2015 and December 31, 2014:
Quantitative Information about Level 3 Fair Value Measurements | ||||||||||||||
(dollar amounts in thousands) |
Fair Value at March 31, 2015 |
Valuation Technique |
Significant Unobservable Input | Range (Weighted Average) | ||||||||||
MSRs |
$ | 20,455 | Discounted cash flow | Constant prepayment rate | 6.0% - 24.0% (15.0%) | |||||||||
|
Spread over forward interest rate swap rates |
|
325 - 1,166 (641) | |||||||||||
Net costs to service | -$ | 18 - $70 ($38) | ||||||||||||
|
|
|
|
|
|
|
||||||||
Derivative assets |
8,472 | Consensus Pricing | Net market price | -3.3% - 6.4% (2.0%) | ||||||||||
Derivative liabilities |
| Estimated Pull through % | 50.0% - 88.0% (74.0%) | |||||||||||
|
|
|
|
|
|
|
||||||||
Municipal securities |
1,635,808 | Discounted cash flow | Discount rate | 0.5% - 4.0% (2.6%) | ||||||||||
|
|
|
|
|
|
|
||||||||
Private-label CMO |
30,072 | Discounted cash flow | Discount rate | 2.8% - 7.0% (5.7%) | ||||||||||
Constant prepayment rate | 13.6% - 32.6% (20.6%) | |||||||||||||
Probability of default | 0.1% - 4.0% (0.7%) | |||||||||||||
Loss severity | 0.0% - 64.0% (33.3%) | |||||||||||||
|
|
|
|
|
|
|
||||||||
Asset-backed securities |
89,155 | Discounted cash flow | Discount rate | 4.3% - 12.3% (6.7%) | ||||||||||
Cumulative prepayment rate | 0.0% - 100.0% (9.4%) | |||||||||||||
Cumulative default | 1.9% - 100.0% (15.2%) | |||||||||||||
Loss given default | 85.0% - 100.0% (95.9%) | |||||||||||||
Cure given deferral | 0.0% - 75.0% (38.0%) | |||||||||||||
|
|
|
|
|
|
|
||||||||
Automobile loans |
6,495 | Discounted cash flow | Constant prepayment rate | 154.2% | ||||||||||
Discount rate | 0.2% - 5.0% (2.3%) | |||||||||||||
Life of pool cumulative losses | 2.1% | |||||||||||||
|
|
|
|
|
|
|
||||||||
Impaired loans |
89,043 | Appraisal value | NA | NA | ||||||||||
|
|
|
|
|
|
|
||||||||
Other real estate owned |
33,951 | Appraisal value | NA | NA | ||||||||||
|
|
|
|
|
|
|
111
Quantitative Information about Level 3 Fair Value Measurements | ||||||||||||
(dollar amounts in thousands) |
Fair Value at December 31, 2014 |
Valuation Technique |
Significant Unobservable Input |
Range (Weighted Average) | ||||||||
MSRs |
$ | 22,786 | Discounted cash flow | Constant prepayment rate | 7% - 26% (16%) | |||||||
Spread over forward interest rate swap rates | 228 - 900 (546) | |||||||||||
Net costs to service | $ | 21 - $79 ($40) | ||||||||||
|
|
|
|
|
|
|||||||
Derivative assets |
4,064 | Consensus Pricing | Net market price | -5.09% - 17.46% (1.7%) | ||||||||
Derivative liabilities |
704 | Estimated Pull through % | 38% - 91% (75%) | |||||||||
|
|
|
|
|
|
|||||||
Municipal securities |
1,417,593 | Discounted cash flow | Discount rate | 0.5% - 4.9% (2.5%) | ||||||||
|
|
|
|
|
|
|||||||
Private-label CMO |
30,464 | Discounted cash flow | Discount rate | 2.7% - 7.2% (6.0%) | ||||||||
Constant prepayment rate | 13.6% - 32.6% (20.7%) | |||||||||||
Probability of default | 0.1% - 4.0% (0.7%) | |||||||||||
Loss severity | 0.0% - 64.0% (33.9%) | |||||||||||
|
|
|
|
|
|
|||||||
Asset-backed securities |
82,738 | Discounted cash flow | Discount rate | 4.3% - 13.3% (7.3%) | ||||||||
Cumulative prepayment rate | 0.0% - 100% (10.1%) | |||||||||||
Cumulative default | 1.9% - 100% (15.9%) | |||||||||||
Loss given default | 20% - 100% (94.4%) | |||||||||||
Cure given deferral | 0.0% - 75% (32.6%) | |||||||||||
|
|
|
|
|
|
|||||||
Automobile loans |
10,590 | Discounted cash flow | Constant prepayment rate | 154.2% | ||||||||
Discount rate | 0.2% - 5.0% (2.3%) | |||||||||||
Life of pool cumulative losses | 2.1% | |||||||||||
|
|
|
|
|
|
|||||||
Impaired loans |
52,911 | Appraisal value | NA | NA | ||||||||
|
|
|
|
|
|
|||||||
Other real estate owned |
35,039 | Appraisal value | NA | NA | ||||||||
|
|
|
|
|
|
The following provides a general description of the impact of a change in an unobservable input on the fair value measurement and the interrelationship between unobservable inputs, where relevant/significant. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below.
A significant change in the unobservable inputs may result in a significant change in the ending fair value measurement of Level 3 instruments. In general, prepayment rates increase when market interest rates decline and decrease when market interest rates rise and higher prepayment rates generally result in lower fair values for MSR assets, Private-label CMO securities, Asset-backed securities, and automobile loans.
Credit loss estimates, such as probability of default, constant default, cumulative default, loss given default, cure given deferral, and loss severity, are driven by the ability of the borrowers to pay their loans and the value of the underlying collateral and are impacted by changes in macroeconomic conditions, typically increasing when economic conditions worsen and decreasing when conditions improve. An increase in the estimated prepayment rate typically results in a decrease in estimated credit losses and vice versa. Higher credit loss estimates generally result in lower fair values. Credit spreads generally increase when liquidity risks and market volatility increase and decrease when liquidity conditions and market volatility improve.
Discount rates and spread over forward interest rate swap rates typically increase when market interest rates increase and/or credit and liquidity risks increase and decrease when market interest rates decline and/or credit and liquidity conditions improve. Higher discount rates and credit spreads generally result in lower fair market values.
Net market price and pull through percentages generally increase when market interest rates increase and decline when market interest rates decline. Higher net market price and pull through percentages generally result in higher fair values.
112
Fair values of financial instruments
The following table provides the carrying amounts and estimated fair values of Huntingtons financial instruments that are carried either at fair value or cost at March 31, 2015 and December 31, 2014:
March 31, 2015 | December 31, 2014 | |||||||||||||||
(dollar amounts in thousands) |
Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
||||||||||||
Financial Assets |
||||||||||||||||
Cash and short-term assets |
$ | 973,906 | $ | 973,906 | $ | 1,285,124 | $ | 1,285,124 | ||||||||
Trading account securities |
47,626 | 47,626 | 42,191 | 42,191 | ||||||||||||
Loans held for sale |
1,620,552 | 1,620,552 | 416,327 | 416,327 | ||||||||||||
Available-for-sale and other securities |
9,922,399 | 9,922,399 | 9,384,670 | 9,384,670 | ||||||||||||
Held-to-maturity securities |
3,336,663 | 3,374,889 | 3,379,905 | 3,382,715 | ||||||||||||
Net loans and leases |
47,090,506 | 45,339,244 | 47,050,530 | 45,110,406 | ||||||||||||
Derivatives |
445,344 | 445,344 | 352,642 | 352,642 | ||||||||||||
Financial Liabilities |
||||||||||||||||
Deposits |
52,832,695 | 53,382,798 | 51,732,151 | 52,454,804 | ||||||||||||
Short-term borrowings |
2,007,236 | 2,007,236 | 2,397,101 | 2,397,101 | ||||||||||||
Long-term debt |
5,158,836 | 5,136,961 | 4,335,962 | 4,286,304 | ||||||||||||
Derivatives |
349,741 | 349,741 | 284,255 | 284,255 |
The following table presents the level in the fair value hierarchy for the estimated fair values of only Huntingtons financial instruments that are not already on the Unaudited Condensed Consolidated Balance Sheets at fair value at March 31, 2015 and December 31, 2014:
Estimated Fair Value Measurements at Reporting Date Using | Balance at March 31, 2015 |
|||||||||||||||
(dollar amounts in thousands) |
Level 1 | Level 2 | Level 3 | |||||||||||||
Financial Assets |
||||||||||||||||
Held-to-maturity securities |
$ | | $ | 3,374,889 | $ | | $ | 3,374,889 | ||||||||
Net loans and leases |
| | 45,339,244 | 45,339,244 | ||||||||||||
Financial Liabilities |
||||||||||||||||
Deposits |
| 49,433,736 | 3,949,062 | 53,382,798 | ||||||||||||
Short-term borrowings |
| | 2,007,236 | 2,007,236 | ||||||||||||
Other long-term debt |
| | 5,136,961 | 5,136,961 | ||||||||||||
Estimated Fair Value Measurements at Reporting Date Using | Balance
at December 31, 2014 |
|||||||||||||||
(dollar amounts in thousands) |
Level 1 | Level 2 | Level 3 | |||||||||||||
Financial Assets |
||||||||||||||||
Held-to-maturity securities |
$ | | $ | 3,382,715 | $ | | $ | 3,382,715 | ||||||||
Net loans and leases |
| | 45,110,406 | 45,110,406 | ||||||||||||
Financial Liabilities |
||||||||||||||||
Deposits |
| 48,183,798 | 4,271,006 | 52,454,804 | ||||||||||||
Short-term borrowings |
| | 2,397,101 | 2,397,101 | ||||||||||||
Other long-term debt |
| | 4,286,304 | 4,286,304 |
The short-term nature of certain assets and liabilities result in their carrying value approximating fair value. These include trading account securities, customers acceptance liabilities, short-term borrowings, bank acceptances outstanding, FHLB advances, and cash and short-term assets, which include cash and due from banks, interest-bearing deposits in banks, and federal funds sold and securities purchased under resale agreements. Loan commitments and letters-of-credit generally have short-term, variable-rate features and contain clauses that limit Huntingtons exposure to changes in customer credit quality. Accordingly, their carrying values, which are immaterial at the respective balance sheet dates, are reasonable estimates of fair value. Not all the financial instruments listed in the table above are subject to the disclosure provisions of ASC Topic 820.
113
Certain assets, the most significant being operating lease assets, bank owned life insurance, and premises and equipment, do not meet the definition of a financial instrument and are excluded from this disclosure. Similarly, mortgage and nonmortgage servicing rights, deposit base, and other customer relationship intangibles are not considered financial instruments and are not included above. Accordingly, this fair value information is not intended to, and does not, represent Huntingtons underlying value. Many of the assets and liabilities subject to the disclosure requirements are not actively traded, requiring fair values to be estimated by Management. These estimations necessarily involve the use of judgment about a wide variety of factors, including but not limited to, relevancy of market prices of comparable instruments, expected future cash flows, and appropriate discount rates.
The following methods and assumptions were used by Huntington to estimate the fair value of the remaining classes of financial instruments:
Held-to-maturity securities
Fair values are determined by using models that are based on security-specific details, as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices, and interest rate spreads on relevant benchmark securities.
Loans and Direct Financing Leases
Variable-rate loans that reprice frequently are based on carrying amounts, as adjusted for estimated credit losses. The fair values for other loans and leases are estimated using discounted cash flow analyses and employ interest rates currently being offered for loans and leases with similar terms. The rates take into account the position of the yield curve, as well as an adjustment for prepayment risk, operating costs, and profit. This value is also reduced by an estimate of expected losses and the credit risk associated in the loan and lease portfolio. The valuation of the loan portfolio reflected discounts that Huntington believed are consistent with transactions occurring in the marketplace.
Deposits
Demand deposits, savings accounts, and money market deposits are, by definition, equal to the amount payable on demand. The fair values of fixed-rate time deposits are estimated by discounting cash flows using interest rates currently being offered on certificates with similar maturities.
Debt
Fixed-rate, long-term debt is based upon quoted market prices, which are inclusive of Huntingtons credit risk. In the absence of quoted market prices, discounted cash flows using market rates for similar debt with the same maturities are used in the determination of fair value.
16. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are recorded in the Unaudited Condensed Consolidated Balance Sheet as either an asset or a liability (in accrued income and other assets or accrued expenses and other liabilities, respectively) and measured at fair value.
Derivatives used in Asset and Liability Management Activities
Huntington engages in balance sheet hedging activity, principally for asset liability management purposes, to convert fixed rate assets or liabilities into floating rate or vice versa. Balance sheet hedging activity is arranged to receive hedge accounting treatment and is classified as either fair value or cash flow hedges. Fair value hedges are purchased to convert deposits and subordinated and other long-term debt from fixed-rate obligations to floating rate. Cash flow hedges are also used to convert floating rate loans made to customers into fixed rate loans.
The following table presents the gross notional values of derivatives used in Huntingtons asset and liability management activities at March 31, 2015, identified by the underlying interest rate-sensitive instruments:
Fair Value | Cash Flow | |||||||||||
(dollar amounts in thousands) |
Hedges | Hedges | Total | |||||||||
Instruments associated with: |
||||||||||||
Loans |
$ | | $ | 10,034,750 | $ | 10,034,750 | ||||||
Deposits |
69,100 | | 69,100 | |||||||||
Long-term debt |
3,760,000 | | 3,760,000 | |||||||||
|
|
|
|
|
|
|||||||
Total notional value at March 31, 2015 |
$ | 3,829,100 | $ | 10,034,750 | $ | 13,863,850 | ||||||
|
|
|
|
|
|
114
The following table presents additional information about the interest rate swaps used in Huntingtons asset and liability management activities at March 31, 2015:
Average | Weighted-Average | |||||||||||||||||||
Notional | Maturity | Fair | Rate | |||||||||||||||||
(dollar amounts in thousands) |
Value | (years) | Value | Receive | Pay | |||||||||||||||
Asset conversion swaps |
||||||||||||||||||||
Receive fixedgeneric |
$ | 9,289,000 | 1.7 | $ | 12,412 | 0.80 | % | 0.26 | % | |||||||||||
Pay fixedgeneric |
745,750 | 1.6 | (1,422 | ) | | 0.79 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total asset conversion swaps |
10,034,750 | 1.7 | 10,990 | 0.74 | 0.30 | |||||||||||||||
Liability conversion swaps |
||||||||||||||||||||
Receive fixedgeneric |
3,829,100 | 3.2 | 80,587 | 1.67 | 0.27 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liability conversion swaps |
3,829,100 | 3.2 | 80,587 | 1.67 | 0.27 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total swap portfolio |
$ | 13,863,850 | 2.1 | $ | 91,577 | 1.00 | % | 0.29 | % | |||||||||||
|
|
|
|
|
|
|
|
|
|
These derivative financial instruments were entered into for the purpose of managing the interest rate risk of assets and liabilities. Consequently, net amounts receivable or payable on contracts hedging either interest earning assets or interest bearing liabilities were accrued as an adjustment to either interest income or interest expense. The net amounts resulted in an increase to net interest income of $24.7 million and $24.6 million for the three-month periods ended March 31, 2015, and 2014, respectively.
In connection with the sale of Huntingtons Class B Visa® shares, Huntington entered into a swap agreement with the purchaser of the shares. The swap agreement adjusts for dilution in the conversion ratio of Class B shares resulting from the Visa® litigation. At March 31, 2015, the fair value of the swap liability of $0.4 million is an estimate of the exposure liability based upon Huntingtons assessment of the potential Visa® litigation losses.
The following table presents the fair values at March 31, 2015 and December 31, 2014 of Huntingtons derivatives that are designated and not designated as hedging instruments. Amounts in the table below are presented gross without the impact of any net collateral arrangements:
Asset derivatives included in accrued income and other assets:
March 31, | December 31, | |||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Interest rate contracts designated as hedging instruments |
$ | 92,019 | $ | 53,114 | ||||
Interest rate contracts not designated as hedging instruments |
223,830 | 183,610 | ||||||
Foreign exchange contracts not designated as hedging instruments |
59,029 | 32,798 | ||||||
Commodities contracts not designated as hedging instruments |
194,859 | 180,218 | ||||||
|
|
|
|
|||||
Total contracts |
$ | 569,737 | $ | 449,740 | ||||
|
|
|
|
Liability derivatives included in accrued expenses and other liabilities:
March 31, | December 31, | |||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Interest rate contracts designated as hedging instruments |
$ | 442 | $ | 12,648 | ||||
Interest rate contracts not designated as hedging instruments |
149,186 | 110,627 | ||||||
Foreign exchange contracts not designated as hedging instruments |
50,228 | 29,754 | ||||||
Commodities contracts not designated as hedging instruments |
192,572 | 179,180 | ||||||
|
|
|
|
|||||
Total contracts |
$ | 392,428 | $ | 332,209 | ||||
|
|
|
|
The changes in fair value of the fair value hedges are, to the extent that the hedging relationship is effective, recorded through earnings and offset against changes in the fair value of the hedged item.
115
The following table presents the change in fair value for derivatives designated as fair value hedges as well as the offsetting change in fair value on the hedged item for the three-month periods ended March 31, 2015 and 2014:
Three Months Ended | ||||||||
March 31, | ||||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Interest rate contracts |
||||||||
Change in fair value of interest rate swaps hedging deposits (1) |
$ | (213 | ) | $ | (267 | ) | ||
Change in fair value of hedged deposits (1) |
214 | 266 | ||||||
Change in fair value of interest rate swaps hedging subordinated notes (2) |
3,231 | 1,066 | ||||||
Change in fair value of hedged subordinated notes (2) |
(3,231 | ) | (1,066 | ) | ||||
Change in fair value of interest rate swaps hedging other long-term debt (2) |
20,025 | (4,051 | ) | |||||
Change in fair value of hedged other long-term debt (2) |
(19,645 | ) | 6,474 |
(1) | Effective portion of the hedging relationship is recognized in Interest expensedeposits in the Unaudited Condensed Consolidated Statements of Income. Any resulting ineffective portion of the hedging relationship is recognized in noninterest income in the Unaudited Condensed Consolidated Statements of Income. |
(2) | Effective portion of the hedging relationship is recognized in Interest expensesubordinated notes and other long-term debt in the Unaudited Condensed Consolidated Statements of Income. Any resulting ineffective portion of the hedging relationship is recognized in noninterest income in the Unaudited Condensed Consolidated Statements of Income. |
To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives fair value will not be included in current earnings but are reported as a component of OCI in the Unaudited Condensed Consolidated Statements of Shareholders Equity. These changes in fair value will be included in earnings of future periods when earnings are also affected by the changes in the hedged cash flows. To the extent these derivatives are not effective, changes in their fair values are immediately included in noninterest income.
The following table presents the gains and (losses) recognized in OCI and the location in the Unaudited Condensed Consolidated Statements of Income of gains and (losses) reclassified from OCI into earnings for the three-month periods ended March 31, 2015 and 2014 for derivatives designated as effective cash flow hedges:
Derivatives in cash flow hedging relationships |
Amount of gain or (loss) recognized in OCI on derivatives (effective portion) (after-tax) |
Location of gain or (loss) reclassified from accumulated OCI into earnings (effective portion) |
Amount of (gain) or loss reclassified from accumulated OCI into earnings (effective portion) |
|||||||||||||||
Three Months Ended | Three Months Ended |
|||||||||||||||||
March 31, | March 31, | |||||||||||||||||
(dollar amounts in thousands) |
2015 | 2014 | 2015 | 2014 | ||||||||||||||
Interest rate contracts |
||||||||||||||||||
Loans |
$ | 18,294 | $ | 1,823 | Interest and fee income - loans and leases | $ | (133 | ) | $ | (2,892 | ) | |||||||
Investment Securities |
| | Noninterest income - other income | 10 | | |||||||||||||
Subordinated notes |
| | Interest expense - subordinated notes and other long-term debt | | | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 18,294 | $ | 1,823 | $ | (123 | ) | $ | (2,892 | ) | ||||||||
|
|
|
|
|
|
|
|
Reclassified gains and losses on swaps related to loans and investment securities and swaps related to subordinated debt are recorded within interest income and interest expense, respectively. During the next twelve months, Huntington expects to reclassify to earnings $22.2 million after-tax unrealized gains on cash flow hedging derivatives currently in OCI.
116
The following table details the gains and (losses) recognized in noninterest income on the ineffective portion on interest rate contracts for derivatives designated as cash flow hedges for the three-month periods ended March 31, 2015 and 2014:
Three Months Ended | ||||||||
March 31, | ||||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Derivatives in cash flow hedging relationships |
||||||||
Interest rate contracts |
||||||||
Loans |
$ | (163 | ) | $ | 132 |
Derivatives used in trading activities
Various derivative financial instruments are offered to enable customers to meet their financing and investing objectives and for their risk management purposes. Derivative financial instruments used in trading activities consisted of commodity, interest rate, and foreign exchange contracts. The derivative contracts grant the option holder the right to buy or sell an underlying financial instrument for a predetermined price before the contract expires. Huntington may enter into offsetting third-party contracts with approved, reputable counterparties with substantially matching terms and currencies in order to economically hedge significant exposure related to derivatives used in trading activities.
Commodity derivatives help the customer hedge risk and reduce exposure to price changes in commodities. Activity related to commodity derivatives is concentrated in large corporate, middle market, and energy sectors. Commodities markets trade and include oil, refined products, natural gas, coal, as well as industrial and precious metals. The energy sector focuses on oil, gas, and coal. Based on policy limits and the relatively small notional amounts of commodity activity, we do not anticipate any meaningful price risk for our commodity derivatives. Interest rate options grant the option holder the right to buy or sell an underlying financial instrument for a predetermined price before the contract expires. Interest rate futures are commitments to either purchase or sell a financial instrument at a future date for a specified price or yield and may be settled in cash or through delivery of the underlying financial instrument. Interest rate caps and floors are option-based contracts that entitle the buyer to receive cash payments based on the difference between a designated reference rate and a strike price, applied to a notional amount. Written options, primarily caps, expose Huntington to market risk but not credit risk. Purchased options contain both credit and market risk. The interest rate risk of these customer derivatives is mitigated by entering into similar derivatives having offsetting terms with other counterparties. The credit risk to these customers is evaluated and included in the calculation of fair value. Foreign currency derivatives help the customer hedge risk and reduce exposure to fluctuations in exchange rates. Transactions are primarily in liquid currencies with Canadian dollars and Euros comprising a majority of all transactions.
The net fair values of these derivative financial instruments, for which the gross amounts are included in accrued income and other assets or accrued expenses and other liabilities at March 31, 2015 and December 31, 2014, were $82.7 million and $74.4 million, respectively. The total notional values of derivative financial instruments used by Huntington on behalf of customers, including offsetting derivatives, were $15.2 billion and $14.4 billion at March 31, 2015 and December 31, 2014, respectively. Huntingtons credit risks from interest rate swaps used for trading purposes were $267.5 million and $219.3 million at the same dates, respectively.
Huntington manages credit risk of its derivative positions by diversifying its positions among various counterparties, entering into master netting arrangements where possible with its counterparties, requiring collateral and, in certain cases, transferring the counterparty credit risk related to interest rate swaps to and from other financial institutions through the use of risk participation arrangements. Huntingtons notional exposure for interest rate swaps originated by other financial institutions was $446.3 million and $456.7 million at March 31, 2015 and December 31, 2014, respectively. The fair value of these risk participations was $9.3 million and $7.2 million at March 31, 2015 and December 31, 2014, respectively. Huntington will make payments under these agreements if a customer defaults on its obligation to perform under the terms of the underlying interest rate derivative contract. These contracts mature between 2015 and 2043 and are deemed investment grade.
Financial assets and liabilities that are offset in the Condensed Consolidated Balance Sheets
Huntington records derivatives at fair value as further described in Note 15. Huntington records these derivatives net of any master netting arrangement in the Unaudited Condensed Consolidated Balance Sheets. Collateral agreements are regularly entered into as part of the underlying derivative agreements with Huntingtons counterparties to mitigate counterparty credit risk.
117
All derivatives are carried on the Unaudited Condensed Consolidated Balance Sheets at fair value. Derivative balances are presented on a net basis taking into consideration the effects of legally enforceable master netting agreements. Cash collateral exchanged with counterparties is also netted against the applicable derivative fair values. Huntington enters into derivative transactions with two primary groups: broker-dealers and banks, and Huntingtons customers. Different methods are utilized for managing counterparty credit exposure and credit risk for each of these groups.
Huntington enters into transactions with broker-dealers and banks for various risk management purposes. These types of transactions generally are high dollar volume. Huntington enters into bilateral collateral and master netting agreements with these counterparties, and routinely exchange cash and high quality securities collateral with these counterparties. Huntington enters into transactions with customers to meet their financing, investing, payment and risk management needs. These types of transactions generally are low dollar volume. Huntington generally enters into master netting agreements with customer counterparties, however collateral is generally not exchanged with customer counterparties.
At March 31, 2015 and December 31, 2014, aggregate credit risk associated with these derivatives, net of collateral that has been pledged by the counterparty, was $16.0 million and $19.5 million, respectively. The credit risk associated with interest rate swaps is calculated after considering master netting agreements with broker-dealers and banks.
At March 31, 2015, Huntington pledged $120.6 million of investment securities and cash collateral to counterparties, while other counterparties pledged $176.6 million of investment securities and cash collateral to Huntington to satisfy collateral netting agreements. In the event of credit downgrades, Huntington would not be required to provide additional collateral.
The following tables present the gross amounts of these assets and liabilities with any offsets to arrive at the net amounts recognized in the Unaudited Condensed Consolidated Balance Sheets at March 31, 2015 and December 31, 2014:
Offsetting of Financial Assets and Derivative Assets
Gross amounts not offset in the condensed consolidated balance sheets |
||||||||||||||||||||||||||||
(dollar amounts in thousands) |
Gross amounts of recognized assets |
Gross amounts offset in the condensed consolidated balance sheets |
Net amounts of assets presented in the condensed consolidated balance sheets |
Financial instruments |
Cash collateral received |
Net amount | ||||||||||||||||||||||
Offsetting of Financial Assets and Derivative Assets |
|
|||||||||||||||||||||||||||
March 31, 2015 |
Derivatives | $ | 590,994 | $ | (145,650 | ) | $ | 445,344 | $ | (41,303 | ) | $ | (2,086 | ) | $ | 401,955 | ||||||||||||
December 31, 2014 |
Derivatives | 480,803 | (128,161 | ) | 352,642 | (27,744 | ) | (1,095 | ) | 323,803 |
Offsetting of Financial Liabilities and Derivative Liabilities
Gross amounts not offset in the condensed consolidated balance sheets |
||||||||||||||||||||||||||||
(dollar amounts in thousands) |
Gross amounts of recognized liabilities |
Gross amounts offset in the condensed consolidated balance sheets |
Net amounts of liabilities presented in the condensed consolidated balance sheets |
Financial instruments |
Cash collateral delivered |
Net amount | ||||||||||||||||||||||
Offsetting of Financial Liabilities and Derivative Liabilities |
|
|||||||||||||||||||||||||||
March 31, 2015 |
Derivatives | $ | 409,003 | $ | (59,262 | ) | $ | 349,741 | $ | (73,305 | ) | $ | (461 | ) | $ | 275,975 | ||||||||||||
December 31, 2014 |
Derivatives | 363,192 | (78,937 | ) | 284,255 | (78,654 | ) | (111 | ) | 205,490 |
118
Derivatives used in mortgage banking activities
Huntington also uses certain derivative financial instruments to offset changes in value of its residential MSRs. These derivatives consist primarily of forward interest rate agreements and forward commitments to deliver mortgage-backed securities. The derivative instruments used are not designated as hedges. Accordingly, such derivatives are recorded at fair value with changes in fair value reflected in mortgage banking income. The following table summarizes the derivative assets and liabilities used in mortgage banking activities
March 31, | December 31, | |||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Derivative assets: |
||||||||
Interest rate lock agreements |
$ | 8,472 | $ | 4,064 | ||||
Forward trades and options |
366 | 35 | ||||||
|
|
|
|
|||||
Total derivative assets |
8,838 | 4,099 | ||||||
|
|
|
|
|||||
Derivative liabilities: |
||||||||
Interest rate lock agreements |
(202 | ) | (259 | ) | ||||
Forward trades and options |
(3,954 | ) | (3,760 | ) | ||||
|
|
|
|
|||||
Total derivative liabilities |
(4,156 | ) | (4,019 | ) | ||||
|
|
|
|
|||||
Net derivative asset (liability) |
$ | 4,682 | $ | 80 | ||||
|
|
|
|
The total notional value of these derivative financial instruments at March 31, 2015 and December 31, 2014, was $0.7 billion and $0.6 billion, respectively. The total notional amount at March 31, 2015, corresponds to trading assets with a fair value of $3.5 million and no trading liabilities. Net trading gains and (losses) related to MSR hedging for the three-month periods ended March 31, 2015 and 2014, were $4.7 million and $0.8 million, respectively. These amounts are included in mortgage banking income in the Unaudited Condensed Consolidated Statements of Income.
17. VIEs
Consolidated VIEs
Consolidated VIEs at March 31, 2015, consisted of certain loan and lease securitization trusts. Huntington has determined the trusts are VIEs. Huntington has concluded that it is the primary beneficiary of these trusts because it has the power to direct the activities of the entity that most significantly affect the entitys economic performance and it has either the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. During the 2015 first quarter, Huntington acquired two securitization trusts with its acquisition of Macquarie.
119
The following tables present the carrying amount and classification of the consolidated trusts assets and liabilities that were included in the Unaudited Condensed Consolidated Balance Sheets at March 31, 2015 and December 31, 2014:
March 31, 2015 | ||||||||||||||||
Macquarie Equipment Funding Trust |
Other | |||||||||||||||
Series | Series | Consolidated | ||||||||||||||
(dollar amounts in thousands) |
2012A | 2014A | Trusts | Total | ||||||||||||
Assets: |
||||||||||||||||
Cash |
$ | | $ | | $ | | $ | | ||||||||
Loans and leases |
62,265 | 235,301 | | 297,566 | ||||||||||||
Allowance for loan and lease losses |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loans and leases |
62,265 | 235,301 | | 297,566 | ||||||||||||
Accrued income and other assets |
| | 234 | 234 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 62,265 | $ | 235,301 | $ | 234 | $ | 297,800 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Other long-term debt |
$ | 51,251 | $ | 203,533 | $ | | $ | 254,784 | ||||||||
Accrued interest and other liabilities |
| | 234 | 234 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
$ | 51,251 | $ | 203,533 | $ | 234 | $ | 255,018 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Equity: |
||||||||||||||||
Beneficial Interest owned by third party |
$ | 11,014 | $ | 31,768 | $ | | $ | 42,782 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities and equity |
$ | 62,265 | $ | 235,301 | $ | 234 | $ | 297,800 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2014 | ||||||||||||||||
(dollar amounts in thousands) |
Other Consolidated Trusts |
Total | ||||||||||||||
Assets: |
||||||||||||||||
Cash |
$ | | $ | | ||||||||||||
Loans and leases |
| | ||||||||||||||
Allowance for loan and lease losses |
| | ||||||||||||||
|
|
|
|
|||||||||||||
Net loans and leases |
| | ||||||||||||||
Accrued income and other assets |
243 | 243 | ||||||||||||||
|
|
|
|
|||||||||||||
Total assets |
$ | 243 | $ | 243 | ||||||||||||
|
|
|
|
|||||||||||||
Liabilities: |
||||||||||||||||
Other long-term debt |
$ | | $ | | ||||||||||||
Accrued interest and other liabilities |
243 | 243 | ||||||||||||||
|
|
|
|
|||||||||||||
Total liabilities |
$ | 243 | $ | 243 | ||||||||||||
|
|
|
|
|||||||||||||
Equity: |
||||||||||||||||
Beneficial Interest owned by third party |
$ | | $ | | ||||||||||||
|
|
|
|
|||||||||||||
Total liabilities and equity |
$ | 243 | $ | 243 | ||||||||||||
|
|
|
|
The loans and leases were designated to repay the securitized notes. Huntington services the loans and leases and uses the proceeds from principal and interest payments to pay the securitized notes during the amortization period. Huntington has not provided financial or other support that was not previously contractually required.
120
Unconsolidated VIEs
The following tables provide a summary of the assets and liabilities included in Huntingtons Unaudited Condensed Consolidated Financial Statements, as well as the maximum exposure to losses, associated with its interests related to unconsolidated VIEs for which Huntington holds an interest, but is not the primary beneficiary, to the VIE at March 31, 2015, and December 31, 2014:
March 31, 2015 | ||||||||||||
(dollar amounts in thousands) |
Total Assets | Total Liabilities | Maximum Exposure to Loss | |||||||||
2012-1 Automobile Trust |
$ | 1,465 | $ | | $ | 1,465 | ||||||
2012-2 Automobile Trust |
2,489 | | 2,489 | |||||||||
2011 Automobile Trust |
630 | | 630 | |||||||||
Tower Hill Securities, Inc. |
49,516 | 65,000 | 49,516 | |||||||||
Trust Preferred Securities |
13,919 | 317,082 | | |||||||||
Low Income Housing Tax Credit Partnerships |
358,015 | 138,483 | 358,015 | |||||||||
Other Investments |
82,343 | 20,861 | 82,343 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 508,377 | $ | 541,426 | $ | 494,458 | ||||||
December 31, 2014 | ||||||||||||
(dollar amounts in thousands) |
Total Assets | Total Liabilities | Maximum Exposure to Loss | |||||||||
2012-1 Automobile Trust |
$ | 2,136 | $ | | $ | 2,136 | ||||||
2012-2 Automobile Trust |
3,220 | | 3,220 | |||||||||
2011 Automobile Trust |
944 | | 944 | |||||||||
Tower Hill Securities, Inc. |
55,611 | 65,000 | 55,611 | |||||||||
Trust Preferred Securities |
13,919 | 317,075 | | |||||||||
Low Income Housing Tax Credit Partnerships |
368,283 | 154,861 | 368,283 | |||||||||
Other Investments |
83,400 | 20,760 | 83,400 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 527,513 | $ | 557,696 | $ | 513,594 |
2012-1 AUTOMOBILE TRUST, 2012-2 AUTOMOBILE TRUST, and 2011 AUTOMOBILE TRUST
During the 2012 fourth quarter, 2012 first quarter and 2011 third quarter, we transferred automobile loans totaling $1.0 billion, $1.3 billion and $1.0 billion, respectively, to trusts in securitization transactions. The securitizations and the resulting sale of all underlying securities qualified for sale accounting. Huntington has concluded that it is not the primary beneficiary of these trusts because it has neither the obligation to absorb losses of the entities that could potentially be significant to the VIEs nor the right to receive benefits from the entities that could potentially be significant to the VIEs. Huntington is not required and does not currently intend to provide any additional financial support to the trusts. Investors and creditors only have recourse to the assets held by the trusts. The interest Huntington holds in the VIEs relates to servicing rights which are included within accrued income and other assets of Huntingtons Unaudited Condensed Consolidated Balance Sheets. The maximum exposure to loss is equal to the carrying value of the servicing asset.
TOWER HILL SECURITIES, INC.
In 2010, we transferred approximately $92.1 million of municipal securities, $86.0 million in Huntington Preferred Capital, Inc. (Real Estate Investment Trust) Class E Preferred Stock and cash of $6.1 million to Tower Hill Securities, Inc. in exchange for $184.1 million of Common and Preferred Stock of Tower Hill Securities, Inc. The municipal securities and the REIT Shares will be used to satisfy $65.0 million of mandatorily redeemable securities issued by Tower Hill Securities, Inc. and are not available to satisfy the general debts and obligations of Huntington or any consolidated affiliates. The transfer was recorded as a secured financing. Interests held by Huntington consist of municipal securities within available for sale and other securities and Series B preferred securities within other long term debt of Huntingtons Unaudited Condensed Consolidated Balance Sheets. The maximum exposure to loss is equal to the carrying value of the municipal securities.
121
TRUST PREFERRED SECURITIES
Huntington has certain wholly-owned trusts whose assets, liabilities, equity, income, and expenses are not included within Huntingtons Unaudited Condensed Consolidated Financial Statements. These trusts have been formed for the sole purpose of issuing trust-preferred securities, from which the proceeds are then invested in Huntington junior subordinated debentures, which are reflected in Huntingtons Unaudited Condensed Consolidated Balance Sheets as subordinated notes. The trust securities are the obligations of the trusts, and as such, are not consolidated within Huntingtons Unaudited Condensed Consolidated Financial Statements. A list of trust preferred securities outstanding at March 31, 2015 follows:
(dollar amounts in thousands) |
Rate | Principal amount of subordinated note/ debenture issued to trust (1) |
Investment in unconsolidated subsidiary |
|||||||||
Huntington Capital I |
0.96 | %(2) | $ | 111,816 | $ | 6,186 | ||||||
Huntington Capital II |
0.90 | (3) | 54,593 | 3,093 | ||||||||
Sky Financial Capital Trust III |
1.68 | (4) | 72,165 | 2,165 | ||||||||
Sky Financial Capital Trust IV |
1.66 | (4) | 74,320 | 2,320 | ||||||||
Camco Financial Trust |
2.70 | (5) | 4,188 | 155 | ||||||||
|
|
|
|
|||||||||
Total |
$ | 317,082 | $ | 13,919 | ||||||||
|
|
|
|
(1) | Represents the principal amount of debentures issued to each trust, including unamortized original issue discount. |
(2) | Variable effective rate at March 31, 2015, based on three month LIBOR + 0.70. |
(3) | Variable effective rate at March 31, 2015, based on three month LIBOR + 0.625. |
(4) | Variable effective rate at March 31, 2015, based on three month LIBOR + 1.40. |
(5) | Variable effective rate (including impact of purchase accounting accretion) at March 31, 2015, based on three month LIBOR + 1.33. |
Each issue of the junior subordinated debentures has an interest rate equal to the corresponding trust securities distribution rate. Huntington has the right to defer payment of interest on the debentures at any time, or from time-to-time for a period not exceeding five years provided that no extension period may extend beyond the stated maturity of the related debentures. During any such extension period, distributions to the trust securities will also be deferred and Huntingtons ability to pay dividends on its common stock will be restricted. Periodic cash payments and payments upon liquidation or redemption with respect to trust securities are guaranteed by Huntington to the extent of funds held by the trusts. The guarantee ranks subordinate and junior in right of payment to all indebtedness of the Company to the same extent as the junior subordinated debt. The guarantee does not place a limitation on the amount of additional indebtedness that may be incurred by Huntington.
LOW INCOME HOUSING TAX CREDIT PARTNERSHIPS
Huntington makes certain equity investments in various limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (LIHTC) pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital, to facilitate the sale of additional affordable housing product offerings, and to assist in achieving goals associated with the Community Reinvestment Act. The primary activities of the limited partnerships include the identification, development, and operation of multi family housing that is leased to qualifying residential tenants. Generally, these types of investments are funded through a combination of debt and equity.
Huntington is a limited partner in each Low Income Housing Tax Credit Partnership. A separate unrelated third party is the general partner. Each limited partnership is managed by the general partner, who exercises full and exclusive control over the affairs of the limited partnership. Duties entrusted to the general partner of each limited partnership include, but are not limited to: investment in operating companies, company expenditures, investment of excess funds, borrowing funds, employment of agents, disposition of fund property, prepayment and refinancing of liabilities, votes and consents, contract authority, disbursement of funds, accounting methods, tax elections, bank accounts, insurance, litigation, cash reserve, and use of working capital reserve funds. Except for limited rights granted to consent to certain transactions, the limited partner(s) may not participate in the operation, management, or control of the limited partnerships business, transact any business in the limited partnerships name or have any power to sign documents for or otherwise bind the limited partnership. In addition, the general partner may only be removed by the limited partner(s) in the event the general partner fails to comply with the terms of the agreement and/or is negligent in performing its duties.
122
Huntington believes the general partner of each limited partnership has the power to direct the activities which most significantly affect the performance of each partnership, therefore, Huntington has determined that it is not the primary beneficiary of any LIHTC partnership. Huntington uses the proportional amortization method to account for a majority of its investments in these entities. These investments are included in accrued income and other assets. Investments that do not meet the requirements of the proportional amortization method are recognized using the equity method. Investment gains/losses related to these investments are included in non-interest-income in the Unaudited Condensed Consolidated Statements of Income.
The following table presents the balances of Huntingtons affordable housing tax credit investments and related unfunded commitments at March 31, 2015 and December 31, 2014.
March 31, | December 31, | |||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Affordable housing tax credit investments |
$ | 576,817 | $ | 576,381 | ||||
Less: amortization |
(218,802 | ) | (208,098 | ) | ||||
|
|
|
|
|||||
Net affordable housing tax credit investments |
$ | 358,015 | $ | 368,283 | ||||
|
|
|
|
|||||
Unfunded commitments |
$ | 138,483 | $ | 154,861 |
The following table presents other information relating to Huntingtons affordable housing tax credit investments for the three-month periods ended March 31, 2015 and 2014.
Three Months Ended | ||||||||
March 31, | ||||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Tax credits and other tax benefits recognized |
$ | 15,747 | $ | 14,316 | ||||
Proportional amortization method |
||||||||
Tax credit amortization expense included in provision for income taxes |
11,074 | 9,360 | ||||||
Equity method |
||||||||
Tax credit investment losses included in non-interest income |
147 | 223 |
Huntington recognized immaterial impairment losses on tax credit investments during the three-month periods ended March 31, 2015 and 2014.
OTHER INVESTMENTS
Other investments determined to be VIEs include investments in New Market Tax Credit Investments, Historic Tax Credit Investments, Small Business Investment Companies, Rural Business Investment Companies, certain equity method investments and other miscellaneous investments.
18. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments to extend credit
In the ordinary course of business, Huntington makes various commitments to extend credit that are not reflected in the Unaudited Condensed Consolidated Financial Statements. The contractual amounts of these financial agreements at March 31, 2015 and December 31, 2014, were as follows:
March 31, | December 31, | |||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Contract amount represents credit risk: |
||||||||
Commitments to extend credit |
||||||||
Commercial |
$ | 10,978,254 | $ | 11,181,522 | ||||
Consumer |
7,809,875 | 7,579,632 | ||||||
Commercial real estate |
953,874 | 908,112 | ||||||
Standby letters-of-credit |
474,224 | 497,457 | ||||||
Commercial letters-of-credit |
18,063 | 36,460 |
123
Commitments to extend credit generally have fixed expiration dates, are variable-rate, and contain clauses that permit Huntington to terminate or otherwise renegotiate the contracts in the event of a significant deterioration in the customers credit quality. These arrangements normally require the payment of a fee by the customer, the pricing of which is based on prevailing market conditions, credit quality, probability of funding, and other relevant factors. Since many of these commitments are expected to expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements. The interest rate risk arising from these financial instruments is insignificant as a result of their predominantly short-term, variable-rate nature.
Standby letters-of-credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most of these arrangements mature within two years. The carrying amount of deferred revenue associated with these guarantees was $6.6 million and $4.4 million at March 31, 2015 and December 31, 2014, respectively.
Through the Companys credit process, Huntington monitors the credit risks of outstanding standby letters-of-credit. When it is probable that a standby letter-of-credit will be drawn and not repaid in full, losses are recognized in the provision for credit losses. At March 31, 2015, Huntington had $474.2 million of standby letters-of-credit outstanding, of which 80% were collateralized. Included in this $474.2 million total are letters-of-credit issued by the Bank that support securities that were issued by customers and remarketed by The Huntington Investment Company, the Companys broker-dealer subsidiary.
Huntington uses an internal grading system to assess an estimate of loss on its loan and lease portfolio. This same loan grading system is used to monitor credit risk associated with standby letters-of-credit. Under this grading system as of March 31, 2015, approximately $181 million of the standby letters-of-credit were rated strong with sufficient asset quality, liquidity, and good debt capacity and coverage; approximately $293 million were rated average with acceptable asset quality, liquidity, and modest debt capacity; and approximately less than $1 million were rated substandard with negative financial trends, structural weaknesses, operating difficulties, and higher leverage.
Commercial letters-of-credit represent short-term, self-liquidating instruments that facilitate customer trade transactions and generally have maturities of no longer than 90 days. The goods or cargo being traded normally secures these instruments.
Commitments to sell loans
Activity related to our mortgage origination activity supports the hedging of the mortgage pricing commitments to customers and the secondary sale to third parties. At March 31, 2015 and December 31, 2014, Huntington had commitments to sell residential real estate loans of $873.4 million and $545.0 million, respectively. These contracts mature in less than one year.
Litigation
The nature of Huntingtons business ordinarily results in a certain amount of pending as well as threatened claims, litigation, investigations, regulatory and legal and administrative cases, matters and proceedings, all of which are considered incidental to the normal conduct of business. When the Company determines it has meritorious defenses to the claims asserted, it vigorously defends itself. The Company considers settlement of cases when, in Managements judgment, it is in the best interests of both the Company and its shareholders to do so.
On at least a quarterly basis, Huntington assesses its liabilities and contingencies in connection with threatened and outstanding legal cases, matters and proceedings, utilizing the latest information available. For cases, matters and proceedings where it is both probable the Company will incur a loss and the amount can be reasonably estimated, Huntington establishes an accrual for the loss. Once established, the accrual is adjusted as appropriate to reflect any relevant developments. For cases, matters or proceedings where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established.
In certain cases, matters and proceedings, exposure to loss exists in excess of the accrual to the extent such loss is reasonably possible, but not probable. Management believes an estimate of the aggregate range of reasonably possible losses, in excess of amounts accrued, for current legal proceedings is from $0 to approximately $110.0 million at March 31, 2015. For certain other cases, and matters, Management cannot reasonably estimate the possible loss at this time. Any estimate involves significant judgment, given the varying stages of the proceedings (including the fact that many of them are currently in preliminary stages), the existence of multiple defendants in several of the current proceedings whose share of liability has yet to be determined, the numerous unresolved issues in many of the proceedings, and the inherent uncertainty of the various potential outcomes of such proceedings. Accordingly, Managements estimate will change from time-to-time, and actual losses may be more or less than the current estimate.
124
While the final outcome of legal cases, matters, and proceedings is inherently uncertain, based on information currently available, advice of counsel, and available insurance coverage, Management believes that the amount it has already accrued is adequate and any incremental liability arising from the Companys legal cases, matters, or proceedings will not have a material negative adverse effect on the Companys consolidated financial position as a whole. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these cases, matters, and proceedings, if unfavorable, may be material to the Companys consolidated financial position in a particular period.
The Bank has been named a defendant in two lawsuits, arising from the Banks commercial lending, depository, and equipment leasing relationships with Cyberco Holdings, Inc. (Cyberco), based in Grand Rapids, Michigan. In November 2004, the Federal Bureau of Investigation and the Internal Revenue Service raided Cybercos facilities and Cybercos operations ceased. An equipment leasing fraud was uncovered, whereby Cyberco sought financing from equipment lessors and financial institutions, including the Bank, allegedly to purchase computer equipment from Teleservices Group, Inc. (Teleservices). Cyberco created fraudulent documentation to close the financing transactions when, in fact, no computer equipment was ever purchased or leased from Teleservices, which later proved to be a shell corporation.
Cyberco filed a Chapter 7 bankruptcy petition on December 9, 2004, and a state court receiver for Teleservices then filed a Chapter 7 bankruptcy petition for Teleservices on January 21, 2005. In an adversary proceeding commenced against the Bank on December 8, 2006, the Cyberco bankruptcy trustee sought recovery of over $70.0 million he alleged was transferred to the Bank. The Cyberco bankruptcy trustee also alleged preferential transfers were made to the Bank in the amount of approximately $1.2 million. The Bank moved to dismiss the complaint and all but the preference claims were dismissed on January 29, 2008. The Bankruptcy Court ordered the case to be tried in July 2012, and entered an order governing all pretrial conduct. The Bank filed a motion for summary judgment on the basis that the Cyberco trustee sought recovery of the same alleged transfers as the Teleservices trustee in a separate case described below. The Bankruptcy Court granted the motion in principal part and the parties stipulated to a full dismissal which was entered on June 19, 2012.
The Teleservices bankruptcy trustee filed a separate adversary proceeding against the Bank on January 19, 2007, seeking to avoid and recover alleged transfers that occurred in two ways: (1) checks made payable to the Bank for application to Cybercos indebtedness to the Bank, and (2) deposits into Cybercos bank accounts with the Bank. A trial was held as to only the Banks defenses. Subsequently, the trustee filed a summary judgment motion on her affirmative case, alleging the fraudulent transfers to the Bank totaled approximately $73.0 million and seeking judgment in that amount (which includes the $1.2 million alleged to be preferential transfers by the Cyberco bankruptcy trustee). On March 17, 2011, the Bankruptcy Court issued an Opinion determining that the alleged transfers made to the Bank during the period from April 30, 2004 through November 2004 were not received in good faith and that the Bank failed to show a lack of knowledge of the avoidability of the alleged transfers made from September 2003 through November 2004. The trustee then filed an amended motion for summary judgment in her affirmative case and a hearing was held on July 1, 2011.
On March 30, 2012, the Bankruptcy Court issued an Opinion on the Teleservices trustees motion determining the Bank was the initial transferee of the checks made payable to it and was a subsequent transferee of all deposits into Cybercos accounts. The Bankruptcy Court ruled Cybercos deposits were themselves transfers to the Bank under the Bankruptcy Code, and the Bank was liable for both the checks and the deposits, totaling approximately $ 73.0 million. The Bankruptcy Court delivered its report and recommendation to the District Court for the Western District of Michigan, recommending that the District Court enter a final judgment against the Bank in the principal amount of $ 71.8 million, plus interest through July 27, 2012, in the amount of $ 8.8 million. The parties filed their respective objections and responses to the Bankruptcy Courts report and recommendation. The District Court held a hearing in September 2014 and is conducting a de novo review of the fact findings and legal conclusions in the Bankruptcy Courts report and recommendation. It has not issued a ruling to date.
The Bank is a defendant in an action filed on January 17, 2012 against MERSCORP, Inc. and numerous other financial institutions that participate in the mortgage electronic registration system (MERS). The putative class action was filed on behalf of all 88 counties in Ohio. The plaintiffs allege that the recording of mortgages and assignments thereof is mandatory under Ohio law and seek a declaratory judgment that the defendants are required to record every mortgage and assignment on real property located in Ohio and pay the attendant statutory recording fees. The complaint also seeks damages, attorneys fees and costs. Huntington filed a motion to dismiss the complaint, which has been fully briefed, but no ruling has been issued by the Geauga County, Ohio Court of Common Pleas. Similar litigation has been initiated against MERSCORP, Inc. and other financial institutions in other jurisdictions throughout the country, however, the Bank has not been named a defendant in those other cases.
125
The Bank is a defendant in a putative class action filed on October 15, 2013. The plaintiffs filed the action in West Virginia state court on behalf of themselves and other West Virginia mortgage loan borrowers who allege they were charged late fees in violation of West Virginia law and the loan documents. Plaintiffs seek statutory civil penalties, compensatory damages and attorneys fees. The Bank removed the case to federal court, answered the complaint, and, on January 17, 2014, filed a motion for judgment on the pleadings, asserting that West Virginia law is preempted by federal law and therefore does not apply to the Bank. Following further briefing by the parties, the Court denied the Banks motion for judgment on the pleadings on September 26, 2014. On October 7, 2014, the Bank filed a motion to certify the District Courts decision for interlocutory review by the Fourth Circuit Court of Appeals. The plaintiffs have opposed the Banks motion. No ruling has yet been issued by the Court.
19. PARENT COMPANY FINANCIAL STATEMENTS
The parent company unaudited condensed financial statements, which include transactions with subsidiaries, are as follows:
Balance Sheets |
March 31, | December 31, | ||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 876,020 | $ | 662,768 | ||||
Due from The Huntington National Bank |
276,847 | 276,851 | ||||||
Due from non-bank subsidiaries |
49,994 | 51,129 | ||||||
Investment in The Huntington National Bank |
5,956,496 | 6,073,408 | ||||||
Investment in non-bank subsidiaries |
509,691 | 509,114 | ||||||
Accrued interest receivable and other assets |
228,579 | 279,366 | ||||||
|
|
|
|
|||||
Total assets |
$ | 7,897,627 | $ | 7,852,636 | ||||
|
|
|
|
|||||
Liabilities and shareholders equity |
||||||||
Long-term borrowing |
$ | 1,052,852 | $ | 1,046,105 | ||||
Dividends payable, accrued expenses, and other liabilities |
382,821 | 478,361 | ||||||
|
|
|
|
|||||
Total liabilities |
1,435,673 | 1,524,466 | ||||||
|
|
|
|
|||||
Shareholders equity (1) |
6,461,954 | 6,328,170 | ||||||
|
|
|
|
|||||
Total liabilities and shareholders equity |
$ | 7,897,627 | $ | 7,852,636 | ||||
|
|
|
|
(1) | See Huntingtons Unaudited Condensed Consolidated Statements of Changes in Shareholders Equity. |
126
Three Months Ended | ||||||||
Statements of Income |
March 31, | |||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Income |
||||||||
Dividends from |
||||||||
The Huntington National Bank |
$ | 334,000 | $ | | ||||
Non-bank subsidiaries |
3,333 | 1,819 | ||||||
Interest from |
||||||||
The Huntington National Bank |
1,087 | 997 | ||||||
Non-bank subsidiaries |
595 | 699 | ||||||
Other |
334 | 1,602 | ||||||
|
|
|
|
|||||
Total income |
339,349 | 5,117 | ||||||
|
|
|
|
|||||
Expense |
||||||||
Personnel costs |
| 11,177 | ||||||
Interest on borrowings |
4,277 | 4,252 | ||||||
Other |
15,809 | 15,997 | ||||||
|
|
|
|
|||||
Total expense |
20,086 | 31,426 | ||||||
|
|
|
|
|||||
Income (loss) before income taxes and equity in undistributed net income of subsidiaries |
319,263 | (26,309 | ) | |||||
Income taxes (benefit) |
(33,535 | ) | (14,347 | ) | ||||
|
|
|
|
|||||
Income (loss) before equity in undistributed net income of subsidiaries |
352,798 | (11,962 | ) | |||||
Equity in undistributed net income (loss) of: |
||||||||
The Huntington National Bank |
(187,400 | ) | 157,229 | |||||
Non-bank subsidiaries |
456 | 3,876 | ||||||
|
|
|
|
|||||
Net income |
$ | 165,854 | $ | 149,143 | ||||
|
|
|
|
|||||
Other comprehensive income (loss) (1) |
61,460 | 12,262 | ||||||
|
|
|
|
|||||
Comprehensive income |
$ | 227,314 | $ | 161,405 | ||||
|
|
|
|
(1) | See Huntingtons Unaudited Condensed Consolidated Statements of Comprehensive Income for other comprehensive income (loss) detail. |
127
Three Months Ended | ||||||||
Statements of Cash Flows |
March 31, | |||||||
(dollar amounts in thousands) |
2015 | 2014 | ||||||
Operating activities |
||||||||
Net income |
$ | 165,854 | $ | 149,143 | ||||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||
Equity in undistributed net income of subsidiaries |
186,944 | (165,501 | ) | |||||
Depreciation and amortization |
144 | 110 | ||||||
Other, net |
(36,990 | ) | 1,464 | |||||
|
|
|
|
|||||
Net cash provided by (used for) operating activities |
315,952 | (14,784 | ) | |||||
|
|
|
|
|||||
Investing activities |
||||||||
Repayments from subsidiaries |
1,800 | 2,685 | ||||||
Advances to subsidiaries |
(70 | ) | (350 | ) | ||||
Cash paid for acquisitions, net of cash received |
| (13,452 | ) | |||||
|
|
|
|
|||||
Net cash provided by (used for) investing activities |
1,730 | (11,117 | ) | |||||
|
|
|
|
|||||
Financing activities |
||||||||
Dividends paid on stock |
(56,703 | ) | (49,110 | ) | ||||
Repurchases of common stock |
(51,707 | ) | (136,137 | ) | ||||
Proceeds from issuance of common stock |
| 2,597 | ||||||
Other, net |
3,980 | 7,951 | ||||||
|
|
|
|
|||||
Net cash provided by (used for) financing activities |
(104,430 | ) | (174,699 | ) | ||||
|
|
|
|
|||||
Change in cash and cash equivalents |
213,252 | (200,600 | ) | |||||
Cash and cash equivalents at beginning of period |
662,768 | 966,065 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of period |
$ | 876,020 | $ | 765,465 | ||||
|
|
|
|
|||||
Supplemental disclosure: |
||||||||
Interest paid |
$ | 4,277 | $ | 4,252 |
20. SEGMENT REPORTING
Our business segments are based on our internally-aligned segment leadership structure, which is how we monitor results and assess performance. We have five major business segments: Retail and Business Banking, Commercial Banking, Automobile Finance and Commercial Real Estate (AFCRE), Regional Banking and The Huntington Private Client Group (RBHPCG), and Home Lending. The Treasury / Other function includes our technology and operations, other unallocated assets, liabilities, revenue, and expense.
Retail and Business Banking: The Retail and Business Banking segment provides a wide array of financial products and services to consumer and small business customers including but not limited to checking accounts, savings accounts, money market accounts, certificates of deposit, consumer loans, and small business loans. Other financial services available to consumer and small business customers include investments, insurance, interest rate risk protection, foreign exchange hedging, and treasury management. Huntington serves customers primarily through our network of branches in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. In addition to our extensive branch network, customers can access Huntington through online banking, mobile banking, telephone banking, and ATMs.
Huntington has established a Fair Play banking philosophy and built a reputation for meeting the banking needs of consumers in a manner which makes them feel supported and appreciated. Huntington believes customers are recognizing this and other efforts as key differentiators and it is earning us more customers, deeper relationships and the J.D. Power retail service excellence award for 2013 and 2014.
Business Banking is a dynamic and growing part of our business and we are committed to being the bank of choice for small businesses in our markets. Business Banking is defined as companies with revenues under $20 million and consists of approximately 162,000 businesses. Huntington continues to develop products and services that are designed specifically to meet the needs of small business. Huntington continues to look for ways to help companies find solutions to their financing needs and is the number one SBA lender in the country. We have also won the J.D. Power award for small business service excellence in 2012 and 2014.
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Commercial Banking: Through a relationship banking model, this segment provides a wide array of products and services to the middle market, large corporate, and government public sector customers located primarily within our geographic footprint. The segment is divided into seven business units: middle market, large corporate, specialty banking, asset finance, capital markets, treasury management, and insurance.
Middle Market Banking primarily focuses on providing banking solutions to companies with annual revenues of $20 million to $250 million. Through a relationship management approach, various products, capabilities and solutions are seamlessly orchestrated in a client centric way.
Corporate Banking works with larger, often more complex companies with revenues greater than $250 million. These entities, many of which are publically traded, require a different and customized approach to their banking needs.
Specialty Banking offers tailored products and services to select industries that have a foothold in the Midwest. Each banking team is comprised of industry experts with a dynamic understanding of the market and industry. Many of these industries are experiencing tremendous change, which creates opportunities for Huntington to leverage our expertise and help clients navigate, adapt and succeed.
Asset Finance division is a combination of our Equipment Finance, Public Capital, Asset Based Lending, Technology and Healthcare Equipment Leasing, and Lender Finance divisions that focus on providing financing solutions against these respective asset classes.
Capital Markets has two distinct product capabilities: corporate risk management services and institutional sales, trading & underwriting. The Capital Markets Group offers a full suite of risk management tools including commodities, foreign exchange and interest rate hedging services. The Institutional Sales, Trading & Underwriting team provides access to capital and investment solutions for both municipal and corporate institutions.
Treasury Management teams help businesses manage their working capital programs and reduce expenses. Our liquidity solutions help customers save and invest wisely, while our payables and receivables capabilities help them manage purchases and the receipt of payments for good and services. All of this is provided while helping customers take a sophisticated approach to managing their overhead, inventory, equipment and labor.
Insurance brokerage business specializes in commercial property and casualty, employee benefits, personal lines, life and disability and specialty lines of insurance. We also provide brokerage and agency services for residential and commercial title insurance and excess and surplus product lines of insurance. As an agent and broker we do not assume underwriting risks; instead we provide our customers with quality, noninvestment insurance contracts.
Automobile Finance and Commercial Real Estate: This segment provides lending and other banking products and services to customers outside of our traditional retail and commercial banking segments. Our products and services include providing financing for the purchase of vehicles by customers at franchised automotive dealerships, financing the acquisition of new and used vehicle inventory of franchised automotive dealerships, and financing for land, buildings, and other commercial real estate owned or constructed by real estate developers, automobile dealerships, or other customers with real estate project financing needs. Products and services are delivered through highly specialized relationship-focused bankers and product partners. Huntington creates well-defined relationship plans which identify needs where solutions are developed and customer commitments are obtained.
The Automotive Finance team services automobile dealerships, its owners, and consumers buying automobiles through these franchised dealerships. Huntington has provided new and used automobile financing and dealer services throughout the Midwest since the early 1950s. This consistency in the market and our focus on working with strong dealerships, has allowed us to expand into selected markets outside of the Midwest and to actively deepen relationships while building a strong reputation.
The Commercial Real Estate team serves real estate developers, REITs, and other customers with lending needs that are secured by commercial properties. Most of these customers are located within our footprint.
The Commercial Real Estate team also serves Huntington Community Development which focuses on improving the quality of life for our communities and the residents of low-to moderate-income neighborhoods by developing and delivering innovative products and services to support affordable housing and neighborhood stabilization.
Regional Banking and The Huntington Private Client Group: Regional Banking and The Huntington Private Client Group is well positioned competitively as we have closely aligned with our eleven regional banking markets. A fundamental point of differentiation is our commitment to be actively engaged within our local marketsbuilding connections with community and business leaders and offering a uniquely personal experience delivered by colleagues working within those markets.
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The Huntington Private Client Group is organized into units consisting of The Huntington Private Bank, The Huntington Trust, The Huntington Investment Company, Huntington Asset Advisors, and Huntington Asset Services. Our private banking, trust, investment and community development functions focus their efforts in our Midwest footprint and Florida; while our proprietary funds and ETFs, and fund administration functions target a national client base.
The Huntington Private Bank provides high net-worth customers with deposit, lending (including specialized lending options) and banking services.
The Huntington Trust also serves high net-worth customers and delivers wealth management and legacy planning through investment and portfolio management, fiduciary administration, trust services and trust operations. This group also provides retirement plan services and corporate trust to businesses and municipalities.
The Huntington Investment Company, a dually registered broker-dealer and registered investment adviser, employs representatives who work with our Retail and Private Bank to provide investment solutions for our customers. This team offers a wide range of products and services, including brokerage, annuities, advisory and other investment products.
Huntington Asset Advisors provides investment management services solely advising the Huntington Funds, our proprietary family of mutual funds and Huntington Strategy Shares, our Exchange Trade Funds.
Huntington Asset Services has a national clientele and offers administrative and operational support to fund complexes, including fund accounting, transfer agency, administration, and distribution services.
Home Lending: Home Lending originates and services consumer loans and mortgages for customers who are generally located in our primary banking markets. Consumer and mortgage lending products are primarily distributed through the Retail and Business Banking segment, as well as through commissioned loan originators. Home lending earns interest on loans held in the warehouse and portfolio, earns fee income from the origination and servicing of mortgage loans, and recognizes gains or losses from the sale of mortgage loans. Home Lending supports the origination and servicing of mortgage loans across all segments.
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Listed below is certain operating basis financial information reconciled to Huntingtons March 31, 2015, December 31, 2014, and March 31, 2014, reported results by business segment:
Three Months Ended March 31, | ||||||||||||||||||||||||||||
Retail & | ||||||||||||||||||||||||||||
Income Statements | Business | Commercial | Home | Treasury/ | Huntington | |||||||||||||||||||||||
(dollar amounts in thousands) |
Banking | Banking | AFCRE | RBHPCG | Lending | Other | Consolidated | |||||||||||||||||||||
2015 |
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Net interest income |
$ | 248,650 | $ | 74,918 | $ | 95,162 | $ | 26,805 | $ | 15,277 | $ | 6,873 | $ | 467,685 | ||||||||||||||
Provision (reduction in allowance) for credit losses |
7,152 | 6,835 | (1,383 | ) | 2,645 | 5,342 | | 20,591 | ||||||||||||||||||||
Noninterest income |
95,759 | 54,893 | 4,675 | 40,475 | 18,658 | 17,163 | 231,623 | |||||||||||||||||||||
Noninterest expense |
256,182 | 56,417 | 36,178 | 61,135 | 35,789 | 13,156 | 458,857 | |||||||||||||||||||||
Income taxes |
28,376 | 23,296 | 22,765 | 1,225 | (2,519 | ) | (19,137 | ) | 54,006 | |||||||||||||||||||
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Net income |
$ | 52,699 | $ | 43,263 | $ | 42,277 | $ | 2,275 | $ | (4,677 | ) | $ | 30,017 | $ | 165,854 | |||||||||||||
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2014 |
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Net interest income |
$ | 219,841 | $ | 70,943 | $ | 88,580 | $ | 25,438 | $ | 13,028 | $ | 19,676 | $ | 437,506 | ||||||||||||||
Provision (reduction in allowance) for credit losses |
7,460 | 11,547 | (8,608 | ) | 2,319 | 11,912 | | 24,630 | ||||||||||||||||||||
Noninterest income |
92,962 | 50,316 | 4,493 | 43,114 | 20,286 | 37,314 | 248,485 | |||||||||||||||||||||
Noninterest expense |
235,275 | 60,421 | 38,164 | 56,022 | 35,123 | 35,116 | 460,121 | |||||||||||||||||||||
Income taxes |
24,524 | 17,252 | 22,231 | 3,574 | (4,802 | ) | (10,682 | ) | 52,097 | |||||||||||||||||||
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Net income |
$ | 45,544 | $ | 32,039 | $ | 41,286 | $ | 6,637 | $ | (8,919 | ) | $ | 32,556 | $ | 149,143 | |||||||||||||
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Assets at | Deposits at | |||||||||||||||
March 31, | December 31, | March 31, | December 31, | |||||||||||||
(dollar amounts in thousands) |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Retail & Business Banking |
$ | 15,507,296 | $ | 15,146,857 | $ | 30,149,844 | $ | 29,350,255 | ||||||||
Commercial Banking |
16,335,324 | 15,043,477 | 11,194,863 | 11,184,566 | ||||||||||||
AFCRE |
16,731,015 | 16,027,910 | 1,443,057 | 1,377,921 | ||||||||||||
RBHPCG |
3,343,229 | 3,871,020 | 6,706,564 | 6,727,892 | ||||||||||||
Home Lending |
4,019,778 | 3,949,247 | 350,199 | 326,841 | ||||||||||||
Treasury / Other |
12,066,019 | 12,259,499 | 2,988,168 | 2,764,676 | ||||||||||||
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Total |
$ | 68,002,661 | $ | 66,298,010 | $ | 52,832,695 | $ | 51,732,151 | ||||||||
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21. BUSINESS COMBINATIONS
MACQUARIE EQUIPMENT FINANCE
On March 31, 2015, Huntington completed its acquisition of Macquarie in a cash transaction valued at $457.8 million. The acquisition gives us the ability to drive added growth to our national equipment finance business as well as additional small business finance capabilities.
As a result of the acquisition, Huntington recorded approximately $1.1 billion of assets and assumed $616.6 million of debt, securitizations, and other liabilities. Assets acquired and liabilities assumed were recorded at fair value in accordance with ASC 805, Business Combinations. The fair values for assets were estimated using discounted cash flow analyses using interest rates currently being offered for leases with similar terms (Level 3). This value was reduced by an estimate of probable losses and the credit risk associated with leased assets. The fair values of debt, securitizations, and other liabilities were estimated by discounting cash flows using interest rates currently being offered with similar maturities (Level 3). As part of the acquisition, Huntington recorded $155.8 million of goodwill, all of which is deductible for tax purposes.
Pro forma results have not been disclosed, as those amounts are not significant to the unaudited condensed consolidated financial statements.
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Item 3: Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosures for the current period can be found in the Market Risk section of this report, which includes changes in market risk exposures from disclosures presented in Huntingtons 2014 Form 10-K.
Item 4: Controls and Procedures
Disclosure Controls and Procedures
Huntington maintains disclosure controls and procedures designed to ensure that the information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized, and reported within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuers management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Huntingtons Management, with the participation of its Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of Huntingtons disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon such evaluation, Huntingtons Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, Huntingtons disclosure controls and procedures were effective.
There have not been any changes in Huntingtons internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, Huntingtons internal controls over financial reporting.
In accordance with the instructions to Part II, the other specified items in this part have been omitted because they are not applicable or the information has been previously reported.
Information required by this item is set forth in Note 18 of the Notes to Unaudited Condensed Consolidated Financial Statements included in Item 1 of this report and incorporated herein by reference.
Information required by this item is set forth in Part 1 Item 2- Managements Discussion and Analysis of Financial Condition and Results of Operations of this report and incorporated herein by reference.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) and (b)
Not Applicable
(c) |
Period |
Total Number of Shares Purchased |
Average Price Paid Per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) |
Maximum Number of Shares (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans or Programs (2) |
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January 1, 2015 to January 31, 2015 |
1,454,925 | $ | 10.01 | 22,592,959 | $ | 37,147,641 | ||||||||||
February 1, 2015 to February 28, 2015 |
2,476,028 | 10.52 | 25,068,987 | 11,099,826 | ||||||||||||
March 1, 2015 to March 31, 2015 |
1,018,005 | 10.89 | 26,086,992 | 13,752 | ||||||||||||
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Total |
4,948,958 | $ | 10.45 | 26,086,992 | $ | 13,752 | ||||||||||
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(1) | The reported shares were repurchased pursuant to Huntingtons publicly announced stock repurchase authorizations. |
(2) | The number shown represents, as of the end of each period, the maximum number of shares (approximate dollar value) of Common Stock that may yet be purchased under publicly announced stock repurchase authorizations. The shares may be purchased, from time-to-time, depending on market conditions. |
On March 11, 2015, Huntington Bancshares Incorporated was notified by the Federal Reserve that it had no objection to Huntingtons proposed capital actions included in Huntingtons capital plan submitted to the Federal Reserve in January 2015. These actions included the potential repurchase of up to $366 million of common stock from the second quarter of 2015, through the second quarter of 2016. Huntingtons board of directors authorized a share repurchase program consistent with Huntingtons capital plan. During the 2015 first quarter, Huntington repurchased a total of 4.9 million shares at a weighted average share price of $10.45, which completed our previous authorization.
Exhibit Index
This report incorporates by reference the documents listed below that we have previously filed with the SEC. The SEC allows us to incorporate by reference information in this document. The information incorporated by reference is considered to be a part of this document, except for any information that is superseded by information that is included directly in this document.
This information may be read and copied at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. The SEC also maintains an Internet web site that contains reports, proxy statements, and other information about issuers, like us, who file electronically with the SEC. The address of the site is http://www.sec.gov. The reports and other information filed by us with the SEC are also available at our Internet web site. The address of the site is http://www.huntington.com. Except as specifically incorporated by reference into this Quarterly Report on Form 10-Q, information on those web sites is not part of this report. You also should be able to inspect reports, proxy statements, and other information about us at the offices of the NASDAQ National Market at 33 Whitehall Street, New York, New York.
Exhibit Number |
Document Description | Report or Registration Statement | SEC File or Registration Number |
Exhibit Reference |
||||||
3.1 | Articles of Restatement of Charter. | Annual Report on Form 10-K for the year ended December 31, 1993 | 000-02525 | 3 | (i) | |||||
3.2 | Articles of Amendment to Articles of Restatement of Charter. | Current Report on Form 8-K dated May 31, 2007 | 000-02525 | 3.1 | ||||||
3.3 | Articles of Amendment to Articles of Restatement of Charter. | Current Report on Form 8-K dated May 7, 2008 | 000-02525 | 3.1 | ||||||
3.4 | Articles of Amendment to Articles of Restatement of Charter. | Current Report on Form 8-K dated April 27, 2010 | 001-34073 | 3.1 | ||||||
3.5 | Articles Supplementary of Huntington Bancshares Incorporated, as of April 22, 2008. | Current Report on Form 8-K dated April 22, 2008 | 000-02525 | 3.1 | ||||||
3.6 | Articles Supplementary of Huntington Bancshares Incorporated, as of April 22. 2008. | Current Report on Form 8-K dated April 22, 2008 | 000-02525 | 3.2 | ||||||
3.7 | Articles Supplementary of Huntington Bancshares Incorporated, as of November 12, 2008. | Current Report on Form 8-K dated November 12, 2008 | 001-34073 | 3.1 |
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3.8 | Articles Supplementary of Huntington Bancshares Incorporated, as of December 31, 2006. | Annual Report on Form 10-K for the year ended December 31, 2006 | 000-02525 | 3.4 | ||||||
3.9 | Articles Supplementary of Huntington Bancshares Incorporated, as of December 28, 2011. | Current Report on Form 8-K dated December 28, 2011. | 001-34073 | 3.1 | ||||||
3.10 | Bylaws of Huntington Bancshares Incorporated, as amended and restated, as of July 16, 2014. | Current Report on Form 8-K dated July 17, 2014 | 001-34073 | 3.1 | ||||||
4.1 | Instruments defining the Rights of Security Holdersreference is made to Articles Fifth, Eighth, and Tenth of Articles of Restatement of Charter, as amended and supplemented. Instruments defining the rights of holders of long-term debt will be furnished to the Securities and Exchange Commission upon request. | |||||||||
10.1 | *Huntington Bancshares Incorporated Restricted Stock Unit Grant Agreement. | |||||||||
10.2 | *Huntington Bancshares Incorporated 2015 Long-Term Incentive Plan. | Definitive Proxy Statement for the 2015 Annual Meeting of Shareholders | 001-34073 | A | ||||||
31.1 | Rule 13a-14(a) Certification Chief Executive Officer. | |||||||||
31.2 | Rule 13a-14(a) Certification Chief Financial Officer. | |||||||||
32.1 | Section 1350 Certification Chief Executive Officer. | |||||||||
32.2 | Section 1350 Certification Chief Financial Officer. | |||||||||
101 | The following material from Huntingtons Form 10-Q Report for the quarterly period ended March 31, 2015, formatted in XBRL: (1) Unaudited Condensed Consolidated Balance Sheets, (2) Unaudited Condensed Consolidated Statements of Income, (3) Unaudited Condensed Consolidated Statements of Comprehensive Income (4) Unaudited Condensed Consolidated Statement of Changes in Shareholders Equity, (5) Unaudited Condensed Consolidated Statements of Cash Flows, and (6) the Notes to Unaudited Condensed Consolidated Financial Statements. |
* | Denotes management contract or compensatory plan or arrangement |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Huntington Bancshares Incorporated
(Registrant)
Date: May 5, 2015 | /s/ Stephen D. Steinour | |
Stephen D. Steinour | ||
Chairman, Chief Executive Officer and President | ||
Date: May 5, 2015 | /s/ Howell D. McCullough III | |
Howell D. McCullough III | ||
Chief Financial Officer |
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