FORM 10-Q
Table of Contents

 

 

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 September 30, 2012

Commission File Number 1-34073

 

 

Huntington Bancshares Incorporated

 

 

 

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

41 South High Street, Columbus, Ohio 43287

Registrant’s telephone number (614) 480-8300

 

 

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

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

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

 

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

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

There were 855,485,376 shares of Registrant’s common stock ($0.01 par value) outstanding on September 30, 2012.

 

 

 


Table of Contents

HUNTINGTON BANCSHARES INCORPORATED

INDEX

 

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements (Unaudited)

  

Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011

     73   

Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2012 and 2011

     74   

Condensed Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2012 and 2011

     75   

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2012 and 2011

     76   

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011

     77   

Notes to Unaudited Condensed Consolidated Financial Statements

     78   

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

  

Executive Overview

     6   

Discussion of Results of Operations

     9   

Risk Management and Capital:

  

Credit Risk

     27   

Market Risk

     44   

Liquidity Risk

     47   

Operational Risk

     50   

Compliance Risk

     51   

Capital

     52   

Business Segment Discussion

     56   

Additional Disclosures

     69   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     148   

Item 4. Controls and Procedures

     148   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     148   

Item 1A. Risk Factors

     148   

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

     148   

Item 6. Exhibits

     149   

Signatures

     151   

 

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Table of Contents

Glossary of Acronyms and Terms

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

 

2011 Form 10-K    Annual Report on Form 10-K for the year ended December 31, 2011
ABL    Asset Based Lending
ACL    Allowance for Credit Losses
AFCRE    Automobile Finance and Commercial Real Estate
ALCO    Asset & Liability Management Committee
ALLL    Allowance for Loan and Lease Losses
ARM    Adjustable Rate Mortgage
ASC    Accounting Standards Codification
ASU    Accounting Standards Update
ATM    Automated Teller Machine
AULC    Allowance for Unfunded Loan Commitments
AVM    Automated Valuation Methodology
C&I    Commercial and Industrial
CapPR    Capital Plan Review
CCAR    Comprehensive Capital Analysis and Review
CDO    Collateralized Debt Obligations
CDs    Certificates of Deposit
CMO    Collateralized Mortgage Obligations
CRE    Commercial Real Estate
Dodd-Frank Act    Dodd-Frank Wall Street Reform and Consumer Protection Act
EPS    Earnings Per Share
EVE    Economic Value of Equity
FASB    Financial Accounting Standards Board
FDIC    Federal Deposit Insurance Corporation
FHA    Federal Housing Administration
FHLB    Federal Home Loan Bank
FHLMC    Federal Home Loan Mortgage Corporation
FICA    Federal Insurance Contributions Act
FICO    Fair Isaac Corporation
FNMA    Federal National Mortgage Association
FRB    Federal Reserve Bank
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
IRS    Internal Revenue Service
ISE    Interest Sensitive Earnings
LIBOR    London Interbank Offered Rate
LGD    Loss-Given-Default
LTV    Loan to Value
MD&A    Management’s Discussion and Analysis of Financial Condition and Results of Operations
MSA    Metropolitan Statistical Area

 

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MSR    Mortgage Servicing Rights
NALs    Nonaccrual Loans
NCO    Net Charge-off
NPAs    Nonperforming Assets
NPR    Notice of Proposed Rulemaking
N.R.    Not relevant. Denominator of calculation is a gain in the current period compared with a
   loss in the prior period, or vice-versa.
OCC    Office of the Comptroller of the Currency
OCI    Other Comprehensive Income (Loss)
OCR    Optimal Customer Relationship
OLEM    Other Loans Especially Mentioned
OREO    Other Real Estate Owned
OTTI    Other-Than-Temporary Impairment
PD    Probability-Of-Default
Plan    Huntington Bancshares Retirement Plan
Problem Loans    Includes nonaccrual loans and leases (Table 17), troubled debt restructured loans (Table 18), accruing loans and leases past due 90 days or more (aging analysis section of Footnote 3), and Criticized commercial loans (credit quality indicators section of Footnote 3).
REIT    Real Estate Investment Trust
ROC    Risk Oversight Committee
SAD    Special Assets Division
SBA    Small Business Administration
SEC    Securities and Exchange Commission
SERP    Supplemental Executive Retirement Plan
SRIP    Supplemental Retirement Income Plan
TDR    Troubled Debt Restructured Loan
U.S. Treasury    U.S. Department of the Treasury
UCS    Uniform Classification System
UPB    Unpaid Principal Balance
USDA    U.S. Department of Agriculture
VA    U.S. Department of Veteran Affairs
VIE    Variable Interest Entity
WGH    Wealth Advisors, Government Finance, and Home Lending

 

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Table of Contents

PART I. FINANCIAL INFORMATION

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

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

INTRODUCTION

We are a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through the Bank, we have 145 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, customized insurance service programs, and other financial products and services. Our over 690 banking offices are located in Indiana, Kentucky, Michigan, Ohio, Pennsylvania, and West Virginia. 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 2011 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2011 Form 10-K. This MD&A should also be read in conjunction with the financial statements, notes and other information contained in this report.

Our discussion is divided into key segments:

 

   

Executive Overview—Provides a summary of our current financial performance, and business overview, including our thoughts on the impact of the economy, legislative and regulatory initiatives, and recent industry developments. This section also provides our outlook regarding our expectations for the remainder of 2012.

 

   

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

 

   

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

 

   

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

 

   

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

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

 

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EXECUTIVE OVERVIEW

Summary of 2012 Third Quarter Results

For the quarter, we reported net income of $167.8 million, or $0.19 per common share, compared with $152.7 million, or $0.17 per common share, in the prior quarter (see Table 1).

Fully-taxable equivalent net interest income was $435.6 million for the quarter, up $0.8 million, or less than 1%, from the prior quarter. The increase reflected the benefit of a $0.3 billion, or 1%, increase in average earning assets, partially offset by a 4 basis point decrease in the fully-taxable equivalent net interest margin to 3.38% from 3.42%. The 4 basis point decrease in the net interest margin reflected the negative impact of a 10 basis point decline in the yield on earning assets, 6 basis points of which were related to the yield on loans. This was partially offset by the benefit of a 6 basis point reduction in total funding costs.

The provision for credit losses increased $0.5 million, or 1%, from the prior quarter. This reflected a $20.9 million, or 25%, increase in NCOs to $105.1 million, or an annualized 1.05% of average total loans and leases, from $84.2 million, or an annualized 0.82%, in the prior quarter. Of this quarter’s NCOs, $33.0 million related to regulatory guidance requiring loans discharged under Chapter 7 bankruptcy to be charged down to their collateral value. Approximately 90% of these borrowers continue to make payments as scheduled. Partially offsetting the increase in NCOs was significant improvement in asset quality trends, resulting in lower calculated reserves.

Total noninterest income increased $7.2 million, or 3%, from the prior quarter. This included a $6.3 million, or 16%, increase in mortgage banking income and a $3.8 million increase in securities gains. Gain on sale of loans increased $2.5 million, or 60%, due to the sale of $0.2 billion of automobile loans that we classified as held for sale at the end of the prior quarter. These positive impacts were partially offset by a $4.4 million, or 16%, decrease in other income as the prior quarter included a gain on the sale of affordable housing investments.

Noninterest expense increased $14.0 million, or 3%, from the prior quarter. This included a $4.7 million, or 2%, increase in personnel costs primarily reflecting higher healthcare costs and a $4.4 million increase in the cost associated with early extinguishment of trust preferred securities that were redeemed during the quarter. Noninterest expense included $4.5 million of expense related to the development of infrastructure and systems to support the Federal Reserve CCAR process.

The period-end ACL as a percentage of total loans and leases decreased to 2.09% from 2.28% in the prior quarter. The ACL as a percentage of period end NALs was essentially unchanged, decreasing 3 percentage points to 189%. NALs declined by $29.1 million, or 6%, to $445.0 million, or 1.11% of total loans, during the quarter despite a $63.0 million increase associated with the revised treatment of Chapter 7 bankruptcy consumer loans.

Our Tier 1 common risk-based capital ratio at September 30, 2012, was 10.27%, up from 10.08% at June 30, 2012, and our tangible common equity ratio increased to 8.74% from 8.41% over this same period. The regulatory Tier 1 risk-based capital ratio at September 30, 2012, was 11.87%, down from 11.93%, at June 30, 2012. This decline reflected the capital actions taken throughout the quarter and are discussed below.

Over the quarter, and consistent with planned capital actions, we redeemed $114.3 million of trust preferred securities and repurchased 3.7 million common shares at an average price of $6.68 per share. The weighted average coupon of the remaining $300 million of trust preferred securities is LIBOR + 1.02%. Reinvesting excess capital to grow the business organically remains our first priority. Importantly, through dividends and share repurchases, we have the flexibility, subject to market conditions, to return a meaningful amount of our earnings to the owners of the company.

Business Overview

General

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

The third quarter results clearly showed the continued benefit of the investment we have made over the preceding three years. Adding over 250,000 consumer households, a 27% increase, and 26,000 commercial relationships, or 21% increase, since the first quarter of 2010 has allowed us to grow quarterly total revenue by more than $59 million even with the negative impacts from the low absolute level of interest rates, the flat shape of the yield curve, and the reduction of over $25 million revenue per quarter due to the Durbin amendment and implementation of changes to Regulation E. Not only are we gaining customers, we are selling deeper with 76% of consumer checking account households and 33% of commercial relationships now with 4 or more products or services. Strategic investments have a maximum of two years to break even with many reaching that level in the first year. A portion of our strategic investments remain in the early stages, such as our strategy to build over 180 in-store full service branches. The in-store branches are on target with the estimated aggregate impact to operating income negligible next year and positive in 2014.

 

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Economy

We continue to see positive trends within our Midwest markets relative to the broader United States. Nevertheless, broad based customer sentiment began to change late in the quarter. Customers have increased concerns, in the near term, regarding the U.S. economy as we approach the election and scheduled impacts of the Budget Control Act of 2011. We are optimistic that once permanent solutions are in place, the strength of the Midwest and the soundness of our strategy will continue to drive growth and improved profitability.

Generally, our footprint large metropolitan statistical areas (MSA) unemployment rates were below the national average as of July 2012. In addition, our footprint states have continued to be strong export states. For the three-month average ending July 2012, exports from our footprint states were 8.5% greater than the same period last year. By comparison, overall U.S. exports were 5.1% higher. Office vacancy rates in our footprint MSAs were above the national vacancy rate in the prior quarter, but have generally remained on declining trends.

While our footprint has clearly benefited from certain aspects of this recovery, the United States and global economies continue to experience elevated levels of volatility and uncertainty.

Legislative and Regulatory

Regulatory reforms continue to be adopted which impose additional restrictions on current business practices. Recent actions affecting us include the Federal Reserve BASEL III proposal and the capital plans rule.

BASEL III and the Dodd-Frank Act – In June 2012, the FRB, OCC, and FDIC (collectively, the Agencies) each issued Notices of Proposed Rulemaking (NPRs) that would revise and replace the Agencies’ current capital rules to align with the BASEL III capital standards and meet certain requirements of the Dodd-Frank Act. Certain requirements of the NPRs would establish more restrictive capital definitions, higher risk-weightings for certain asset classes, capital buffers and higher minimum capital ratios. The NPRs were in a comment period through October 22, 2012, and are subject to further modification by the Agencies. We are currently evaluating the impact of the NPRs on our regulatory capital ratios. We estimate a reduction of approximately 150 basis points to our BASEL I Tier I Common risk-based capital ratio based on our existing balance sheet composition, if the proposed NPRs are adopted as proposed. We anticipate that our capital ratios, on a BASEL III basis, would continue to exceed the well-capitalized minimum requirements. For additional discussion, please see BASEL III and the Dodd-Frank Act section within the Capital section.

Capital Plans Rule / Supervisory and Company-Run Stress Test Requirements– During 2011, we participated in the Federal Reserve’s Capital Plan Review (CapPR) process and made our capital plan submission in January 2012. On March 14, 2012, we announced that the Federal Reserve had completed its review of our capital plan submission and did not object to our proposed capital actions. The capital planning review process included reviews of our internal capital adequacy assessment process and our plans to make capital distributions, such as dividend payments or stock repurchases, as well as a stress test requirement designed to test our capital adequacy throughout times of economic and financial stress.

In October 2012, the Federal Reserve published two final rules with stress testing requirements for certain bank holding companies, state member banks, and savings and loan holding companies. The final rules implement sections 165(i)(1) and (i)(2) of the Dodd-Frank Act that require supervisory and company-run stress tests. The Federal Reserve will begin conducting supervisory stress tests under the final rules in the 2012 fourth quarter for the 19 bank holding companies that participated in the 2009 Supervisory Capital Assessment Program and subsequent Comprehensive Capital Analysis and Reviews. We were not included in this group of 19 bank holding companies.

Huntington will be subject to the Federal Reserve’s supervisory stress tests beginning in late 2013, however as in the prior year, we are subject to CapPR and will conduct internal stress testing as part of the completion of our annual Capital Plan. The Federal Reserve is expected to release the scenarios for this year’s supervisory and company-run stress tests no later than November 15, 2012. As required by the Dodd-Frank Act, the scenarios will describe hypothetical baseline, adverse, and severely adverse conditions, with paths for key macroeconomic and financial variables. We must submit our Capital Plan to the Federal Reserve no later than January 5, 2013.

In October 2012, the OCC issued its Annual Stress Test final rule. This final rule implements section 165(i) of the Dodd-Frank Act which requires certain companies to conduct annual stress tests pursuant to regulations prescribed by their respective primary financial regulatory agencies. The OCC has stipulated in its final rule that it will consult closely with the Federal Reserve to provide common stress scenarios for use at both the depository institution and holding company levels. The OCC has deferred the requirement for us to complete separate annual stress tests at the bank-level until next year. For additional discussion, please see Updates to Risk Factors within the Additional Disclosures section.

 

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Expectations

For the next several quarters, average net interest income is expected to be relatively stable from the third quarter’s level as we anticipate an increase in total loans, excluding the impacts of any future loan securitizations. Those benefits to net interest income are expected to be mostly offset, however, by slight downward net interest margin pressure due to the anticipated competitive pressures on loan pricing, as well as reinvestment into lower rate securities, and declining positive impacts from deposit repricing. The C&I portfolio is expected to continue to show growth. Although, given the most recent trend, we are expecting near-term growth to be slower than the strong growth we experienced earlier this year. Our C&I sales pipeline remains robust with much of this reflecting the positive impact from our strategic initiatives, focused OCR sales process, and continued support of middle market and small business lending in the Midwest. We will continue to evaluate the use of automobile loan securitizations to limit total on-balance sheet exposure due to our expectation of continued strong levels of originations. On October 11, 2012, a $1.0 billion automobile loan securitization was completed and resulted in a gain of approximately $17 million. Residential mortgages and home equity loan balances are expected to be relatively stable in response to the proposed capital rules recently released by our regulators. CRE loans likely will experience declines from current levels.

Excluding potential future automobile loan securitizations, we anticipate the increase in total loans will modestly outpace growth in total deposits. This reflects our continued focus on our overall cost of funds and the continued shift towards low- and no-cost demand deposits and money market deposit accounts.

Noninterest income, excluding the impact of any automobile loan sales or security gains and any net MSR impact, is expected to be relatively stable at current levels. Continued growth in new customers and increased contribution from increased cross-sell are expected to be offset by a slowdown in mortgage banking activity.

Noninterest expense is expected to modestly increase above the 2012 third quarter level. For the full year, we continue to anticipate positive operating leverage and modest improvement in our expense efficiency ratio. Additional regulatory costs and expenses associated with strategic actions, including the planned opening of over 80 in-store branches this year, are expected to be partially offset by our focus on improving expense efficiencies throughout the company.

Credit quality is expected to experience improvement. The level of provision for credit losses in the first three quarters of the year was at the low end of our long-term expectation, and we expect some quarterly volatility given the absolute low level of the provision for credit losses and the uncertain and uneven nature of the economic recovery.

We anticipate the effective tax rate for the 2012 fourth quarter to approximate 24% to 26%, which includes permanent tax benefits primarily related to tax-exempt income, tax-advantaged investments, and general business credits.

 

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DISCUSSION OF RESULTS OF OPERATIONS

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

 

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Table 1 - Selected Quarterly Income Statement Data (1)

 

       
     2012     2011  

(dollar amounts in thousands, except per share amounts)

   Third     Second     First     Fourth     Third  

Interest income

   $ 483,787     $ 487,544     $ 479,937     $ 485,216     $ 490,996  

Interest expense

     53,489       58,582       62,728       70,191       84,518  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     430,298       428,962       417,209       415,025       406,478  

Provision for credit losses

     37,004       36,520       34,406       45,291       43,586  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     393,294       392,442       382,803       369,734       362,892  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     67,806       65,998       60,292       63,324       65,184  

Trust services

     29,689       29,914       30,906       28,775       29,473  

Electronic banking

     22,135       20,514       18,630       18,282       32,901  

Mortgage banking income

     44,614       38,349       46,418       24,098       12,791  

Brokerage income

     16,526       19,025       19,260       18,688       20,349  

Insurance income

     17,792       17,384       18,875       17,906       17,220  

Bank owned life insurance income

     14,371       13,967       13,937       14,271       15,644  

Capital markets fees

     11,805       13,455       9,982       9,811       11,256  

Gain on sale of loans

     6,591       4,131       26,770       2,884       19,097  

Automobile operating lease income

     2,146       2,877       3,775       4,727       5,890  

Securities gains (losses)

     4,169       350       (613     (3,878     (1,350

Other income

     23,423       27,855       37,088       30,464       30,104  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     261,067       253,819       285,320       229,352       258,559  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Personnel costs

     247,709       243,034       243,498       228,101       226,835  

Outside data processing and other services

     49,880       48,149       42,058       53,422       49,602  

Net occupancy

     27,599       25,474       29,079       26,841       26,967  

Equipment

     25,950       24,872       25,545       25,884       22,262  

Deposit and other insurance expense

     15,534       15,731       20,738       18,481       17,492  

Marketing

     20,178       21,365       16,776       16,379       22,251  

Professional services

     18,024       15,458       11,230       16,769       20,281  

Amortization of intangibles

     11,431       11,940       11,531       13,175       13,387  

Automobile operating lease expense

     1,619       2,183       2,854       3,362       4,386  

OREO and foreclosure expense

     4,982       4,106       4,950       5,009       4,668  

Loss (Gain) on early extinguishment of debt

     1,782       (2,580     —          (9,697     —     

Other expense

     33,615       34,537       54,417       32,548       30,987  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     458,303       444,269       462,676       430,274       439,118  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     196,058       201,992       205,447       168,812       182,333  

Provision for income taxes

     28,291       49,286       52,177       41,954       38,942  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 167,767     $ 152,706     $ 153,270     $ 126,858     $ 143,391  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends on preferred shares

     7,983       7,984       8,049       7,703       7,703  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to common shares

   $ 159,784     $ 144,722     $ 145,221     $ 119,155     $ 135,688  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares—basic

     857,871       862,261       864,499       864,136       863,911  

Average common shares—diluted

     863,588       867,551       869,164       868,156       867,633  

Net income per common share—basic

   $ 0.19     $ 0.17     $ 0.17     $ 0.14     $ 0.16  

Net income per common share—diluted

     0.19       0.17       0.17       0.14       0.16  

Cash dividends declared per common share

     0.04       0.04       0.04       0.04       0.04  

Return on average total assets

     1.19     1.10     1.13     0.92     1.05

Return on average common shareholders’ equity

     11.9       11.1       11.4       9.3       10.8  

Return on average tangible common shareholders’ equity (2)

     13.9       13.1       13.5       11.2       13.0  

Net interest margin (3)

     3.38       3.42       3.40       3.38       3.34  

Efficiency ratio (4)

     64.5       62.8       63.8       64.0       63.5  

Effective tax rate

     14.4       24.4       25.4       24.9       21.4  

Revenue—FTE

          

Net interest income

   $ 430,298     $ 428,962     $ 417,209     $ 415,025     $ 406,478  

FTE adjustment

     5,254       5,747       3,935       3,479       3,658  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (3)

     435,552       434,709       421,144       418,504       410,136  

Noninterest income

     261,067       253,819       285,320       229,352       258,559  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue (3)

   $ 696,619     $ 688,528     $ 706,464     $ 647,856     $ 668,695  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

 

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(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 (losses).

 

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Table 2 - Selected Year to Date Income Statement Data(1)

 

 
     Nine Months Ended
September 30,
    Change  

(dollar amounts in thousands, except per share amounts)

   2012     2011     Amount     Percent  

Interest income

   $ 1,451,268     $ 1,485,010     $ (33,742     (2 )% 

Interest expense

     174,799       270,865       (96,066     (35
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     1,276,469       1,214,145       62,324       5  

Provision for credit losses

     107,930       128,768       (20,838     (16
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     1,168,539       1,085,377       83,162       8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     194,096       180,183       13,913       8  

Trust services

     90,509       90,607       (98     —     

Electronic banking

     61,279       93,415       (32,136     (34

Mortgage banking income

     129,381       59,310       70,071       118  

Brokerage income

     54,811       61,679       (6,868     (11

Insurance income

     54,051       51,564       2,487       5  

Bank owned life insurance income

     42,275       48,065       (5,790     (12

Capital markets fees

     35,242       26,729       8,513       32  

Gain on sale of loans

     37,492       29,060       8,432       29  

Automobile operating lease income

     8,798       22,044       (13,246     (60

Securities gains (losses)

     3,906       197       3,709       1,883  

Other income

     88,366       88,418       (52     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     800,206       751,271       48,935       7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Personnel costs

     734,241       664,433       69,808       11  

Outside data processing and other services

     140,087       133,773       6,314       5  

Net occupancy

     82,152       82,288       (136     —     

Equipment

     76,367       66,660       9,707       15  

Deposit and other insurance expense

     52,003       59,211       (7,208     (12

Marketing

     58,319       59,248       (929     (2

Professional services

     44,712       53,826       (9,114     (17

Amortization of intangibles

     34,902       40,143       (5,241     (13

Automobile operating lease expense

     6,656       16,656       (10,000     (60

OREO and foreclosure expense

     14,038       12,997       1,041       8  

Gain on early extinguishment of debt

     (798     —          (798     —     

Other expense

     122,569       108,991       13,578       12  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     1,365,248       1,298,226       67,022       5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     603,497       538,422       65,075       12  

Provision for income taxes

     129,754       122,667       7,087       6  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 473,743     $ 415,755     $ 57,988       14
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared on preferred shares

     24,016       23,110       906       4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to common shares

   $ 449,727     $ 392,645     $ 57,082       15
  

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares—basic

     861,543       863,542       (1,999     —  

Average common shares—diluted (2)

     866,768       867,446       (678     —     

Per common share

        

Net income per common share - basic

   $ 0.52     $ 0.45     $ 0.07       16

Net income per common share - diluted

     0.52       0.45       0.07       16  

Cash dividends declared

     0.12       0.06       0.06       100  

Return on average total assets

     1.14     1.04     0.10     10

Return on average common shareholders’ equity

     11.5       10.9       0.6       6  

Return on average tangible common shareholders’ equity (3)

     13.5       13.2       0.3       2  

Net interest margin (4)

     3.40       3.39       0.01       —     

Efficiency ratio (5)

     63.7       63.6       0.1       —     

Effective tax rate

     21.5       22.8       (1.3     (6
        

Revenue—FTE

        

Net interest income

   $ 1,276,469     $ 1,214,145     $ 62,324       5

FTE adjustment

     14,936       11,437       3,499       31  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (4)

     1,291,405       1,225,582       65,823       5  

Noninterest income

     800,206       751,271       48,935       7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue (4)

   $ 2,091,611     $ 1,976,853     $ 114,758       6
  

 

 

   

 

 

   

 

 

   

 

 

 

 

12


Table of Contents
(1) 

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

(2) 

For all periods presented, the impact of the preferred stock issued in 2008 and the warrants issued to the U.S. Department of the Treasury in 2008 related to Huntington’s participation in the voluntary Capital Purchase Program was excluded from the diluted share calculation because the result was more than basic earnings per common share (anti-dilutive) for the periods. The preferred stock and warrants were repurchased in December 2010 and January 2011, respectively.

(3) 

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.

(4) 

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

(5) 

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

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. Litigation Reserve. $23.5 million and $17.0 million of additions to litigation reserves were recorded as other noninterest expense in the first quarter of 2012 and 2011, respectively. This resulted in a negative impact of $0.02 per common share in 2012 and $0.01 per common share in 2011 for both the quarterly and year-to-date basis.

 

  2. Bargain Purchase Gain. During the 2012 first quarter, an $11.4 million bargain purchase gain associated with the FDIC-assisted Fidelity Bank acquisition was recorded in noninterest income. This resulted in a positive impact of $0.01 per common share for both the quarterly and year-to-date basis.

 

  3. State deferred tax asset valuation allowance adjustment. During the 2012 third quarter, a valuation allowance of $19.5 million (net of tax) was released for the portion of the deferred tax asset and state net operating loss carryforwards expected to be realized. This resulted in a positive impact of $0.02 per common share for both the quarterly and year-to-date basis. Additional information can be found in the ‘Provision for Income Taxes’ section within this MD&A.

 

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

Table 3 - Significant Items Influencing Earnings Performance Comparison

 

     Three Months Ended  
      September 30, 2012     June 30, 2012     September 30, 2011  

(dollar amounts in thousands, except per share amounts)

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

Net income

   $ 167,767        $ 152,706        $ 143,391     

Earnings per share, after-tax

      $ 0.19        $ 0.17        $ 0.16  

Change from prior quarter - $

        0.02          —             —     

Change from prior quarter - %

        12        —          —  

Change from year-ago - $

      $ 0.03        $ 0.01        $ 0.06  

Change from year-ago - %

        19        6        60

Significant Items - favorable (unfavorable) impact:

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

State deferred tax asset valuation allowance adjustment (2)

   $ 19,513      $ 0.02     $ —         $ —        $ —         $ —     

 

(1) Pretax unless otherwise noted.
(2) After-tax.

 

     Nine Months Ended  
     September 30, 2012     September 30, 2011  

(dollar amounts in thousands)

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

Net income

   $ 473,743       $ 415,755    

Earnings per share, after-tax

     $ 0.52       $ 0.45  

Change from a year-ago - $

       0.07         0.31  

Change from a year-ago - %

       16       221

Significant Items—favorable (unfavorable) impact:

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

State deferred tax asset valuation allowance adjustment (2)

   $ 19,513     $ 0.02     $ —        $ —     

Bargain purchase gain

     11,409       0.01       —          —     

Litigation reserves addition

     (23,500     (0.02     (17,028     (0.01

 

(1) Pretax unless otherwise noted.
(2) After-tax.

Net Interest Income / Average Balance Sheet

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

 

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Table 4 - Consolidated Quarterly Average Balance Sheets

     Average Balances     Change  
     2012     2011     3Q12 vs. 3Q11  

(dollar amounts in millions)

   Third     Second (2)     First     Fourth     Third     Amount     Percent  

Assets:

              

Interest-bearing deposits in banks

   $ 82     $ 124     $ 100     $ 107     $ 164     $ (82     (50 )% 

Trading account securities

     66       54       50       81       92       (26     (28

Loans held for sale

     1,829       410       1,265       316       237       1,592       672  

Available-for-sale and other securities:

              

Taxable

     8,014       8,285       8,171       8,065       7,902       112       1  

Tax-exempt

     423       387       404       409       421       2       —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     8,437       8,672       8,575       8,474       8,323       114       1  

Held-to-maturity securities—taxable

     796       611       632       650       665       131       20  

Loans and leases: (1)

              

Commercial:

              

Commercial and industrial

     16,343       16,094       14,824       14,219       13,664       2,679       20  

Commercial real estate:

              

Construction

     569       584       598       533       670       (101     (15

Commercial

     5,153       5,491       5,254       5,425       5,441       (288     (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     5,722       6,075       5,852       5,958       6,111       (389     (6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     22,065       22,169       20,676       20,177       19,775       2,290       12  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

              

Automobile

     4,065       4,985       4,576       5,639       6,211       (2,146     (35

Home equity

     8,369       8,310       8,234       8,149       8,002       367       5  

Residential mortgage

     5,177       5,253       5,174       5,043       4,788       389       8  

Other consumer

     444       462       485       511       521       (77     (15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     18,055       19,010       18,469       19,342       19,522       (1,467     (8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     40,120       41,179       39,145       39,519       39,297       823       2  

Allowance for loan and lease losses

     (855     (908     (961     (1,014     (1,066     211       (20
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans and leases

     39,265       40,271       38,184       38,505       38,231       1,034       3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     51,330       51,050       49,767       49,147       48,778       2,552       5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and due from banks

     960       928       1,012       1,671       1,700       (740     (44

Intangible assets

     597       609       613       625       639       (42     (7

All other assets

     4,106       4,158       4,225       4,221       4,142       (36     (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 56,138     $ 55,837     $ 54,656     $ 54,650     $ 54,193     $ 1,945       4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Shareholders’ Equity:

              

Deposits:

              

Demand deposits - noninterest-bearing

   $ 12,329     $ 12,064     $ 11,273     $ 10,716     $ 8,719     $ 3,610       41

Demand deposits - interest-bearing

     5,814       5,939       5,646       5,570       5,573       241       4  

Money market deposits

     14,515       13,182       13,141       13,594       13,321       1,194       9  

Savings and other domestic deposits

     4,975       4,978       4,817       4,706       4,752       223       5  

Core certificates of deposit

     6,131       6,618       6,510       6,769       7,592       (1,461     (19
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     43,764       42,781       41,387       41,355       39,957       3,807       10  

Other domestic time deposits of $250,000 or more

     300       298       347       405       387       (87     (22

Brokered deposits and negotiable CDs

     1,878       1,421       1,301       1,410       1,533       345       23  

Deposits in foreign offices

     356       357       430       434       401       (45     (11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     46,298       44,857       43,465       43,604       42,278       4,020       10  

Short-term borrowings

     1,329       1,391       1,512       1,728       2,251       (922     (41

Federal Home Loan Bank advances

     107       626       419       29       285       (178     (62

Subordinated notes and other long-term debt

     1,638       2,251       2,652       2,866       3,030       (1,392     (46
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     37,043       37,061       36,775       37,511       39,125       (2,082     (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

All other liabilities

     1,035       1,094       1,116       978       1,017       18       2  

Shareholders’ equity

     5,731       5,618       5,492       5,445       5,332       399       7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 56,138     $ 55,837     $ 54,656     $ 54,650     $ 54,193     $ 1,945       4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) For purposes of this analysis, NALs are reflected in the average balances of loans.
(2) The acquisition of Fidelity Bank on March 30, 2012, contributed to the increase in average loans and deposits

 

15


Table of Contents

Table 5 - Consolidated Quarterly Net Interest Margin Analysis

 

     Average Rates (2)  

Fully-taxable equivalent basis (1)

   2012     2011  
     Third     Second     First     Fourth     Third  

Assets

          

Interest-bearing deposits in banks

     0.21     0.31     0.05     0.06     0.04

Trading account securities

     1.07       1.64       1.65       0.97       1.41  

Loans held for sale

     3.18       3.46       3.80       3.96       4.46  

Available-for-sale and other securities:

          

Taxable

     2.29       2.33       2.39       2.37       2.43  

Tax-exempt

     4.15       4.23       4.17       4.22       4.17  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     2.39       2.41       2.47       2.46       2.52  

Held-to-maturity securities—taxable

     2.81       2.97       2.98       2.99       3.04  

Loans and leases: (3)

          

Commercial:

          

Commercial and industrial

     3.90       3.99       4.01       4.01       4.13  

Commercial real estate:

          

Construction

     3.84       3.66       3.85       4.78       3.87  

Commercial

     3.85       3.93       3.82       3.91       3.91  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     3.85       3.89       3.82       3.99       3.91  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     3.89       3.97       3.96       4.01       4.06  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

          

Automobile

     4.87       4.68       4.87       4.80       4.89  

Home equity

     4.27       4.30       4.30       4.41       4.45  

Residential mortgage

     4.02       4.14       4.17       4.30       4.47  

Other consumer

     7.16       7.42       7.47       7.32       7.57  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     4.40       4.43       4.49       4.57       4.68  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     4.12       4.18       4.21       4.28       4.37  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     3.79     3.89     3.91     3.95     4.02
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

          

Deposits:

          

Demand deposits - noninterest-bearing

     —       —       —       —       —  

Demand deposits - interest-bearing

     0.07       0.07       0.06       0.08       0.10  

Money market deposits

     0.33       0.30       0.26       0.32       0.41  

Savings and other domestic deposits

     0.37       0.39       0.45       0.52       0.69  

Core certificates of deposit

     1.25       1.38       1.60       1.69       1.95  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     0.47       0.50       0.54       0.61       0.77  

Other domestic time deposits of $250,000 or more

     0.68       0.66       0.68       0.78       0.93  

Brokered deposits and negotiable CDs

     0.71       0.75       0.79       0.77       0.77  

Deposits in foreign offices

     0.18       0.19       0.18       0.19       0.26  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     0.48       0.51       0.55       0.61       0.77  

Short-term borrowings

     0.16       0.16       0.16       0.18       0.16  

Federal Home Loan Bank advances

     0.50       0.21       0.21       2.09       0.32  

Subordinated notes and other long-term debt

     2.91       2.83       2.74       2.56       2.43  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     0.58     0.63     0.68     0.74     0.86
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest rate spread

     3.15     3.18     3.15     3.15     3.11

Impact of noninterest-bearing funds on margin

     0.22       0.25       0.25       0.23       0.22  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin

     3.38     3.42     3.40     3.38     3.34
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) FTE yields are calculated assuming a 35% tax rate.
(2) Loan and lease and deposit average rates include impact of applicable derivatives, non-deferrable fees, and amortized deferred fees.
(3) For purposes of this analysis, NALs are reflected in the average balances of loans.

 

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Table 6 - Average Loans/Leases and Deposits

 

     Third Quarter      Second Quarter      3Q12 vs 3Q11     3Q12 vs 2Q12  

(dollar amounts in millions)

   2012      2011      2012      Amount     Percent     Amount     Percent  

Loans/Leases:

                 

Commercial and industrial

   $ 16,343      $ 13,664      $ 16,094      $ 2,679       20   $ 249       2

Commercial real estate

     5,722        6,111        6,075        (389     (6     (353     (6
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     22,065        19,775        22,169        2,290       12       (104     (0

Automobile

     4,065        6,211        4,985        (2,146     (35     (920     (18

Home equity

     8,369        8,002        8,310        367       5       59       1  

Residential mortgage

     5,177        4,788        5,253        389       8       (76     (1

Other loans

     444        521        462        (77     (15     (18     (4
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     18,055        19,522        19,010        (1,467     (8     (955     (5
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

   $ 40,120      $ 39,297      $ 41,179      $ 823       2   $ (1,059     (3 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Deposits:

                 

Demand deposits—noninterest-bearing

   $ 12,329      $ 8,719      $ 12,064      $ 3,610       41   $ 265       2

Demand deposits—interest-bearing

     5,814        5,573        5,939        241       4       (125     (2
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     18,143        14,292        18,003        3,851       27       140       1  

Money market deposits

     14,515        13,321        13,182        1,194       9       1,333       10  

Savings and other domestic time deposits

     4,975        4,752        4,978        223       5       (3     (0

Core certificates of deposit

     6,131        7,592        6,618        (1,461     (19     (487     (7
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     43,764        39,957        42,781        3,807       10       983       2  

Other deposits

     2,534        2,321        2,076        213       9       458       22  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

   $ 46,298      $ 42,278      $ 44,857      $ 4,020       10   $ 1,441       3
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

2012 Third Quarter versus 2011 Third Quarter

Fully-taxable equivalent net interest income increased $25.4 million, or 6%, from the year-ago quarter. This reflected a $2.6 billion, or 5%, increase in average total earning assets and a 4 basis point increase in the FTE net interest margin. The increase in average earning assets reflected:

 

   

$0.8 billion, or 2%, increase in average total loans and leases.

 

   

$1.6 billion, 672%, increase in average loans held for sale, primarily reflecting a $1.3 billion reclassification to loans held for sale in the 2012 second quarter for a securitization that was completed in October 2012.

The 4 basis point increase in the FTE net interest margin reflected the positive impact from the reduction in the cost of average total interest-bearing liabilities, partially offset by a negative impact from lower earning asset yields.

The $0.8 billion, or 2%, increase in average total loans and leases primarily reflected:

 

   

$2.7 billion, or 20%, growth in the average C&I portfolio primarily reflecting a combination of factors, including growth across multiple business lines including middle market and equipment finance.

Partially offset by:

 

   

$2.1 billion, or 35%, decrease in the average automobile portfolio. This reflected the impact of our program of securitization and sale of such loans. Specifically, securitizations of $1.0 billion in the 2011 third quarter and $1.3 billion in the 2012 first quarter, as well as the reclassification to loans held for sale of $1.3 billion in the 2012 second quarter in preparation for a securitization that was completed in October 2012.

The $4.0 billion, or 10%, increase in average total deposits from the year-ago quarter reflected:

 

   

$3.8 billion, or 10%, growth in average total core deposits. The drivers of this change were a $3.6 billion, or 41%, growth in average noninterest-bearing demand deposits and more modest growth in money market deposits, partially offset by $1.5 billion, or 19%, decline in average core certificates of deposit.

 

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2012 Third Quarter versus 2012 Second Quarter

Fully-taxable equivalent net interest income increased $0.8 million, or less than 1%, from the 2012 second quarter. This reflected the benefit of a $0.3 billion, or 1%, increase in average earning assets partially offset by a 4 basis point decrease in the FTE net interest margin to 3.38%. The increase in average earnings assets reflected a $1.4 billion increase in average loans held for sale and a $0.2 billion increase in average C&I, partially offset by the $0.9 billion decrease in average automobile loans, reflecting the prior quarter’s reclassification of $1.3 billion of automobile loans into held for sale, and a $0.4 billion decrease in CRE loans. The primary items impacting the decrease in the net interest margin were:

 

   

6 basis point reduction related to the impact of the extended low rate environment on asset yields and mix.

   

4 basis point reduction related to balance sheet management changes.

Partially offset by:

 

   

6 basis point increase from the reduction in deposit rates and improvement in deposit mix.

The $1.1 billion, or 3%, decrease in average total loans and leases from the 2012 second quarter reflected:

 

   

$0.9 billion, or 18%, decrease in average automobile loans. The decline reflected the reclassification of $1.3 billion of automobile loans to loans held for sale at the end of the prior quarter in preparation of a securitization that was completed in October 2012. Automobile loan originations continued to be strong during the 2012 third quarter, exceeding $1.0 billion.

 

   

$0.4 billion, or 6%, decrease in average CRE loans, primarily reflecting the continued runoff of the noncore CRE portfolio, as well as a reduction in the core portfolio due to lower levels of new loan production.

Partially offset by:

 

   

$0.2 billion, or 2%, growth in average C&I loans. This reflected the continued growth across multiple business lines including middle market and equipment finance, although there was a relative slowing of growth late in the quarter as borrowers expressed increased concerns, in the near term, around the U.S. economy.

The $1.0 billion, or 2%, increase in average total core deposits from the 2012 second quarter reflected:

 

   

$1.3 billion, or 10%, increase in average money market deposits.

 

   

$0.3 billion, or 2%, increase in average noninterest-bearing demand deposits reflecting an improved deposit mix as a result of growing total number of households and consumer checking accounts.

Partially offset by:

 

   

$0.5 billion, or 7%, decrease in average core certificates of deposit primarily reflecting the continued focus on reducing the overall cost of deposits.

Noncore funding sources displayed a significant mix shift due to the decision to replace maturing FHLB advances with brokered deposits, reflecting the following changes from the prior quarter:

 

   

$0.5 billion, or 32%, increase in average brokered deposits and negotiable CDs.

 

   

$0.5 billion, or 83%, decrease in average FHLB advances.

 

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Table 7 - Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis

 

      YTD Average Balances     YTD Average Rates (2)  
Fully-taxable equivalent basis (1)    Nine Months Ended September 30,     Change     Nine Months Ended September 30,  

(dollar amounts in millions)

   2012     2011     Amount     Percent     2012     2011  

Assets:

            

Interest-bearing deposits in banks

   $ 102     $ 141     $ (39     (28 )%      0.20     0.12

Trading account securities

     57       116       (59     (51     1.42       1.46  

Federal funds sold and securities purchased under resale agreement

     —          7       (7     (100     0.29       0.09  

Loans held for sale

     1,170       279       891       319       3.43       4.39  

Available-for-sale and other securities:

            

Taxable

     8,156       8,475       (319     (4     2.34       2.52  

Tax-exempt

     405       434       (29     (7     4.18       4.30  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     8,561       8,909       (348     (4     2.42       2.61  

Held-to-maturity securities—taxable

     680       282       398       141       2.91       3.00  

Loans and leases: (3)

            

Commercial:

            

Commercial and industrial

     15,756       13,387       2,369       18       3.97       4.33  

Commercial real estate:

            

Construction

     584       612       (28     (5     3.78       3.55  

Commercial

     5,299       5,676       (377     (7     3.87       3.91  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     5,883       6,288       (405     (6     3.86       3.88  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     21,639       19,675       1,964       10       3.94       4.19  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

            

Automobile

     4,540       5,958       (1,418     (24     4.80       5.05  

Home equity

     8,305       7,869       436       6       4.29       4.49  

Residential mortgage

     5,201       4,607       594       13       4.11       4.61  

Other consumer

     463       539       (76     (14     7.35       7.73  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     18,509       18,973       (464     (2     4.44       4.79  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     40,148       38,648       1,500       4       4.17       4.48  
          

 

 

   

 

 

 

Allowance for loan and lease losses

     (908     (1,141     233       (20    
  

 

 

   

 

 

   

 

 

   

 

 

     

Net loans and leases

     39,240       37,507       1,733       5      
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     50,718       48,382       2,336       5       3.86     4.14
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and due from banks

     967       1,358       (391     (29    

Intangible assets

     606       652       (46     (7    

All other assets

     4,163       4,196       (33     (1    
  

 

 

   

 

 

   

 

 

   

 

 

     

Total assets

   $ 55,546     $ 53,447     $ 2,099       4    
  

 

 

   

 

 

   

 

 

   

 

 

     

Liabilities and Shareholders’ Equity:

            

Deposits:

            

Demand deposits—noninterest-bearing

   $ 11,890     $ 7,958     $ 3,932       49     —       —  

Demand deposits—interest-bearing

     5,800       5,499       301       5       0.07       0.10  

Money market deposits

     13,616       13,230       386       3       0.30       0.44  

Savings and other domestic deposits

     4,924       4,744       180       4       0.40       0.75  

Core certificates of deposit

     6,418       8,017       (1,599     (20     1.41       2.02  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     42,648       39,448       3,200       8       0.50       0.83  

Other domestic time deposits of $250,000 or more

     315       486       (171     (35     0.67       1.02  

Brokered deposits and negotiable CDs

     1,535       1,426       109       8       0.74       0.92  

Deposits in foreign offices

     381       374       7       2       0.18       0.24  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     44,879       41,734       3,145       8       0.51       0.83  

Short-term borrowings

     1,410       2,166       (756     (35     0.16       0.17  

Federal Home Loan Bank advances

     383       138       245       178       0.24       0.64  

Subordinated notes and other long-term debt

     2,179       3,266       (1,087     (33     2.81       2.38  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     36,961       39,346       (2,385     (6     0.63       0.92  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

All other liabilities

     1,081       975       106       11      

Shareholders’ equity

     5,614       5,168       446       9      
  

 

 

   

 

 

   

 

 

   

 

 

     

Total liabilities and shareholders’ equity

   $ 55,546     $ 53,447     $ 2,099       4    
  

 

 

   

 

 

   

 

 

   

 

 

     

Net interest rate spread

             3.16       3.17  

Impact of noninterest-bearing funds on margin

             0.24       0.22  
          

 

 

   

 

 

 

Net interest margin

             3.40     3.39
          

 

 

   

 

 

 

 

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Table of Contents
(1) FTE yields are calculated assuming a 35% tax rate.
(2) Loan, lease, and deposit average rates include the impact of applicable derivatives, non-deferrable fees, and amortized deferred fees.
(3) For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans.

2012 First Nine Months versus 2011 First Nine Months

Fully-taxable equivalent net interest income for the first nine-month period of 2012 increased $65.8 million, or 5%, from the comparable year-ago period. This reflected the benefit of a 5% increase in average total earning assets. The fully-taxable equivalent net interest margin increased to 3.40% from 3.39%. The increase in average earning assets reflected a combination of factors including:

 

   

$1.5 billion, or 4%, increase in average total loans and leases.

 

   

$0.9 billion, or 319%, increase in average loans held for sale, primarily reflecting reclassifications to loans held for sale in preparation for expected automobile securitizations.

 

   

$0.4 billion, or 141%, increase in average held-to-maturity securities.

Partially offset by:

 

   

$0.3 billion, or 4%, decline in average total available-for-sale and other securities.

The following table details the change in our reported loans and deposits:

Table 8 - Average Loans/Leases and Deposits - 2012 First Nine Months vs. 2011 First Nine Months

 

     Nine Months Ended September 30,      Change  

(dollar amounts in millions)

   2012 (1)      2011      Amount     Percent  

Loans/Leases:

          

Commercial and industrial

   $ 15,756      $ 13,387      $ 2,369       18

Commercial real estate

     5,883        6,288        (405     (6
  

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial

     21,639        19,675        1,964       10  

Automobile

     4,540        5,958        (1,418     (24

Home equity

     8,305        7,869        436       6  

Residential mortgage

     5,201        4,607        594       13  

Other consumer

     463        539        (76     (14
  

 

 

    

 

 

    

 

 

   

 

 

 

Total consumer

     18,509        18,973        (464     (2
  

 

 

    

 

 

    

 

 

   

 

 

 

Total loans and leases

   $ 40,148      $ 38,648      $ 1,500       4
  

 

 

    

 

 

    

 

 

   

 

 

 

Deposits:

          

Demand deposits—noninterest-bearing

   $ 11,890      $ 7,958      $ 3,932       49

Demand deposits—interest-bearing

     5,800        5,499        301       5  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total demand deposits

     17,690        13,457        4,233       31  

Money market deposits

     13,616        13,230        386       3  

Savings and other domestic deposits

     4,924        4,744        180       4  

Core certificates of deposit

     6,418        8,017        (1,599     (20
  

 

 

    

 

 

    

 

 

   

 

 

 

Total core deposits

     42,648        39,448        3,200       8  

Other deposits

     2,231        2,286        (55     (2
  

 

 

    

 

 

    

 

 

   

 

 

 

Total deposits

   $ 44,879      $ 41,734      $ 3,145       8
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) The acquisition of Fidelity Bank on March 30, 2012, contributed to the increase in average loans and deposits.

The $1.5 billion, or 4%, increase in average total loans and leases primarily reflected:

 

   

$2.4 billion, or 18%, increase in the average C&I portfolio, primarily reflecting a combination of factors, including growth across multiple business lines including middle market and equipment finance as well as the impact of the Fidelity acquisition in March 2012.

 

   

$0.6 billion, or 13%, increase in the average residential mortgage portfolio, primarily reflecting a 31% increase in originations, as well as a lower percentage of mortgages sold in the secondary market.

 

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Table of Contents
   

$0.4 billion, or 6%, increase in the average home equity portfolio with 75% of new originations in 2012 in a first-lien position.

Partially offset by:

 

   

$1.4 billion, or 24%, decline in the average automobile portfolio. This reflected the impact of our continued program of the securitization and sale of such loans. Specifically, securitizations of $1.0 billion in the 2011 third quarter and $1.3 billion in the 2012 first quarter, as well as the reclassification to loans held for sale of $1.3 billion in the 2012 second quarter in preparation for a securitization that was completed in October 2012.

 

   

$0.4 billion, or 6%, decline in the average CRE portfolio, primarily reflecting the continued execution of our plan to reduce the total CRE exposure, primarily in the noncore CRE portfolio. Declines were partially offset by additions to the core CRE portfolio associated with the FDIC-assisted acquisition of Fidelity Bank.

The $3.1 billion, or 8%, increase in average total deposits reflected:

 

   

$3.9 billion, or 49%, increase in noninterest-bearing demand deposits reflecting an improved deposit mix as a result of growing total number of households and consumer checking accounts as well as our treasury management and OCR focus on growing commercial demand deposits.

Partially offset by:

 

   

$1.6 billion, or 20%, decline in core certificates of deposits, primarily reflecting our continued focus on reducing our overall costs of deposits.

 

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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 inherent 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 2012 third quarter increased $0.5 million, or 1%, from the prior quarter to $37.0 million from $36.5 million, however declined $6.6 million, or 15%, from the year-ago quarter. On a year-to-date basis, provision for credit losses for the first nine-month period of 2012 declined $20.8 million, or 16%, compared to year-ago period. The current quarter’s provision for credit losses was $68.1 million less than total NCOs and the provision for credit losses for the first nine-month period of 2012 was $164.4 million less than total NCOs. (See Credit Quality discussion).

Noninterest Income

(This section should be read in conjunction with Significant Item 2.)

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

Table 9 - Noninterest Income

 

     2012     2011     3Q12 vs 3Q11     3Q12 vs 2Q12  

(dollar amounts in thousands)

   Third      Second      First     Fourth     Third     Amount     Percent     Amount     Percent  

Service charges on deposit accounts

   $ 67,806      $ 65,998      $ 60,292     $ 63,324     $ 65,184     $ 2,622       4   $ 1,808       3

Trust services

     29,689        29,914        30,906       28,775       29,473       216       1       (225     (1

Electronic banking

     22,135        20,514        18,630       18,282       32,901       (10,766     (33     1,621       8  

Mortgage banking income

     44,614        38,349        46,418       24,098       12,791       31,823       249       6,265       16  

Brokerage income

     16,526        19,025        19,260       18,688       20,349       (3,823     (19     (2,499     (13

Insurance income

     17,792        17,384        18,875       17,906       17,220       572       3       408       2  

Bank owned life insurance income

     14,371        13,967        13,937       14,271       15,644       (1,273     (8     404       3  

Capital markets fees

     11,805        13,455        9,982       9,811       11,256       549       5       (1,650     (12

Gain on sale of loans

     6,591        4,131        26,770       2,884       19,097       (12,506     (65     2,460       60  

Automobile operating lease income

     2,146        2,877        3,775       4,727       5,890       (3,744     (64     (731     (25

Securities gains (losses)

     4,169        350        (613     (3,878     (1,350     5,519       N.R.        3,819       1,091  

Other income

     23,423        27,855        37,088       30,464       30,104       (6,681     (22     (4,432     (16
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 261,067      $ 253,819      $ 285,320     $ 229,352     $ 258,559     $ 2,508       1   $ 7,248       3
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2012 Third Quarter versus 2011 Third Quarter

The $2.5 million, or 1%, increase in total noninterest income from the year-ago quarter reflected:

 

   

$31.8 million, or 249%, increase in mortgage banking income. This primarily reflected a $25.2 million increase in origination and secondary marketing income. Additionally, we recorded a $4.1 million net trading loss related to MSR hedging in the current quarter compared to a net trading loss related to MSR hedging of $9.2 million in the year-ago quarter.

 

   

$5.5 million increase in securities gains.

 

   

$2.6 million, or 4%, increase in service charges on deposits, due to continued strong customer growth.

Partially offset by:

 

   

$12.5 million, or 65%, decrease in gain on sale of loans, as the year ago quarter included a $15.5 million automobile loan securitization gain.

 

   

$10.8 million, or 33%, decrease in electronic banking income related to implementing the lower debit card interchange fee structure mandated in the Durbin Amendment of the Dodd-Frank Act.

 

   

$6.7 million, or 22%, decrease in other income, primarily related to the reimbursement of third party costs in the year-ago quarter.

 

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$3.8 million, or 19%, decline in brokerage income primarily related to reduced sales of market-linked CDs given lower market interest rates.

 

   

$3.7 million, or 64%, decline in automobile operating lease income, reflecting the impact of a declining portfolio as a result of having exited that business in 2008.

2012 Third Quarter versus 2012 Second Quarter

The $7.2 million, or 3%, increase in total noninterest income from the prior quarter reflected:

 

   

$6.3 million, or 16%, increase in mortgage banking income. This primarily reflected a $10.7 million increase in origination and secondary marketing income. This increase was partially offset by as we recorded a $4.1 million net trading loss related to MSR hedging in the current quarter compared to a net trading gain related to MSR hedging of $0.8 million in the prior quarter.

 

   

$3.8 million increase in securities gains. Certain securities designated as available-for-sale were sold, and the proceeds from those sales were reinvested into the held-to-maturity portfolio. At quarter end, $1.6 billion, or 17%, of the investment portfolio was designated as held-to-maturity.

 

   

$2.5 million, or 60%, increase in gain on sale of loans, which included a $1.9 million gain on the sale of automobile loans in the current quarter.

Partially offset by:

 

   

$4.4 million decrease in other income, as the prior quarter included a gain on the sale of affordable housing investments.

2012 First Nine Months versus 2011 First Nine Months

Noninterest income for the first nine-month period of 2012 increased $48.9 million, or 7%, from the comparable year-ago period.

Table 10 - Noninterest Income - 2012 First Nine Months vs. 2011 First Nine Months

 

     Nine Months Ended September 30,      Change  

(dollar amounts in thousands)

   2012      2011      Amount     Percent  

Service charges on deposit accounts

   $ 194,096      $ 180,183      $ 13,913       8

Trust services

     90,509        90,607        (98     —     

Electronic banking

     61,279        93,415        (32,136     (34

Mortgage banking income

     129,381        59,310        70,071       118  

Brokerage income

     54,811        61,679        (6,868     (11

Insurance income

     54,051        51,564        2,487       5  

Bank owned life insurance income

     42,275        48,065        (5,790     (12

Capital markets fees

     35,242        26,729        8,513       32  

Gain on sale of loans

     37,492        29,060        8,432       29  

Automobile operating lease income

     8,798        22,044        (13,246     (60

Securities gains (losses)

     3,906        197        3,709       1,883  

Other income

     88,366        88,418        (52     —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total noninterest income

   $ 800,206      $ 751,271      $ 48,935      
  

 

 

    

 

 

    

 

 

   

 

 

 

The $48.9 million, or 7%, increase in total noninterest income reflected:

 

   

$70.1 million, or 118%, increase in mortgage banking income. This primarily reflected a $55.4 million increase in origination and secondary marketing income as originations increased 31% from the year-ago period. Additionally, we recorded a $4.4 million net trading gain related to MSR hedging in the first nine-month period of 2012 compared to net trading loss related to MSR hedging of $7.9 million in the year-ago period.

 

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$13.9 million, or 8%, increase in service charges of deposit account, due to continued strong customer growth.

 

   

$8.5 million, or 32%, increase in capital market fees, primarily reflecting strong customer demand for derivatives and other risk management products.

 

   

$8.4 million, or 29%, increase in gain on sale of loans, as the current year-to-date period included gains totaling $24.9 million from automobile loan securitizations and sales, partially offset by a $15.5 million automobile securitization gain in the year-ago period.

Partially offset by:

 

   

$32.1 million, or 34%, decline in electronic banking income, primarily reflecting the implementation of the lower debit card interchange fee structure mandated in the Durbin Amendment of the Dodd-Frank Act.

 

   

$13.2 million, or 60%, decline in automobile operating lease expense primarily reflecting the impact of a declining portfolio as a result of having exited that business in 2008.

Other income was little changed. The current year-to-date period included an $11.4 million bargain purchase gain associated with the FDIC-assisted Fidelity Bank acquisition, almost entirely offset by the reimbursement of third party costs and larger gains on the sale of SBA loans in the year-ago period.

Noninterest Expense

(This section should be read in conjunction with Significant Item 1.)

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

Table 11 - Noninterest Expense

 

     2012      2011      3Q12 vs 3Q11     3Q12 vs 2Q12  

(dollar amounts in thousands)

   Third      Second     First      Fourth     Third      Amount     Percent     Amount     Percent  

Personnel costs

   $ 247,709      $ 243,034     $ 243,498      $ 228,101     $ 226,835      $ 20,874       9   $ 4,675       2

Outside data processing and other services

     49,880        48,149       42,058        53,422       49,602        278       1       1,731       4  

Net occupancy

     27,599        25,474       29,079        26,841       26,967        632       2       2,125       8  

Equipment

     25,950        24,872       25,545        25,884       22,262        3,688       17       1,078       4  

Deposit and other insurance expense

     15,534        15,731       20,738        18,481       17,492        (1,958     (11     (197     (1

Marketing

     20,178        21,365       16,776        16,379       22,251        (2,073     (9     (1,187     (6

Professional services

     18,024        15,458       11,230        16,769       20,281        (2,257     (11     2,566       17  

Amortization of intangibles

     11,431        11,940       11,531        13,175       13,387        (1,956     (15     (509     (4

Automobile operating lease expense

     1,619        2,183       2,854        3,362       4,386        (2,767     (63     (564     (26

OREO and foreclosure expense

     4,982        4,106       4,950        5,009       4,668        314       7       876       21  

Loss (Gain) on early extinguishment of debt

     1,782        (2,580     —           (9,697     —           1,782       —          4,362       N.R.   

Other expense

     33,615        34,537       54,417        32,548       30,987        2,628       8       (922     (3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

   $ 458,303      $ 444,269     $ 462,676      $ 430,274     $ 439,118      $ 19,185       4   $ 14,034       3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Number of employees (full-time equivalent), at period-end

     11,731        11,417       11,166        11,245       11,473        258       2     314       3

2012 Third Quarter versus 2011 Third Quarter

The $19.2 million, or 4%, increase in total noninterest expense from the year-ago quarter reflected:

 

   

$20.9 million, or 9%, increase in personnel costs reflecting an increase in the number of full-time equivalent employees as well as increased salaries and benefits.

 

   

$3.7 million, or 17%, increase in equipment expense reflecting the impact of depreciation from our in-store branch expansions and other technology investments.

 

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Partially offset by:

 

   

$2.8 million, or 63%, decline in automobile operating lease expense as the portfolio continued its planned runoff as we exited that business in 2008.

2012 Third Quarter versus 2012 Second Quarter

The $14.0 million, or 3%, increase in total noninterest expense from the prior quarter reflected:

 

   

$4.7 million, or 2%, increase in personnel costs, primarily reflecting higher healthcare costs.

 

   

$4.5 million total increase across several noninterest expense categories related to the development of infrastructure and systems to support the Federal Reserve CCAR process.

 

   

$4.4 million increase in the cost of extinguishment of debt related to a loss on trust preferred securities redemption in the current quarter compared with a gain in the prior quarter.

2012 First Nine Months versus 2011 First Nine Months

Noninterest expense for the first nine-month period of 2012 increased $67.0 million, or 5%, from the comparable year-ago period.

Table 12 - Noninterest Expense - 2012 First Nine Months vs. 2011 First Nine Months

 

     Nine Months Ended September 30,      Change  

(dollar amounts in thousands)

   2012     2011      Amount     Percent  

Personnel costs

   $ 734,241     $ 664,433      $ 69,808       11

Outside data processing and other services

     140,087       133,773        6,314       5  

Net occupancy

     82,152       82,288        (136     —     

Equipment

     76,367       66,660        9,707       15  

Deposit and other insurance expense

     52,003       59,211        (7,208     (12

Marketing

     58,319       59,248        (929     (2

Professional services

     44,712       53,826        (9,114     (17

Amortization of intangibles

     34,902       40,143        (5,241     (13

Automobile operating lease expense

     6,656       16,656        (10,000     (60

OREO and foreclosure expense

     14,038       12,997        1,041       8  

Gain on early extinguishment of debt

     (798     —           (798     —     

Other expense

     122,569       108,991        13,578       12  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest expense

   $ 1,365,248     $ 1,298,226      $ 67,022       5
  

 

 

   

 

 

    

 

 

   

 

 

 

Number of employees (full-time equivalent), at period-end

     11,731       11,473        258       2

The $67.0 million, or 5%, increase in total noninterest expense reflected:

 

   

$69.8 million, or 11%, increase in personnel costs, primarily reflecting an increase in bonuses, commissions, and full-time equivalent employees, as well as increased salaries and benefits.

 

   

$13.6 million, or 12%, increase in other expense, primarily reflecting higher litigation reserves and an increase in the provision for mortgage representations and warranties.

 

   

$9.7 million, or 15%, increase in equipment, primarily reflecting the impact of depreciation from our in-store branch expansions and other technology investments.

Partially offset by:

 

   

$10.0 million, or 60%, decline in automobile operating lease expense, primarily reflecting the impact of a declining portfolio as a result of having exited that business in 2008.

 

   

$9.1 million, or 17%, decline in professional services, primarily reflecting lower legal-related expenses.

 

   

$7.2 million, or 12%, decline in deposit and other insurance expense.

 

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Provision for Income Taxes

The provision for income taxes in the 2012 third quarter was $28.3 million. This compared with a provision for income taxes of $49.3 million in the 2012 second quarter and $38.9 million in the 2011 third quarter. All three quarters included the benefits from tax-exempt income, tax-advantaged investments, and general business credits. In prior periods, we established a full valuation allowance against state deferred tax assets and state net operating loss carryforwards based on the uncertainty of forecasted state taxable income expected in applicable jurisdictions in order to utilize the state deferred tax asset and net operating loss carryforwards. Based on current analysis of both positive and negative evidence and projected forecasted state taxable income, we believe that it is more likely than not that a portion of the state deferred tax asset and state net operating loss carryforwards will be realized. As a result of this analysis, a $19.5 million reduction in the 2012 third quarter provision for income taxes was recorded. At September 30, 2012, a state valuation allowance of $62.7 million remains for certain net operating loss carryforwards that are not expected to be realized within the carryforward periods.

At September 30, 2012, we had a net deferred tax asset of $201.5 million. Based on both positive and negative evidence and our level of forecasted future taxable income, there was no impairment to the deferred tax asset at September 30, 2012. As of September 30, 2012, there is no disallowed deferred tax asset for regulatory capital purposes compared to $39.1 million at December 31, 2011.

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

 

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RISK MANAGEMENT AND CAPITAL

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

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

We believe that our primary risk exposures are credit, market, liquidity, operational, and compliance oriented. More information on risk can be found in the Risk Factors section included in Item 1A of our 2011 Form 10-K and subsequent filings with the SEC. Additionally, the MD&A included in our 2011 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2011 Form 10-K. Our definition, philosophy, and approach to risk management have not materially changed from the discussion presented in the 2011 Form 10-K.

Credit Risk

Credit risk is the risk of financial loss if a counterparty is not able to meet the agreed upon terms of the financial obligation. The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. We also have significant credit risk associated with our available-for-sale and other investment and held-to-maturity 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 for trading activities. While there is credit risk associated with derivative activity, we believe this exposure is minimal. The significant change in the economic conditions and the resulting changes in borrower behavior over the past several years resulted in our continuing 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 September 30, 2012, our loans and leases totaled $40.3 billion, representing a $1.3 billion, or 3%, increase compared to $38.9 billion at December 31, 2011, primarily reflecting growth in the C&I portfolio, partially offset by declines in the automobile portfolio as a result of our securitization program and the CRE portfolio reflecting the continued runoff in the noncore portfolio. The C&I loan increase included the impacts related to a continuation of the growth in high quality loans originated over recent quarters and the purchase of a portfolio of high quality municipal equipment leases. The decline in the automobile portfolio reflected the transfer of automobile loans to loans held for sale related to automobile securitizations (see Automobile Portfolio discussion), partially offset by continued strong originations.

At September 30, 2012, commercial loans and leases totaled $22.0 billion, and represented 54% of our total credit exposure. Our commercial portfolio is diversified along product type, customer size, and geography within our footprint, and is comprised of the following (see Commercial Credit discussion):

C&I – C&I loans and leases are made to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or other projects. The majority of these borrowers are customers doing business within our geographic regions. C&I loans and leases are generally underwritten individually and secured with the assets of the company and/or the personal guarantee of the business owners. The financing of owner occupied facilities is considered a C&I loan even though there is improved real estate as collateral. This treatment is a result of the credit decision process, which focuses on cash flow from operations of the business to repay the debt. The operation, sale, rental, or refinancing of the real estate is not considered the primary repayment source for these types of loans. As we look to grow our C&I portfolio, we have further developed our ABL capabilities by adding experienced ABL professionals to take advantage of market opportunities resulting in better leveraging of the manufacturing base in our primary markets. Our Equipment Finance area is targeting larger equipment financings in the manufacturing sector in addition to our core products, while appropriately managing the level of residual risk incurred as a result of the leasing activity.

 

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

Construction CRE – Construction CRE loans are loans to individuals, companies, or developers 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, residential (land, single family, and condominiums), 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 $18.3 billion at September 30, 2012, and represented 46% of our total loan and lease credit exposure. The consumer portfolio is primarily comprised of automobile, home equity loans and lines-of-credit, and residential mortgages (see Consumer Credit discussion).

Automobile – Automobile loans are primarily comprised of loans made through automotive dealerships and include exposure in selected states outside of our primary banking markets. No state outside of our primary banking markets represented more than 5% of our total automobile portfolio at September 30, 2012. We have successfully implemented a loan securitization strategy to maintain our established portfolio concentration limits.

Home equity – Home equity lending includes both home equity loans and lines-of-credit. This type of lending, which is secured by a first-lien or junior-lien on the borrower’s residence, allows customers to borrow against the equity in their home. Given the current low interest rate environment, many borrowers have utilized the line-of-credit home equity product as the primary source of financing their home versus residential mortgages. As a result, the proportion of the home equity portfolio secured by a first-lien has increased significantly over the past three years, positively impacting the portfolio’s risk profile. The portfolio’s credit risk profile is substantially reduced when we hold a first-lien position. During the first nine-month period of 2012, 75% of our home equity portfolio originations were secured by a first-lien. The first-lien position, combined with continued high average FICO scores, significantly reduces the PD associated with these loans. The combination provides a strong base when assessing the expected future performance of this portfolio. Real estate market values at the time of origination directly affect the amount of credit extended and, in the event of default, subsequent changes in these values impact the severity of losses. We actively manage the extension of credit and the amount of credit extended through a combination of criteria including financial position, debt-to-income policies, and LTV policy limits.

Residential mortgage – Residential mortgage loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15-year to 30-year term, and in most cases, are extended to borrowers to finance their primary residence. Generally, our practice is to sell a significant portion of our fixed-rate originations in the secondary market. As such, at September 30, 2012, 51% of our total residential mortgage portfolio were ARMs. These ARMs primarily consist of a fixed-rate of interest for the first 3 to 5 years, and then adjust annually. 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 the repurchase risk inherent in the portfolio (see Operational Risk section).

Other consumer – Primarily consists of consumer loans not secured by real estate, including personal unsecured loans.

 

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

Table 13 - Loan and Lease Portfolio Composition (1)

 

     2012     2011  

(dollar amounts in millions)

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

Commercial:(2)

                         

Commercial and industrial

   $ 16,478        41   $ 16,322        41   $ 15,838        39   $ 14,699        38   $ 13,939        36

Commercial real estate:

                         

Construction

     541        1       591        1       597        1       580        1       520        1  

Commercial

     4,956        12       5,317        13       5,443        13       5,246        13       5,414        14  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial real estate

     5,497        13       5,908        14       6,040        14       5,826        14       5,934        15  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial

     21,975        54       22,230        55       21,878        53       20,525        52       19,873        51  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Consumer:

                         

Automobile

     4,276        11       3,808        10       4,787        12       4,458        11       5,558        14  

Home equity

     8,381        21       8,344        21       8,261        20       8,215        21       8,079        21  

Residential mortgage

     5,192        13       5,123        13       5,284        13       5,228        13       4,986        13  

Other consumer

     436        1       454        1       469        2       498        3       516        1  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer

     18,285        46       17,729        45       18,801        47       18,399        48       19,139        49  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans and leases

   $ 40,260        100   $ 39,959        100   $ 40,679        100   $ 38,924        100   $ 39,012        100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Loans acquired in the FDIC-assisted acquisition of Fidelity Bank are reflected in the above table effective March 31, 2012.
(2) As defined by regulatory guidance, there were no commercial loans outstanding that would be considered a concentration of lending to a particular industry or group of industries.

As shown the table above, we have larger exposures associated with C&I and the home equity portfolios. We have an established process to measure and address concentration exposure to certain portfolio segments, project types, and industries.

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

Table 14 - Loan and Lease Portfolio by Collateral Type (1)

 

     2012     2011  

(dollar amounts in millions)

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

Secured loans:

                         

Real estate—commercial

   $ 9,278        23   $ 9,398        23   $ 9,326        24   $ 9,557        25   $ 9,554        24

Real estate—consumer

     13,573        33       13,467        33       13,470        34       13,444        35       13,065        33  

Vehicles

     6,096        15       5,650        14       6,623        16       6,021        16       6,898        18  

Receivables/Inventory

     5,046        13       5,026        13       4,749        12       4,450        12       4,297        11  

Machinery/Equipment

     2,639        7       2,759        7       2,536        6       1,994        5       1,864        5  

Securities/Deposits

     717        2       789        2       733        2       800        2       805        2  

Other

     1,110        3       1,043        3       983        2       1,018        1       1,103        3  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total secured loans and leases

     38,459        96       38,132        95       38,420        96     $ 37,284        96     37,586        96  

Unsecured loans and leases

     1,801        4       1,827        5       1,738        4       1,640        4       1,426        4  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans and leases

   $ 40,260        100   $ 39,959        100   $ 40,158        100     38,924        100   $ 39,012        100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Loans acquired in the FDIC-assisted acquisition of Fidelity Bank are reflected in the above table effective June 30, 2012.

Commercial Credit

The primary factors considered in commercial credit approvals are the financial strength of the borrower, assessment of the borrower’s management capabilities, cash flows from operations, industry sector trends, type and sufficiency of collateral, type of exposure, transaction structure, and the general economic outlook. While these are the primary factors considered, there are a number of other factors that may be considered in the decision process. We utilize a centralized preview and senior loan approval committee, led by our chief credit officer. The risk rating (see next paragraph) and complexity of the credit determines the threshold for approval of the senior loan committee with a minimum credit exposure of $10.0 million. For loans not requiring senior loan committee approval, with the exception of small business loans, credit officers who understand each local region and are experienced in the industries and loan structures of the requested credit exposure are involved in all loan decisions and have the primary credit authority. For small business loans, we utilize a centralized loan approval process for standard products and structures. In this centralized decision environment, certain individuals who understand each local region may make credit-extension decisions to preserve our commitment to the communities we operate in. In addition to disciplined and consistent judgmental factors, a sophisticated credit scoring process is used as a primary evaluation tool in the determination of approving a loan within the centralized loan approval process.

 

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In commercial lending, on-going credit management is dependent on the type and nature of the loan. We monitor all significant exposures on an on-going basis. All commercial credit extensions are assigned internal risk ratings reflecting the borrower’s PD and LGD (severity of loss). This two-dimensional rating methodology provides granularity in the portfolio management process. The PD is rated and applied at the borrower level. The LGD is rated and applied based on the specific type of credit extension and the quality and lien position associated with the underlying collateral. The internal risk ratings are assessed at origination and updated at each periodic monitoring event. There is also extensive macro portfolio management analysis on an on-going basis. We continually review and adjust our risk-rating criteria based on actual experience, which provides us with the current risk level in the portfolio and is the basis for determining an appropriate ALLL amount for the commercial portfolio. A centralized portfolio management team monitors and reports on the performance of the entire commercial portfolio, including small business loans, to provide consistent oversight.

In addition to the initial credit analysis conducted during the approval process, our Credit Review group performs testing to provide an independent review and assessment of the quality and / or risk of new loan originations. This group is part of our Risk Management area, and conducts portfolio reviews on a risk-based cycle to evaluate individual loans, validate risk ratings, as well as test the consistency of credit processes.

Our standardized loan grading system considers many components that directly correlate to loan quality and likelihood of repayment, one of which is guarantor support. On an annual basis, or more frequently if warranted, we consider, among other things, the guarantor’s reputation and creditworthiness, along with various key financial metrics such as liquidity and net worth, assuming such information is available. Our assessment of the guarantor’s credit strength, or lack thereof, is reflected in our risk ratings for such loans, which is directly tied to, and an integral component of, our ALLL methodology. When a loan goes to impaired status, viable guarantor support is considered in the determination of the recognition of a loan loss.

If our assessment of the guarantor’s credit strength yields an inherent capacity to perform, we will seek repayment from the guarantor as part of the collection process and have done so successfully. However, we do not formally track the repayment success from guarantors.

Substantially all loans categorized as Classified (see Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements) are managed by our SAD. The SAD is a specialized group of credit professionals that handle the day-to-day management of workouts, commercial recoveries, and problem loan sales. Its responsibilities include developing and implementing action plans, assessing risk ratings, and determining the appropriateness of the allowance, the accrual status, and the ultimate collectability of the Classified loan portfolio.

Our commercial portfolio is diversified by product type, customer size, and geography throughout our footprint. No outstanding commercial loans and leases comprised an industry or geographic concentration of lending. Certain segments of our commercial portfolio are discussed in further detail below.

C&I PORTFOLIO

The C&I portfolio is comprised of loans to businesses where the source of repayment is associated with the on-going operations of the business. Generally, the loans are secured with the financing of the borrower’s assets, such as equipment, accounts receivable, and/or inventory. In many cases, the loans are secured by real estate, although the operation, sale, or refinancing of the real estate is not a primary source of repayment for the loan. For loans secured by real estate, appropriate appraisals are obtained at origination and updated on an as needed basis in compliance with regulatory requirements.

There were no commercial loan segments considered an industry or geographic concentration of lending. Currently, higher-risk segments of the C&I portfolio include loans to borrowers supporting the home building industry, contractors, and transportation. We manage the risks inherent in this portfolio through origination policies, a defined loan concentration policy with established limits, on-going loan level reviews and portfolio level reviews, recourse requirements, and continuous portfolio risk management activities. Our origination policies for this portfolio include loan product-type specific policies such as LTV and debt service coverage ratios, as applicable.

While some C&I borrowers have been challenged by the continued weakness in the economy, problem loans have trended downward, reflecting a combination of proactive risk identification and effective workout strategies implemented by our SAD. Nevertheless, some borrowers may no longer have sufficient capital to withstand the extended stress and comply with the original terms of their credit agreements. We continue to focus attention on the portfolio management process to proactively identify borrowers that may be facing financial difficulty to assess all potential solutions. The impact of the economic environment is further evidenced by the level of line-of-credit activity, as borrowers continued to maintain relatively low utilization percentages.

 

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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 higher-risk classes. 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.

In 2010, we segregated our CRE portfolio into core and noncore segments. We believe segregating noncore CRE from core CRE improved our ability to understand the nature, performance prospects, and problem resolution opportunities of these segments, thus allowing us to continue to deal proactively with any emerging credit issues. We have not subsequently added any CRE loans to the noncore portfolio.

In 2010, a CRE loan was generally considered core when the borrower was an experienced, well-capitalized developer in our Midwest footprint, and had either an established meaningful relationship with us that generated an acceptable return on capital or demonstrated the prospect of becoming one. The core CRE portfolio was $3.9 billion at September 30, 2012, representing 71% of total CRE loans. The performance of the core portfolio has met our expectations based on the consistency of the asset quality metrics within the portfolio. Based on our extensive project level assessment process, including forward-looking collateral valuations, we continue to believe the credit quality of the core portfolio is stable. Loans are not reclassified between the core and noncore segments based on performance. Nonetheless, we do not anticipate an elevated level of problem loans in the core portfolio.

A CRE loan was generally considered noncore based on the lack of a substantive relationship outside of the loan product, with no immediate prospects for meeting the core relationship criteria. The noncore CRE portfolio declined from $1.8 billion at December 31, 2011, to $1.6 billion at September 30, 2012, and represented 29% of total CRE loans. Of the loans in the noncore portfolio at September 30, 2012, 71% were categorized as Pass, 95% had guarantors, 99% were secured, and 92% were located within our geographic footprint. However, it is within the noncore portfolio where most of the credit quality challenges exist. For example, $0.1 billion, or 7%, of related outstanding balances, are classified as NALs. SAD administered $0.7 billion, or 43%, of total noncore CRE loans at September 30, 2012. We expect to exit the majority of noncore CRE relationships over time through normal repayments and refinancings, possible sales, or the reclassification to a core CRE relationship if it expands to meet the core criteria.

Credit quality data regarding the ACL and NALs, segregated by core CRE loans and noncore CRE loans, is presented in the following table:

Table 15 - Commercial Real Estate - Core vs. Noncore Portfolios

 

      September 30, 2012  

(dollar amounts in millions)

   Ending
Balance
     Prior NCOs      ACL $      ACL %     Credit Mark (2)     Nonaccrual
Loans
 

Total core (1)

   $ 3,891      $ 18      $ 95        2.44     2.89   $ 39  

Noncore—SAD (3)

     694        163        129        18.59       34.07       108  

Noncore—Other

     912        20        61        6.69       8.69       2  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total noncore

     1,606        183        190        11.83       20.85       110  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total commercial real estate

   $ 5,497      $ 201      $ 285        5.18     8.53   $ 149  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
      December 31, 2011  

Total core

   $ 3,978      $ 25      $ 125        3.14     3.75   $ 26  

Noncore—SAD (3)

     735        253        182        24.76       44.03       195  

Noncore—Other

     1,113        17        88        7.91       9.29       9  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total noncore

     1,848        270        270        14.61       25.50       204  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total commercial real estate

   $ 5,826      $ 295      $ 395        6.78     11.27   $ 230  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) Includes loans acquired in the FDIC-assisted acquisition of Fidelity Bank. The acquired loans were recorded at fair value with no associated ACL.
(2) Calculated as (Prior NCOs + ACL $) / (Ending Balance + Prior NCOs).
(3) Noncore loans managed by SAD, the area responsible for managing loans and relationships designated as Classified Loans.

 

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As shown in the above table, the ending balance of the CRE portfolio at September 30, 2012, declined $0.3 billion, or 6%, compared with December 31, 2011. Of this decline, 74% occurred in the noncore segment, and was a result of payoffs and NCOs as we actively focus on the noncore portfolio to reduce our overall CRE exposure. This reduction demonstrates our continued commitment to achieving a materially lower risk profile in the CRE portfolio, consistent with our overall objective of maintaining an aggregate moderate-to-low risk profile. We will continue to support our core developer customers as appropriate, however, we do not believe that significant additional CRE activity is appropriate given the current market conditions.

Also, as shown above, substantial reserves for the noncore portfolio have been established. At September 30, 2012, the ACL related to the noncore portfolio was 11.83%. The combination of the existing ACL and prior NCOs represents the total credit actions taken on each segment of the portfolio. From this data, we calculate a credit mark that provides a consistent measurement of the cumulative credit actions taken against a specific portfolio segment. The 34.07% credit mark associated with the SAD-managed noncore portfolio is an indicator of the proactive portfolio management strategy employed for this portfolio.

Consumer Credit

Consumer credit approvals are based on, among other factors, the financial strength and payment history of the borrower, type of exposure, and the transaction structure. We make extensive use of portfolio assessment models to continuously monitor the quality of the portfolio, which may result in changes to future origination strategies. The on-going analysis and review process results in a determination of an appropriate allowance for our consumer loan and lease portfolio.

Effective with the 2012 third quarter, we identified certain loans within the consumer portfolio that met the definition of collateral dependent as defined by regulatory guidance as the borrowers had not reaffirmed their debt discharged in a Chapter 7 bankruptcy filing. The bankruptcy court’s discharge of the borrower’s debt is considered a concession when the discharged debt is not reaffirmed, and as such, the loans were classified as TDRs, placed on nonaccrual status, and written down to collateral value, less anticipated selling costs. Previously, we recorded the charge-off when the loan reached 60-days past due and did not classify these loans as TDRs. Many of these loans were current, with many borrowers having paid according to the contractual terms for several years. This change increased NCOs by $33.0 million, NALs by $63.0 million, and TDRs by $71.0 million across the automobile, residential mortgage, and home equity portfolios. We continue to evaluate the appropriate accounting treatment of subsequent customer payments on these Chapter 7 bankruptcy NALs.

AUTOMOBILE PORTFOLIO

Our strategy in the automobile portfolio continued to focus on high quality borrowers as measured by both FICO and internal custom scores, combined with appropriate LTVs, terms, and a reasonable level of 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 strategy and operational capabilities 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 standard while growing the portfolio. We have developed and implemented a loan securitization strategy to ensure we remain within our established portfolio concentration limits.

During the 2012 first quarter, we transferred automobile loans totaling $1.3 billion to a trust in a securitization transaction. Also, in the 2012 second quarter, $1.3 billion of automobile loans were transferred to loans held for sale, in anticipation of another automobile loan securitization that was completed in October 2012. Additional information regarding these securitization transactions is located in Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements.

RESIDENTIAL REAL ESTATE SECURED PORTFOLIOS

The properties securing our residential mortgage and home equity portfolios are primarily located within our geographic footprint. The continued stress on home prices has caused the performance in these portfolios to remain weaker than historical levels. 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. We continue to evaluate all of our policies and processes associated with managing these portfolios. Our loss mitigation and foreclosure activities are consolidated in one location under common management. This structure allows us to focus on effectively helping our customers with appropriate solutions for their specific circumstances.

 

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Table 16 - Selected Home Equity and Residential Mortgage Portfolio Data

 

     Home Equity     Residential Mortgage  
     Secured by first-lien     Secured by junior-lien    

 

   

 

 

(dollar amounts in millions)

   09/30/12     12/31/11     09/30/12     12/31/11     09/30/12     12/31/11  

Ending balance

   $ 4,214      $ 3,815      $ 4,167      $ 4,400      $ 5,192      $ 5,228   

Portfolio weighted average LTV ratio(1)

     71     71     81     81     77     77

Portfolio weighted average FICO score(2)

     751       749       735       734       737       731  
     Home Equity     Residential Mortgage (3)  
     Secured by first-lien     Secured by junior-lien        
     Nine Months Ended September 30,  
     2012     2011     2012     2011     2012     2011  

Originations

   $ 1,302      $ 1,392      $ 446      $ 630      $ 818      $ 1,102   

Origination weighted average LTV ratio(1)

     72     71     80     82     84     84

Origination weighted average FICO score(2)

     771       768       758       759       754       758  

 

(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

Our home equity portfolio (loans and lines-of-credit) consists of both first-lien and junior-lien mortgage loans with underwriting criteria based on minimum credit scores, debt-to-income ratios, and LTV ratios. We offer closed-end home equity loans which are generally fixed-rate with principal and interest payments, and variable-rate interest-only home equity lines-of-credit which do not require payment of principal during the 10-year revolving period of the line-of-credit. Applications are underwritten centrally in conjunction with an automated underwriting system.

At September 30, 2012, 50% of our home equity portfolio was secured by first-lien mortgages. The credit risk profile is substantially reduced when we hold a first-lien position. During the first nine-month period of 2012, 75% of our home equity portfolio originations were secured by a first-lien mortgage. We focus on high quality borrowers primarily located within our footprint. The majority of our home equity line-of-credit borrowers consistently pay more than the minimum payment required in any given month. Additionally, since we focus on developing complete relationships with our customers, many of our home equity borrowers are utilizing other products and services. The combination of high quality borrowers as measured by financial condition and FICO score, as well as the concentration of first-lien position loans, provides a high degree of confidence regarding the performance of the 2009-2012 originations.

Within the home equity line-of-credit 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. As previously discussed, a significant portion of recent originations are secured by first-liens on the underlying property as high quality borrowers take advantage of the low variable-rates available with a line-of-credit.

We believe we have underwritten credit conservatively within this portfolio. We have not originated home equity loans or lines-of-credit with an LTV at origination greater than 100%, except for infrequent situations with high quality borrowers. However, declines in housing prices have decreased the value of the collateral for this portfolio and have caused a portion of the portfolio to have an LTV greater than 100%. These higher LTV ratios are directly correlated with borrower payment patterns and are a focus of our Loss Mitigation and Home Saver groups. Effective in the 2012 third quarter, we no longer originate junior-lien loans with an LTV greater than 90%.

We obtain a property valuation for every loan or line-of-credit as part of the origination process, and the valuation is reviewed by a real estate professional in conjunction with the credit underwriting process. The type of property valuation obtained is based on a series of credit parameters, and ranges from an AVM with a property inspection to a complete walkthrough appraisal. While we believe an AVM estimate is an appropriate valuation source for a portion of our home equity lending activities, we continue to re-evaluate all of our policies on an on-going basis with the intent of ensuring complete independence in the requesting and reviewing of real estate valuations associated with loan decisions. We update values as appropriate, and in compliance with applicable regulations, for loans identified as higher risk. Loans are identified as higher risk based on performance indicators and the updated values are utilized to facilitate our portfolio management processes, as well as our workout and loss mitigation functions.

 

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We continue to make origination policy adjustments based on our assessment of an appropriate risk profile and industry actions, as well as the recently issued Basel III NPRs (see Capital section). In addition to origination policy adjustments, we take actions, as necessary, to manage the risk profile of this portfolio. We believe our Credit Risk Management systems allow for effective portfolio analysis and segmentation to identify the highest risk exposures in the portfolio. Our disclosures regarding lien position, FICO distribution, and geographical distribution are examples of segmentation analysis.

We continue to identify situations where borrowers make a purposeful financial decision to stop making required payments on the junior-lien loan, and in some cases, the first-lien loan. This strategic default scenario is generally associated with borrowers that have very limited or no history of delinquency. These accounts also tend to migrate quickly from a current status to charge-off without the historical stops at each delinquency stage. The resulting increase in the relative speed of the migration from current status to charge-off represents a negative impact to the longer term performance of the portfolio. Although the collateral value assessment is an important component of the overall credit risk analysis, there are very few instances of available equity in junior-lien default situations.

Further, in January 2012, regulatory guidance was published addressing specific risks and required actions associated with junior-lien loans. As a result of this guidance, effective with the 2012 first quarter, any junior-lien loan associated with a nonaccruing first-lien loan is also placed on nonaccrual status. This action resulted in an increase in home equity NALs of $8.7 million in the 2012 first quarter. Also contained in the regulatory guidance was an item associated with maturing HELOCs. Even in situations where the product contains an amortization period at the conclusion of the draw period, we believe it is likely that there will be a payment shock to the borrower at the end of the interest-only draw period. This is a risk embedded in the portfolio that we address with proactive contact strategies beginning 180 days prior to maturity. In certain circumstances, our Home Savers team is able to provide payment and structure relief to borrowers experiencing significant financial hardship associated with the payment adjustment.

Residential Mortgage Portfolio

We focus on higher quality borrowers and underwrite all applications centrally. We do not originate residential mortgages that allow negative amortization or allow the borrower multiple payment options. We will continue to evaluate the impact of the recently issued Basel III NPRs on our residential mortgage origination policies.

All residential mortgages are originated based on a completed full appraisal during the credit underwriting process. We update values on a regular basis in compliance with applicable regulations to facilitate our portfolio management, as well as our workout and loss mitigation functions.

At September 30, 2012, 51% of our total residential mortgage loan portfolio had adjustable rates. At September 30, 2012, ARM loans that were expected to have rates reset totaled $1.7 billion through 2015. These loans scheduled to reset are primarily associated with loans originated subsequent to 2007, and as such, are not subject to the most significant declines in underlying property value. Given the quality of our borrowers, the relatively low current interest rates, and the results of our continued analysis (including possible impacts of changes in interest rates), we believe that we have a relatively limited exposure to ARM reset risk. Nonetheless, we have taken actions to mitigate our risk exposure. We initiate borrower contact at least six months prior to the interest rate resetting, and have been successful in converting many ARMs to fixed-rate loans through this process. Given the relatively low current interest rates, many fixed-rate products currently offer a better interest rate to our ARM borrowers.

Several government programs continued to impact the residential mortgage portfolio, including various refinance programs such as HAMP and HARP, which positively affected the availability of credit for the industry. We utilize these programs to enhance our existing strategies of working closely with our customers. During the nine-month period ended September 30, 2012, we closed $659 million in HARP residential mortgages and $16 million in HAMP residential mortgages. The HARP residential mortgage loans are considered current and are either part of our residential mortgage portfolio or serviced for others. The HAMP refinancings are associated with residential mortgages that are serviced for others.

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 2012 third quarter, reflected overall continued improvement. NALs declined 6% to $445.0 million compared to the prior quarter, despite the impact of $63.0 million of NAL additions as a result of Chapter 7 bankruptcy loans. NCOs increased compared to the prior quarter solely as a result of the $33.0 impact of NCOs related to Chapter 7 bankruptcy loans. Commercial criticized and commercial classified loans declined significantly reflecting the continued improvement in the commercial portfolio. The ACL to total loans ratio declined to 2.09% and our ACL coverage ratios remained at appropriate levels. Our ACL as a percentage of NPAs remained strong at 189%.

 

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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) impaired loans held for sale, (3) OREO properties, and (4) other NPAs. Any loan in our portfolio may be placed on nonaccrual status prior to the policies described below when collection of principal or interest is in doubt.

C&I and CRE loans are placed on nonaccrual status at 90-days past due. With the exception of residential mortgage loans guaranteed by government organizations which continue to accrue interest, residential mortgage loans are placed on nonaccrual status at 150-days past due. First-lien home equity loans are placed on nonaccrual status at 150-days past due. Junior-lien home equity loans are placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien loan has been identified as nonaccrual. Automobile and other consumer loans are not placed on nonaccrual status, but are generally charged-off when the loan is 120-days past due. However, when a borrower with discharged non-reaffirmed debt in a Chapter 7 bankruptcy is identified and the loan is determined to be collateral dependent, the consumer loan is placed on nonaccrual status.

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

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

 

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Table 17 - Nonaccrual Loans and Leases and Nonperforming Assets

 

     2012     2011  

(dollar amounts in thousands)

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

Nonaccrual loans and leases:

          

Commercial and industrial

   $ 109,452     $ 133,678     $ 142,492     $ 201,846     $ 209,632  

Commercial real estate

     148,986       219,417       205,105       229,889       257,086  

Automobile

     11,814       —          —          —          —     

Residential mortgage

     123,140       75,048       74,114       68,658       61,129  

Home equity

     51,654       46,023       45,847       40,687       37,156  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonaccrual loans and leases(1)

     445,046       474,166       467,558       541,080       565,003  

Other real estate owned, net

          

Residential(2)

     23,640       21,499       31,850       20,330       18,588  

Commercial

     30,566       17,109       16,897       18,094       19,418  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other real estate owned, net

     54,206       38,608       48,747       38,424       38,006  

Other nonperforming assets(3)

     10,476       10,476       10,772       10,772       10,972  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 509,728     $ 523,250     $ 527,077     $ 590,276     $ 613,981  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nonaccrual loans as a % of total loans and leases

     1.11     1.19     1.15     1.39     1.45

Nonperforming assets ratio(4)

     1.26       1.31       1.29       1.51       1.57  

 

(1) September 30, 2012, includes $63.0 million Chapter 7 bankruptcy NALs.
(2) Residential real estate owned acquired in the FDIC-assisted Fidelity Bank acquisition are reflected in the above table effective March 31, 2012.
(3) Other nonperforming assets represent an investment security backed by a municipal bond.
(4) This ratio is calculated as nonperforming assets divided by the sum of loans and leases, other nonperforming assets, and net other real estate.

The $13.5 million, or 3%, decline in NPAs compared with June 30, 2012, primarily reflected:

 

   

$70.4 million, or 32%, decline in CRE NALs, reflecting both NCO activity and problem credit resolutions, including borrower payments and payoffs partially resulting from successful workout strategies implemented by our SAD. Additionally, one relatively large-dollar NAL was transferred to OREO during the current quarter. Although we anticipate some degree of quarter-to-quarter volatility in our NAL levels, we expect that the overall trend will continue to be lower.

 

   

$24.2 million, or 18%, decline in C&I NALs, reflecting problem credit resolutions, including payoffs partially resulting from successful workout strategies implemented by our SAD. The decline was associated with loans throughout our footprint, with no specific industry concentration.

Partially offset by:

 

   

$48.1 million, or 64%, increase in residential mortgage NALs, primarily driven by $46.3 million of Chapter 7 bankruptcy NALs. The NAL balances have been written down to net realizable value, less anticipated selling costs which substantially limits any significant future risk of additional loss on these loans.

 

   

$15.6 million, or 40%, increase in OREO, primarily reflecting one relatively large-dollar CRE NAL transferred to OREO during the current quarter.

 

   

$11.8 million increase in automobile NALs, entirely reflecting Chapter 7 bankruptcy NALs. Prior to the implementation of this guidance, automobile loans were not placed on nonaccrual status.

 

   

$5.6 million, or 12%, increase in home equity NALs, primarily driven by $4.9 million of Chapter 7 bankruptcy NALs. The NAL balances have been written down to net realizable value, less anticipated selling costs which substantially limits any significant future risk of additional loss on these loans.

As part of our loss mitigation process, we reunderwrite, modify, or restructure loans when borrowers are experiencing payment difficulties, based on the borrower’s ability to repay the loan.

 

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Compared with December 31, 2011, NPAs decreased $80.5 million, or 14%, primarily reflecting:

 

   

$92.4 million, or 46%, decline in C&I NALs, reflecting both NCO activity and problem credit resolutions, including payoffs. The decline was associated with loans throughout our footprint, with no specific industry concentration.

 

   

$80.9 million, or 35%, decline in CRE NALs, reflecting both NCO activity and problem credit resolutions, including borrower payments and payoffs.

Partially offset by:

 

   

$54.5 million, or 79%, increase in residential mortgage NALs, reflecting $46.3 million of Chapter 7 bankruptcy NALs. The remaining portion of the increase reflects the continued softness in residential real estate property values. The NAL balances have been written down to net realizable value, less anticipated selling costs, which substantially limits any significant future risk of additional loss on these loans.

 

   

$15.8 million, or 41%, increase in OREO, primarily reflecting one relatively large-dollar CRE NAL transferred to OREO during the 2012 third quarter.

 

   

$11.8 million increase in automobile NALs, entirely reflecting Chapter 7 bankruptcy loans. Prior to the implementation of this guidance, automobile loans were not placed on nonaccrual status.

 

   

$11.0 million, or 27%, increase in home equity NALs, reflecting $4.9 million of Chapter 7 bankruptcy loans, as well as the implementation of other regulatory guidance in the 2012 first quarter (see ACL section) which resulted in an increase in home equity NALs of $8.7 million in the 2012 first quarter.

TDR Loans

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

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

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

Table 18 - Accruing and Nonaccruing Troubled Debt Restructured Loans

 

      2012      2011  

(dollar amounts in thousands)

   September 30,      June 30,      March 31, (1)      December 31,      September 30,  

Troubled debt restructured loans—accruing:

              

Commercial and industrial

   $ 55,809      $ 57,008      $ 53,795      $ 54,007      $ 77,509  

Commercial real estate

     222,155        202,190        231,923        249,968        244,089  

Automobile

     33,719        34,460        35,521        36,573        37,371  

Home equity

     92,763        66,997        59,270        52,224        47,712  

Residential mortgage

     280,890        298,967        294,836        309,678        304,365  

Other consumer

     2,644        3,038        4,233        6,108        4,513  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructured loans—accruing

     687,980        662,660        679,578        708,558        715,559  

Troubled debt restructured loans—nonaccruing:

              

Commercial and industrial

     28,859        35,535        26,886        48,553        27,410  

Commercial real estate

     20,284        55,022        39,606        21,968        46,854  

Automobile

     11,814        —           —           —           —     

Home equity

     7,756        374        334        369        166  

Residential mortgage

     83,163        28,332        29,549        26,089        20,877  

Other consumer

     113        113        113        113        113  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructured loans—nonaccruing

     151,989        119,376        96,488        97,092        95,420  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructured loans

   $ 839,969      $ 782,036      $ 776,066      $ 805,650      $ 810,979  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) No loans related to the FDIC-assisted Fidelity Bank acquisition were considered troubled debt restructured loans at March 31, 2012.

 

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Our strategy is to structure the commercial TDRs in a manner that avoids new concessions subsequent to the initial TDR terms. However, there are times when subsequent modifications are required, such as when the modified loan matures. Often the loans are performing in accordance with the TDR terms, and a new note is originated with similar modified terms. It is 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 a more aggressive strategy is put in place. 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 legal agreement, they are 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 are comprised of interest rate reductions, amortization or maturity date changes beyond what the collateral supports, principal forgiveness, covenant concessions, etc., based on the borrower’s specific needs at a point in time. Our policy does not limit the number of times a loan may be modified. A loan may be modified multiple times if it is considered to be in the best interest of both the borrower and us.

Loans are not automatically considered to be accruing TDRs upon the granting of a new concession. Accrual status is determined based on delinquency status and whether collection of principal and interest is in doubt. If the loan is not 90-days past due and no loss is expected based on the modified terms, the modified TDR remains in accruing status. For loans that are on nonaccrual status before the modification, collection of both principal and interest must not be in doubt, and the borrower must be able to exhibit sufficient cash flows for a six-month period of time to service the debt in order to return to accruing status. This six-month period could extend before or after the restructure date.

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

Table 19 - Troubled Debt Restructured Loan Activity

 

     2012      2011  

(dollar amounts in thousands)

   Third     Second     First(1)     Fourth     Third  

TDRs, beginning of period

   $ 782,036     $ 776,066     $ 805,650      $ 810,979     $ 721,197  

New TDRs(2)

     196,707       94,837       136,237        99,603       170,800  

Payments

     (51,125     (38,299     (40,120 )       (67,470     (25,124

Charge-offs

     (22,537     (16,551     (25,042 )       (7,440     (12,376

Sales

     (3,978     (1,840     (5,036 )       (8,089     (5,310

Refinanced to non-TDR

     —          —          —          —          (4,851

Transfer to OREO

     (15,974     (860     (1,472 )       (2,658     (1,114

Restructured TDRs—accruing(3)

     (25,218     (14,618     (58,192 )       (4,751     (49,376

Restructured TDRs—nonaccruing(3)

     (13,833     (10,833     (30,388 )       (23,825     (8,235

Other

     (6,109     (5,866     (5,571 )       9,301       25,368  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TDRs, end of period

   $ 839,969     $ 782,036     $ 776,066      $ 805,650     $ 810,979  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) No loans related to the FDIC-assisted Fidelity Bank acquisition were considered troubled debt restructured loans at March 31, 2012.
(2) 2012 third quarter includes $71.0 million Chapter 7 bankruptcy TDRs.
(3) Represents existing commercial 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.)

We maintain two reserves, 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.

 

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A provision for credit losses is recorded to adjust the ACL to the level we have determined to be appropriate to absorb credit losses inherent in our loan and lease portfolio. The provision for credit losses in the 2012 third quarter was $37.0 million, compared with $36.5 million in the prior quarter and $43.6 million in the year-ago quarter. The provision for credit losses for the first nine-month period of 2012 was $107.9 million, compared with $128.8 million in the first nine-month period of 2011. (See Provision for Credit Losses discussion).

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

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.

We have incorporated recent regulatory guidance which focused on home equity loans, specifically junior-lien loans when the related first-lien loan is delinquent, into our ACL adequacy analysis processes. As we evaluated this guidance in the context of the continued economic strain on some of our borrowers, we determined it was appropriate to assess borrower risk at a more granular level in order to ensure we had identified the incurred risk embedded within our portfolios secured by residential real estate, particularly the home equity junior-lien portfolio. In addition to the updated FICO score for each borrower and the delinquency status of each Huntington loan, our analysis also considers any non-delinquent Huntington loan secured by residential real estate when the borrower has a significant delinquency on the most recent credit bureau report.

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

Table 20 - Allocation of Allowance for Credit Losses (1)

 

      2012     2011  

(dollar amounts in thousands)

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

Commercial

                         

Commercial and industrial

   $ 257,081        41   $ 280,548        41   $ 246,026        39   $ 275,367        38   $ 285,254        36

Commercial real estate

     280,376        13       305,391        14       339,494        14       388,706        14       418,895        15  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial

     537,457        54       585,939        55       585,520        53       664,073        52       704,149        51  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Consumer

                         

Automobile

     33,281        11       30,217        10       36,552        12       38,282        11       49,402        14  

Home equity

     122,605        21       135,562        21       168,898        20       143,873        21       139,616        21  

Residential mortgage

     67,220        13       78,015        13       89,129        13       87,194        13       98,974        13  

Other consumer

     28,579        1       29,913        1       32,970        2       31,406        3       27,569        1  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer

     251,685        46       273,707        45       327,549        47       300,755        48       315,561        49  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total allowance for loan and lease losses

     789,142        100     859,646        100     913,069        100     964,828        100     1,019,710        100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Allowance for unfunded loan commitments

     53,563          50,978          50,934          48,456          38,779     
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

    

Total allowance for credit losses

   $ 842,705        $ 910,624        $ 964,003        $ 1,013,284        $ 1,058,489     
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

    
                         

Total allowance for loan and leases losses as % of:

                         

Total loans and leases(2)

        1.96        2.15        2.24        2.48        2.61

Nonaccrual loans and leases(3)

        177          181          195          178          180  

Nonperforming assets(4)

        155          164          173          163          166  

Total allowance for credit losses as % of: (1)

                         

Total loans and leases(2)

        2.09        2.28        2.37        2.60        2.71

Nonaccrual loans and leases(3)

        189          192          206          187          187  

Nonperforming assets(4)

        165          174          183          172          172  

 

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(1) Percentages represent the percentage of each loan and lease category to total loans and leases. Total loans and leases include loans acquired in the FDIC-assisted Fidelity Bank acquisition effective March 31, 2012.
(2) Loans acquired in the FDIC-assisted Fidelity Bank acquisition are reflected in this calculation effective March 31, 2012.
(3) None of the loans acquired in the FDIC-assisted Fidelity Bank acquisition were considered nonaccrual.
(4) None of the loans acquired in the FDIC-assisted Fidelity Bank acquisition were considered nonaccrual, however, acquired other real estate owned properties are included in nonperforming assets, and are reflected in the calculation effective March 31, 2012.

The reduction in the ALLL compared with June 30, 2012 reflected a decline in all portfolios, except for the automobile portfolio. The declines in the C&I and CRE portfolios reflected significant improvements in the level of Criticized and Classified loans combined with lower CRE loan balances. The home equity portfolio declined as a result of a combination of the improving underlying asset quality and our view of expected future performance. The residential mortgage portfolio declined slightly as a result of the underlying asset quality, while the automobile portfolio increased slightly as a result of portfolio growth.

The ACL to total loans declined to 2.09% at September 30, 2012 compared to 2.60% at December 31, 2011. We believe the decline in the ratio is appropriate given the continued improvement in the risk profile of our loan portfolio. Further, we believe that early identification of loans with changes in credit metrics and aggressive action plans for these loans, combined with originating high quality new loans will contribute to continued improvement in our key credit quality metrics. However, the overall economic conditions improved only slightly in the first nine-month period of 2012. The overall economic conditions have shown some recent improvement, but risks to a full recovery remain, including the European economic instability, continued budget issues in local governments, flat domestic economic growth, and the variety of policy proposals regarding job growth, debt management, and domestic tax policy. Continued high unemployment, among other factors, has slowed any significant recovery. In the near-term, we anticipate a continued high unemployment rate and the concern around the U.S. and local government budget issues will continue to negatively impact the financial condition of some of our retail and commercial borrowers.

The pronounced downturn in the residential real estate market that began in early 2007 has resulted in significantly lower residential real estate values. We have significant exposure to loans secured by residential real estate and continue to be an active lender in our communities. The impact of the downturn in real estate values has had a significant impact on some of our borrowers as evidenced by the higher delinquencies and NCOs since late 2007. Beginning in 2012, the trend of purposeful delinquencies or strategic defaults began to impact both NCO and NAL levels in the residential real estate secured portfolios. These borrower actions impacted writedowns and increased NAL levels in the residential mortgage and first-lien home equity portfolio, and NCOs in the junior-lien home equity portfolio. Given the combination of these noted 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.

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.

The following table reflects NCO detail for each of the last five quarters:

 

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Table 21 - Quarterly Net Charge-off Analysis

 

      2012     2011  

(dollar amounts in thousands)

   Third     Second     First     Fourth     Third  

Net charge-offs by loan and lease type:

          

Commercial:

          

Commercial and industrial

   $ 13,023     $ 15,678     $ 28,495     $ 10,913     $ 17,891  

Commercial real estate:

          

Construction

     (280     (1,531     (1,186     (2,471     1,450  

Commercial

     17,654       30,709       11,692       30,854       22,990  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     17,374       29,178       10,506       28,383       24,440  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     30,397       44,856       39,001       39,296       42,331  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

          

Automobile

     4,019       449       3,078       4,237       3,863  

Home equity

     46,596       21,045       23,729       23,419       26,222  

Residential mortgage

     16,880       10,786       10,570       9,732       11,562  

Other consumer

     7,203       7,109       6,614       7,233       6,577  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     74,698       39,389       43,991       44,621       48,224  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net charge-offs

   $ 105,095     $ 84,245     $ 82,992     $ 83,917     $ 90,555  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs—annualized percentages:

          

Commercial:

          

Commercial and industrial

     0.32     0.39     0.77     0.31     0.52

Commercial real estate:

          

Construction

     (0.20     (1.05     (0.79     (1.85     0.87  

Commercial

     1.37       2.24       0.89       2.27       1.69  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     1.21       1.92       0.72       1.91       1.60  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     0.55       0.81       0.75       0.78       0.86  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

          

Automobile

     0.40       0.04       0.27       0.30       0.25  

Home equity

     2.23       1.01       1.15       1.15       1.31  

Residential mortgage

     1.30       0.82       0.82       0.77       0.97  

Other consumer

     6.49       6.15       5.45       5.66       5.05  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     1.65       0.83       0.95       0.92       0.99  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs as a % of average loans

     1.05     0.82     0.85     0.85     0.92
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 revised 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 and 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.

Home equity NCO annualized percentages generally are greater than those of the residential mortgage portfolio as a result of the junior-lien loans. The opposite relationship in the first nine-month period of 2011 was the result of portfolio actions in the residential mortgage portfolio, including accelerated loss recognition and portfolio sales activity.

We anticipate a continuation of the pattern established over the last year of residential mortgage portfolio NCO annualized percentages being lower than the home equity portfolio NCO annualized percentages. As we have focused on originating high-quality home equity loans, we believe the PD risk is lower in the home equity portfolio. However, the LGD component is significantly higher than the residential mortgage portfolio, which results in our projection for lower NCOs in the residential mortgage portfolio relative to the home equity portfolio in the future. Therefore, we believe the residential mortgage NCO annualized percentage will remain lower compared to the home equity portfolio as a result of the entire first-lien composition of the residential mortgage portfolio, as well as the result of previous credit actions improving the underlying quality of these portfolios.

 

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Both the home equity and residential mortgage portfolio NCO levels are anticipated to remain at elevated levels in the near future. The home equity portfolio will continue to be impacted by borrowers that are seeking to refinance, but are in a negative equity position because of the junior-lien loan. Right-sizing and debt forgiveness associated with these situations are becoming more frequent as borrowers realize the impact to their credit is minor, and that a default on a junior-lien loan is not likely to cause borrowers to lose their home.

From a delinquency standpoint, 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.

2012 Third Quarter versus 2012 Second Quarter

C&I NCOs decreased $2.7 million, or 17%. Current quarter NCOs were generally associated with smaller relationships and there was not any specific concentration in either geography or project type. Given the relatively low absolute level of NCOs in this portfolio, some level of volatility on a quarter to quarter basis is expected.

CRE NCOs decreased $11.8 million, or 40%. As with the C&I portfolio, some level of volatility on a quarter to quarter basis is expected.

Automobile NCOs increased $3.6 million, reflecting $2.0 million of Chapter 7 bankruptcy NCOs. The relatively low levels of NCOs reflected the continued high credit quality of originations and a strong resale market for used automobiles. We anticipate continued strength in the used automobile market for the remainder of 2012 and into 2013.

Residential mortgage NCOs increased $6.1 million, or 56%, primarily reflecting the impact of Chapter 7 bankruptcy NCOs.

Home equity NCOs increased $25.6 million, or 121%, reflecting $23.1 million of Chapter 7 bankruptcy NCOs.

The table below reflects NCO activity for the first nine-month periods ended September 30, 2012 and 2011:

 

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Table 22 - Year to Date Net Charge-off Analysis

 

     Nine Months Ended September 30,  

(dollar amounts in thousands)

   2012     2011  

Net charge-offs by loan and lease type:

    

Commercial:

    

Commercial and industrial

   $ 57,196     $ 78,786  

Commercial real estate:

    

Construction

     (2,997     33,995  

Commercial

     60,055       85,723  
  

 

 

   

 

 

 

Commercial real estate

     57,058       119,718  
  

 

 

   

 

 

 

Total commercial

     114,254       198,504  
  

 

 

   

 

 

 

Consumer:

    

Automobile

     7,546       10,830  

Home equity

     91,370       78,378  

Residential mortgage

     38,236       46,949  

Other consumer

     20,926       18,511  
  

 

 

   

 

 

 

Total consumer

     158,078       154,668  
  

 

 

   

 

 

 

Total net charge-offs

   $ 272,332      $ 353,172  
  

 

 

   

 

 

 

Net charge-offs—annualized percentages:

    

Commercial:

    

Commercial and industrial

     0.48     0.78

Commercial real estate:

    

Construction

     (0.68     7.41  

Commercial

     1.51       2.01  
  

 

 

   

 

 

 

Commercial real estate

     1.29       2.54  
  

 

 

   

 

 

 

Total commercial

     0.70       1.35  
  

 

 

   

 

 

 

Consumer:

    

Automobile

     0.22       0.24  

Home equity

     1.47       1.33  

Residential mortgage

     0.98       1.36  

Other consumer

     6.03       4.58  
  

 

 

   

 

 

 

Total consumer

     1.14       1.09  
  

 

 

   

 

 

 

Net charge-offs as a % of average loans

     0.90     1.22
  

 

 

   

 

 

 

2012 First Nine Months versus 2011 First Nine Months

C&I NCOs decreased $21.6 million, or 27%, primarily reflecting credit quality improvement in the underlying portfolio as well as our on-going proactive credit management practices. There was not any concentration in either geography or project type.

CRE NCOs decreased $62.7 million, or 52%, primarily reflecting credit quality improvement in the underlying portfolio as well as our on-going proactive credit management practices. There was no concentration in either geography or project type, and the NCOs were generally associated with small relationships. The performance of the portfolio was consistent with our expectations.

Automobile NCOs decreased $3.3 million, or 30%, despite the $2.0 impact of Chapter 7 bankruptcy NCOs in the current year-to-date period. The relatively low levels of NCOs reflected the continued high credit quality of originations and a strong resale market for used vehicles.

Home equity NCOs increased $13.0 million, or 17%, and included $23.1 million of Chapter 7 bankruptcy NCOs. Despite the increase as a result of the Chapter 7 bankruptcy loans, the decline in the remaining portion of the portfolio is consistent with our expectations. We continue to manage the default rate through focused delinquency monitoring as essentially all defaults for junior-lien home equity loans incur significant losses reflecting the reduction of equity associated with the collateral property.

 

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Residential mortgage NCOs declined $8.7 million, or 19%, despite $7.9 million of Chapter 7 bankruptcy NCOs. The decline reflects improvement in the overall economy compared to the year-ago period.

Market Risk

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, credit spreads, and expected lease residual values. We have identified two primary sources of market risk: interest rate risk and price risk.

Interest Rate Risk

OVERVIEW

Interest rate risk is the risk to earnings and value of equity arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities from embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a non-parallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR (basis risk).

In the following, we discuss the impact on earnings and equity from changes in interest rates. In recent quarters, due to the absolute low levels of interest rates, the analysis of the impact from a decline in rates has become less meaningful. The reason for this is that current interest rates are lower than the modeled impact (usually a gradual or sudden decline in interest rates of 100 and 200 basis points). Accordingly, where appropriate, we use rate floors in the analysis to ensure that modeled rates do not go below 0%.

INCOME SIMULATION AND ECONOMIC VALUE ANALYSIS

Interest rate risk measurement is calculated and reported to the ALCO and ROC monthly. The information reported includes the identification of any policy limits exceeded, along with an assessment that describes the policy limit breach and outlines the action plan and timeline for resolution, mitigation, or assumption of the risk. We use two approaches to model interest rate risk: income simulation (known as ISE analysis) and economic value analysis (known as EVE analysis). We use ISE to measure the sensitivity of forecasted interest sensitive earnings to changes in market rates over a one-year period. Although we classify BOLI, automobile operating lease assets, and cash balances held at the Federal Reserve Bank as noninterest-earning assets, and the net revenue from these assets is recorded in noninterest income and noninterest expense, we include these portfolios in the ISE because they have attributes similar to interest-earning assets. We use EVE to measure the sensitivity of period-end assets and liabilities to changes in market interest rates. We measure EVE on a net tangible equity basis, excluding ALLL and AULC reserves. The major difference between ISE and EVE is that ISE uses a forecasted balance sheet to determine the sensitivity of earnings to market interest rates, while EVE is a point in time valuation of the net equity position.

The models used for both ISE and EVE consider prepayment speeds on mortgage loans, mortgage-backed securities, and consumer installment loans, as well as cash flows of other assets and liabilities. Both also include the effects of derivatives, such as interest rate swaps, caps, floors, and other types of interest rate options. Unlike EVE, ISE also considers balance sheet growth assumptions.

ISE first determines a baseline scenario for interest sensitive earnings using market interest rates implied by the forward yield curve as of the period-end. We use alternative scenarios, usually involving gradual (ramps) and immediate (shocks) rate changes, to determine any changes in net interest income and margin versus the baseline scenario. In addition to standard ramps and shocks, ISE uses other interest rate scenarios that alter the shape of the yield curve (e.g., a flatter or steeper yield curve), or hold current interest rates constant for the entire measurement period. ISE also uses alternative scenarios to measure short-term repricing risks, such as the impact of LIBOR-based interest rates rising or falling faster than the Prime rate.

The ISE analysis used in the following table reflects the analysis used monthly by management. It models gradual +/-100 and +/-200 basis point parallel shifts in market interest rates over the next one-year period, beyond the interest rate change implied by the forward yield curve. We use rate floors in the analysis so that market interest rates will not fall below 0% for the -100 and -200 basis point scenarios. The table below shows the results of these scenarios as of September 30, 2012, and December 31, 2011. All of the positions were within the board of directors’ policy limits for those periods.

 

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Table 23 - Interest Sensitive Earnings at Risk

 

     Interest Sensitive Earnings at Risk (%)  

Basis point change scenario

     -200        -100        +100        +200   
  

 

 

   

 

 

   

 

 

   

 

 

 

Board policy limits

     -4.0     -2.0     -2.0     -4.0
  

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2012

     -2.7        -1.9        1.5        2.9   

December 31, 2011

     -3.6        -2.3        1.8        3.4   

The ISE at risk reported at September 30, 2012, shows that we are asset sensitive, meaning that earnings increase (decrease) when rates rise (fall). The primary reason for these results is that more assets (primarily Libor-indexed loans to customers) than liabilities (primarily non-maturity deposits) will reprice over the modeled one-year period. The results for September 30, 2012 and December 31, 2011 are very similar, except that the level of asset sensitivity is lower for all rate movements at September 30, 2012. The reason for the difference between the periods is the shift in liabilities from time deposits to non-maturity deposits during 2012.

The following table shows the income sensitivity of selected assets and liabilities to changes in market interest rates. The table compares the ISE analysis for selected Huntington portfolios to a portfolio that assumes 100% sensitivity to changes in interest rates. We calculate the percent change in interest income/expense as the change in the simulated Huntington portfolio divided by the change in the 100% sensitive portfolio. Due to the absolute low level of rates, the results for the -100 and -200 basis point parallel ramps are not meaningful (NM), since the portfolio that is 100% sensitive to rate movements does not use rate floors and rates can decline below 0%. However, the results for the +100 and +200 basis point ramps do confirm the asset sensitive nature of the portfolio. In both the +100 and +200 basis point ramps, interest income for total loans (36.8% and 38.1%, respectively) increases faster than interest expense for interest bearing deposits (31.7% and 33.0%, respectively) as Libor-based loans are more sensitive to rate movements than managed rate, non-maturity deposits. Additionally, total borrowings show changes in interest expense of 73.6% and 78.3% for +100 and +200 basis point scenarios, respectively. Since total borrowings represent a small percentage of total interest-sensitive liabilities, the financial impact of their sensitivity to rising rates is minimal.

Table 24 - Interest Income/Expense Sensitivity

 

     Percent of
Total Earning
Assets (1)
    Percent Change in Interest Income/Expense for a Given
Change in Interest Rates
Over / (Under) Base Case Parallel
Ramp
 

Basis point change scenario

       -200        -100        +100       +200  

Total loans

     78     NM %     NM     36.8     38.1

Total investments and other earning assets

     22       NM        NM        28.8       26.5  

Total interest sensitive income

       NM        NM        34.4       35.1  
    

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     66       NM        NM        31.7       33.0  

Total borrowings

     5       NM        NM        73.6       78.3  

Total interest-sensitive expense

       NM        NM        35.8       37.4  
    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) At September 30, 2012.

The EVE analysis used in the following table reflects the analysis used monthly by management. It models immediate +/-100 and +/-200 basis points parallel shifts in market interest rates, beyond the interest rate change implied by the forward yield curve. The table below shows the results of the scenarios at September 30, 2012, and December 31, 2011. The board of directors has established policy limits for this analysis and the results below were within the limits at September 30, 2012 and December 31, 2011.

Table 25 - Economic Value of Equity at Risk

 

     Economic Value of Equity at Risk (%)  

Basis point change scenario

     -200        -100        +100        +200   
  

 

 

   

 

 

   

 

 

   

 

 

 

Board policy limits

     -12.0     -5.0     -5.0     -12.0
  

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2012

     -2.8        -1.2        -0.9        -3.8   

December 31, 2011

     -1.5        0.8        -1.7        -4.6   

The EVE at risk reported at September 30, 2012, shows that as interest rates increase (decrease) immediately, the value of the net equity position will decrease (increase), since the amount and duration of the assets is longer than the amount and duration of liabilities. When interest rates rise, assets lose economic value; the longer the duration, the greater the value lost. The opposite is true when interest rates fall. The results for the -100 and -200 basis point scenarios are less meaningful because in many cases market rates are already lower than the amount of the interest rate shock. The results for the +100 and +200 basis point scenarios reflect the increase in the duration of liabilities, primarily non-maturity deposit balances, and the increase in the amount of fixed rate investment securities, from December 31, 2011 to September 30, 2012.

 

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The following table details the economic value sensitivity to changes in market interest rates at September 30, 2012 for loans, investments, deposits, and borrowings. We measure the change in economic value for each portfolio as the percent change from the base economic value for that portfolio. As above, the results in the -100 and -200 basis point scenarios are less meaningful, since market rates are in many cases already lower than the amount of the shock. However, in the +100 and +200 basis point scenarios, the analysis shows the benefit related to higher non-maturity deposit balances. Most of the negative impact in total net tangible assets in the +100 & +200 basis point scenarios is offset by total net tangible liabilities, the largest component of which are non-maturity deposits.

Table 26 - Economic Value Sensitivity

 

     Percent of
Total Net
Tangible
Assets (1)
    Percent Change in Economic Value for a Given
Change in Interest Rates
Over /(Under) Base Case Parallel Shocks
 

Basis point change scenario

       -200       -100       +100        +200   
    

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

     71     0.8     0.7     -1.4     -2.8

Total investments and other earning assets

     20       1.6       1.4       -2.7        -5.8   

Total net tangible assets (2)

       1.0       0.8       -1.6        -3.4   

Total deposits

     83       -1.7       -1.2       1.8        3.4   

Total borrowings

     5       -0.4       -0.3       0.8        1.4   

Total net tangible liabilities (3)

       -1.7       -1.2       1.7        3.3   

 

(1) At September 30, 2012.
(2) Tangible assets excluding ALLL.
(3) Tangible liabilities excluding AULC.

MSRs

(This section should be read in conjunction with Note 6 of Notes to Unaudited Condensed Consolidated Financial Statements.)

At September 30, 2012, we had a total of $108.1 million of capitalized MSRs representing the right to service $15.6 billion in mortgage loans. Of this $108.1 million, $36.6 million was recorded using the fair value method, and $71.5 million was recorded using the amortization method.

MSR fair 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 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. In addition, we engage a third party to provide valuation tools and assistance with our strategies with the objective to decrease the volatility from MSR fair value changes. However, volatile changes in interest rates can diminish the effectiveness of these hedges. We typically 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.

 

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Liquidity Risk

Liquidity risk is the risk of loss due to the possibility that funds may not be available to satisfy current or future commitments resulting from external macro market issues, investor and customer perception of financial strength, and events unrelated to us, such as war, terrorism, or financial institution market specific issues. In addition, the mix and maturity structure of Huntington’s balance sheet, amount of on-hand cash and unencumbered securities, and the availability of contingent sources of funding, can have an impact on Huntington’s ability to satisfy current or future funding commitments. We manage liquidity risk at both the Bank and the parent company.

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 our 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.

Bank Liquidity and Sources of Liquidity

Our primary sources of funding for the Bank are retail and commercial core deposits. At September 30, 2012, these core deposits funded 78% of total assets (110% of total loans). At September 30, 2012 and December 31, 2011, total core deposits represented 95% of total deposits.

Core deposits are comprised of interest-bearing and noninterest-bearing demand deposits, money market deposits, savings and other domestic deposits, consumer certificates of deposit both over and under $250,000, and nonconsumer certificates of deposit less than $250,000. Noncore deposits consist of brokered money market deposits and certificates of deposit, foreign time deposits, and other domestic deposits of $250,000 or more comprised primarily of public fund certificates of deposit more than $250,000.

Core deposits may increase our need for liquidity as certificates of deposit mature or are withdrawn before maturity and as nonmaturity deposits, such as checking and savings account balances, are withdrawn. Noninterest-bearing demand deposits increased $1.5 billion from December 31, 2011, but include certain large commercial deposits that may be more short-term in nature.

Demand deposit overdrafts that have been reclassified as loan balances were $15.1 million and $26.2 million at September 30, 2012 and December 31, 2011, respectively. Other domestic time deposits of $250,000 or more and brokered deposits and negotiable CDs totaled $2.1 billion and $1.7 billion at September 30, 2012 and December 31, 2011, respectively.

The following tables reflect deposit composition and short-term borrowings detail for each of the last five quarters:

 

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Table 27 - Deposit Composition

 

     2012     2011  

(dollar amounts in millions)

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

By Type

                         

Demand deposits—noninterest-bearing

   $ 12,680        27   $ 12,324        27   $ 11,797        26   $ 11,158        26   $ 9,502        22

Demand deposits—interest-bearing

     5,909        13       6,060        13       6,126        14       5,722        13       5,763        13  

Money market deposits

     14,926        32       13,756        30       13,169        29       13,117        30       13,759        32  

Savings and other domestic deposits

     4,949        11       4,961        11       4,954        11       4,698        11       4,711        11  

Core certificates of deposit

     5,817        12       6,508        14       6,920        15       6,513        15       7,084        16  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total core deposits

     44,281        95       43,609        95       42,966        95       41,208        95       40,819        94  

Other domestic deposits of $250,000 or more

     352        1       260        1       325        1       390        1       421        1  

Brokered deposits and negotiable CDs

     1,795        4       1,888        4       1,276        3       1,321        3       1,535        4  

Deposits in foreign offices

     313        —          319        —          442        1       361        1       445        1  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total deposits

   $ 46,741        100   $ 46,076        100   $ 45,009        100   $ 43,280        100   $ 43,220        100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total core deposits:

                         

Commercial

   $ 19,207        43   $ 18,324        42   $ 17,101        40   $ 16,366        38   $ 15,526        38

Consumer

     25,074        57       25,285        58       25,865        60       24,842        62       25,293        62  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total core deposits

   $ 44,281        100   $ 43,609        100   $ 42,966        100   $ 41,208        100   $ 40,819        100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Management expects the FDIC to allow the extended or unlimited coverage for noninterest-bearing accounts to expire on December 31, 2012, as scheduled. We anticipate the expiration of the FDIC coverage will have a minimal impact on our liquidity position.

Table 28 - Federal Funds Purchased and Repurchase Agreements

 

     2012     2011    

 

 

(dollar amounts in millions)

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

Balance at period-end

          

Federal Funds purchased and securities sold under agreements to repurchase

   $ 1,249     $ 1,191     $ 1,482     $ 1,434     $ 2,201  

Other short-term borrowings

     11       15       22       7       24  

Weighted average interest rate at period-end

          

Federal Funds purchased and securities sold under agreements to repurchase

     0.14     0.19     0.14     0.17     0.16

Other short-term borrowings

     1.99       1.57       0.81       2.74       1.01  

Maximum amount outstanding at month-end during the period

          

Federal Funds purchased and securities sold under agreements to repurchase

   $ 1,464     $ 1,286     $ 1,590     $ 1,752     $ 2,431  

Other short-term borrowings

     16       26       23       18       53  

Average amount outstanding during the period

          

Federal Funds purchased and securities sold under agreements to repurchase

   $ 1,315     $ 1,365     $ 1,501     $ 1,707     $ 2,200  

Other short-term borrowings

     15       26       11       21       51  

Weighted average interest rate during the period

          

Federal Funds purchased and securities sold under agreements to repurchase

     0.15     0.15     0.14     0.17     0.16

Other short-term borrowings

     1.67       0.92       1.76       0.95       0.56  

 

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To the extent we are unable to obtain sufficient liquidity through core deposits, we may meet our liquidity needs through sources of wholesale funding or asset securitization or sale. These sources of wholesale funding include other domestic time deposits of $250,000 or more, brokered deposits and negotiable CDs, deposits in foreign offices, short-term borrowings, FHLB advances, other long-term debt, and subordinated notes. At September 30, 2012, total wholesale funding was $5.2 billion, a decrease from $6.6 billion at December 31, 2011. During the 2012 second quarter, Bank obligations of $600 million matured. An additional $65 million of Bank obligations will mature in October 2012.

The Bank also has access to the Federal Reserve’s discount window. These borrowings are secured by commercial loans and home equity lines-of-credit. The Bank is also a member of the FHLB, and as such, has access to advances from this facility. These advances are generally secured by residential mortgages, other mortgage-related loans, and available-for-sale securities. Information regarding amounts pledged, for the ability to borrow if necessary, and the unused borrowing capacity at both the Federal Reserve Bank and the FHLB, is outlined in the following table:

Table 29 - Federal Reserve and FHLB Borrowing Capacity

 

     September 30,      December 31,  

(dollar amounts in billions)

   2012      2011  

Loans and securities pledged:

     

Federal Reserve Bank

   $ 10.3      $ 10.5  

FHLB

     8.6        8.3  
  

 

 

    

 

 

 

Total loans and securities pledged

   $ 18.9      $ 18.8  

Total unused borrowing capacity at Federal Reserve Bank and FHLB

   $ 11.0      $ 10.5  

On October 11, 2012, The Huntington National Bank, a wholly owned subsidiary of Huntington, sold $1.0 billion of automobile loans and installment sales contracts to Huntington Auto Trust 2012-2, a newly formed statutory trust established by The Huntington National Bank, in a transaction that was accounted for as a sale under generally accepted accounting principles. Huntington Auto Trust 2012-2 acquired the loans with proceeds of the issuance of $1.0 billion of asset-backed notes in transactions exempt from registration under the Securities Act of 1933, as amended.

At September 30, 2012, we believe the Bank had sufficient liquidity to meet its cash flow obligations for the foreseeable future.

Parent Company Liquidity

The parent company’s 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 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 or equity securities.

At September 30, 2012 and December 31, 2011, the parent company had $0.9 billion, respectively, in cash and cash equivalents.

Based on the current quarterly dividend of $0.04 per common share, cash demands required for common stock dividends are estimated to be approximately $34.2 million per quarter. 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.

Based on a regulatory dividend limitation, the Bank could not have declared and paid a dividend to the parent company at September 30, 2012, without regulatory approval. We do not anticipate that the Bank will request regulatory approval to pay dividends in the near future as we continue to build Bank regulatory capital above its already well-capitalized level. 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 common and preferred dividends previously discussed, the parent company does not have any significant cash demands. There are no maturities of parent company obligations until 2013, when a debt maturity of $50.0 million is payable. It is our policy to keep operating cash on hand at the parent company to satisfy any cash demands for a minimum of the next 18 months.

 

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We sponsor a non-contributory defined benefit pension plan covering substantially all employees hired or rehired prior to January 1, 2010. The Plan provides benefits based upon length of service and compensation levels. Our policy is to contribute an annual amount that is at least equal to the minimum funding requirements. Although not required, Huntington may choose to make a cash contribution to the Plan up to the maximum deductible limit in the 2012 plan year. The Bank and other subsidiaries fund approximately 90% of pension contributions. Funding requirements are calculated annually as of the end of the year and are heavily dependent on the value of our pension plan assets and the interest rate used to discount plan obligations. To the extent that the low interest rate environment continues, including as a result of the Federal Reserve Maturity Extension Program, or the pension plan does not earn the expected asset return rates, annual pension contribution requirements in future years could increase and such increases could be significant. Any additional pension contributions are not expected to significantly impact liquidity. Although not required, Huntington made a $75 million contribution to the Plan in the 2012 third quarter.

During the first nine months of 2012, we redeemed $194.3 million of trust preferred securities, resulting in a net gain of $0.8 million. The trust preferred securities were redeemed at the redemption price (as a percentage of the liquidation amount) plus accrued and unpaid distributions to the redemption date. These redemptions were funded from our existing cash and were consistent with the capital plan we submitted to the Federal Reserve.

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.

Basel III includes short-term liquidity (Liquidity Coverage Ratio) and long-term funding (Net Stable Funding Ratio) standards. The Liquidity Coverage Ratio, which is scheduled to take effect on January 1, 2015, is designed to ensure that banking organizations maintain an adequate level of cash, or assets that can readily be converted to cash, to meet potential short-term liquidity needs. The Net Stable Funding Ratio, which is scheduled to take effect by January 1, 2018, is designed to promote a stable maturity structure of assets and liabilities of banking organizations over a one-year time horizon. These requirements are subject to change by our banking regulators.

Off-Balance Sheet Arrangements

In the normal course of business, we enter into various off-balance sheet arrangements. These arrangements include financial guarantees contained in standby letters-of-credit issued by the Bank and commitments by the Bank to sell mortgage loans.

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, losses are recognized in the provision for credit losses. At September 30, 2012, we had $0.5 billion of standby letters-of-credit outstanding, of which 80% were collateralized. Included in this $0.5 billion are letters-of-credit issued by the Bank that support securities that were issued by our customers and remarketed by The Huntington Investment Company, our broker-dealer subsidiary.

We enter into forward contracts relating to the mortgage banking business to hedge the exposures we have from commitments to extend new residential mortgage loans to our customers and from our mortgage loans held for sale. At September 30, 2012 and December 31, 2011, we had commitments to sell residential real estate loans of $866.9 million and $629.0 million, respectively. These contracts mature in less than one year.

We do not believe that off-balance sheet arrangements will have a material impact on our liquidity or capital resources.

Operational Risk

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; 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. For example, we actively and continuously monitor cyber-attacks such as attempts related to eFraud and loss of sensitive customer data. We constantly evaluate internal systems, processes and controls to mitigate loss from cyber-attacks and, to date, have not experienced any material losses.

 

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To mitigate operational risks, we have established 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. Both of these committees report any significant findings and recommendations to the Risk Management Committee. Additionally, potential concerns may be escalated to our ROC, as appropriate.

The goal of this framework is to implement effective operational risk techniques and strategies, minimize operational and fraud losses, 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, 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 table below reflects activity in the representations and warranties reserve:

Table 30 - Summary of Reserve for Representations and Warranties on Mortgage Loans Serviced for Others

 

     2012     2011  

(dollar amounts in thousands)

   Third     Second     First     Fourth     Third  

Reserve for representations and warranties, beginning of period

   $ 26,298     $ 24,802     $ 23,218     $ 23,854     $ 24,497  

Reserve charges

     (2,833     (2,677     (2,056     (4,736     (3,340

Provision for representations and warranties

     4,003       4,173       3,640       4,100       2,697  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reserve for representations and warranties, end of period

   $ 27,468     $ 26,298     $ 24,802     $ 23,218     $ 23,854  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Table 31 - Mortgage Loan Repurchase Statistics

 

      2012     2011  

(dollar amounts in thousands)

   Third     Second     First     Fourth     Third  

Number of loans sold

     6,093       5,935       6,621       5,461       3,877  

Amount of loans sold (UPB)

   $ 992,310     $ 890,592     $ 1,008,055     $ 815,119     $ 529,722  

Number of loans repurchased (1)

     44       55       41       34       43  

Amount of loans repurchased (UPB) (1)

   $ 5,721     $ 8,998     $ 4,841     $ 5,019     $ 7,325  

Number of claims received

     139       227       134       101       96  

Successful dispute rate (2)

     44     48     46     63     27

Number of make whole payments (3)

     39       47       33       20       38  

Amount of make whole payments (3)

   $ 2,815     $ 2,130     $ 1,611     $ 1,156     $ 3,392  

 

(1) 

Loans repurchased are loans that fail to meet the purchaser’s terms.

(2) 

Successful disputes are a percent of close out requests.

(3) 

Make whole payments are payments to reimburse for losses on foreclosed properties.

Foreclosure Documentation

Compared to the high volume servicers, we service a relatively low volume of residential mortgage foreclosures. We have reviewed our residential foreclosure process. We have not found evidence of financial injury to any borrowers from any foreclosure by the Bank that should not have proceeded. We continuously review our processes and controls to ensure that our foreclosure processes are appropriate.

 

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Compliance Risk

Financial institutions are subject to several laws, rules, and regulations at both the federal and state levels. These broad-based mandates include, but are not limited to, expectations relating to anti-money laundering, lending limits, client privacy, fair lending, 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.

Capital

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 Company’s overall capital adequacy. We believe our current levels of both regulatory capital and shareholders’ equity are adequate.

Regulatory Capital

BASEL III and the Dodd-Frank Act

In June 2012, the FRB, OCC, and FDIC (collectively, the Agencies) each issued NPRs that would revise and replace the Agencies’ current capital rules to align with the BASEL III capital standards and meet certain requirements of the Dodd-Frank Act. Certain requirements of the NPRs would establish more restrictive capital definitions, higher risk-weightings for certain asset classes, capital buffers and higher minimum capital ratios. The NPRs were in a comment period through October 22, 2012, and are subject to further modification by the Agencies.

We are currently evaluating the impact of the NPRs on our regulatory capital ratios and estimate a reduction of approximately 150 basis points to our BASEL I Tier I Common risk-based capital ratio based on our existing balance sheet composition. We anticipate that our capital ratios, on a BASEL III basis, would continue to exceed the well-capitalized minimum requirements. For additional discussion, please see BASEL III and the Dodd-Frank Act section within the Capital section.

Capital Planning

In connection with its increased focus on the adequacy of regulatory capital and risk management for larger financial institutions, in late 2011, the FRB finalized rules to require banks with assets over $50.0 billion to submit capital plans annually. Per the FRB’s rule, our submission included a comprehensive capital plan supported by an assessment of expected uses and sources of capital over a given planning time period under a range of expected and stress scenarios. We participated in the FRB’s CapPR process and made our capital plan submission in January 2012. On March 14, 2012, we announced that the FRB had completed its review of our capital plan submission and did not object to our proposed capital actions. The planned actions included the potential repurchase of up to $182.0 million of common stock and a continuation of our current common dividend through the 2013 first quarter.

In October 2012, the Federal Reserve published two final rules with stress testing requirements for certain bank holding companies, state member banks, and savings and loan holding companies. We will be subject to the Federal Reserve’s supervisory stress tests beginning in late 2013, however as in the prior year, we are subject to CapPR and will conduct internal stress testing as part of the completion of our annual Capital Plan. We are required to submit our Capital Plan to the Federal Reserve no later than January 5, 2013.

In October 2012, the OCC issued its Annual Stress Test final rule. In that ruling, the OCC stipulated it will consult closely with the Federal Reserve to provide common stress scenarios for use at both the depository institution and holding company levels. The OCC has deferred the requirement for us to complete separate annual stress tests at the bank-level until 2013. For additional discussion, refer to the Updates to Risk Factors section located in the Additional Disclosures section of this MD&A.

Capital Adequacy

The FRB establishes capital adequacy requirements, including well-capitalized standards for the Company. The OCC establishes similar capital adequacy requirements and standards for the Bank. Regulatory capital primarily consists of Tier 1 risk-based capital and Tier 2 risk-based capital. The sum of Tier 1 risk-based capital and Tier 2 risk-based capital equals our total risk-based capital.

 

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Risk-based capital guidelines require a minimum level of capital as a percentage of “risk-weighted assets”. Risk-weighted assets consist of total assets plus certain off-balance sheet and market items, subject to adjustment for predefined credit risk factors. At September 30, 2012, both the Company and the Bank were well-capitalized under applicable regulatory capital adequacy guidelines.

Tier 1 common equity, a non-GAAP financial measure, is used by banking regulators, investors and analysts to assess and compare the quality and composition of our capital with the capital of other financial services companies. We use Tier 1 common equity, along with the other capital measures, to assess and monitor our capital position. Tier 1 common equity is defined as Tier 1 capital less elements of Tier 1 capital not in the form of common equity (e.g. perpetual preferred stock, noncontrolling interests in subsidiaries, and trust preferred capital debt securities).

The following table presents risk-weighted assets and other financial data necessary to calculate certain financial ratios, including the Tier 1 common equity ratio, which we use to measure capital adequacy:

Table 32 - Capital Adequacy

 

     2012     2011  

(dollar amounts in millions)

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

Consolidated capital calculations:

          

Common shareholders’ equity

   $ 5,422     $ 5,263     $ 5,164     $ 5,032     $ 5,037  

Preferred shareholders’ equity

     386       386       386       386       363  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     5,808       5,649       5,550       5,418       5,400  

Goodwill

     (444     (444     (444     (444     (444

Other intangible assets

     (144     (159     (171     (175     (188

Other intangible assets deferred tax liability (1)

     50       56       60       61       66  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total tangible equity (2)

     5,270       5,102       4,995       4,860       4,834  

Preferred shareholders’ equity

     (386     (386     (386     (386     (363
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total tangible common equity (2)

   $ 4,884     $ 4,716     $ 4,609     $ 4,474     $ 4,471  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 56,443     $ 56,623     $ 55,877     $ 54,451     $ 54,979  

Goodwill

     (444     (444     (444     (444     (444

Other intangible assets

     (144     (159     (171     (175     (188

Other intangible assets deferred tax liability (1)

     50       56       60       61       66  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total tangible assets (2)

   $ 55,905     $ 56,076     $ 55,322     $ 53,893     $ 54,413  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tier 1 capital

   $ 5,720     $ 5,714     $ 5,709     $ 5,557     $ 5,488  

Preferred shareholders’ equity

     (386     (386     (386     (386     (363

Trust preferred securities

     (335     (449     (532     (532     (565

REIT preferred stock

     (50     (50     (50     (50     (50
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tier 1 common equity (2)

   $ 4,949     $ 4,829     $ 4,741     $ 4,589     $ 4,510  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Risk-weighted assets (RWA)

   $ 48,147     $ 47,890     $ 46,716     $ 45,891     $ 44,376  

Tier 1 common equity / RWA ratio (2)

     10.28     10.08     10.15     10.00     10.17

Tangible equity / tangible asset ratio (2)

     9.43       9.10       9.03       9.02       8.88  

Tangible common equity / tangible asset ratio (2)

     8.74       8.41       8.33       8.30       8.22  

Tangible common equity / RWA ratio (2)

     10.14       9.85       9.86       9.75       10.08  

 

(1) Other intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate.
(2) Tangible equity, Tier 1 common equity, tangible common equity, and tangible assets are non-GAAP financial measures. Additionally, any ratios utilizing these financial measures are also non-GAAP. These financial measures have been included as they are considered to be critical metrics with which to analyze and evaluate financial condition and capital strength. Other companies may calculate these financial measures differently.

 

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Our Tier 1 common equity risk-based ratio improved 28 basis points to 10.28% at September 30, 2012, compared with 10.00% at December 31, 2011. This increase primarily reflected the combination of an increase in retained earnings and a reduction in the disallowed tax deferred asset, partially offset by an increase in risk-weighted assets, the repurchase of 10.2 million common shares, and the impacts related to the payments of dividends.

The following table presents certain regulatory capital data at both the consolidated and Bank levels for each of the past five quarters:

Table 33 - Regulatory Capital Data

 

            2012     2011  

(dollar amounts in millions)

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

Total risk-weighted assets

     Consolidated       $ 48,147     $ 47,890     $ 46,716     $ 45,891     $ 44,376  
     Bank         48,033       47,786       46,498       45,651       44,242  

Tier 1 risk-based capital

     Consolidated         5,720       5,714       5,709       5,557       5,488  
     Bank         4,818       4,636       4,437       4,245       4,159  

Tier 2 risk-based capital

     Consolidated         1,192       1,190       1,186       1,221       1,216  
     Bank         1,196       1,294       1,372       1,508       1,830  

Total risk-based capital

     Consolidated         6,912       6,904       6,895       6,778       6,704  
     Bank         6,014       5,930       5,809       5,753       5,989  

Tier 1 leverage ratio

     Consolidated         10.29     10.34     10.55     10.28     10.24
     Bank         8.68       8.42       8.24       7.89       7.79  

Tier 1 risk-based capital ratio

     Consolidated         11.88       11.93       12.22       12.11       12.37  
     Bank         10.03       9.70       9.54       9.30       9.40  

Total risk-based capital ratio

     Consolidated         14.36       14.42       14.76       14.77       15.11  
     Bank         12.52       12.41       12.49       12.60       13.54  

The decrease in our consolidated Tier 1 risk-based capital ratios compared with December 31, 2011, primarily reflected an increase in risk-weighted assets, the redemption of $194 million in trust preferred securities, the repurchase of 10.2 million common shares, and the impacts related to the payments of dividends, partially offset by an increase in retained earnings and a reduction in the disallowed deferred tax asset.

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 $5.8 billion at September 30, 2012, representing a $0.4 billion, or 7%, increase compared with December 31, 2011, primarily reflecting an increase in retained earnings.

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 October 18, 2012, our board of directors declared a quarterly cash dividend of $0.04 per common share, payable in January 2013. Cash dividends of $0.04 per common share were also declared on January 19, 2012, April 18, 2012, and July 19, 2012. Our 2012 capital plan to the FRB (see Capital Planning section above) included the continuation of our current common dividend through the 2013 first quarter.

On October 18, 2012, 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 in January 2013. Cash dividends of $21.25 per share were also declared on January 19, 2012, April 28, 2012, and July 19, 2012.

 

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On October 18, 2012, our board of directors also declared a quarterly cash dividend on our Floating Rate Series B Non-Cumulative Perpetual Preferred Stock of approximately $7.60 per share. The dividend is payable in January 2013. Cash dividends of approximately $7.89 per share, approximately $7.92 per share, and approximately $8.18 per share were also declared on July 19, 2012, April 28, 2012, and January 19, 2012, respectively.

Share Repurchases

From time to time the Board authorizes the Company to repurchase shares of our common stock. Although we announce when the Board 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 FRB’s response to our capital plan.

Our board of directors has authorized a share repurchase program consistent with our capital plan. During the three-month period ended September 30, 2012, we repurchased 3.7 million common shares at a weighted average share price of $6.70. During the nine-month period ended September 30, 2012, we repurchased 10.2 million common shares at a weighted average share price of $6.42.

 

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BUSINESS SEGMENT DISCUSSION

Overview

We have four major business segments: Retail and Business Banking; Regional and Commercial Banking; Automobile Finance and Commercial Real Estate; and Wealth Advisors, Government Finance, and Home Lending. A Treasury / Other function also includes our insurance business and other unallocated assets, liabilities, revenue, and expenses. While this section reviews financial performance from a business segment perspective, it should be read in conjunction with the Discussion of Results of Operations, Note 18 of the Notes to Unaudited Condensed Consolidated Financial Statements, and other sections for a full understanding of our consolidated financial performance.

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.

Optimal Customer Relationship (OCR)

Our OCR initiative is a cross-business segment strategy designed to increase overall customer profitability and retention by deepening product and service penetration to consumer and commercial customers. We believe this can be accomplished by taking our broad array of services and products and delivering them through a rigorous and disciplined sales management process that is consistent across all business segments and regions. It is also supported by robust sales and referral technology.

OCR was introduced in late 2009. Through 2010, much of the effort was spent on defining processes, sales training, and systems development to fully capture and measure OCR performance metrics. In 2011, we introduced OCR-related metrics for commercial relationships, which complements the previously disclosed consumer OCR-related metrics. In 2012, we are seeing the results in our revenue growth.

CONSUMER OCR PERFORMANCE

For consumer OCR performance, there are three key performance metrics: (1) the number of checking account households, (2) the number of services penetration per consumer checking account household, and (3) the revenue generated. Consumer households from all business segments are included.

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 since it typically represents the primary banking relationship product. We count additional products by type, not number of products. 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 four or more services is viewed to be more profitable and loyal. The overall objective, therefore, is to decrease the percentage of 1-3 services per consumer checking account household, while increasing the percentage of those with 4 or more services.

The following table presents consumer checking account household OCR metrics:

Table 34 - Consumer Checking Household OCR Cross-sell Report

 

     2012     2011  
     Third     Second     First     Fourth     Third  

Number of households

     1,203,508       1,167,413       1,134,444       1,095,638       1,073,708  

Product Penetration by Number of Services

          

1 Service

     4.3     3.6     3.7     4.1     4.4

2-3 Services

     19.8       20.4       21.2       22.4       22.8  

4+ Services

     75.9       76.0       75.1       73.5       72.8  

Total revenue (in millions)

   $ 246.0     $ 249.7     $ 236.5     $ 230.6     $ 251.9  

 

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Our emphasis on cross-sell, coupled with customers increasingly being attracted by 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 over four products at the end of the 2012 third quarter was 75.9%, up from 73.5% at the end of last year. For the first nine-month period of 2012, consumer checking account households grew at a 12.7% annualized rate. Total consumer checking account household revenue in the 2012 third quarter was $246.0 million, down $3.8 million, or 2%, from the 2012 second quarter. Total consumer checking account household revenue was down $5.9 million, or 2%, from the year-ago quarter due to the Durbin amendment.

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. Multiple sales of the same type of product are counted as one product, the same as consumer.

The following table presents commercial relationship OCR metrics:

Table 35 - Commercial Relationship OCR Cross-sell Report

 

     2012     2011  
     Third     Second     First     Fourth     Third  

Commercial Relationships

     149,333       147,190       142,947       138,357       135,826  

Product Penetration by Number of Services

          

1 Service

     25.9     26.5     27.2     28.4     29.7

2-3 Services

     40.6       40.9       40.2       40.2       41.1  

4+ Services

     33.5       32.6       32.7       31.4       29.2  

Total revenue (in millions)

   $ 175.7     $ 189.2     $ 169.7     $ 175.4     $ 175.5  

 

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By focusing on targeted relationships we are able to achieve higher product service distribution among our commercial relationships. Our expanded product offerings allow us to focus not only on the credit driven relationship, but leverage these relationships to generate a deeper share of wallet. The percent of commercial relationships utilizing over four products at the end of the 2012 third quarter was 33.5%, up from 29.2% from the prior year. For the first nine-month period of 2012, commercial relationships grew at a 7.9% annualized rate. Total commercial relationship revenue in the 2012 third quarter was $175.7 million, down $13.5 million, or 7%, from the 2012 second quarter, and up $0.2 million, or 1.7%, higher than the year-ago quarter. This was primarily driven by capital markets activities.

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 four business segments from Treasury / Other. We utilize a full-allocation methodology, where all Treasury / Other expenses, except those related to our insurance business, reported Significant Items (except for the goodwill impairment), and a small amount of other residual unallocated expenses, are allocated to the four business segments.

Funds Transfer Pricing (FTP)

We use an active and centralized FTP methodology to attribute appropriate net interest income to the business segments. The intent of the FTP methodology is to eliminate all interest rate risk from the business segments by providing matched cash flows funding of assets and liabilities. The result is to centralize the financial impact, management, and reporting of interest rate and liquidity 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 term assets (or liabilities), and includes an estimate for the cost of liquidity (liquidity premium). Deposits of an indeterminate maturity receive an FTP credit based on a combination of average lives and replicating portfolio pool rates. Other assets, liabilities, and capital are charged (credited) with a four-year moving average FTP rate. The denominator in the net interest margin calculation has been modified to add the amount of net funds provided by each business segment for all periods presented.

Treasury / Other

The Treasury / Other function includes revenue and expense related to our insurance business, and assets, liabilities, and equity not directly assigned or allocated to one of the four 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 insurance income, 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 any insurance-related expenses, as well as 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.

Net Income by Business Segment

We reported net income of $473.7 million during the first nine-month period of 2012. This compared with net income of $415.8 million during the first nine-month period of 2011. The segregation of net income by business segment for the first nine-month period of 2012 and 2011 is presented in the following table:

 

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Table 36 - Net Income by Business Segment

 

     Nine Months Ended September 30,  

(dollar amounts in thousands)

   2012      2011  

Retail and Business Banking

   $ 72,957      $ 139,255  

Regional and Commercial Banking

     72,851        69,191  

AFCRE

     173,557        151,966  

WGH

     58,885        18,109  

Treasury/Other

     95,493        37,234  
  

 

 

    

 

 

 

Total net income

   $ 473,743      $ 415,755  
  

 

 

    

 

 

 

Average Loans/Leases and Deposits by Business Segment

The segregation of total average loans and leases and total average deposits by business segment for the first nine-month period of 2012 is presented in the following table:

Table 37 - Average Loans/Leases and Deposits by Business Segment

 

      Nine Months Ended September 30, 2012  

(dollar amounts in millions)

   Retail and
Business Banking
     Regional and
Commercial
Banking
     AFCRE      WGH      Treasury /
Other
    TOTAL  

Average Loans/Leases

                

Commercial and industrial

   $ 3,318      $ 9,549      $ 2,029      $ 785      $ 75     $ 15,756  

Commercial real estate

     554        385        4,776        169        (1     5,883  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial

     3,872        9,934        6,805        954        74       21,639  

Automobile

     —           —           4,540        —           —          4,540  

Home equity

     7,446        22        1        825        11       8,305  

Residential mortgage

     1,033        8        —           4,155        5       5,201  

Other consumer

     354        5        89        40        (25     463  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total consumer

     8,833        35        4,630        5,020        (9     18,509  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total loans and leases

   $ 12,705      $ 9,969      $ 11,435      $ 5,974      $ 65     $ 40,148  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Average Deposits

                

Demand deposits—noninterest-bearing

   $ 4,667      $ 2,919      $ 492      $ 3,591      $ 221     $ 11,890  

Demand deposits—interest-bearing

     4,598        105        48        1,042        7       5,800  

Money market deposits

     7,541        1,776        248        4,050        1       13,616  

Savings and other domestic deposits

     4,740        13        15        156        —          4,924  

Core certificates of deposit

     6,280        25        2        105        6       6,418  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total core deposits

     27,826        4,838        805        8,944        235       42,648  

Other deposits

     167        218        64        712        1,070       2,231  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total deposits

   $ 27,993      $ 5,056      $ 869      $ 9,656      $ 1,305     $ 44,879  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Retail and Business Banking

Table 38 - Key Performance Indicators for Retail and Business Banking

 

     Nine Months Ended September 30,     Change  

(dollar amounts in thousands unless otherwise noted)

   2012     2011     Amount     Percent  

Net interest income

   $ 656,216     $ 702,666     $ (46,450     (7 )% 

Provision for credit losses

     103,233       94,825       8,408       9  

Noninterest income

     286,745       311,598       (24,853     (8

Noninterest expense

     727,486       705,201       22,285       3  

Provision for income taxes

     39,285       74,983       (35,698     (48
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 72,957     $ 139,255     $ (66,298     (48 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Number of employees (full-time equivalent)

     5,745       5,641       104       2

Total average assets (in millions)

   $ 14,283     $ 13,345     $ 938       7  

Total average loans/leases (in millions)

     12,705       11,953       752       6  

Total average deposits (in millions)

     27,993       28,734       (741     (3

Net interest margin

     3.14     3.25     (0.11 )%      (3

NCOs

   $ 121,785     $ 125,360     $ (3,575     (3

NCOs as a % of average loans and leases

     1.28     1.40     (0.12 )%      (9

Return on average common equity

     6.9       13.1       (6.2     (47

2012 First Nine Months vs. 2011 First Nine Months

Retail and Business Banking reported net income of $73.0 million in the first nine-month period of 2012. This was a decrease of $66.3 million, or 48%, when compared to the year-ago period.

Results for the first nine months of the year were negatively impacted by the Durbin Amendment of the Dodd-Frank Act, which drove a net $32.6 million reduction in debit card income. This was less than an expected $51 million reduction because of offsetting account growth. Service charges on deposit accounts increased $14.2 million or 10% as a direct result of a 12.1% increase in the number of households. Demand deposit balances increased materially when compared to the year-ago period, including a 25% increase in noninterest-bearing demand deposits. Money market deposits were down 5% and core certificate of deposits were down 20% compared to the year-ago period due to a focus on deposit mix and funding margin management. Household growth continued to outperform expectations with marketing expenses marginally down compared to prior year. Finally, average portfolio loan balances were up 6% over the same period prior year, with a 13 basis point increase in the portfolio spread.

The decrease in net income reflected a combination of factors including:

 

   

$46.5 million, or 7%, decrease in net interest income.

 

   

$8.4 million, or 9%, increase in the provision for credit losses.

 

   

$24.9 million, or 8%, decrease in noninterest income.

 

   

$22.3 million, or 3%, increase in noninterest expense.

The decrease in net interest income from the year-ago period reflected:

 

   

$11.3 million of lower equity funding related to lower rate environment.

 

   

23 basis points decrease in deposit spread and $741 million decline in balances resulted in a $58.0 million reduction in net interest income.

 

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Partially offset by:

 

   

$0.8 billion, or 6%, increase in total average loans and leases, with 13 basis point of increased spread providing $24.7 million of increased margin.

The increase in total average loans and leases from the year-ago period reflected:

 

   

$361 million, or 4%, increase in consumer loans driven by $403 million or 6% increase in home equity lines.

 

   

$279 million, or 9%, increase in the C&I portfolio.

The decrease in total average deposits from the year-ago period reflected:

 

   

$1.6 billion, or 20%, decrease in core certificate of deposits, which reflected continued focus on product mix in reducing the overall cost of deposits.

 

   

$0.4 billion, or 5%, decrease in money market deposits.

Partially offset by:

 

   

$0.9 billion, or 25%, increase in noninterest-bearing demand deposits.

The increase in the provision for credit losses from the year-ago period reflected:

 

   

$8.4 million, or 9%, increase in provision for credit losses reflected financial difficulties experienced primarily by our residential mortgage and home equity second-lien loan borrowers.

The decrease in noninterest income from the year-ago period reflected:

 

   

$31.5 million, or 34%, decrease in electronic banking income, reflecting the impact of the Durbin Amendment of the Dodd-Frank Act on debit card interchange income.

 

   

$6.7 million, or 27%, decrease in other income, as the prior period reflected an increased value in a loan servicing asset.

Partially offset by:

 

   

$14.2 million, or 10%, increase in deposit service charge income due to strong household and account growth in the checking portfolio.

 

   

$6.7 million, or 43%, increase in mortgage banking income due to higher loan originations.

The increase in noninterest expense from the year-ago period reflected:

 

   

$21.2 million, or 10%, increase in personnel costs primarily related to the addition of 41 Giant Eagle and 15 Meijer In-stores branches.

 

   

$42.8 million, or 20%, increase in expense allocations.

Partially offset by:

 

   

$36.4 million lower FDIC insurance expense.

 

   

$3.4 million lower expense for the amortization of intangibles.

 

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Regional and Commercial Banking

Table 39 - Key Performance Indicators for Regional and Commercial Banking

 

     Nine Months Ended September 30,     Change  

(dollar amounts in thousands unless otherwise noted)

   2012     2011     Amount     Percent  

Net interest income

   $ 202,116     $ 178,787     $ 23,329       13

Provision for credit losses

     42,542       23,957       18,585       78  

Noninterest income

     100,724       94,657       6,067       6  

Noninterest expense

     148,219       143,040       5,179       4  

Provision for income taxes

     39,228       37,256       1,972       5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 72,851     $ 69,191     $ 3,660       5
  

 

 

   

 

 

   

 

 

   

 

 

 

Number of employees (full-time equivalent)

     710       662       48       7

Total average assets (in millions)

   $ 10,850     $ 9,062     $ 1,788       20  

Total average loans/leases (in millions)

     9,969       8,132       1,837       23  

Total average deposits (in millions)

     5,056       3,684       1,372       37  

Net interest margin

     2.79     2.95     (0.16 )%      (5

NCOs

   $ 25,688     $ 38,619     $ (12,931     (33

NCOs as a % of average loans and leases

     0.34     0.63     (0.29 )%      (46

Return on average common equity

     11.3       13.1       (1.8     (14

2012 First Nine Months vs. 2011 First Nine Months

Regional and Commercial Banking reported net income of $72.9 million for the first nine-month period of 2012. This was an increase of $3.7 million, or 5%, compared to the year-ago period. The increase in provision expense was impacted by a combination of significant loan growth and reserves allocated to new and specialty lines of business including Healthcare, Asset-Based Lending and Equipment Finance.

The Optimal Customer Relationship (OCR) initiative, which includes robust customer relationship planning, a referral tracking system, and new customer relationship management system, resulted in a 6% increase in loan originations in the first nine-month period of 2012 compared to the year-ago period. The increase in originations during the current period reflected the strategic decision to enter the syndications line of business further enhancing our Large Corporate and Middle Market capabilities, as well as our continued development of our vertical strategies. Additionally, the Commercial Relationship Manager sales teams were focused on the importance of deposit relationships, as well as partnering with Treasury Management to deliver customer-focused liquidity management solutions.

The increase in net income reflected a combination of factors including:

 

   

$23.3 million, or 13%, increase in net interest income.

 

   

$6.1 million, or 6%, increase in noninterest income.

Offset by:

 

   

$18.6 million, or 78%, increase in the provision for credit losses, primarily due to loan growth and reserves allocated to new and specialty lines of business.

 

   

$5.2 million, or 4%, increase in noninterest expense, due to our strategic initiatives investments.

The increase in net interest income from the year-ago period reflected:

 

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$1.8 billion, or 23%, increase in total average loans and leases which reflected the strategic decision to enter the syndications line of business, as well as the continued development of our vertical strategies.

 

   

$1.4 billion, or 37%, increase in average total deposits.

Partially offset by:

 

   

17 basis point decrease in the net interest margin due to funds transfer pricing impacts over the past year.

The increase in total average loans and leases from the year-ago period reflected:

 

   

$0.9 billion, or 73%, increase in the large corporate portfolio average balance due to establishing relationships with targeted prospects within our footprint.

 

   

$0.8 billion, or 71%, increase in the equipment finance portfolio average balance which reflected our focus on developing vertical strategies in business aircraft, rail industry, lender finance and syndications, as well as the purchase of a portfolio of municipal leases in late March 2012.

 

   

$0.2 billion, or 35%, increase in the healthcare portfolio average balance due to 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.

Partially offset by:

 

   

$0.2 billion, or 46%, decline in commercial loans managed by SAD reflecting improved credit quality in the portfolio.

The increase in total average deposits from the year-ago period reflected:

 

   

$1.4 billion, or 40%, increase in average core deposits, which primarily reflected a $0.9 billion increase in average noninterest-bearing deposits. Regional and Commercial Banking initiated a strategic focus to gain a deeper share of wallet with certain key relationships. This focus was specifically targeted to liquidity solutions for these customers and resulted in significant deposit growth. Middle Market accounts, such as Not-For-Profit universities, Healthcare, etc., contributed $0.8 billion of the balance growth, while Large Corporate accounts contributed $0.6 billion.

 

   

Strategic initiatives to deepen customer relationships, new and innovative product offerings, pricing discipline, and sales and retention initiatives.

The increase in the provision for credit losses from the year-ago period reflected:

 

   

A combination of significant loan growth and reserves allocated to new and specialty lines of business, partially offset by improved credit quality in the portfolio evidenced by a $12.9 million decrease in NCOs.

The increase in noninterest income from the year-ago period reflected:

 

   

$7.4 million, or 27%, increase in capital markets related income, including a $3.8 million, or 53%, increase in institutional brokerage income driven by stronger underwriting fees and fixed-income commissions compared to the prior year, a $3.3 million, or 28%, increase in sales of customer interest rate protection products, and a $0.3 million, or 4%, increase in foreign exchange revenue.

 

   

$2.3 million, or 11%, increase in commitment and other loan fees reflecting the deployment of the syndications line of business.

Partially offset by:

 

   

$1.3 million decrease in equipment finance fee income primarily reflecting gains on small ticket lease portfolios in 2011.

 

   

$1.3 million, or 4%, decrease in deposit service charge income and other Treasury Management related revenue reflecting the impact of earnings credits on the significant noninterest bearing deposit growth.

 

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$1.0 million, or 47%, decrease in operating lease income as lease originations were structured as direct finance leases beginning in the 2009 second quarter.

The increase in noninterest expense from the year-ago period reflected:

 

   

$9.7 million, or 14%, increase in personnel costs, reflecting a 7% increase in FTE employees. This increase in personnel is attributable to our strategic investments in our core footprint markets, vertical strategies, and product capabilities.

 

   

$3.0 million, or 50%, increase in allocated FDIC insurance premiums reflecting the significant total asset growth.

 

   

$2.6 million, or 17%, increase in marketing and business development expense.

Partially offset by:

 

   

$4.9 million, or 51%, decrease in legal, outside appraisal, and consulting expense.

 

   

$3.3 million, or 16%, decrease in allocated overhead expense.

 

   

$1.0 million, or 53%, decrease in operating lease expense as lease originations were structured as direct finance leases beginning in the 2009 second quarter.

 

   

$0.5 million, or 9%, decrease in outside data processing and other services.

 

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Automobile Finance and Commercial Real Estate

Table 40 - Key Performance Indicators for Automobile Finance and Commercial Real Estate

 

     Nine Months Ended September 30,     Change  

(dollar amounts in thousands unless otherwise noted)

   2012     2011     Amount     Percent  

Net interest income

   $ 266,765     $ 271,510     $ (4,745     (2 )% 

Provision (reduction in allowance) for credit losses

     (61,030     (30,050     30,980       (103

Noninterest income

     55,018       57,886       (2,868     (5

Noninterest expense

     115,802       125,652       (9,850     (8

Provision for income taxes

     93,454       81,828       11,626       14  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 173,557     $ 151,966     $ 21,591       14
  

 

 

   

 

 

   

 

 

   

 

 

 

Number of employees (full-time equivalent)

     270       273       (3     (1 )% 

Total average assets (in millions)

   $ 12,548     $ 13,157     $ (609     (5

Total average loans/leases (in millions)

     11,435       13,150       (1,715     (13

Total average deposits (in millions)

     869       782       87       11  

Net interest margin

     2.81     2.70     0.11     4  

NCOs

   $ 69,549     $ 124,877     $ (55,328     (44

NCOs as a % of average loans and leases

     0.81     1.27     (0.46 )%      (36

Return on average common equity

     38.6       29.3       9.3       32  

2012 First Nine Months vs. 2011 First Nine Months

AFCRE reported net income of $173.6 million in the first nine-month period of 2012. This was an increase of $21.6 million when compared to the year-ago period.

Results for the current year continued to be positively impacted by lower provision for credit losses resulting from reductions in required reserve levels, as the underlying credit quality of the loan portfolios improved and stabilized. Also, contributing to the increase in net income was an increase in the amount of gain recognized on automobile securitizations. The net interest margin continues to improve, reflecting adherence to our risk-based pricing disciplines. Overall, loan balances have declined compared to a year ago as a result of auto loan securitization activities, as well as the continued planned reduction of our CRE portfolio. Indirect auto loan production levels remain strong with originations through the first nine months of 2012 totaling a record $3.1 billion, up from $2.8 billion in the year ago period.

The increase in net income primarily reflected a combination of factors including:

 

   

$31.0 million, or 103%, decline in the provision for credit losses.

 

   

$9.9 million, or 8%, decrease in noninterest expense.

Partially offset by:

 

   

$4.7 million, or 2%, decrease in net interest income.

 

   

$2.9 million, or 5%, decrease in noninterest income.

The decrease in net interest income from the year ago period reflected:

 

   

$1.4 billion, or 24%, decrease in the average consumer automobile portfolio. This decrease resulted from the $1.0 billion auto loan securitization completed in the 2011 third quarter, the $1.3 billion auto loan securitization completed in the 2012 first quarter, and a $0.2 billion sale of loans completed in the 2012 third quarter.

 

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$0.3 billion, or 4%, decrease in our average commercial portfolio. This decrease primarily reflected a $0.5 billion decrease in CRE loans offset, in part, by a $0.3 billion increase in automobile floor plan loans. The decline in CRE loans continued to reflect our managed reduction of this overall exposure, particularly in the noncore portfolio.

Partially Offset by:

 

   

11 basis point increase in the net interest margin. This increase primarily reflected the continuation of a risk-based pricing strategy in the CRE portfolio that began in early 2009 and has resulted in improved spreads on CRE loan renewals and new business originated, as well as our maintaining pricing discipline on indirect auto loan originations.

The increase in total average deposits from the year-ago period reflected:

 

   

$76 million, or 10%, increase in average core deposits reflecting our commitment to strengthening relationships with core customers and prospects, as well as new commercial automobile dealer relationships.

The reduction in provision for credit losses from the year-ago period reflected:

 

   

$49.6 million, or 44%, decrease in CRE NCOs. Expressed as a percentage of related average balances, CRE NCO’s decreased to 1.25% in the first nine-month period of 2012 from 2.14% in the year-ago period.

 

   

$5.2 million, or 48%, decrease in indirect automobile-related NCOs. As a percentage of related average balances, indirect automobile-related NCO’s were 0.16% in the first nine-month period of 2012 compared to 0.24% in the year-ago period. These relatively lower charge-off levels reflect our consistent focus on high credit quality of originations combined with a continued strong resale market for used vehicles.

 

   

A reduction in required reserve levels, primarily due to lower levels of commercial NALs which totaled $139 million at September 30, 2012, down 46% compared to September 30, 2011.

The decrease in noninterest income from the year-ago period reflected:

 

   

$13.2 million, or 60%, decrease in operating lease income resulting from the continued runoff of that portfolio, as we exited that business at the end of 2008.

Partially offset by:

 

   

The $9.5 million, or 61%, increase in gain on sale of loans. This represents the difference in total gains on the securitization and sale of $1.5 billion of indirect auto loans during the first nine months of 2012 and the gain on the securitization and sale of $1.0 billion of indirect auto loans during the 2011 third quarter.

The decrease in noninterest expense from the year-ago period reflected:

 

   

$10.0 million, or 60%, decrease in operating lease expense resulting from the continued runoff of that portfolio.

 

   

$4.2 million decrease in legal, professional and other outside service expense resulting from a decrease in collection related activities, as well as increased cost deferrals associated with origination activities.

 

   

$2.2 million, or 10%, decrease in personnel costs, which primarily related to higher origination related cost deferrals resulting from increased loan origination activities.

Partially offset by:

 

   

$8.9 million increase in allocated FDIC insurance expense.

 

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Wealth Advisors, Government Finance, and Home Lending

Table 41 - Key Performance Indicators for Wealth Advisors, Government Finance, and Home Lending

 

     Nine Months Ended September 30,     Change  

(dollar amounts in thousands unless otherwise noted)

   2012     2011     Amount     Percent  

Net interest income

   $ 143,396     $ 145,614     $ (2,218     (2 )% 

Provision for credit losses

     23,185       40,036       (16,851     (42

Noninterest income

     250,370       187,443       62,927       34  

Noninterest expense

     279,988       265,161       14,827       6  

Provision for income taxes

     31,708       9,751       21,957       225  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 58,885     $ 18,109     $ 40,776       225
  

 

 

   

 

 

   

 

 

   

 

 

 

Number of employees (full-time equivalent)

     2,089       2,041       48       2

Total average assets (in millions)

   $ 7,584     $ 6,633     $ 951       14  

Total average loans/leases (in millions)

     5,974       5,338       636       12  

Total average deposits (in millions)

     9,656       7,703       1,953       25  

Net interest margin

     1.87     2.17     (0.30 )%      (14

NCOs

   $ 32,874     $ 48,002     $ (15,128     (32

NCOs as a % of average loans and leases

     0.73     1.20     (0.47 )%      (39

Return on average common equity

     10.6       3.6       7.0       194  

Mortgage banking origination volume (in millions)

   $ 3,672     $ 2,798     $ 874       31  

Noninterest income shared with other business segments(1)

     35,281       31,295       3,986       13  

Total assets under management (in billions)—eop

     15.5       14.9       0.6       4  

Total trust assets (in billions)—eop

     66.1       61.6       4.5       7  

 

(1) 

Amount is not included in noninterest income reported above.

eop—End of Period.

2012 First Nine Months vs. 2011 First Nine Months

WGH reported net income of $58.9 million in the first nine-month period of 2012. This was an increase of $40.8 million, or 225%, when compared to the year-ago period.

The improved results for 2012 were largely driven by an increase in mortgage banking revenue attributable to increased mortgage loan originations and the positive impact of net MSR hedge activity. Growth in loan and deposit balances was also very strong, as average loan balances increased 12% and average deposit balances increased 25%, with core deposits increasing by 37%. In the wealth management group, brokerage income declined $4.7 million, or 13%, from the prior period as a result of a reduction in annuity product sales partially offset by an increase in sales of market-linked certificates of deposit. Trust and asset management income was flat the first nine months of 2011, although total trust assets increased to $66.1 billion.

The increase in net income reflected a combination of factors including:

 

   

$62.9 million, or 34%, increase in noninterest income.

 

   

$16.9 million, or 42%, decrease in the provision for credit losses.

Partially offset by:

 

   

$14.8 million, or 6%, increase in noninterest expense.

 

   

$2.2 million, or 2%, decrease in net interest income.

The decrease in net interest income from the year-ago period reflected:

 

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30 basis point decrease in the net interest margin mainly due to compressed deposit margins resulting from declining rates and reduced funds transfer pricing rates on collateralized and shorter-term deposits.

Partially offset by:

 

   

$0.6 billion, or 12%, increase in average total loans and leases.

 

   

$2.0 billion, or 25%, increase in average total deposits.

The increase in total average loans and leases from the year-ago period reflected:

 

   

$0.6 billion, or 17%, increase in the residential mortgage portfolio driven by historically low interest rates.

The increase in average total deposits from the year-ago period reflected:

 

   

$1.4 billion increase in short-term commercial deposits.

 

   

$0.3 billion increase in deposits generated through the wealth management group.

The increase in noninterest income from the year-ago period reflected:

 

   

$63.3 million, or 149%, increase in mortgage banking income due to an increase in mortgage loan originations and the positive impact of net MSR activity.

 

   

$2.9 million, or 60%, increase in other noninterest income due primarily to a gain on sale of certain Low Income Housing Tax Credit investments.

Partially offset by:

 

   

$4.7 million, or 13%, decrease in brokerage income due to a decrease in annuity product sales partially offset by an increase in sales of market-linked certificates of deposit.

The increase in noninterest expense from the year-ago period reflected:

 

   

$11.1 million, or 22%, increase in other expenses, primarily due to loan system conversion costs, increased mortgage volume, and an increase in allocated costs.

 

   

$8.7 million, or 6%, increase in personnel costs, which reflected higher sales commissions and loan origination costs primarily related to the increased mortgage origination volume.

 

   

$5.8 million, or 29%, increase in outside data processing and other services, reflecting a mortgage system conversion and increased mortgage volume.

Partially offset by:

 

   

$7.0 million, or 54%, decrease in deposit and other insurance, primarily allocated FDIC insurance.

 

   

$2.4 million, or 96%, decrease in OREO and foreclosure expense, reflecting OREO expense now being booked in Treasury and Other.

 

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ADDITIONAL DISCLOSURES

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 economic conditions, including impacts from the implementation of the Budget Control Act of 2011 as well as the continuing economic uncertainty in the US, the European Union, and other areas; (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 introduced to implement 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, and regulations including those related to the Dodd-Frank Wall Street Reform and Consumer Protection Act; 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 2011 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 and proposed Basel III definitions, and

 

   

Tangible common equity to risk-weighted assets using Basel I definition.

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 Company’s 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 may be considered non-GAAP financial measures.

Because there are no standardized definitions for these non-regulatory capital ratios, the Company’s 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.

Risk Factors

Information on risk is discussed in the Risk Factors section included in Item 1A of our 2011 Form 10-K. Additional information regarding risk factors can also be found in the Risk Management and Capital discussion of this report.

 

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Updates to Risk Factors

Bank regulators and other regulations, including proposed Basel capital standards and Federal Reserve guidelines, may require higher capital levels, impacting our ability to pay common stock dividends or repurchase our common stock.

In June 2012, the FRB, OCC, and FDIC (collectively, the Agencies) issued three Notices of Proposed Rulemaking (NPRs) that would revise and replace the Agencies’ current capital rules to align with the BASEL III capital standards and meet certain requirements of the Dodd-Frank Act. Certain requirements of the proposed NPRs would establish more restrictive capital definitions, higher risk-weightings for certain asset classes, capital buffers and higher minimum capital ratios. The proposed NPRs were in a comment period through October 22, 2012, and are subject to further modification by the Agencies. See the Capital section within Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In 2011, the Federal Reserve issued guidelines for evaluating proposals by certain bank holding companies, including Huntington, to undertake capital actions in 2012, such as increasing dividend payments or repurchasing or redeeming stock. This process is known as the Federal Reserve’s Capital Plan Review. Pursuant to those Federal Reserve guidelines, Huntington submitted its proposed capital plan to the Federal Reserve in January 2012. On March 14, 2012, we were notified by the Federal Reserve that it had not objected to our proposed capital actions included in our capital plan. These actions included the potential repurchase of up to $182 million of common stock and a continuation of our current common dividend through the first quarter of 2013.

The Federal Reserve is expected to undertake these capital plan reviews on a regular basis in the future. There can be no assurance that the Federal Reserve will respond favorably to our capital plan as part of their future capital plan reviews, and the Federal Reserve or other regulatory capital requirements may limit or otherwise restrict how we utilize our capital, including common stock dividends and stock repurchases. Although not currently anticipated, our regulators may require us to raise additional capital in the future. Issuing additional common stock may dilute existing stockholders.

The Federal Reserve has issued a proposed rule that, in addition to the broader Basel III capital reforms, will implement the application of the Federal Reserve’s capital plans rule, including the requirement to maintain capital above 5% for the Tier 1 Common risk-based capital ratio under both expected and stressed conditions.

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

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

Note 16 of the Notes to Unaudited Condensed Consolidated Financial Statements updates the status of litigation concerning Cyberco Holdings, Inc. Although the bank maintains litigation reserves related to this case, the ultimate resolution of the matter, if unfavorable, may be material to our results of operations for a particular reporting period. (For further discussion, see Note 16 of the Notes to Unaudited Condensed Consolidated Financial Statements.)

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 2011 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.

 

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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 2011 Form 10-K.

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, as well as additional discussion regarding fair value measurements, can be found in Note 13 of the Notes to Unaudited Condensed Consolidated Financial Statements.

Below is a brief description of how fair value is determined for categories that have unobservable inputs.

Available-for-sale securities

Consist of certain asset-backed securities, pooled-trust-preferred securities, private-label CMOs, and municipal securities for which fair value is estimated. Assumptions used to determine the fair value of these securities have greater subjectivity due to the lack of observable market transactions. Generally, there are only limited trades of similar instruments and a discounted cash flow approach is used to determine fair value.

MSRs

MSRs do not trade in an active, open market with readily observable prices. Although sales of MSRs do occur, the precise terms and conditions typically are not readily available. Fair value is determined on an income approach model based upon month-end interest rate curve and prepayment assumptions.

Automobile loans

Effective January 1, 2010, we consolidated an automobile loan securitization that previously had been accounted for as an off-balance sheet transaction. We elected to account for the automobile loan receivables and the associated notes payable at fair value per guidance supplied in ASC 825, “Financial Instruments”.

 

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The key assumptions used to determine the fair value of the automobile loan receivables included a projection 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. The associated notes payable are valued based upon interest rates for similar financial instruments.

Business Combinations

On March 30, 2012, Huntington acquired the loans, deposits, and certain other assets and liabilities of Fidelity Bank located in Dearborn, Michigan from the FDIC. Assets acquired and liabilities assumed are recorded at fair value in accordance with ASC 805, “Business Combinations”.

Recent Accounting Pronouncements and Developments

Note 2 to the Unaudited Condensed Consolidated Financial Statements discusses new accounting pronouncements adopted during 2012 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.

 

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Item 1: Financial Statements

Huntington Bancshares Incorporated

Condensed Consolidated Balance Sheets

(Unaudited)

 

     2012     2011  

(dollar amounts in thousands, except number of shares)

   September 30,     December 31,  

Assets

    

Cash and due from banks

   $ 797,601     $ 1,115,968  

Interest-bearing deposits in banks

     65,635       90,943  

Trading account securities

     91,970       45,899  

Loans held for sale (includes $518,659 and $343,588 respectively, measured at fair value) (1)

     1,852,919       1,618,391  

Available-for-sale and other securities

     7,778,568       8,078,014  

Held-to-maturity securities

     1,582,150       640,551  

Loans and leases (includes $173,639 and $296,250 respectively, measured at fair value) (2)

     40,260,417       38,923,783  

Allowance for loan and lease losses

     (789,142     (964,828
  

 

 

   

 

 

 

Net loans and leases

     39,471,275       37,958,955  
  

 

 

   

 

 

 

Bank owned life insurance

     1,586,902       1,549,783  

Premises and equipment

     590,750       564,429  

Goodwill

     444,268       444,268  

Other intangible assets

     143,804       175,302  

Accrued income and other assets

     2,037,158       2,168,149  
  

 

 

   

 

 

 

Total assets

   $ 56,443,000     $ 54,450,652  
  

 

 

   

 

 

 

Liabilities and shareholders’ equity

    

Liabilities

    

Deposits

   $ 46,741,286     $ 43,279,625  

Short-term borrowings

     1,259,771       1,441,092  

Federal Home Loan Bank advances

     9,406       362,972  

Other long-term debt (includes $123,039 at December 31, 2011, measured at fair value) (2)

     185,613       1,231,517  

Subordinated notes

     1,306,273       1,503,368  

Accrued expenses and other liabilities

     1,133,047       1,213,978  
  

 

 

   

 

 

 

Total liabilities

     50,635,396       49,032,552  
  

 

 

   

 

 

 

Shareholders’ equity

    

Preferred stock—authorized 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

     8,567       8,656  

Capital surplus

     7,551,509       7,596,809  

Less treasury shares, at cost

     (10,817     (10,255

Accumulated other comprehensive loss

     (84,542     (173,763

Retained (deficit) earnings

     (2,043,405     (2,389,639
  

 

 

   

 

 

 

Total shareholders’ equity

     5,807,604       5,418,100  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 56,443,000     $ 54,450,652  
  

 

 

   

 

 

 

Common shares authorized (par value of $0.01)

     1,500,000,000       1,500,000,000  

Common shares issued

     856,748,584       865,584,517  

Common shares outstanding

     855,485,376       864,406,152  

Treasury shares outstanding

     1,263,208       1,178,365  

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.
(2) Amounts represent certain assets and liabilities of a consolidated VIE for which Huntington has elected the fair value option.

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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Huntington Bancshares Incorporated

Condensed Consolidated Statements of Income

(Unaudited)

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  

(dollar amounts in thousands, except per share amounts)

   2012     2011     2012     2011  

Interest and fee income:

        

Loans and leases

   $ 415,322     $ 432,788     $ 1,256,229     $ 1,300,746  

Available-for-sale and other securities

        

Taxable

     45,937       47,947       143,005       160,201  

Tax-exempt

     2,224       2,321       6,547       7,517  

Held-to-maturity securities—taxable

     5,592       5,059       14,844       6,346  

Other

     14,712       2,881       30,643       10,200  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     483,787       490,996       1,451,268       1,485,010  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     40,880       64,985       126,450       209,085  

Short-term borrowings

     544       932       1,685       2,737  

Federal Home Loan Bank advances

     135       234       690       669  

Subordinated notes and other long-term debt

     11,930       18,367       45,974       58,374  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     53,489       84,518       174,799       270,865  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     430,298       406,478       1,276,469       1,214,145  

Provision for credit losses

     37,004       43,586       107,930       128,768  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     393,294       362,892       1,168,539       1,085,377  
  

 

 

   

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     67,806       65,184       194,096       180,183  

Trust services

     29,689       29,473       90,509       90,607  

Electronic banking

     22,135       32,901       61,279       93,415  

Mortgage banking

     44,614       12,791       129,381       59,310  

Brokerage

     16,526       20,349       54,811       61,679  

Insurance

     17,792       17,220       54,051       51,564  

Bank owned life insurance

     14,371       15,644       42,275       48,065  

Capital markets fees

     11,805       11,256       35,242       26,729  

Gain on sale of loans

     6,591       19,097       37,492       29,060  

Automobile operating lease income

     2,146       5,890       8,798       22,044  

Net gains on sales of securities

     4,285       14       5,512       5,908  

Impairment losses recognized in earnings on available-for-sale securities

     (116     (1,364     (1,606     (5,711

Other income

     23,423       30,104       88,366       88,418  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     261,067       258,559       800,206       751,271  
  

 

 

   

 

 

   

 

 

   

 

 

 

Personnel costs

     247,709       226,835       734,241       664,433  

Outside data processing and other services

     49,880       49,602       140,087       133,773  

Net occupancy

     27,599       26,967       82,152       82,288  

Equipment

     25,950       22,262       76,367       66,660  

Deposit and other insurance expense

     15,534       17,492       52,003       59,211  

Marketing

     20,178       22,251       58,319       59,248  

Professional services

     18,024       20,281       44,712       53,826  

Amortization of intangibles

     11,431       13,387       34,902       40,143  

Automobile operating lease expense

     1,619       4,386       6,656       16,656  

OREO and foreclosure expense

     4,982       4,668       14,038       12,997  

Loss (Gain) on extinguishment of debt

     1,782       —          (798     —     

Other expense

     33,615       30,987       122,569       108,991  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     458,303       439,118       1,365,248       1,298,226  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     196,058       182,333       603,497       538,422  

Provision for income taxes

     28,291       38,942       129,754       122,667  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     167,767       143,391       473,743       415,755  

Dividends on preferred shares

     7,983       7,703       24,016       23,110  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to common shares

   $ 159,784     $ 135,688     $ 449,727     $ 392,645  
  

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares—basic

     857,871       863,911       861,543       863,542  

Average common shares—diluted

     863,588       867,633       866,768       867,446  

Per common share:

        

Net income—basic

   $ 0.19     $ 0.16     $ 0.52     $ 0.45  

Net income—diluted

     0.19       0.16       0.52       0.45  

Cash dividends declared

     0.04       0.04       0.12       0.06  

OTTI losses for the periods presented:

        

Total OTTI losses

   $ (253   $ (6,040   $ (1,822   $ (5,711

Noncredit-related portion of loss recognized in OCI

     137       4,676       216       —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Impairment losses recognized in earnings on available-for-sale securities

   $ (116   $ (1,364   $ (1,606   $ (5,711
  

 

 

   

 

 

   

 

 

   

 

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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Huntington Bancshares Incorporated

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  

(dollar amounts in thousands)

   2012      2011     2012      2011  

Net income

   $ 167,767      $ 143,391     $ 473,743      $ 415,755  

Other comprehensive income, net of tax:

          

Unrealized gains on available-for-sale and other securities:

          

Non-credit-related impairment recoveries (losses) on debt securities not expected to be sold

     6,059        (2,835     10,123        7,201  

Unrealized net gains (losses) on available-for-sale and other securities arising during the period, net of reclassification for net realized gains

     36,739        28,401       57,301        85,906  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total unrealized gains on available-for-sale and other securities

     42,798        25,566       67,424        93,107  

Unrealized gains (losses) on cash flow hedging derivatives

     5,394        13,971       12,068        16,183  

Change in accumulated unrealized losses for pension and other post-retirement obligations

     3,243        2,602       9,729        7,802  
  

 

 

    

 

 

   

 

 

    

 

 

 

Other comprehensive income (loss)

     51,435        42,139       89,221        117,092  
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income

   $ 219,202      $ 185,530     $ 562,964      $ 532,847  
  

 

 

    

 

 

   

 

 

    

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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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  

Nine Months Ended September 30, 2011

                       

Balance, beginning of period

    363     $ 362,507       —        $ —          864,195     $ 8,642     $ 7,630,093       (876   $ (8,771   $ (197,496   $ (2,814,433   $ 4,980,542  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

                        415,755       415,755  

Other comprehensive income (loss)

                      117,092         117,092  

Repurchase of warrants convertible to common stock

                (49,100             (49,100

Cash dividends declared:

                       

Common ($0.06 per share)

                        (51,869     (51,869

Preferred Series A ($63.75 per share)

                        (23,110     (23,110

Recognition of the fair value of share-based compensation

                13,986               13,986  

Other share-based compensation activity

            1,010       10       (552           (279     (821

Other

                (337     (254     (1,390       (269     (1,996
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

    363     $ 362,507       —        $ —          865,205     $ 8,652     $ 7,594,090       (1,130   $ (10,161   $ (80,404   $ (2,474,205   $ 5,400,479  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2012

                       

Balance, beginning of period

    363     $ 362,507       35     $ 23,785       865,585     $ 8,656     $ 7,596,809       (1,178   $ (10,255   $ (173,763   $ (2,389,639   $ 5,418,100  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

                        473,743       473,743  

Other comprehensive income (loss)

                      89,221         89,221  

Repurchases of common stock

            (10,168     (102     (65,201             (65,303

Cash dividends declared:

                       

Common ($0.12 per share)

                        (103,172     (103,172

Preferred Series A ($63.75 per share)

                        (23,110     (23,110

Preferred Series B ($25.54 per share)

                        (906     (906

Recognition of the fair value of share-based compensation

                19,958               19,958  

Other share-based compensation activity

            1,331       13       (66           (218     (271

Other

                9       (85     (562       (103     (656
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

    363     $ 362,507       35     $ 23,785       856,748     $ 8,567     $ 7,551,509       (1,263   $ (10,817   $ (84,542   $ (2,043,405   $ 5,807,604  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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Huntington Bancshares Incorporated

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Nine Months Ended  
     September 30,  

(dollar amounts in thousands)

   2012     2011  

Operating activities

    

Net income

   $ 473,743     $ 415,755  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for credit losses

     107,930       128,768  

Depreciation and amortization

     208,041       213,084  

Change in current and deferred income taxes

     124,173       54,280  

Net sales (purchases) of trading account securities

     (46,071     99,693  

Originations of loans held for sale

     (2,852,920     (1,697,186

Principal payments on and proceeds from loans held for sale

     2,724,950       2,121,284  

Gain on early extinguishment of debt

     (798     —     

Bargain purchase gain

     (11,409     —     

Net gain on sales of securities

     (5,512     (5,908

Impairment losses recognized in earnings on available-for-sale securities

     1,606       5,711  

Other, net

     (49,055     51,233  
  

 

 

   

 

 

 

Net cash provided by (used for) operating activities

     674,678       1,386,714  
  

 

 

   

 

 

 

Investing activities

    

Increase (decrease) in interest bearing deposits in banks

     79,398       45,052  

Net cash received from acquisition

     40,310       —     

Proceeds from:

    

Maturities and calls of available-for-sale and other securities

     1,389,995       1,596,552  

Maturities of held-to-maturity securities

     69,822       14,238  

Sales of available-for-sale and other securities

     830,528       2,804,769  

Purchases of available-for-sale and other securities

     (2,074,313     (3,578,931

Purchases of held-to-maturity securities

     (734,740     (204,188

Net proceeds from sales of loans

     1,799,770       1,493,056  

Net loan and lease activity, excluding sales

     (2,532,577     (2,725,678

Proceeds from sale of operating lease assets

     23,634       50,461  

Purchases of premises and equipment

     (82,862     (102,431

Proceeds from sales of other real estate

     26,832       48,901  

Purchases of loans and leases

     (451,829     —     

Other, net

     3,497       (59,763
  

 

 

   

 

 

 

Net cash provided by (used for) investing activities

     (1,612,535     (617,962
  

 

 

   

 

 

 

Financing activities

    

Increase (decrease) in deposits

     2,749,959       1,358,146  

Increase (decrease) in short-term borrowings

     (291,267     193,901  

Maturity/redemption of subordinated notes

     (202,895     (5,000

Proceeds from Federal Home Loan Bank advances

     815,000       200,000  

Maturity/redemption of Federal Home Loan Bank advances

     (1,213,815     (358,509

Maturity/redemption of long-term debt

     (1,044,348     (714,942

Repurchase of Warrant to the Treasury

     —          (49,100

Dividends paid on preferred stock

     (23,736     (23,110

Dividends paid on common stock

     (103,400     (27,042

Repurchase of common stock

     (65,303     —     

Other, net

     (705     (708
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     619,490       573,636  
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (318,367     1,342,388  

Cash and cash equivalents at beginning of period

     1,115,968       847,888  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 797,601     $ 2,190,276  
  

 

 

   

 

 

 

Supplemental disclosures:

    

Income taxes paid (refunded)

   $ 5,581     $ 68,366  

Interest paid

     180,267       276,915  

Non-cash activities

    

Loans transferred to loans held for sale

     1,656,486       4,633  

Transfer of securities to held-to-maturity from available for sale

     278,748       469,070  

Dividends accrued, paid in subsequent quarter

     47,824       40,742  

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

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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. 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 financial statements prepared in accordance with GAAP have been omitted. The Notes to Consolidated Financial Statements appearing in Huntington’s 2011 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 2011-04 — Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The ASU amends Topic 820 to add both additional clarifications to existing fair value measurement and disclosure requirements and changes to existing principles and disclosure guidance. Clarifications were made to the relevancy of the highest and best use valuation concept, measurement of an instrument classified in an entity’s shareholders’ equity and disclosure of quantitative information about the unobservable inputs for level 3 fair value measurements. Changes to existing principles and disclosures included measurement of financial instruments managed within a portfolio, the application of premiums and discounts in fair value measurement, and additional disclosures related to fair value measurements. The updated guidance and requirements are effective for financial statements issued for the first interim or annual period beginning after December 15, 2011, and should be applied prospectively (See Note 13). The amendments did not have a material impact on Huntington’s Unaudited Condensed Consolidated Financial Statements.

ASU 2011-05 — Other Comprehensive Income (Topic 220), Presentation of Comprehensive Income. The ASU amends Topic 220 to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. An entity is also required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments do not change items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income, only the format for presentation. The updated guidance and requirements are effective for financial statements issued for the fiscal years, and the interim periods within those years, beginning after December 15, 2011. The amendments should be applied retrospectively. On October 21, 2011, the FASB exposed a proposed deferral of the requirement that companies present reclassification adjustments for each component of OCI in both net income and OCI on the face of the financial statements. See the Unaudited Condensed Consolidated Statements of Comprehensive Income. The amendment did not have a material impact on Huntington’s Unaudited Condensed Consolidated Financial Statements.

ASU 2011-10 — Property, Plant, and Equipment (Topic 360): Derecognition of In-Substance Real Estate. The ASU amends Topic 360 to clarify that when a reporting entity ceases to have a controlling financial interest (as described in ASC 810 “Consolidation”) in a subsidiary that is in-substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance in Subtopic 360-20 to determine whether it should derecognize the in-substance real estate. The clarification is meant to eliminate diversity in practice. The amendments were effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. The amendments did not have a material impact on Huntington’s Unaudited Condensed Consolidated Financial Statements.

ASU 2011-11 — Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The ASU amends Topic 210 by requiring additional improved information to be disclosed regarding financial instruments and derivative instruments that are offset in accordance with the conditions under ASC 210-20-45 or ASC 810-10-45 or subject to an enforceable master netting arrangement or similar agreement. The amendments are effective for annual and interim reporting periods beginning on or after January 1, 2013. The disclosures required by the amendments should be applied retrospectively for all comparative periods presented. Management does not believe the amendments will have a material impact on Huntington’s Unaudited Condensed Consolidated Financial Statements.

 

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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 (at least 12 months), 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 September 30, 2012, and December 31, 2011, the aggregate amount of these net unamortized deferred loan origination fees and costs and net unearned income was $288.7 million and $122.5 million, respectively.

Loan and Lease Portfolio Composition

The following table provides a detailed listing of Huntington’s loan and lease portfolio at September 30, 2012, and December 31, 2011:

 

     September 30,     December 31,  

(dollar amounts in thousands)

   2012     2011  

Loans and leases:

    

Commercial and industrial

   $ 16,478,008     $ 14,699,371  

Commercial real estate

     5,497,157       5,825,709  

Automobile

     4,275,754       4,457,446  

Home equity

     8,380,542       8,215,413  

Residential mortgage

     5,192,241       5,228,276  

Other consumer

     436,715       497,568  
  

 

 

   

 

 

 

Loans and leases

     40,260,417       38,923,783  
  

 

 

   

 

 

 

Allowance for loan and lease losses

     (789,142     (964,828
  

 

 

   

 

 

 

Net loans and leases

   $ 39,471,275     $ 37,958,955  
  

 

 

   

 

 

 

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 impaired

Other commercial and industrial

Commercial real estate

  

Retail properties

Multi family

Office

Industrial and warehouse

Purchased impaired

Other commercial real estate

Automobile

   NA (1)

Home equity

  

Secured by first-lien

Secured by junior-lien

Residential mortgage

  

Residential mortgage

Purchased impaired

Other consumer

  

Other consumer

Purchased impaired

 

(1) Not applicable. The automobile loan portfolio is not further segregated into classes.

 

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Fidelity Bank acquisition

(See Note 19 for additional information regarding the Fidelity Bank acquisition).

On March 30, 2012, Huntington acquired the loans of Fidelity Bank located in Dearborn, Michigan from the FDIC. Under the agreement, approximately $520.6 million of loans were transferred to Huntington. These loans were recorded at fair value in accordance with ASC 805, “Business Combinations”. The fair values for the loans were estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms (Level 3), and reflected an estimate of probable losses and the credit risk associated with the loans.

Loans Acquired With Deteriorated Credit Quality

ASC 310-30, “Loans and Debt Securities Acquired With Deteriorated Credit Quality”, provides guidance for accounting for acquired loans that have experienced a deterioration of credit quality at the time of acquisition for which it is probable that the investor will be unable to collect all contractually required payments. The excess of cash flows expected at acquisition over the initial investment in the loan is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan, or pool of loans, in situations where there is a reasonable expectation about the timing and amount of cash flows expected to be collected. The difference between the contractually required payments at acquisition and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference. Subsequent decreases to the expected cash flows will generally result in an increase to the allowance for loan and lease 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. The measurement of undiscounted cash flows involves assumptions and judgments for credit risk, interest rate risk, prepayment risk, default rates, loss severity, payment speeds, 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.

The fair values for loans were estimated using discounted cash flow analyses, including prepayment assumptions and using interest rates currently being offered for loans with similar terms (Level 3). This value was reduced by an estimate of probable losses and the credit risk associated with the loans.

The following table presents a rollforward of the accretable yield for three-month and nine-month periods ended September 30, 2012:

 

(dollar amounts in thousands)

   Three Months Ended
September 30, 2012
    Nine Months Ended
September 30, 2012
 

Balance, beginning of period

   $ 24,761     $ —     

Impact of acquisition/purchase on March 30, 2012

     —          27,586  

Accretion

     (2,982     (5,807
  

 

 

   

 

 

 

Balance, end of period

   $ 21,779     $ 21,779  
  

 

 

   

 

 

 

At September 30, 2012, there was no allowance for loan losses recorded on the purchased impaired loan portfolio and no adjustment to either the accretable or nonaccretable yield was required. The following table reflects the outstanding balance of all contractually required payments and carrying amounts of the acquired loans at September 30, 2012:

 

     September 30, 2012  

(in thousands)

   Ending
Balance
     Unpaid Balance  

Commercial and industrial

   $ 62,253      $ 90,527  

Commercial real estate

     133,406        224,607  

Residential mortgage

     2,231        4,160  

Other consumer

     619        922  
  

 

 

    

 

 

 

Total

   $ 198,509      $ 320,216  
  

 

 

    

 

 

 

 

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Loan and Lease Purchases and Sales

The following table summarizes significant portfolio loan and lease purchase and sale activity for the three-month and nine-month periods ended September 30, 2012 and 2011:

 

(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 September 30, 2012

   $ 58,638      $ —         $ —        $ —         $ —         $ —         $ 58,638  

Nine-month period ended September 30, 2012

   $ 536,139      $ 378,122      $ —        $ 13,025      $ 62,324      $ 85      $ 989,695  

Three-month period ended September 30, 2011

   $ —         $ —         $ 59,578 (1)    $ —         $ —         $ —         $ 59,578  

Nine-month period ended September 30, 2011

   $ —         $ —         $ 59,578 (1)    $ —         $ —         $ —         $ 59,578  

Portfolio loans and leases sold or transferred to loans held for sale during the:

                   

Three-month period ended September 30, 2012

   $ 65,768      $ 4,812      $ —        $ —         $ —         $ —         $ 70,580  

Nine-month period ended September 30, 2012

   $ 190,933      $ 52,554      $ 2,783,748     $ —         $ 179,621        —         $ 3,206,856  

Three-month period ended September 30, 2011

   $ 48,530      $ —         $ 1,000,033     $ —         $ —         $ —         $ 1,048,563  

Nine-month period ended September 30, 2011

   $ 204,012      $ 56,123      $ 1,000,033     $ —         $ 170,757      $ —         $ 1,430,925  

 

(1) Reflected the purchase of $59.6 million of automobile loans as a result of exercising a clean-up call option related to loans previously sold under Huntington’s automobile loan sale program.

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.

All classes within the C&I and CRE portfolios 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. 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 not placed on nonaccrual status, but are generally charged-off when the loan is 120-days past due. However, when a borrower with discharged non-reaffirmed debt in a Chapter 7 bankruptcy is identified and the loan is determined to be collateral dependent, the consumer loan is placed on nonaccrual status.

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.

Regarding all classes within the C&I and CRE portfolios, the determination of a borrower’s ability to make the required principal and interest payments is based on an examination of the borrower’s current financial statements, industry, management capabilities, and other qualitative measures. For all classes within the consumer loan portfolio, the determination of a borrower’s 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 borrower’s financial condition. When, in Management’s judgment, the borrower’s 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.

 

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The following table presents NALs by loan class at September 30, 2012, and December 31, 2011 (1):

 

     2012      2011  

(dollar amounts in thousands)

   September 30,      December 31,  

Commercial and industrial:

     

Owner occupied

   $ 60,939      $ 88,415  

Purchased impaired

     —           —     

Other commercial and industrial

     48,513        113,431  
  

 

 

    

 

 

 

Total commercial and industrial

   $ 109,452      $ 201,846  

Commercial real estate:

     

Retail properties

   $ 43,564      $ 58,415  

Multi family

     24,045        39,921  

Office

     23,279        33,202  

Industrial and warehouse

     10,286        30,119  

Purchased impaired

     —           —     

Other commercial real estate

     47,812        68,232  
  

 

 

    

 

 

 

Total commercial real estate

   $ 148,986      $ 229,889  

Automobile

   $ 11,814      $ —     

Home equity:

     

Secured by first-lien

   $ 24,424      $ 20,012  

Secured by junior-lien

     27,230        20,675  
  

 

 

    

 

 

 

Total home equity

   $ 51,654      $ 40,687  

Residential mortgage:

     

Residential mortgage

   $ 123,140      $ 68,658  

Purchased impaired

     —           —     
  

 

 

    

 

 

 

Total residential mortgages

   $ 123,140      $ 68,658  

Other consumer

     

Other consumer

   $ —         $ —     

Purchased impaired

     —           —     
  

 

 

    

 

 

 

Total other consumer

   $ —         $ —     
  

 

 

    

 

 

 

Total nonaccrual loans

   $ 445,046      $ 541,080  
  

 

 

    

 

 

 

 

(1) September 30, 2012, figures include $63.0 million related to Chapter 7 bankruptcy loans.

 

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The following table presents an aging analysis of loans and leases, including past due loans, by loan class at September 30, 2012, and December 31, 2011: (1)

 

     September 30, 2012  
                                               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

   $ 10,816      $ 5,476      $ 41,253      $ 57,545      $ 4,210,843      $ 4,268,388      $ —     

Purchased impaired

     2,069        4,899        26,117        33,085        29,168        62,253        26,117  

Other commercial and industrial

     15,764        4,749        22,131        42,644        12,104,723        12,147,367        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial and industrial

   $ 28,649      $ 15,124      $ 89,501      $ 133,274      $ 16,344,734      $ 16,478,008      $ 26,117 (2) 

Commercial real estate:

                    

Retail properties

   $ 5,769      $ 3,491      $ 22,999      $ 32,259      $ 1,511,252      $ 1,543,511      $ —     

Multi family

     2,682        925        17,114        20,721        952,947        973,668        —     

Office

     12,265        3,275        17,733        33,273        928,377        961,650        —     

Industrial and warehouse

     1,557        858        4,568        6,983        621,379        628,362        —     

Purchased impaired

     4,741        9,741        45,131        59,613        73,793        133,406        45,131  

Other commercial real estate

     948        8,609        27,860        37,417        1,219,143        1,256,560        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

   $ 27,962      $ 26,899      $ 135,405      $ 190,266      $ 5,306,891      $ 5,497,157      $ 45,131 (2) 

Automobile

   $ 31,731        6,730      $ 3,857      $ 42,318      $ 4,233,436      $ 4,275,754      $ 3,857  

Home equity:

                    

Secured by first-lien

   $ 19,696      $ 9,488      $ 32,911      $ 62,095      $ 4,151,610      $ 4,213,705      $ 9,424  

Secured by junior-lien

     30,085        13,065        27,248        70,398        4,096,439        4,166,837        11,919  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity

   $ 49,781      $ 22,553      $ 60,159      $ 132,493      $ 8,248,049      $ 8,380,542      $ 21,343  

Residential mortgage:

                    

Residential mortgage

   $ 145,713      $ 46,646      $ 168,782      $ 361,141      $ 4,828,869      $ 5,190,010      $ 97,752 (3) 

Purchased impaired

     198        37        398        633        1,598        2,231        398  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total residential mortgage

   $ 145,911      $ 46,683      $ 169,180      $ 361,774      $ 4,830,467      $ 5,192,241      $ 98,150  

Other consumer:

                    

Other consumer

   $ 7,050      $ 1,356      $ 695      $ 9,101      $ 426,995      $ 436,096      $ 695  

Purchased impaired

     40        —           389        429        190        619        389  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other consumer

   $ 7,090      $ 1,356      $ 1,084      $ 9,530      $ 427,185      $ 436,715      $ 1,084  

Total loans and leases

   $ 291,122      $ 119,345      $ 459,185      $ 869,652      $ 39,390,766      $ 40,260,417      $ 195,682  

 

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     December 31, 2011  
                                               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

   $ 10,607      $ 7,433      $ 58,513      $ 76,553      $ 3,936,203      $ 4,012,756      $ —     

Other commercial and industrial

     32,962        7,579        60,833        101,374        10,585,241        10,686,615        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial and industrial

   $ 43,569      $ 15,012      $ 119,346      $ 177,927      $ 14,521,444      $ 14,699,371      $ —     

Commercial real estate:

                    

Retail properties

   $ 3,090      $ 823      $ 33,952      $ 37,865      $ 1,547,618      $ 1,585,483      $ —     

Multi family

     5,022        1,768        28,317        35,107        908,438        943,545        —     

Office

     3,134        792        30,041        33,967        990,897        1,024,864        —     

Industrial and warehouse

     2,834        115        18,203        21,152        708,390        729,542        —     

Other commercial real estate

     6,894        3,625        48,739        59,258        1,483,017        1,542,275        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

   $ 20,974      $ 7,123      $ 159,252      $ 187,349      $ 5,638,360      $ 5,825,709      $ —     

Automobile

   $ 42,162      $ 9,046      $ 6,265      $ 57,473      $ 4,399,973      $ 4,457,446      $ 6,265  

Home equity:

                    

Secured by first-lien

     17,260        8,822        29,259        55,341        3,760,238        3,815,579        9,247  

Secured by junior-lien

     32,334        18,357        31,626        82,317        4,317,517        4,399,834        10,951  

Residential mortgage

     134,228        45,774        204,648        384,650        4,843,626        5,228,276        141,901 (4) 

Other consumer

     7,655        1,502        1,988        11,145        486,423        497,568        1,988  

Total loans and leases

   $ 298,182      $ 105,636      $ 552,384      $ 956,202      $ 37,967,581      $ 38,923,783      $ 170,352  

 

(1) NALs are included in this aging analysis based on the loan’s past due status.
(2) All amounts represent accruing purchased impaired loans related to the FDIC-assisted Fidelity Bank acquisition. Under the applicable accounting guidance (ASC 310-30), the loans were recorded at fair value upon acquisition and remain in accruing status.
(3) Includes $87,463 thousand guaranteed by the U.S. government.
(4) Includes $96,703 thousand guaranteed by the U.S. government.

 

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Allowance for Credit Losses

Huntington maintains two reserves, both of which reflect Management’s 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 Management’s 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 declining residential real estate values; the diversification of CRE loans; the development of new or expanded Commercial business segments such as Healthcare, Asset Based Lending, and Energy, and the overall condition of the manufacturing industry. Also, the ACL assessment includes the on-going assessment of credit quality metrics, and a comparison of certain ACL benchmarks to current performance. Management’s determinations regarding the appropriateness of the ACL are reviewed and approved by the Company’s board of directors.

The ALLL consists of two components: (1) the transaction reserve, which includes a loan level allocation per ASC 310-10, specific reserves related to loans considered to be impaired, and loans involved in troubled debt restructurings allocated per ASC 310-40, 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 continuously 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 borrower’s 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 12-month 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 Company’s model validation policies.

The general reserve consists of the economic reserve and risk-profile reserve components. The economic reserve component considers the potential impact of changing market and economic conditions on portfolio performance. The risk-profile component considers 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.

 

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The ACL is increased through a provision for credit losses that is charged to earnings, based on Management’s 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. Management did not substantially change any material aspect of the overall approach in the determination of either the ALLL or AULC, and there were no material changes in assumptions or estimation techniques compared with prior periods that impacted the determination of the current period’s ALLL and AULC. The impact of the Chapter 7 bankruptcy loans was primarily associated with NALs and NCOs, with minimal impact to the ALLL.

The following table presents ALLL and AULC activity by portfolio segment for the three-month and nine-month periods ended September 30, 2012 and 2011: (1)

 

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     Commercial     Commercial           Home     Residential     Other        
(dollar amounts in thousands)    and Industrial     Real Estate     Automobile     Equity     Mortgage     Consumer     Total  

Three-month period ended September 30, 2012:

              

ALLL balance, beginning of period

   $ 280,548     $ 305,391     $ 30,217     $ 135,562     $ 78,015     $ 29,913     $ 859,646  

Loan charge-offs

     (22,522     (26,513     (7,925     (48,710     (17,644     (8,872     (132,186

Recoveries of loans previously charged-off

     9,499       9,139       3,906       2,114       764       1,669       27,091  

Provision for loan and lease losses

     (10,444     (7,641     7,187       33,639       5,809       5,869       34,419  

Allowance for loans sold or transferred to loans held for sale

     —          —          (104     —          276       —          172  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALLL balance, end of period

   $ 257,081     $ 280,376     $ 33,281     $ 122,605     $ 67,220     $ 28,579     $ 789,142  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AULC balance, beginning of period

   $ 42,844     $ 5,225     $ —        $ 2,190     $ 4     $ 715     $ 50,978  

Provision for unfunded loan commitments and letters of credit

     3,263       (125     —          (513     (1     (39     2,585  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AULC balance, end of period

   $ 46,107     $ 5,100     $ —        $ 1,677     $ 3     $ 676     $ 53,563  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ACL balance, end of period

   $ 303,188     $ 285,476     $ 33,281     $ 124,282     $ 67,223     $ 29,255     $ 842,705  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine-month period ended September 30, 2012:

              

ALLL balance, beginning of period

   $ 275,367     $ 388,706     $ 38,282     $ 143,873     $ 87,194     $ 31,406     $ 964,828  

Loan charge-offs

     (79,746     (83,662     (20,534     (97,058     (41,292     (25,946     (348,238

Recoveries of loans previously charged-off

     22,550       26,604       12,988       5,688       3,056       5,020       75,906  

Provision for loan and lease losses

     38,910       (51,272     7,784       70,102       19,200       18,099       102,823  

Allowance for loans sold or transferred to loans held for sale

     —          —          (5,239     —          (938     —          (6,177
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALLL balance, end of period

   $ 257,081     $ 280,376     $ 33,281     $ 122,605     $ 67,220     $ 28,579     $ 789,142  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AULC balance, beginning of period

   $ 39,658     $ 5,852     $ —        $ 2,134     $ 1     $ 811     $ 48,456  

Provision for unfunded loan commitments and letters of credit

     6,449       (752     —          (457     2       (135     5,107  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AULC balance, end of period

   $ 46,107     $ 5,100     $ —        $ 1,677     $ 3     $ 676     $ 53,563  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ACL balance, end of period

   $ 303,188     $ 285,476     $ 33,281     $ 124,282     $ 67,223     $ 29,255     $ 842,705  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Commercial     Commercial           Home     Residential     Other        
(dollar amounts in thousands)    and Industrial     Real Estate     Automobile     Equity     Mortgage     Consumer     Total  

Three-month period ended September 30, 2011:

              

ALLL balance, beginning of period

   $ 281,016     $ 463,874     $ 55,428     $ 146,444     $ 98,992     $ 25,372     $ 1,071,126  

Loan charge-offs

     (28,624     (29,621     (8,087     (27,916     (13,422     (8,229     (115,899

Recoveries of loans previously charged-off

     10,733       5,181       4,224       1,694       1,860       1,652       25,344  

Provision for loan and lease losses

     22,129       (20,539     4,565       19,394       11,544       8,774       45,867  

Allowance for loans sold or transferred to loans held for sale

     —          —          (6,728     —          —          —          (6,728
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALLL balance, end of period

   $ 285,254     $ 418,895     $ 49,402     $ 139,616     $ 98,974     $ 27,569     $ 1,019,710  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AULC balance, beginning of period

   $ 31,341     $ 6,632     $ —        $ 2,249     $ 1     $ 837     $ 41,060  

Provision for unfunded loan commitments and letters of credit

     (882     (1,316     —          (67     —          (16     (2,281
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AULC balance, end of period

   $ 30,459     $ 5,316     $ —        $ 2,182     $ 1     $ 821     $ 38,779  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ACL balance, end of period

   $ 315,713     $ 424,211     $ 49,402     $ 141,798     $ 98,975     $ 28,390     $ 1,058,489  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine-month period ended September 30, 2011:

              

ALLL balance, beginning of period

   $ 340,614     $ 588,251     $ 49,488     $ 150,630     $ 93,289     $ 26,736     $ 1,249,008  

Loan charge-offs

     (110,590     (146,991     (24,939     (83,598     (53,773     (23,716     (443,607

Recoveries of loans previously charged-off

     31,804       27,273       14,109       5,220       6,824       5,205       90,435  

Provision for loan and lease losses

     23,426       (49,638     17,472       67,364       54,148       19,344       132,116  

Allowance for loans sold or transferred to loans held for sale

     —          —          (6,728     —          (1,514     —          (8,242
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALLL balance, end of period

   $ 285,254     $ 418,895     $ 49,402     $ 139,616     $ 98,974     $ 27,569     $ 1,019,710  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AULC balance, beginning of period

   $ 32,726     $ 6,158     $ —        $ 2,348     $ 1     $ 894     $ 42,127  

Provision for unfunded loan commitments and letters of credit

     (2,267     (842     —          (166     —          (73     (3,348
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AULC balance, end of period

   $ 30,459     $ 5,316     $ —        $ 2,182     $ 1     $ 821     $ 38,779  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ACL balance, end of period

   $ 315,713     $ 424,211     $ 49,402     $ 141,798     $ 98,975     $ 28,390     $ 1,058,489  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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.

 

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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 Huntington’s position in the future. For these reasons, Huntington considers the loans to be potential problem loans.

Substandard = Inadequately protected loans by the borrower’s 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 borrower’s most recent credit bureau score (FICO), which we update quarterly. A FICO credit bureau score is a credit score developed by Fair Isaac Corporation based on data provided by the credit bureaus. The FICO 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 FICO 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. The table below shows increases in FICO scores <650 for both the automobile and first-lien home equity portfolios. These increases do not reflect a deterioration in asset quality for the portfolios, as other risk characteristics mitigate any increased level of risk associated with the FICO score distribution.

 

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The following table presents each loan and lease class by credit quality indicator at September 30, 2012, and December 31, 2011:

 

     September 30, 2012  
     Credit Risk Profile by UCS classification  

(dollar amounts in thousands)

   Pass      OLEM      Substandard      Doubtful      Total  

Commercial and industrial:

              

Owner occupied

   $ 3,945,489      $ 104,330      $ 217,574      $ 995      $ 4,268,388  

Purchased impaired

     1,283        6,956        54,014        —           62,253  

Other commercial and industrial

     11,543,754        196,823        405,027        1,763        12,147,367  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial and industrial

   $ 15,490,526      $ 308,109      $ 676,615      $ 2,758      $ 16,478,008  

Commercial real estate:

              

Retail properties

   $ 1,306,360      $ 30,514      $ 206,637      $ —         $ 1,543,511  

Multi family

     867,939        41,777        63,814        138        973,668  

Office

     838,877        33,442        89,331        —           961,650  

Industrial and warehouse

     569,313        11,705        47,344        —           628,362  

Purchased impaired

     4,830        29,993        98,510        73        133,406  

Other commercial real estate

     1,072,876        43,709        139,877        98        1,256,560  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

   $ 4,660,195      $ 191,140      $ 645,513      $ 309      $ 5,497,157  
     Credit Risk Profile by FICO score (1)  
     750+      650-749      <650      Other (2)      Total  

Automobile

   $ 2,553,258      $ 2,182,389      $ 735,651      $ 104,456      $ 5,575,754  (3) 

Home equity:

              

Secured by first-lien

   $ 2,441,087      $ 1,404,312      $ 348,109      $ 20,197      $ 4,213,705  

Secured by junior-lien

     1,943,216        1,530,622        569,785        123,214        4,166,837  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity

   $ 4,384,303      $ 2,934,934      $ 917,894      $ 143,411      $ 8,380,542  

Residential mortgage:

              

Residential mortgage

   $ 2,577,715      $ 1,795,920      $ 696,414      $ 119,961      $ 5,190,010  

Purchased impaired

     349        1,347        468        67        2,231  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total residential mortgage

   $ 2,578,064      $ 1,797,267      $ 696,882      $ 120,028      $ 5,192,241  

Other consumer:

              

Other consumer

   $ 163,538      $ 180,968      $ 65,480      $ 26,110      $ 436,096  

Purchased impaired

     —           231        289        99        619  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other consumer

   $ 163,538      $ 181,199      $ 65,769      $ 26,209      $ 436,715  
     December 31, 2011  
     Credit Risk Profile by UCS classification  

(dollar amounts in thousands)

   Pass      OLEM      Substandard      Doubtful      Total  

Commercial and industrial:

              

Owner occupied

   $ 3,624,103      $ 101,897      $ 285,561      $ 1,195      $ 4,012,756  

Other commercial and industrial

     10,108,946        145,963        425,882        5,824        10,686,615  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial and industrial

   $ 13,733,049      $ 247,860      $ 711,443      $ 7,019      $ 14,699,371  

Commercial real estate:

              

Retail properties

   $ 1,191,471      $ 122,337      $ 271,675      $ —         $ 1,585,483  

Multi family

     801,717        48,094        93,449        285        943,545  

Office

     896,230        67,050        61,476        108        1,024,864  

Industrial and warehouse

     649,165        9,688        70,621        68        729,542  

Other commercial real estate

     1,112,751        110,276        318,479        769        1,542,275  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

   $ 4,651,334      $ 357,445      $ 815,700      $ 1,230      $ 5,825,709  

 

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     Credit Risk Profile by FICO score (1)  
     750+      650-749      <650      Other (2)      Total  

Automobile

   $ 2,635,082      $ 2,276,990      $ 707,141      $ 88,233      $ 5,707,446  (4) 

Home equity:

              

Secured by first-lien

     2,196,566        1,287,444        329,670        1,899        3,815,579   

Secured by junior-lien

     2,119,292        1,646,117        625,298        9,127        4,399,834   

Residential mortgage

     2,454,401        1,752,409        723,377        298,089        5,228,276   

Other consumer

     185,333        206,749        83,431        22,055        497,568   

 

(1) Reflects currently updated customer credit scores.
(2) Reflects deferred fees and costs, loans in process, loans to legal entities, etc.
(3) Includes $1,300,000 thousand of loans reflected as loans held for sale.
(4) Includes $1,250,000 thousand of loans reflected as loans held for sale.

 

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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 evaluated 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. Also, 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 loan’s 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. When the contractual interest rate is variable, the effective interest rate of the loan changes over time. A specific reserve is established as a component of the ALLL when a loan has been determined to be impaired. Subsequent to the initial measurement of impairment, if there is a significant change to the impaired loan’s 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.

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.

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 September 30, 2012, and December 31, 2011:

 

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    Commercial
and Industrial
    Commercial
Real Estate
    Automobile     Home Equity     Residential
Mortgage
    Other
Consumer
    Total  

ALLL at September 30, 2012:

             
(dollar amounts in thousands)              

Portion of ending balance:

             

Attributable to loans purchased with deteriorated credit quality

  $ —        $ —        $ —        $ —        $ —        $ —        $ —     

Attributable to loans individually evaluated for impairment

    22,023       36,689       1,196       3,635       14,134       245       77,922  

Attributable to loans collectively evaluated for impairment

    235,058       243,687       32,085       118,970       53,086       28,334       711,220  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ALLL balance

  $ 257,081     $ 280,376     $ 33,281     $ 122,605     $ 67,220     $ 28,579     $ 789,142  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and Leases at September 30, 2012:

             
(dollar amounts in thousands)              

Portion of ending balance:

             

Attributable to loans purchased with deteriorated credit quality

  $ 62,253     $ 133,406     $ —        $ —        $ 2,231     $ 619     $ 198,509  

Attributable to loans individually evaluated for impairment

    106,554       322,277       45,533       100,519       364,053       2,757       941,693  

Attributable to loans collectively evaluated for impairment

    16,309,201       5,041,474       4,230,221       8,280,023       4,825,957       433,339       39,120,215  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans evaluated for impairment

  $ 16,478,008     $ 5,497,157     $ 4,275,754     $ 8,380,542     $ 5,192,241     $ 436,715     $ 40,260,417  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Commercial and
Industrial
    Commercial
Real Estate
    Automobile     Home Equity     Residential
Mortgage
    Other
Consumer
    Total  

ALLL at December 31, 2011

             
(dollar amounts in thousands)              

Portion of ending balance:

             

Attributable to loans individually evaluated for impairment

  $ 30,613     $ 55,306     $ 1,393     $ 1,619     $ 16,091     $ 530     $ 105,552  

Attributable to loans collectively evaluated for impairment

    244,754       333,400       36,889       142,254       71,103       30,876       859,276  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ALLL balance:

  $ 275,367     $ 388,706     $ 38,282     $ 143,873     $ 87,194     $ 31,406     $ 964,828  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and Leases at December 31, 2011:

             
(dollar amounts in thousands)              

Portion of ending balance:

             

Attributable to loans individually evaluated for impairment

  $ 153,724     $ 387,402     $ 36,574     $ 52,593     $ 335,768     $ 6,220     $ 972,281  

Attributable to loans collectively evaluated for impairment

    14,545,647       5,438,307       4,420,872       8,162,820       4,892,508       491,348       37,951,502  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans evaluated for impairment

  $ 14,699,371     $ 5,825,709     $ 4,457,446     $ 8,215,413     $ 5,228,276     $ 497,568     $ 38,923,783  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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: (1), (2)

 

            Three Months Ended      Nine Months Ended  
     September 30, 2012      September 30, 2012      September 30, 2012  
            Unpaid                    Interest             Interest  
     Ending      Principal      Related      Average      Income      Average      Income  

(dollar amounts in thousands)

   Balance      Balance (5)      Allowance      Balance      Recognized      Balance      Recognized  

With no related allowance recorded:

                    

Commercial and industrial:

                    

Owner occupied

   $ 3,652      $ 10,099      $ —         $ 4,702      $ 1      $ 5,310      $ 61  

Purchased impaired

     62,253        90,527        —           62,740        935        64,627        1,767  

Other commercial and industrial

     17,886        37,036        —           9,274        88        8,556        343  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial and industrial

   $ 83,791      $ 137,662      $ —         $ 76,716      $ 1,024      $ 78,493      $ 2,171  

Commercial real estate:

                    

Retail properties

   $ 58,095      $ 63,479      $ —         $ 53,317      $ 531      $ 52,127      $ 2,007  

Multi family

     4,483        5,170        —           5,413        85        5,879        278  

Office

     8,256        10,415        —           8,695        138        4,631        191  

Industrial and warehouse

     16,651        19,609        —           9,779        106        8,045        312  

Purchased impaired

     133,406        224,607        —           134,279        2,004        138,858        3,954  

Other commercial real estate

     14,408        15,374        —           15,070        140        17,068        412  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

   $ 235,299      $ 338,654      $ —         $ 226,553      $ 3,004      $ 226,608      $ 7,154  

Home equity:

                    

Secured by first-lien

   $ —         $ —         $ —         $ —         $ —         $ —         $ —     

Secured by junior-lien

     —           —           —           —           —           —           —     

Total home equity

   $ —         $ —         $ —         $ —         $ —         $ —         $ —     

Residential mortgage:

                    

Residential mortgage

   $ —         $ —         $ —         $ —         $ —         $ —         $ —     

Purchased impaired

     2,231        4,160        —           2,293        34        3,947        68  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total residential mortgage

   $ 2,231      $ 4,160      $ —         $ 2,293      $ 34      $ 3,947      $ 68  

Other consumer

                    

Other consumer

   $ —         $ —         $ —         $ —         $ —         $ —         $ —     

Purchased impaired

     619        922        —           626        9        782        18  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other consumer

   $ 619      $ 922      $ —         $ 626      $ 9      $ 782      $ 18  

With an allowance recorded:

                    

Commercial and industrial: (3)

                    

Owner occupied

   $ 41,476      $ 46,462      $ 5,678      $ 39,339      $ 303      $ 38,927      $ 998  

Purchased impaired

     —           —           —           —           —           —           —     

Other commercial and industrial

     43,540        54,747        16,345        56,377        424        77,289        1,906  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial and industrial

   $ 85,016      $ 101,209      $ 22,023      $ 95,716      $ 727      $ 116,216      $ 2,904  

Commercial real estate: (4)

                    

Retail properties

   $ 96,085      $ 104,001      $ 16,468      $ 109,146      $ 848      $ 117,069      $ 4,032  

Multi family

     22,918        27,550        3,546        26,375        280        29,734        1,108  

Office

     16,918        22,154        3,118        10,394        52        16,954        210  

Industrial and warehouse

     26,402        27,972        3,180        23,854        151        24,205        504  

Purchased impaired

     —           —           —           —           —           —           —     

Other commercial real estate

     58,061        75,883        10,377        66,999        455        74,020        2,032  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

   $ 220,384      $ 257,560      $ 36,689      $ 236,768      $ 1,786      $ 261,982      $ 7,886  

Automobile

   $ 45,533      $ 47,525      $ 1,196      $ 39,996      $ 782      $ 38,022      $ 2,398  

Home equity:

                    

Secured by first-lien

   $ 67,256      $ 76,166      $ 1,736      $ 59,247      $ 730      $ 49,559      $ 1,769  

Secured by junior-lien

     33,263        48,123        1,899        24,698        368        20,463        804  

Total home equity

   $ 100,519      $ 124,289      $ 3,635      $ 83,945      $ 1,098      $ 70,022      $ 2,573  

Residential mortgage (6):

                    

Residential mortgage

   $ 364,053      $ 402,182      $ 14,134      $ 345,677      $ 2,722      $ 337,876      $ 8,525  

Purchased impaired

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total residential mortgage

   $ 364,053      $ 402,182      $ 14,134      $ 345,677      $ 2,722      $ 337,876      $ 8,525  

Other consumer:

                    

Other consumer

   $ 2,757      $ 2,757      $ 245      $ 2,954      $ 19      $ 4,118      $ 78  

Purchased impaired

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other consumer

   $ 2,757      $ 2,757      $ 245      $ 2,954      $ 19      $ 4,118      $ 78  

 

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     December 31, 2011  
            Unpaid         
     Ending      Principal      Related  

(dollar amounts in thousands)

   Balance      Balance (5)      Allowance  

With no related allowance recorded:

        

Commercial and industrial:

        

Owner occupied

   $ —         $ —         $ —     

Other commercial and industrial

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total commercial and industrial

   $ —         $ —         $ —     

Commercial real estate:

        

Retail properties

   $ 43,970      $ 45,192      $ —     

Multi family

     6,292        6,435        —     

Office

     1,191        1,261        —     

Industrial and warehouse

     8,163        9,945        —     

Other commercial real estate

     22,396        38,401        —     
  

 

 

    

 

 

    

 

 

 

Total commercial real estate

   $ 82,012      $ 101,234      $ —     

With an allowance recorded:

        

Commercial and industrial:

        

Owner occupied

   $ 53,613      $ 77,205      $ 7,377  

Other commercial and industrial

     100,111        117,469        23,236  
  

 

 

    

 

 

    

 

 

 

Total commercial and industrial

   $ 153,724      $ 194,674      $ 30,613  

Commercial real estate:

        

Retail properties

   $ 129,396      $ 161,596      $ 30,363  

Multi family

     38,154        45,138        4,753  

Office

     23,568        42,287        2,832  

Industrial and warehouse

     29,435        47,373        3,136  

Other commercial real estate

     84,837        119,212        14,222  
  

 

 

    

 

 

    

 

 

 

Total commercial real estate

   $ 305,390      $ 415,606      $ 55,306  

Automobile

   $ 36,574      $ 36,574      $ 1,393  

Home equity:

        

Secured by first-lien

     35,842        35,842        626  

Secured by junior-lien

     16,751        16,751        993  

Residential mortgage

     335,768        361,161        16,091  

Other consumer

     6,220        6,220        530  

 

(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 September 30, 2012, $43,795 thousand of the $85,016 thousand commercial and industrial loans with an allowance recorded were considered impaired due to their status as a TDR.
(4) At September 30, 2012, $36,922 thousand of the $220,384 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 September 30, 2012, $17,445 thousand of the $364,053 thousand residential mortgages loans with an allowance recorded were guaranteed by the U.S. government.

 

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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 Company’s 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 borrower’s specific circumstances at a point in time. Commercial loan modifications, including those classified as 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. This concession also 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.

 

  (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 court’s discharge of a borrower’s 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 nine-month periods ended September 30, 2012 and 2011, was not significant.

TDRs by Loan Type

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 borrower’s or project’s 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 refinancing or modification of a loan occurs 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.

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, 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.

 

 

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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 Company’s 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

Huntington’s ALLL is largely driven 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 above. Upon the occurrence of a TDR in our C&I and CRE portfolios, the reserve is measured based on discounted expected cash flows 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 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 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 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. 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 bank’s outstanding book balance and then to recoveries of charged-off principal, unpaid interest, and/or fee expenses.

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.

The following tables present by class and by the reason for the modification, the number of contracts, post-modification outstanding balance, and the net change in ALLL resulting from the modification for the three-month and nine-month periods ended September 30, 2012 and 2011:

 

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            New Troubled Debt Restructurings During The Three-Month Period Ended (1)  
            September 30, 2012     September 30, 2011  
                   Post-modification                   Post-modification         
                   Outstanding                   Outstanding         
            Number of      Ending      Financial effects     Number of      Ending      Financial effects  
(dollar amounts in thousands)           Contracts      Balance      of  modification(2)     Contracts      Balance      of modification (2)  

C&I—Owner occupied:

     (3)                    

Interest rate reduction

        7      $ 4,292      $ 13        3      $ 638      $ (70

Amortization or maturity date change

        23        5,271        (49 )       16        11,023        (1,085

Other

        5        1,410        (153 )       2        729        (1
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total C&I—Owner occupied

        35      $ 10,973      $ (189 )       21      $ 12,390      $ (1,156

C&I—Other commercial and industrial:

     (3)                    

Interest rate reduction

        6      $ 2,029      $ (261 )       6      $ 18,292      $ 1,225   

Amortization or maturity date change

        20        12,393        (432 )       11        2,175        13   

Other

        10        3,523        136        2        3,027        64   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total C&I—Other commercial and industrial

        36      $ 17,945      $ (557 )       19      $ 23,494      $ 1,302   

CRE—Retail properties:

     (3)                    

Interest rate reduction

        —         $ —         $ —          2      $ 19,883      $ 5,603   

Amortization or maturity date change

        1        116        (2 )       7        17,984        4,012   

Other

        1        276        (1 )       1        2,595        5   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total CRE—Retail properties

        2      $ 392      $ (3 )       10      $ 40,462      $ 9,620   

CRE—Multi family:

     (3)                    

Interest rate reduction

        8      $ 809      $ (22 )       4      $ 1,275      $ 103   

Amortization or maturity date change

        12        1,216        51        1        1,066        (51

Other

        1        343        (8 )       —           —           —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total CRE—Multi family

        21      $ 2,368      $ 21        5      $ 2,341      $ 52   

CRE—Office:

     (3)                    

Interest rate reduction

        1      $ 2,039      $ (599 )       —         $ —         $ —     

Amortization or maturity date change

        2        9,632        (36 )       —           —           —     

Other

        —           —           —          —           —           —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total CRE—Office

        3      $ 11,671      $ (635 )       —         $ —         $ —     

CRE—Industrial and warehouse:

     (3)                    

Interest rate reduction

        1      $ 1,600      $ (224 )       —         $ —         $ —     

Amortization or maturity date change

        7        31,577        (3,729     2        229        (2

Other

        —           —           —          1        2,147        (937
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total CRE—Industrial and Warehouse

        8      $ 33,177      $
 
(3,953
 

  
    3      $ 2,376      $ (939

CRE—Other commercial real estate:

     (3)                    

Interest rate reduction

        2      $ 755      $ (72 )       10      $ 7,834      $ (374

Amortization or maturity date change

        10        13,454        383        12        31,470        (211

Other

        3        199        111        2        2,489        —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total CRE—Other commercial real estate

        15      $ 14,408      $ 422        24      $ 41,793      $ (585

Automobile:

     (4)                    

Interest rate reduction

        7      $ 51      $ —          12      $ 147      $ 3  

Amortization or maturity date change

        501        3,533        (30 )       822        7,687        (68

Chapter 7 bankruptcy

        1,978        11,666        1,754        —           —           —     

Other

        —           —           —          —           —           —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Automobile

        2,486      $ 15,250      $ 1,724        834      $ 7,834      $ (65

Residential mortgage:

     (5)                    

Interest rate reduction

        8      $ 1,300      $ 59        2      $ 181      $ —     

Amortization or maturity date change

        113        16,234        117        164        22,120        649  

Chapter 7 bankruptcy

        528        39,352        4,527        —           —           —     

Other

        6        663        41        5        600        33  
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Residential mortgage

        655      $ 57,549      $ 4,744        171      $ 22,901      $ 682  

First-lien home equity:

     (6)                    

Interest rate reduction

        47      $ 6,837      $ 1,185        48      $ 5,857      $ 1,016  

Amortization or maturity date change

        31        2,928        28        49        5,820        111  

Chapter 7 bankruptcy

        177        7,461        4,203        —           —           —     

Other

        —           —           —          —           —           —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total First-lien home equity

        255      $ 17,226      $ 5,416        97      $ 11,677      $ 1,127  

Junior-lien home equity:

     (7)                    

Interest rate reduction

        15      $ 1,273      $ 226        55      $ 2,992      $ 22  

Amortization or maturity date change

        40        1,586        (40 )       44        1,631        40  

Chapter 7 bankruptcy

        1,198        12,366        17,781        —           —           —     

Other

        7        285        —          —           —           —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Junior-lien home equity

        1,260      $ 15,510      $ 17,967        99      $ 4,623      $ 62  

Other consumer:

     (8)                    

Interest rate reduction

        7      $ 65      $ 9        6      $ 561      $ 48  

Amortization or maturity date change

        4        25        —          50        348        (18

Chapter 7 bankruptcy

        12        148        —          —           —           —     

Other

        —           —           —          —           —           —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Other consumer

        23      $ 238      $ 9        56      $ 909      $ 30  

Total new troubled debt restructurings

        4,799      $ 196,707      $ 24,966        1,339      $ 170,800      $ 10,130  

 

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Table of Contents
          New Troubled Debt Restructurings During The Nine-Month Period Ended (1)  
          September 30, 2012     September 30, 2011  
                 Post-modification                   Post-modification         
                 Outstanding                   Outstanding         
          Number of      Ending      Financial effects     Number of      Ending      Financial effects  
(dollar amounts in thousands)         Contracts      Balance      of  modification(2)     Contracts      Balance      of  modification(2)  

C&I - Owner occupied:

   (3)                 

Interest rate reduction

        21      $ 9,260      $ 145        27      $ 12,240      $ (748 )  

Amortization or maturity date change

        70        16,305        522        35        19,294        (1,759 )  

Other

        13        4,181        1,105        4        3,072        242   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total C&I—Owner occupied

        104      $ 29,746      $ 1,772        66      $ 34,606      $ (2,265

C&I—Other commercial and industrial:

   (3)                 

Interest rate reduction

        23      $ 7,095      $ 1        18      $ 21,382      $ 11   

Amortization or maturity date change

        91        36,403        (1,270     41        23,145        (156 )  

Other

        28        34,524        201        17        25,421        (3,123 )  
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total C&I—Other commercial and industrial

        142      $ 78,022      $ (1,068     76      $ 69,948      $ (3,268

CRE—Retail properties:

   (3)                 

Interest rate reduction

        8      $ 6,027      $ 957        8      $ 46,534      $ 4,359   

Amortization or maturity date change

        11        3,166        (23 )       14        25,689        6,358   

Other

        1        276        (1 )       6        14,253        1,289   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total CRE—Retail properties

        20      $ 9,469      $ 933        28      $ 86,476      $ 12,006   

CRE—Multi family:

   (3)                 

Interest rate reduction

        10      $ 1,143      $ (27 )       10      $ 4,378      $ (8 )  

Amortization or maturity date change

        25        2,913        (20 )       5        2,256        25   

Other

        7        7,961        668        —           —           —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total CRE—Multi family

        42      $ 12,017      $ 621        15      $ 6,634      $ 17   

CRE—Office:

   (3)                 

Interest rate reduction

        4      $ 4,155      $ (236 )       3      $ 1,505      $ 258   

Amortization or maturity date change

        6        11,208        327        2        1,238        83   

Other

        3        306        —          —           —           —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total CRE—Office

        13      $ 15,669      $ 91        5      $ 2,743      $ 341   

CRE—Industrial and warehouse:

   (3)                 

Interest rate reduction

        2      $ 4,600      $ (220 )       1      $ 2,165      $ (299 )  

Amortization or maturity date change

        13        34,350        (3,850     6        19,300        (5,446 )  

Other

        —           —           —          1        2,147        (937 )  
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total CRE—Industrial and Warehouse

        15      $ 38,950      $ (4,070     8      $ 23,612      $ (6,682

CRE—Other commercial real estate:

   (3)                 

Interest rate reduction

        9      $ 2,792      $ (288 )       15      $ 17,893      $ (1,180

Amortization or maturity date change

        38        66,007        4,145        48        103,120        (2,022 )  

Other

        5        9,634        (1,893     5        8,199        19   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total CRE—Other commercial real estate

        52      $ 78,433      $ 1,964        68      $ 129,212      $
 
(3,183
 

  

Automobile:

   (4)                 

Interest rate reduction

        28      $ 271      $ 4        14      $ 186      $ 3   

Amortization or maturity date change

        1,401        9,813        (73 )       1,534        13,832        (113 )  

Chapter 7 bankruptcy

        1,978        11,666        1,754        —           —           —     

Other

        —           —           —          —           —           —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Automobile

        3,407      $ 21,750      $ 1,685        1,548      $ 14,018      $ (110

Residential mortgage:

   (5)                 

Interest rate reduction

        12      $ 7,466      $ 10        8      $ 6,604      $ (589 )  

Amortization or maturity date change

        318        42,326        1,051        499        67,351        2,289   

Chapter 7 bankruptcy

        528        39,352        4,527        —           —           —     

Other

        6        663        41        18        3,555        115   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Residential mortgage

        864      $ 88,807      $ 5,629        525      $ 77,510      $ 1,815   

First-lien home equity:

   (6)                 

Interest rate reduction

        177      $ 21,841      $ 3,666        95      $ 11,836      $ 1,899   

Amortization or maturity date change

        57        5,825        23        75        9,073        587   

Chapter 7 bankruptcy

        177        7,461        4,203        —           —           —     

Other

        —           —           —          —           —           —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total First-lien home equity

        411      $ 35,127      $ 7,892        170      $ 20,909      $ 2,486   

Junior-lien home equity:

   (7)                 

Interest rate reduction

        52      $ 2,749      $ 443        109      $ 5,480      $ 287   

Amortization or maturity date change

        59        2,458        (57 )       89        2,975        59   

Chapter 7 bankruptcy

        1,198        12,366        17,781        —           —           —     

Other

        7        288        —          —           —           —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Junior-lien home equity

        1,316      $ 17,861      $ 18,167        198      $ 8,455      $ 346   

Other consumer:

   (8)                 

Interest rate reduction

        12      $ 228      $ 23        11      $ 837      $ 73   

Amortization or maturity date change

        15        352        30        57        363        (19 )  

Chapter 7 bankruptcy

        12        148        —          —           —           —     

Other

        —           —           —          —           —           —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Other consumer

        39      $ 728      $ 53        68      $ 1,200      $ 54   

Total new troubled debt restructurings

        6,425      $ 427,579      $ 33,669        2,775      $ 475,323      $ 1,557   

 

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(1)

TDRs may include multiple concessions and the disclosure classifications are based on the primary concession provided to the borrower.

(2)

Amount represents the financial impact via provision for loan and lease losses as a result of the modification.

(3)

Post-modification balances approximate pre-modification balances. The aggregate amount of charge-offs as a result of a restructuring are not significant.

(4)

Chapter 7 bankruptcy pre-modification balances were impacted by $2.0 million of charge-offs.

(5)

Chapter 7 bankruptcy pre-modification balances were impacted by $7.9 million of charge-offs.

(6)

Chapter 7 bankruptcy pre-modification balances were impacted by $4.3 million of charge-offs.

(7)

Chapter 7 bankruptcy pre-modification balances were impacted by $18.8 million of charge-offs.

(8)

Chapter 7 bankruptcy pre-modification balances were not significantly impacted by charge-offs.

Any loan within any portfolio or class is considered as payment redefaulted at 90-days past due.

 

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The following tables present TDRs modified within the previous twelve months that have subsequently redefaulted during the three-month and nine-month periods ended September 30, 2012 and 2011:

 

     Troubled Debt Restructurings That Have Redefaulted  
     Within One Year Of Modification During The Three Months Ended  
     September 30, 2012     September 30, 2011(1)  
(dollar amounts in thousands)    Number of
Contracts
     Ending
Balance
    Number of
Contracts
     Ending
Balance
 

C&I – Owner occupied:

          

Interest rate reduction

     2      $ 239        —         $ —     

Amortization or maturity date change

     4        489        3        3,224   

Other

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total C&I – Owner occupied

     6      $ 728         3      $ 3,224   

C&I – Other commercial and industrial:

          

Interest rate reduction

     —         $ —          —         $ —     

Amortization or maturity date change

     3        84        2        9,300   

Other

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total C&I – Other commercial and industrial

     3      $ 84        2      $ 9,300   

CRE – Retail Properties:

          

Interest rate reduction

     —         $ —          —         $ —     

Amortization or maturity date change

     —           —          —           —     

Other

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total CRE – Retail properties

     —         $ —          —         $ —     

CRE – Multi family:

          

Interest rate reduction

     —         $ —          2      $ 812   

Amortization or maturity date change

     —           —          —           —     

Other

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total CRE – Multi family

     —         $ —          2      $ 812   

CRE – Office:

          

Interest rate reduction

     —         $ —          —         $ —     

Amortization or maturity date change

     —           —          —           —     

Other

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total CRE – Office

     —         $ —          —         $ —     

CRE – Industrial and Warehouse:

          

Interest rate reduction

     —         $ —          —         $ —     

Amortization or maturity date change

     —           —          2        229   

Other

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total CRE – Industrial and Warehouse

     —         $ —          2      $ 229    

CRE – Other commercial real estate:

          

Interest rate reduction

     —         $ —          2      $ 132   

Amortization or maturity date change

     —           —          —           —     

Other

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total CRE – Other commercial real estate

     —         $ —          2      $ 132   

Automobile:

          

Interest rate reduction

     1      $ —          —         $ —     

Amortization or maturity date change

     20        —          41        —     

Other

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Automobile

     21      $ —   (2)      41      $ —   (2) 
          

Residential mortgage:

          

Interest rate reduction

     —         $ —          1      $ 65   

Amortization or maturity date change

     18        2,422        22        2,276   

Chapter 7 bankruptcy

     17        1,760        —           —     

Other

     1        106        1        149   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Residential mortgage

     36      $ 4,288        24      $ 2,490   

First-lien home equity:

          

Interest rate reduction

     —         $ —          —         $ —     

Amortization or maturity date change

     4        489         —           —     

Other

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total First-lien home equity

     4      $ 489        —         $ —     

Junior-lien home equity:

          

Interest rate reduction

     —         $ —          —         $ —     

Amortization or maturity date change

     1        20        —           —     

Other

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Junior-lien home equity

     1      $ 20        —         $ —     

Other consumer:

          

Interest rate reduction

     —         $ —          —         $ —     

Amortization or maturity date change

     —           —          —           —     

Other

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Other consumer

     —         $ —   (3)      —         $ —   (3) 

Total troubled debt restructurings with subsequent redefault

     71      $ 5,609        76      $ 16,187   

 

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     Troubled Debt Restructurings That Have Redefaulted  
     Within One Year of Modification During The Nine Months Ended  
     September 30, 2012     September 30, 2011(1)  
(dollar amounts in thousands)    Number of
Contracts
     Ending
Balance
    Number of
Contracts
     Ending
Balance
 

C&I – Owner occupied:

          

Interest rate reduction

     3      $ 1,237        9      $ 3,850   

Amortization or maturity date change

     10        1,085        7        4,072   

Other

     —           —          2        2,352   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total C&I – Owner occupied

     13      $ 2,322        18      $ 10,274   

C&I – Other commercial and industrial:

          

Interest rate reduction

     3      $ 401        1      $ 193   

Amortization or maturity date change

     12        558        6        9,932   

Other

     3        387        —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total C&I – Other commercial and industrial

     18      $ 1,346        7      $ 10,125   

CRE – Retail Properties:

          

Interest rate reduction

     —         $ —          —         $ —     

Amortization or maturity date change

     2        372        1        796   

Other

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total CRE – Retail properties

     2      $ 372        1      $ 796   

CRE – Multi family:

          

Interest rate reduction

     2      $ 1,236        4      $ 1,180   

Amortization or maturity date change

     1        117        2        465   

Other

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total CRE – Multi family

     3      $ 1,353        6      $ 1,645   

CRE – Office:

          

Interest rate reduction

     —         $ —          1      $ 116   

Amortization or maturity date change

     —           —          1        334   

Other

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total CRE – Office

     —         $ —          2      $ 450   

CRE – Industrial and Warehouse:

          

Interest rate reduction

     —         $ —          —         $ —     

Amortization or maturity date change

     —           —          7        2,581   

Other

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total CRE – Industrial and Warehouse

     —         $ —          7      $ 2,581   

CRE – Other commercial real estate:

          

Interest rate reduction

     1      $ 898        7      $ 2,214   

Amortization or maturity date change

     4        646        10        2,037   

Other

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total CRE – Other commercial real estate

     5      $ 1,544        17      $ 4,251   

Automobile:

          

Interest rate reduction

     4      $ —          1      $ —     

Amortization or maturity date change

     123        —          112        —     

Other

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Automobile

     127      $ —   (4)      113      $ —   (4) 

Residential mortgage:

          

Interest rate reduction

     1      $ 29        2      $ 221   

Amortization or maturity date change

     76        10,866        51        5,544   

Chapter 7 bankruptcy

     17        1,761        —           —     

Other

     5        523        5        757   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Residential mortgage

     99      $ 13,179        58      $ 6,522   

First-lien home equity:

          

Interest rate reduction

     9      $ 821        —         $ —     

Amortization or maturity date change

     5        503        3        121   

Other

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total First-lien home equity

     14      $ 1,324        3      $ 121   

Junior-lien home equity:

          

Interest rate reduction

     2      $ 112        2      $ 153   

Amortization or maturity date change

     3        99        5        249   

Other

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Junior-lien home equity

     5      $ 211        7      $ 402   

Other consumer:

          

Interest rate reduction

     1      $ —          —         $ —     

Amortization or maturity date change

     3        —          2        11   

Other

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Other consumer

     4      $ —   (5)      2      $ 11 (5) 

Total troubled debt restructurings with subsequent redefault

     290      $ 21,651        241      $ 37,178   

 

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(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 in any portfolio or class. Any loan in any portfolio or class may be considered to be in payment redefault prior to the guidelines noted above when collection of principal or interest is in doubt.

(2)

Automobile loans are charged-off at time of subsequent redefault. During the three-month periods ended September 30, 2012, and September 30, 2011, $103 thousand and $220 thousand, respectively, of total automobile loans were charged-off at the time of subsequent redefault.

(3)

Other consumer loans are charged-off at time of subsequent redefault. During the three-month periods ended September 30, 2012, and September 30, 2011, no amount of total other consumer loans were charged-off at the time of subsequent redefault.

(4)

Automobile loans are charged-off at time of subsequent redefault. During the nine-month periods ended September 30, 2012, and September 30, 2011, $749 thousand and $813 thousand, respectively, of total automobile loans were charged-off at the time of subsequent redefault.

(5)

Other consumer loans are charged-off at time of subsequent redefault. During the nine-month periods ended September 30, 2012, and September 30, 2011, $62 thousand and $11 thousand, respectively, of total other consumer loans were charged-off at the time of subsequent redefault.

Pledged Loans and Leases

At September 30, 2012, the Bank has access to the Federal Reserve’s discount window and advances from the FHLB – Cincinnati. As of September 30, 2012, these borrowings and advances are secured by $18.9 billion of loans and securities.

 

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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 September 30, 2012 and December 31, 2011:

 

     September 30, 2012      December 31, 2011  

(dollar amounts in thousands)

   Amortized
Cost
     Fair Value      Amortized
Cost
     Fair Value  

U.S. Treasury:

           

Under 1 year

   $ —         $ —         $ —         $ —     

1-5 years

     51,280        52,030        51,773        52,672  

6-10 years

     508        541        509        532  

Over 10 years

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. Treasury

     51,788        52,571        52,282        53,204  
  

 

 

    

 

 

    

 

 

    

 

 

 

Federal agencies: mortgage-backed securities:

           

Under 1 year

     2        2        —           —     

1-5 years

     193,873        197,245        218,410        219,055  

6-10 years

     453,302        471,319        400,105        409,521  

Over 10 years

     3,802,732        3,900,036        3,760,108        3,836,316  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Federal agencies: mortgage-backed securities

     4,449,909        4,568,602        4,378,623        4,464,892  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other agencies:

           

Under 1 year

     2,499        2,558        101,346        101,656  

1-5 years

     303,776        313,516        611,047        620,639  

6-10 years

     46,524        48,073        12,333        13,249  

Over 10 years

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other agencies

     352,799        364,147        724,726        735,544  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. Government backed agencies

     4,854,496        4,985,320        5,155,631        5,253,640  
  

 

 

    

 

 

    

 

 

    

 

 

 

Municipal securities:

           

Under 1 year

     276        277        —           —     

1-5 years

     175,839        181,037        186,250        190,228  

6-10 years

     195,193        203,733        98,801        104,857  

Over 10 years

     89,385        90,578        109,811        112,641  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total municipal securities

     460,693        475,625        394,862        407,726  
  

 

 

    

 

 

    

 

 

    

 

 

 

Private-label CMO:

           

Under 1 year

     —           —           —           —     

1-5 years

     —           —           —           —     

6-10 years

     8,560        8,702        11,740        11,783  

Over 10 years

     71,945        67,080        72,858        60,581  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total private-label CMO

     80,505        75,782        84,598        72,364  
  

 

 

    

 

 

    

 

 

    

 

 

 

Asset-backed securities:

           

Under 1 year

     —           —           —           —     

1-5 years

     567,975        576,772        644,080        646,315  

6-10 years

     204,519        210,504        197,940        199,075  

Over 10 years

     306,293        186,343        258,270        121,698  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total asset-backed securities (1)

     1,078,787        973,619        1,100,290        967,088  
  

 

 

    

 

 

    

 

 

    

 

 

 

Covered bonds:

           

Under 1 year

     —           —           —           —     

1-5 years

     282,448        291,965        510,937        504,045  

6-10 years

     —           —           —           —     

Over 10 years

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total covered bonds

     282,448        291,965        510,937        504,045  
  

 

 

    

 

 

    

 

 

    

 

 

 

Corporate debt:

           

Under 1 year

     27,439        27,808        501        518  

1-5 years

     480,902        488,622        383,909        379,657  

6-10 years

     121,962        126,535        148,896        148,708  

Over 10 years

     10,154        10,324        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate debt

     640,457        653,289        533,306        528,883  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other:

           

Under 1 year

     3,150        3,146        1,900        1,900  

1-5 years

     750        750        2,250        2,234  

6-10 years

     —           —           —           —     

Over 10 years

     —           —           —           —     

Non-marketable equity securities

     301,464        301,464        286,515        286,515  

Marketable equity securities

     17,293        17,608        53,665        53,619  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other

     322,657        322,968        344,330        344,268  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale and other securities

   $ 7,720,043      $ 7,778,568      $ 8,123,954      $ 8,078,014  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Amounts at September 30, 2012 and December 31, 2011 include automobile asset backed securities with a fair value of $33 million and $145 million, respectively, which meet the eligibility requirements for the Term Asset-Backed Securities Loan Facility, or “TALF,” administered by the Federal Reserve Bank of New York.

 

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Other securities at September 30, 2012 and December 31, 2011 include $165.6 million of stock issued by the FHLB of Cincinnati, $3.5 million and none, respectively, of stock issued by the FHLB of Indianapolis, and $132.4 million and $120.9 million, respectively, of Federal Reserve Bank stock. Other securities also include corporate debt and marketable equity securities. Non-marketable equity securities are valued at amortized cost. At September 30, 2012 and December 31, 2011, Huntington did not have any material equity positions in FNMA or FHLMC.

The following tables provide amortized cost, fair value, and gross unrealized gains and losses recognized in accumulated other comprehensive income by investment category at September 30, 2012 and December 31, 2011.

 

            Unrealized        

(dollar amounts in thousands)

   Amortized
Cost
     Gross
Gains
     Gross
Losses
    Fair
Value
 

September 30, 2012

          

U.S. Treasury

   $ 51,788      $ 783      $ —        $ 52,571  

Federal agencies:

          

Mortgage-backed securities

     4,449,909        118,918        (225     4,568,602  

Other agencies

     352,799        11,350        (2     364,147  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total U.S. Government backed securities

     4,854,496        131,051        (227     4,985,320  

Municipal securities

     460,693        14,960        (28     475,625  

Private-label CMO

     80,505        1,091        (5,814     75,782  

Asset-backed securities

     1,078,787        15,768        (120,936     973,619  

Covered bonds

     282,448        9,517        —          291,965  

Corporate debt

     640,457        13,509        (677     653,289  

Other securities

     322,657        360        (49     322,968  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale and other securities

   $ 7,720,043      $ 186,256      $ (127,731   $ 7,778,568  
  

 

 

    

 

 

    

 

 

   

 

 

 
            Unrealized        

(dollar amounts in thousands)

   Amortized
Cost
     Gross
Gains
     Gross
Losses
    Fair
Value
 

December 31, 2011

          

U.S. Treasury

   $ 52,282      $ 922      $ —        $ 53,204  

Federal agencies:

          

Mortgage-backed securities

     4,378,623        88,266        (1,997     4,464,892  

Other agencies

     724,726        10,821        (3     735,544  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total U.S. Government backed securities

     5,155,631        100,009        (2,000     5,253,640  

Municipal securities

     394,862        12,889        (25     407,726  

Private-label CMO

     84,598        347        (12,581     72,364  

Asset-backed securities

     1,100,290        3,925        (137,127     967,088  

Covered bonds

     510,937        860        (7,752     504,045  

Corporate debt

     533,306        891        (5,314     528,883  

Other securities

     344,330        219        (281     344,268  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale and other securities

   $ 8,123,954      $ 119,140      $ (165,080   $ 8,078,014  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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The following tables provide detail on investment securities with unrealized losses aggregated by investment category and length of time the individual securities have been in a continuous loss position, at September 30, 2012 and December 31, 2011.

 

     Less than 12 Months     Over 12 Months     Total  

(dollar amounts in thousands )

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

September 30, 2012

               

U.S. Treasury

   $ —         $ —        $ —         $ —        $ —         $ —     

Federal agencies:

               

Mortgage-backed securities

     11,543        (110     38,500        (115     50,043        (225

Other agencies

     1,416        (2     —           —          1,416        (2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total U.S. Government backed securities

     12,959        (112     38,500        (115     51,459        (227

Municipal securities

     27,851        (28     —           —          27,851        (28

Private-label CMO

     24,092        —          36,014        (5,814     60,106        (5,814

Asset-backed securities

     —           —          103,406        (120,936     103,406        (120,936

Covered bonds

     —           —          —           —          —           —     

Corporate debt

     31,108        (64     274,387        (613     305,495        (677

Other securities

     —           —          1,409        (49     1,409        (49
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 96,010      $ (204   $ 453,716      $ (127,527   $ 549,726      $ (127,731
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     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, 2011

               

U.S. Treasury

   $ —         $ —        $ —         $ —        $ —         $ —     

Federal agencies:

               

Mortgage-backed securities

     417,614        (1,997     —           —          417,614        (1,997

Other agencies

     3,070        (3     —           —          3,070        (3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total U.S. Government backed securities

     420,684        (2,000     —           —          420,684        (2,000

Municipal securities

     6,667        (1     7,311        (24     13,978        (25

Private-label CMO

     11,613        (48     51,039        (12,533     62,652        (12,581

Asset-backed securities

     252,671        (547     113,663        (136,580     366,334        (137,127

Covered bonds

     363,694        (7,214     14,684        (538     378,378        (7,752

Corporate debt

     237,401        (3,652     198,338        (1,662     435,739        (5,314

Other securities

     1,984        (16     —           (265     1,984        (281
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 1,294,714      $ (13,478   $ 385,035      $ (151,602   $ 1,679,749      $ (165,080
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following table is a summary of realized securities gains and losses for the three-month and nine-month periods ended September 30, 2012 and 2011:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(dollar amounts in thousands)

   2012     2011     2012     2011  

Gross gains on sales of securities

   $ 6,253     $ 174     $ 7,736     $ 16,532  

Gross (losses) on sales of securities

     (1,968     (160     (2,224     (10,624
  

 

 

   

 

 

   

 

 

   

 

 

 

Net gain on sales of securities

   $ 4,285     $ 14     $ 5,512     $ 5,908  
  

 

 

   

 

 

   

 

 

   

 

 

 

Alt-A Mortgage-Backed, Pooled-Trust-Preferred, and Private-Label CMO Securities

Our three highest risk segments of our investment portfolio are the Alt-A mortgage-backed, pooled-trust-preferred, and private-label CMO portfolios. The Alt-A mortgage-backed securities and pooled-trust-preferred securities are in the asset-backed securities portfolio. The performance of the underlying securities in each of these segments continued to reflect the economic environment. Each of these securities in these three segments is subjected to a rigorous review of its projected cash flows. These reviews are supported with analysis from independent third parties.

 

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The following table presents the credit ratings for our Alt-A mortgage-backed, pooled-trust-preferred, and private label CMO securities as of September 30, 2012:

Credit Ratings of Selected Investment Securities (1)

(dollar amounts in thousands)

 

                   Credit Rating of Fair Value Amount  
     Amortized
Cost
     Fair Value      AAA      AA +/-      A+/-        BBB +/-      <BBB-  

Private-label CMO securities

   $ 80,505      $ 75,782      $ 24,092      $ —         $ 19,733      $ 4,593      $ 27,364  

Alt-A mortgage-backed securities

     29,805        27,351        —           27,351        —           —           —     

Pooled-trust-preferred securities

     197,382        78,926        —           —           21,053        —           57,873  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total at September 30, 2012

   $ 307,692      $ 182,059      $ 24,092      $ 27,351      $ 40,786      $ 4,593      $ 85,237  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total at December 31, 2011

   $ 342,867      $ 194,062      $ 1,045      $ 23,353      $ 52,935      $ 6,858      $ 109,871  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Credit ratings reflect the lowest current rating assigned by a nationally recognized credit rating agency.

Negative changes to the above credit ratings would generally result in an increase of our risk-weighted assets, and a reduction to our regulatory capital ratios.

The following table summarizes the relevant characteristics of our pooled-trust-preferred securities portfolio, which are included in asset-backed securities, at September 30, 2012. Each security is part of a pool of issuers and supports a more senior tranche of securities except for the I-Pre TSL II, and MM Comm III securities which are the most senior class.

Trust Preferred Securities Data

September 30, 2012

(dollar amounts in thousands)

 

Deal Name

   Par Value      Amortized
Cost
     Fair
Value
     Unrealized
Loss (2)
    Lowest
Credit
Rating (3)
     # of Issuers
Currently
Performing/
Remaining (4)
     Actual
Deferrals
and
Defaults
as a % of
Original
Collateral
    Expected
Defaults

as a % of
Remaining
Performing
Collateral
    Excess
Subordination (5)
 

Alesco II (1)

   $ 41,645      $ 30,653      $ 9,486      $ (21,167     C         31/36         11     15     —  

Alesco IV (1)

     21,407        8,242        471        (7,771     C         29/40         18       24       —     

ICONS

     20,000        20,000        12,440        (7,560     BB         23/24         3       14       45  

I-Pre TSL II

     30,803        30,723        21,053        (9,670     A         23/25         5       13       74  

MM Comm III

     7,402        7,072        3,878        (3,194     B         5/10         7       13       32  

Pre TSL IX (1)

     5,000        3,955        1,351        (2,604     C         32/47         22       13       5  

Pre TSL X (1)

     18,157        9,914        4,979        (4,935     C         34/51         31       17       —     

Pre TSL XI (1)

     25,601        22,307        7,923        (14,384     C         41/62         29       17       —     

Pre TSL XIII (1)

     28,790        22,702        7,566        (15,136     C         40/63         35       28       1  

Reg Diversified (1)

     25,500        6,908        365        (6,543     D         23/44         46       20       —     

Soloso (1)

     12,500        3,906        554        (3,352     C         40/65         30       20       —     

Tropic III

     31,000        31,000        8,860        (22,140     CC         24/43         36       25       27  
  

 

 

    

 

 

    

 

 

    

 

 

             

Total

   $ 267,805      $ 197,382      $ 78,926      $ (118,456            
  

 

 

    

 

 

    

 

 

    

 

 

             

 

(1) Security was determined to have OTTI. As such, the book value is net of recorded credit impairment.
(2) The majority of securities have been in a continuous loss position for 12 months or longer.
(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

 

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Huntington evaluates its available-for-sale securities portfolio on a quarterly basis for indicators of OTTI. Huntington assesses whether OTTI has occurred when the fair value of a debt security is less than the amortized cost basis at period-end. Management reviews the amount of unrealized loss, the length of time the security has been in an unrealized loss position, the credit rating history, market trends of similar security classes, time remaining to maturity, and the source of both interest and principal payments to identify securities which could potentially be impaired. OTTI is considered to have occurred; (1) if Huntington intends to sell the security; (2) if it is more likely than not Huntington will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of the expected cash flows is not sufficient to recover all contractually required principal and interest payments.

For securities that Huntington does not expect to sell and it is not more likely than not to be required to sell, the OTTI is separated into credit and noncredit components. A discounted cash flow analysis, which includes evaluating the timing of the expected cash flows, is completed for all debt securities subject to credit impairment. The measurement of the credit loss component is equal to the difference between the debt security’s cost basis and the present value of its expected future cash flows discounted at the security’s effective yield. The credit-related OTTI, represented by the expected loss in principal, is recognized in noninterest income. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit-related and, therefore, are recognized in OCI. Huntington believes that it will fully collect the carrying value of securities on which noncredit-related impairment has been recognized in OCI. Noncredit-related OTTI results from other factors, including increased liquidity spreads and extension of the security. For securities which Huntington does expect to sell, or if it is more likely than not Huntington will be required to sell the security before recovery of its amortized cost basis, all OTTI is recognized in earnings. Presentation of OTTI is made in the Condensed Consolidated Statements of Income on a gross basis with a reduction for the amount of OTTI recognized in OCI. Once an OTTI is recorded, when future cash flows can be reasonably estimated, future cash flows are re-allocated between interest and principal cash flows to provide for a level-yield on the security.

Huntington applied the related OTTI guidance on the debt security types listed below.

Alt-A mortgage-backed and private-label CMO securities are collateralized by first-lien residential mortgage loans. The securities are valued by a third party 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.

Pooled-trust-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. A third party 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 security’s 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% 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 1% 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 5.00% to LIBOR plus 16.25% as of 2012. 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).

For the three-month and nine-month periods ended September 30, 2012 and 2011, the following table summarizes by security type the total OTTI losses recognized in the Unaudited Condensed Consolidated Statements of Income for securities evaluated for impairment as described above.

 

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     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  

(dollar amounts in thousands)

   2012     2011     2012     2011  

Available-for-sale and other securities:

        

Alt-A Mortgage-backed

   $ —        $ (131   $ —        $ (361

Pooled-trust-preferred

     —          (204     —          (3,410

Private label CMO

     (116     (1,029     (1,601     (1,940
  

 

 

   

 

 

   

 

 

   

 

 

 

Total debt securities

     (116     (1,364     (1,601     (5,711
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

     —          —          (5     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

   $ (116   $ (1,364   $ (1,606   $ (5,711
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table rolls forward the OTTI amounts recognized in earnings on debt securities held by Huntington for the three-month and nine-month periods ended September 30, 2012 and 2011 as follows:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  

(dollar amounts in thousands)

   2012     2011      2012     2011  

Balance, beginning of period

   $ 57,152     $ 54,402      $ 56,764     $ 54,536  

Reductions from sales/maturities

     (7,848     —           (8,945     (4,481

Credit losses not previously recognized

     —          26        —          26  

Additional credit losses

     116       1,338        1,601       5,685  
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance, end of period

   $ 49,420     $ 55,766      $ 49,420     $ 55,766  
  

 

 

   

 

 

    

 

 

   

 

 

 

The fair values of these 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 and asset-backed securities 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 fair value is recovered, which may be maturity and; therefore, does not consider them to be other-than-temporarily impaired at September 30, 2012.

As of September 30, 2012, Management has evaluated all other investment securities with unrealized losses and all non-marketable securities for impairment and concluded no additional OTTI is required.

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.

During the 2012 third quarter, Huntington transferred $278.7 million of federal agencies, mortgage-backed securities and other agency securities from the available-for-sale securities portfolio to the held-to-maturity securities portfolio. The securities were reclassified at fair value at the date of transfer. At the time of the transfer, less than $0.1 million of unrealized net gains were recognized in OCI. The amounts in OCI will be recognized in earnings over the remaining life of the securities as an offset to the adjustment of yield in a manner consistent with the amortization of the premium on the same transferred securities, resulting in an immaterial impact on net income.

Additionally, during the 2012 third quarter, Huntington purchased $734.7 million of federal agencies, mortgage-backed securities which were classified directly into the held-to-maturity portfolio.

 

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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 September 30, 2012 and December 31, 2011.

 

     September 30, 2012      December 31, 2011  
     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

     —           —           —           —     

Over 10 years

     1,506,139        1,548,303        640,551        660,186  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Federal agencies: mortgage-backed securities

     1,506,139        1,548,303        640,551        660,186  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other agencies:

           

Over 10 years

     76,011        76,667        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other agencies

     76,011        76,667        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. Government backed agencies

     1,582,150        1,624,970        640,551        660,186  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity securities

   $ 1,582,150      $ 1,624,970      $ 640,551      $ 660,186  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides amortized cost, gross unrealized gains and losses, and fair value by investment category at September 30, 2012 and December 31, 2011:

 

            Unrealized        
     Amortized      Gross      Gross     Fair  

(dollar amounts in thousands)

   Cost      Gains      Losses     Value  

September 30, 2012

          

Federal Agencies:

          

Mortgage-backed securities

   $ 1,506,139      $ 42,164      $ —        $ 1,548,303  

Other agencies

     76,011        656        —          76,667  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total U.S. Government backed securities

     1,582,150        42,820        —          1,624,970  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total held-to-maturity securities

   $ 1,582,150      $ 42,820      $ —        $ 1,624,970  
  

 

 

    

 

 

    

 

 

   

 

 

 
            Unrealized        
     Amortized      Gross      Gross     Fair  

(dollar amounts in thousands)

   Cost      Gains      Losses     Value  

December 31, 2011

          

Federal Agencies:

          

Mortgage-backed securities

   $ 640,551      $ 19,652      $ (17   $ 660,186  

Other agencies

     —           —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total U.S. Government backed securities

     640,551        19,652        (17     660,186  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total held-to-maturity securities

   $ 640,551      $ 19,652      $ (17   $ 660,186  
  

 

 

    

 

 

    

 

 

   

 

 

 

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 OTTI would be recognized in earnings. As of September 30, 2012, Management has evaluated all held-to-maturity securities and concluded no OTTI existed in the portfolio.

 

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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 and nine-month periods ended September 30, 2012 and 2011:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  

(dollar amounts in thousands)

   2012      2011      2012      2011  

Residential mortgage loans sold with servicing retained

   $ 889,769      $ 515,179      $ 2,746,068      $ 2,264,697  

Pretax gains resulting from above loan sales (1)

     30,195        12,737        83,849        57,982  

 

(1) Recorded in other noninterest income.

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 are 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 asset is established and is based upon Management’s forward assumptions regarding interest rates. MSRs are included in accrued income and other assets. 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 and nine-month periods ended September 30, 2012 and 2011:

 

     Three Months Ended     Nine Months Ended  

Fair Value Method:

   September 30,     September 30,  

(dollar amounts in thousands)

   2012     2011     2012     2011  

Fair value, beginning of period

   $ 45,061     $ 104,997     $ 65,001     $ 125,679  

Change in fair value during the period due to:

        

Time decay (1)

     (633     (1,222     (2,282     (3,987

Payoffs (2)

     (3,043     (4,614     (11,334     (15,013

Changes in valuation inputs or assumptions (3)

     (4,764     (25,337     (14,764     (32,855
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair value, end of period:

   $ 36,621     $ 73,824     $ 36,621     $ 73,824  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 spreads.

 

     Three Months Ended     Nine Months Ended  

Amortization Method:

   September 30,     September 30,  

(dollar amounts in thousands)

   2012     2011     2012     2011  

Carrying value, beginning of period

   $ 83,236     $ 84,742     $ 72,434     $ 70,516  

New servicing assets created

     7,725       4,572       26,081       24,549  

Impairment (charge) / recovery

     (14,779     (14,057     (13,886     (14,057

Amortization and other

     (4,729     (3,804     (13,176     (9,555
  

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value, end of period

   $ 71,453     $ 71,453     $ 71,453     $ 71,453  
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair value, end of period

   $ 71,453     $ 71,467     $ 71,453     $ 71,467  
  

 

 

   

 

 

   

 

 

   

 

 

 

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.

 

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For MSRs under the fair value method, a summary of key assumptions and the sensitivity of the MSR value at September 30, 2012, and December 31, 2011, to changes in these assumptions follows:

 

     September 30, 2012     December 31, 2011  
           Decline in fair value due to           Decline in fair value due to  
           10%     20%           10%     20%  
           adverse     adverse           adverse     adverse  

(dollar amounts in thousands)

   Actual     change     change     Actual     change     change  

Constant prepayment rate

     22.1   $ (2,768   $ (5,406     20.11   $ (4,720   $ (9,321

Spread over forward interest rate swap rates

     1,291 bps      (1,314     (2,628     650 bps      (1,511     (3,023

For MSRs under the amortization method, a summary of key assumptions and the sensitivity of the MSR value at September 30, 2012, and December 31, 2011, to changes in these assumptions follows:

 

     September 30, 2012     December 31, 2011  
           Decline in fair value due to           Decline in fair value due to  
           10%     20%           10%     20%  
           adverse     adverse           adverse     adverse  

(dollar amounts in thousands)

   Actual     change     change     Actual     change     change  

Constant prepayment rate

     19.65   $ (4,723   $ (9,105     15.92   $ (3,679   $ (7,160

Spread over forward interest rate swap rates

     943 bps      (2,429     (4,858     953 bps      (2,605     (5,211

Total servicing fees included in mortgage banking income amounted to $11.3 million and $12.1 million for the three-month periods ended September 30, 2012 and 2011, respectively. For the nine-month periods ended September 30, 2012 and 2011, servicing fees totaled $34.7 million and $37.1 million, respectively.

Automobile Loans and Leases

In the 2012 first quarter, automobile loans totaling $1.3 billion were transferred to a trust in a securitization transaction in exchange for $1.3 billion of net proceeds. The securitization and resulting sale of all underlying securities qualified for sale accounting. As a result of this transaction, Huntington recognized a $23.0 million gain which is reflected in other noninterest income on the Condensed Consolidated Statement of Income and recorded a $19.9 million servicing asset which is reflected in accrued income and other assets on the Condensed Consolidated Balance Sheet.

$1.3 billion of automobile loans were transferred from the automobile loan portfolio to loans held for sale during the 2012 second quarter in preparation of a securitization that was completed in October 2012. The securitization and resulting sale of all underlying securities qualified for sale accounting. As a result of this transaction, in the 2012 fourth quarter, Huntington recognized a gain of approximately $17 million.

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 and nine-month periods ended September 30, 2012 and 2011, and the fair value at the end of each period were as follows:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  

(dollar amounts in thousands)

   2012     2011     2012     2011  

Carrying value, beginning of period

   $ 26,737     $ 49     $ 13,377     $ 97  

New servicing assets created

     2,854       16,039       22,737       16,039  

Amortization and other

     (3,912     (743     (10,435     (791
  

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value, end of period

   $ 25,679     $ 15,345     $ 25,679     $ 15,345  
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair value, end of period

   $ 26,635     $ 16,039     $ 26,635     $ 16,039  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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A summary of key assumptions and the sensitivity of the automobile loan servicing rights value at September 30, 2012, and December 31, 2011, to changes in these assumptions follows:

 

     September 30, 2012     December 31, 2011  
           Decline in fair value due to           Decline in fair value due to  
           10%     20%           10%     20%  
           adverse     adverse           adverse     adverse  

(dollar amounts in thousands)

   Actual     change     change     Actual     change     change  

Constant prepayment rate

     1.17   $ (1,119   $ (1,971     1.30   $ (362   $ (708

Spread over forward interest rate swap rates

     80 bps      (13     (26     NA bps      NA        NA   

Servicing income, net of amortization of capitalized servicing assets, amounted to $2.2 million and $0.3 million for the three-month periods ending September 30, 2012, and 2011, respectively. For the nine-month periods ended September 30, 2012 and 2011, servicing income, net of amortization of capitalized serving assets, amounted to $5.6 million and $1.0 million, respectively.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

A rollforward of goodwill by business segment for the first nine-month period of 2012 was as follows:

 

     Retail &      Regional &                              
     Business      Commercial                    Treasury/      Huntington  

(dollar amounts in thousands)

   Banking      Banking      AFCRE      WGH      Other      Consolidated  

Balance, beginning of period

   $ 286,824      $ 16,169      $ —         $ 98,951      $ 42,324      $ 444,268  

Adjustments

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 286,824      $ 16,169      $ —         $ 98,951      $ 42,324      $ 444,268  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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. No events or changes in circumstances since the October 1, 2011, annual impairment test were noted that would indicate it was more likely than not a goodwill impairment existed.

At September 30, 2012, and December 31, 2011, Huntington’s other intangible assets consisted of the following:

 

     Gross           Net  
     Carrying     Accumulated     Carrying  

(dollar amounts in thousands)

   Amount     Amortization     Value  

September 30, 2012

      

Core deposit intangible

   $ 380,249 (1)    $ (292,329   $ 87,920  

Customer relationship

     104,574       (48,973     55,601  

Other

     25,164       (24,881     283  
  

 

 

   

 

 

   

 

 

 

Total other intangible assets

   $ 509,987     $ (366,183   $ 143,804  
  

 

 

   

 

 

   

 

 

 

December 31, 2011

      

Core deposit intangible

   $ 376,846     $ (263,410   $ 113,436  

Customer relationship

     104,574       (43,052     61,522  

Other

     25,164       (24,820     344  
  

 

 

   

 

 

   

 

 

 

Total other intangible assets

   $ 506,584     $ (331,282   $ 175,302  
  

 

 

   

 

 

   

 

 

 

 

(1) Includes $3,403 thousand related to the FDIC-assisted acquisition of Fidelity Bank on March 30, 2012.

 

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The estimated amortization expense of other intangible assets for the remainder of 2012 and the next five years is as follows:

 

(dollar amounts    Amortization  

in thousands)

   Expense  

2012

   $ 11,967  

2013

     41,083  

2014

     36,368  

2015

     20,207  

2016

     6,993  

2017

     6,511  

 

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8. OTHER COMPREHENSIVE INCOME

The components of other comprehensive income for the three-month and nine-month periods ended September 30, 2012 and 2011, were as follows:

 

     Three Months Ended  
     September 30, 2012  
     Tax (Expense)  

(dollar amounts in thousands)

   Pretax     Benefit     After-tax  

Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold

   $ 9,322     $ (3,263   $ 6,059  

Unrealized holding gains (losses) on available-for-sale debt securities arising during the period

     61,074       (21,608     39,466  

Less: Reclassification adjustment for net losses (gains) included in net income

     (4,169     1,459       (2,710
  

 

 

   

 

 

   

 

 

 

Net change in unrealized holding gains (losses) on available-for-sale debt securities

     66,227       (23,412     42,815  
  

 

 

   

 

 

   

 

 

 

Net change in unrealized holding gains (losses) on available-for-sale equity securities

     (26     9       (17

Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period

     21,595       (7,568     14,027  

Less: Reclassification adjustment for net losses (gains) losses included in net income

     (13,298     4,665       (8,633
  

 

 

   

 

 

   

 

 

 

Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships

     8,297       (2,903     5,394  
  

 

 

   

 

 

   

 

 

 

Amortization of net actuarial loss and prior service cost included in net income

     4,990       (1,747     3,243  
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income

   $ 79,488     $ (28,053   $ 51,435  
  

 

 

   

 

 

   

 

 

 
     Three Months Ended  
     September 30, 2011  
     Tax (Expense)  

(dollar amounts in thousands)

   Pretax     Benefit     After-tax  

Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold

   $ (4,362   $ 1,527     $ (2,835

Unrealized holding gains (losses) on available-for-sale debt securities arising during the period

     42,832       (15,180     27,652  

Less: Reclassification adjustment for net losses (gains) included in net income

     1,350       (473     877  
  

 

 

   

 

 

   

 

 

 

Net change in unrealized holding gains (losses) on available-for-sale debt securities

     39,820       (14,126     25,694  
  

 

 

   

 

 

   

 

 

 

Net change in unrealized holding gains (losses) on available-for-sale equity securities

     (197     69       (128

Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period

     25,338       (8,868     16,470  

Less: Reclassification adjustment for net losses (gains) losses included in net income

     (3,844     1,345       (2,499
  

 

 

   

 

 

   

 

 

 

Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships

     21,494       (7,523     13,971  
  

 

 

   

 

 

   

 

 

 

Amortization of net actuarial loss and prior service cost included in net income

     4,003       (1,401     2,602  
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income

   $ 65,120     $ (22,981   $ 42,139  
  

 

 

   

 

 

   

 

 

 
     Nine Months Ended  
     September 30, 2012  
     Tax (expense)  

(dollar amounts in thousands)

   Pretax     Benefit     After-tax  

Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold

   $ 15,574     $ (5,451   $ 10,123  

Unrealized holding gains (losses) on available-for-sale debt securities arising during the period

     92,436       (32,831     59,605  

Less: Reclassification adjustment for net losses (gains) included in net income

     (3,906     1,367       (2,539
  

 

 

   

 

 

   

 

 

 

Net change in unrealized holding gains (losses) on available-for-sale debt securities

     104,104       (36,915     67,189  
  

 

 

   

 

 

   

 

 

 

Net change in unrealized holding gains (losses) on available-for-sale equity securities

     361       (126     235  

Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period

     5,139       (1,810     3,329  

Less: Reclassification adjustment for net losses (gains) losses included in net income

     13,428       (4,689     8,739  
  

 

 

   

 

 

   

 

 

 

Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships

     18,567       (6,499     12,068  
  

 

 

   

 

 

   

 

 

 

Amortization of net actuarial loss and prior service cost included in
net income

     14,968       (5,239     9,729  
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income

   $ 138,000     $ (48,779   $ 89,221  
  

 

 

   

 

 

   

 

 

 

 

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     Nine Months Ended  
     September 30, 2011  
     Tax (expense)  
(dollar amounts in thousands)    Pretax     Benefit     After-tax  

Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold

     11,079       (3,878     7,201  

Unrealized holding gains (losses) on available-for-sale debt securities arising during the period

     132,575       (46,446     86,129  

Less: Reclassification adjustment for net losses (gains) included in net income

     (197     69       (128
  

 

 

   

 

 

   

 

 

 

Net change in unrealized holding gains (losses) on available-for-sale debt securities

     143,457       (50,255     93,202  
  

 

 

   

 

 

   

 

 

 

Net change in unrealized holding gains (losses) on available-for-sale equity securities

     (145     50       (95

Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period

     21,102       (7,374     13,728  

Less: Reclassification adjustment for net losses (gains) losses included in net income

     3,795       (1,340     2,455  
  

 

 

   

 

 

   

 

 

 

Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships

     24,897       (8,714     16,183  
  

 

 

   

 

 

   

 

 

 

Amortization of net actuarial loss and prior service cost included in net income

     12,003       (4,201     7,802  
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income

   $ 180,212     $ (63,120   $ 117,092  
  

 

 

   

 

 

   

 

 

 

Activity in accumulated other comprehensive income (loss), net of tax, for the nine-month periods ended September 30, 2012 and 2011, were as follows:

 

(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, 2010

   $ (101,290   $ (427   $ 35,710      $ (131,489   $ (197,496

Period change

     93,202       (95     16,183        7,802       117,092  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance, September 30, 2011

   $ (8,088   $ (522   $ 51,893      $ (123,687   $ (80,404
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance, December 31, 2011

   $ (29,267   $ (30   $ 40,898      $ (185,364   $ (173,763

Period change

     67,189       235       12,068        9,729       89,221  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance, September 30, 2012

   $ 37,922     $ 205     $ 52,966      $ (175,635   $ (84,542
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Amount at September 30, 2012 includes $0.2 million of net unrealized gains 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.

9. SHAREHOLDERS’ EQUITY

Share Repurchase Program

On March 14, 2012, Huntington Bancshares Incorporated announced that the Federal Reserve did not object to Huntington’s proposed capital actions included in Huntington’s capital plan submitted to the Federal Reserve in January of this year. These actions included the potential repurchase of up to $182 million of common stock and a continuation of Huntington’s current common dividend through the first quarter of 2013. Huntington’s board of directors authorized a share repurchase program consistent with Huntington’s capital plan. During the three-month and nine-month periods ended September 30, 2012, Huntington repurchased a total of 3.7 million and 10.2 million shares of common stock, respectively, at a weighted average share price of $6.68 and $6.42, respectively. Huntington did not repurchase any shares of common stock during 2011.

10. 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 Huntington’s convertible preferred stock. 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 Huntington’s 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 each of the three-month and nine-month periods ended September 30, 2012 and 2011, was as follows:

 

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     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(dollar amounts in thousands, except per share amounts)    2012     2011     2012     2011  

Basic earnings per common share:

        

Net income

   $ 167,767     $ 143,391     $ 473,743     $ 415,755  

Preferred stock dividends

     (7,983     (7,703     (24,016     (23,110
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 159,784     $ 135,688     $ 449,727     $ 392,645  

Average common shares issued and outstanding

     857,871       863,911       861,543       863,542  

Basic earnings per common share

   $ 0.19     $ 0.16     $ 0.52     $ 0.45  

Diluted earnings per common share

        

Net income available to common shareholders

   $ 159,784     $ 135,688     $ 449,727     $ 392,645  

Effect of assumed preferred stock conversion

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to diluted earnings per share

   $ 159,784     $ 135,688     $ 449,727     $ 392,645  

Average common shares issued and outstanding

     857,871       863,911       861,543       863,542  

Dilutive potential common shares:

        

Stock options and restricted stock units and awards

     4,479       2,646       4,007       2,938  

Shares held in deferred compensation plans

     1,238       1,076       1,218       966  

Conversion of preferred stock

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Dilutive potential common shares:

     5,717       3,722       5,225       3,904  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total diluted average common shares issued and outstanding

     863,588       867,633       866,768       867,446  

Diluted earnings per common share

   $ 0.19     $ 0.16     $ 0.52     $ 0.45  

For the three-month and nine-month periods ended September 30, 2012 and 2011, approximately 23.5 million and 25.2 million, respectively and 24.6 million, and 13.9 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.

11. 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 at the closing market price on the date of the grant. Options granted typically vest ratably over three years or when other conditions are met. Options granted prior to May 2004 have a term of ten years. All options granted after May 2004 have a term of seven years.

Huntington uses the Black-Scholes option pricing model to value share-based compensation expense. Forfeitures are estimated at the date of grant based on historical rates 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. Expected volatility is based on the estimated volatility of Huntington’s stock over the expected term of the option. The expected dividend yield is based on the dividend rate and stock price at the date of the grant.

 

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The following table illustrates the weighted-average assumptions used in the option-pricing model for options granted for the three-month and nine-month periods ended September 30, 2012 and 2011.

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  

Assumptions

        

Risk-free interest rate

     0.87     1.97     1.10     1.97

Expected dividend yield

     2.46       2.64       2.37       2.62  

Expected volatility of Huntington’s common stock

     35.0       30.0       34.9       30.0  

Expected option term (years)

     6.0       6.0       6.0       6.0  

Weighted-average grant date fair value per share

   $ 1.68     $ 1.40     $ 1.79     $ 1.41  

The following table illustrates total share-based compensation expense and related tax benefit for the three-month and nine-month periods ended September 30, 2012 and 2011:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  

(dollar amounts in thousands)

   2012      2011      2012      2011  

Share-based compensation expense

   $ 7,138      $ 6,463      $ 19,958      $ 13,986  

Tax benefit

     2,366        2,182        6,627        4,815  

Huntington’s stock option activity and related information for the nine-month period ended September 30, 2012, was as follows:

 

(amounts in thousands, except years and per share amounts)

   Options     Weighted-
Average
Exercise
Price
     Weighted-
Average
Remaining
Contractual
Life (Years)
     Aggregate
Intrinsic
Value
 

Outstanding at January 1, 2012

     27,205     $ 11.47        

Granted

     5,556       6.74        

Exercised

     (426     4.25        

Forfeited/expired

     (5,470     19.63        
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding at September 30, 2012

     26,865     $ 8.94        4.7      $ 17,978  
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested and expected to vest at September 30, 2012 (1)

     25,765     $ 9.05        4.6      $ 17,339  
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at September 30, 2012

     13,158     $ 11.75        3.3      $ 9,081  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) The number of options expected to vest includes an estimate of expected forfeitures.

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 nine-month periods ended September 30, 2012 and September 30, 2011, cash received for the exercises of stock options was $1.8 million and $0.4 million, respectively. The tax benefit realized from stock option exercises was $0.3 million and less than $0.1 million for each respective period.

Huntington also grants restricted stock, restricted stock units, performance share awards 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 awards 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 Huntington’s common stock on the date of award.

 

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The following table summarizes the status of Huntington’s restricted stock units and performance share awards as of September 30, 2012, and activity for the nine-month period ended September 30, 2012:

 

(amounts in thousands, except per share amounts)

   Restricted
Stock
Units
    Weighted-
Average
Grant Date
Fair Value

Per Share
     Performance
Share
Awards
     Weighted-
Average
Grant Date
Fair Value
Per Share
 

Nonvested at January 1, 2012

     7,591     $ 6.09        —         $ —     

Granted

     2,840       6.69        694        6.77  

Vested

     (1,090     5.67        —           —     

Forfeited

     (291     6.27        —           —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Nonvested at September 30, 2012

     9,050     $ 6.32        694      $ 6.77  
  

 

 

   

 

 

    

 

 

    

 

 

 

The weighted-average grant date fair value of nonvested shares granted for the nine-month periods ended September 30, 2012 and 2011, were $6.71 and $6.27, respectively. The total fair value of awards vested was $6.9 million and $8.7 million during the nine-month periods ended September 30, 2012, and 2011, respectively. As of September 30, 2012, the total unrecognized compensation cost related to nonvested awards was $35.8 million with a weighted-average expense recognition period of 1.7 years.

During the 2012 second quarter, shareholders approved the Huntington Bancshares Incorporated 2012 Long-Term Incentive Plan which authorized 51 million shares for future grants. Of the remaining 79 million shares of common stock authorized for issuance at September 30, 2012, 37 million were outstanding and 42 million were available for future grants. Huntington issues shares to fulfill stock option exercises and restricted stock units from available authorized shares. At September 30, 2012, Management believes there are adequate authorized shares available to satisfy anticipated stock option exercises and award releases in 2012.

12. 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 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. Although not required, Huntington made a $75 million contribution to the Plan in the third quarter of 2012.

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 any employee retiring on or after January 1, 1993, post-retirement healthcare benefits are based upon the employee’s number of months of service and are limited to the actual cost of coverage. Life insurance benefits are a percentage of the employee’s base salary at the time of retirement, with a maximum of $50,000 of coverage. The employer paid portion of the post-retirement health and life insurance plan was eliminated for employees retiring on and after March 1, 2010. Eligible employees retiring on and after March 1, 2010, who elect retiree medical coverage, will pay the full cost of this coverage. Huntington will not provide any employer paid life insurance to employees retiring on and after March 1, 2010. Eligible employees will be able to convert or port their existing life insurance at their own expense under the same terms that are available to all terminated employees.

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  
     September 30,     September 30,  

(dollar amounts in thousands)

   2012     2011     2012     2011  

Service cost

   $ 6,217     $ 5,412     $ —        $ —     

Interest cost

     7,304       7,518       338       404  

Expected return on plan assets

     (11,432     (10,822     —          —     

Amortization of transition asset

     (1     (1     —          —     

Amortization of prior service cost

     (1,442     (1,442     (339     (338

Amortization of gains (losses)

     6,739       5,873       (83     (106

Settlements

     1,750       1,750       —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Benefit expense

   $ 9,135     $ 8,288     $ (84   $ (40
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Pension Benefits     Post Retirement Benefits  
     Nine Months Ended     Nine Months Ended  
     September 30,     September 30,  

(dollar amounts in thousands)

   2012     2011     2012     2011  

Service cost

   $ 18,651     $ 16,238     $ —        $ —     

Interest cost

     21,912       22,554       1,013       1,214  

Expected return on plan assets

     (34,297     (32,468     —          —     

Amortization of transition asset

     (3     (3     —          —     

Amortization of prior service cost

     (4,326     (4,326     (1,015     (1,014

Amortization of gains

     20,218       17,621       (249     (318

Settlements

     5,250       5,250       —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Benefit expense

   $ 27,405     $ 24,866     $ (251   $ (118

The Bank, as trustee, held all Plan assets at September 30, 2012, and December 31, 2011. The Plan assets consisted of investments in a variety of Huntington mutual funds and Huntington common stock as follows:

 

     Fair Value  

(dollar amounts in thousands)

   September 30, 2012     December 31, 2011  

Cash

   $ 1,786        —     $ 25        —  

Cash equivalents:

          

Huntington funds - money market

     22,911        4       39,943        7  

Fixed income:

          

Huntington funds - fixed income funds

     107,122        17       174,615        32  

Corporate obligations

     124,530        19       —           —     

U.S. Government Agencies

     34,893        5       —           —     

Equities:

          

Huntington funds

     312,303        49       283,963        53  

Huntington common stock

     39,998        6       40,424        8  
  

 

 

    

 

 

   

 

 

    

 

 

 

Fair value of plan assets

   $ 643,543        100    $ 538,970        100 
  

 

 

    

 

 

   

 

 

    

 

 

 

Investments of the Plan are accounted for at cost on the trade date and are reported at fair value. All of the Plan’s investments at September 30, 2012, are classified as Level 1 within the fair value hierarchy. 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 September 30, 2012, Plan assets were invested 4% in cash and cash equivalents, 55% in equity investments, and 41% in bonds, with an average duration of 3.7 years on bond investments. 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.

Huntington has a defined contribution plan that is available to eligible employees. Huntington matches participant contributions, up to the first 3% of base pay contributed to the Plan. Half of the employee contribution is matched on the 4th and 5th percent of base pay contributed to the Plan.

 

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The following table shows the costs of providing the SERP, SRIP, and defined contribution plans:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  

(dollar amounts in millions)

   2012      2011      2012      2011  

SERP & SRIP

   $ 0.8      $ 0.7      $ 2.5      $ 2.1  

Defined contribution plan

     4.2        3.8        12.8        11.3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Benefit cost

   $ 5.0      $ 4.5      $ 15.3      $ 13.4  
  

 

 

    

 

 

    

 

 

    

 

 

 

13. FAIR VALUES OF ASSETS AND LIABILITIES

Huntington follows the fair value accounting guidance under ASC 820 and ASC 825.

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 instrument’s 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.

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. 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. 96% 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. 3% of our positions are Level 3, and consist of non-agency ALT-A asset-backed securities, private-label CMO securities, pooled-trust-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.

For non-agency ALT-A asset-backed securities, private-label CMO securities, and pooled-trust-preferred CDO securities the fair value methodology incorporates values obtained from proprietary discounted cash flow models provided by a third party. The modeling process for the ALT-A asset-backed securities and private-label CMO securities incorporates assumptions management believes market participants would use to value the security under current market conditions. The assumptions used include prepayment projections, credit loss assumptions, and discount rates, which include a risk premium due to liquidity and uncertainty that are based on both observable and unobservable inputs. Huntington validates the reasonableness of the assumptions by comparing the assumptions with market information. Huntington uses the discounted cash flow analysis, in conjunction with other relevant pricing information obtained from third party pricing services or broker quotes to establish the fair value that management believes is representative under current market conditions. The modeling of the fair value of the pooled-trust-preferred CDO’s utilizes a similar methodology, with the probability of default (“PD”) of each issuer being the most critical input. Management evaluates the PD assumptions provided to the third party pricing service 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 and prepayments. Each quarter, the Company seeks to obtain information on actual trades of securities with similar characteristics to further support our fair value estimates and our underlying assumptions. For purposes of determining fair value at September 30, 2012, the discounted cash flow modeling was the predominant input.

 

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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 the automobile loan receivables and the associated notes payable at fair value per guidance supplied in ASC 825, “Financial Instruments”. 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.

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, which is operated and maintained by a third party, 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 1 consist of exchange traded options and forward commitments to deliver mortgage-backed securities which are valued using quoted prices. Asset and liability conversion swaps and options, and interest rate caps are classified as Level 2. These derivative positions are valued using a discounted cash flow method that incorporates current market interest rates. 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.

Securitization trust notes payable

Consists of certain securitization trust notes payable related to the automobile loan receivables measured at fair value. The notes payable are classified as Level 2 and are valued based on interest rates for similar financial instruments.

 

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Assets and Liabilities measured at fair value on a recurring basis

Assets and liabilities measured at fair value on a recurring basis at September 30, 2012 and December 31, 2011 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)     September 30, 2012  

Assets

             

Loans held for sale

   $ —         $ 518,659      $ —         $ —        $ 518,659  

Trading account securities:

             

U.S. Treasury securities

     —           —           —           —          —     

Federal agencies: Mortgage-backed

     —           3,312        —           —          3,312  

Federal agencies: Other agencies

     —           25        —           —          25  

Municipal securities

     —           11,529        —           —          11,529  

Other securities

     77,029        75        —           —          77,104  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     77,029        14,941        —           —          91,970  

Available-for-sale and other securities:

             

U.S. Treasury securities

     52,571        —           —           —          52,571  

Federal agencies: Mortgage-backed

     —           4,568,602        —           —          4,568,602  

Federal agencies: Other agencies

     —           364,147        —           —          364,147  

Municipal securities

     —           409,289        66,336        —          475,625  

Private-label CMO

     —           24,092        51,690        —          75,782  

Asset-backed securities

     —           867,342        106,277        —          973,619  

Covered bonds

     —           291,965        —           —          291,965  

Corporate debt

     —           653,289        —           —          653,289  

Other securities

     17,608        3,896        —           —          21,504  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     70,179        7,182,622        224,303        —          7,477,104  

Automobile loans

     —           —           173,639        —          173,639  

MSRs

     —           —           36,621        —          36,621  

Derivative assets

     6,515        525,888        18,418        (108,411     442,410  

Liabilities

             

Securitization trust notes payable

     —           —           —           —          —     

Derivative liabilities

     20,360        255,861        450        (95,616     181,055  

Other liabilities

     —           —           —           —          —     
     Fair Value Measurements at Reporting Date Using      Netting     Balance at  

(dollar amounts in thousands)

   Level 1      Level 2      Level 3      Adjustments (1)     December 31, 2011  

Assets

             

Mortgage loans held for sale

   $ —         $ 343,588      $ —         $ —        $ 343,588  

Trading account securities:

             

U.S. Treasury securities

     —           —           —           —          —     

Federal agencies: Mortgage-backed

     —           5,541        —           —          5,541  

Federal agencies: Other agencies

     —           —           —           —          —     

Municipal securities

     —           8,147        —           —          8,147  

Other securities

     32,085        126        —           —          32,211  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     32,085        13,814        —           —          45,899  

Available-for-sale and other securities:

             

U.S. Treasury securities

     53,204        —           —           —          53,204  

Federal agencies: Mortgage-backed

     —           4,464,892        —           —          4,464,892  

Federal agencies: Other agencies

     —           735,544        —           —          735,544  

Municipal securities

     —           312,634        95,092        —          407,726  

Private-label CMO

     —           —           72,364        —          72,364  

Asset-backed securities

     —           845,390        121,698        —          967,088  

Covered bonds

     —           504,045        —           —          504,045  

Corporate debt

     —           528,883        —           —          528,883  

Other securities

     53,619        4,134        —           —          57,753  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     106,823        7,395,522        289,154        —          7,791,499  

Automobile loans

     —           —           296,250        —          296,250  

MSRs

     —           —           65,001        —          65,001  

Derivative assets

     4,886        485,428        6,770        (94,082     403,002  

Liabilities

             

Securitization trust notes payable

     —           123,039        —           —          123,039  

Derivative liabilities

     12,245        246,132        6,939        —          265,316  

Other liabilities

     —           751        —           —          751  

 

(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.

 

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The tables below present a rollforward of the balance sheet amounts for the three-month and nine-month periods ended September 30, 2012 and 2011, 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 September 30, 2012  
                 Available-for-sale securities        

(dollar amounts in thousands)

   MSRs     Derivative
instruments
    Municipal
securities
    Private-
label CMO
    Asset-
backed
securities
    Automobile
loans
 

Opening balance

   $ 45,061     $ 12,391     $ 78,151     $ 67,145     $ 119,674     $ 210,031  

Transfers into Level 3

     —          —          —          —          —          —     

Transfers out of Level 3

     —          —          —          —          —          —     

Total gains/losses for the period:

            

Included in earnings

     (8,440     7,481       —          93       39       (546

Included in OCI

     —          —          —          2,632       10,484       —     

Purchases

     —          —          —          —          —          —     

Sales

     —          —          —          (15,183     (20,852     —     

Repayments

     —          —          —          —          —          (35,846

Issues

     —          —          —          —          —          —     

Settlements

     —          (1,904     (11,815     (2,997     (3,068     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Closing balance

   $ 36,621     $ 17,968     $ 66,336     $ 51,690     $ 106,277     $ 173,639  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (8,440   $ 5,577     $ —        $ 2,632     $ 10,484     $ (546
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Level 3 Fair Value Measurements  
     Three Months Ended September 30, 2011  
                 Available-for-sale securities        

(dollar amounts in thousands)

   MSRs     Derivative
instruments
    Municipal
securities
    Private-
label CMO
    Asset-
backed
securities
    Automobile
loans
 

Opening balance

   $ 104,997     $ 418     $ 123,800     $ 88,770     $ 165,742     $ 400,935  

Transfers into Level 3

     —          —          —          —          —          —     

Transfers out of Level 3

     —          —          —          —          —          —     

Total gains/losses for the period:

            

Included in earnings

     (31,173     7,557       —          (872     (354     (3,695

Included in OCI

     —          —          —          (2,543     (9,874     —     

Purchases

     —          —          —          —          —          —     

Sales

     —          —          —          —          —          —     

Repayments

     —          —          —          —          —          (52,711

Issues

     —          —          —          —          —          —     

Settlements

     —          (41     (22,373     (6,455     (2,495     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Closing balance

   $ 73,824     $ 7,934     $ 101,427     $ 78,900     $ 153,019     $ 344,529  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (31,173   $ 7,516     $ —        $ (2,543   $ (9,874   $ (3,695
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Level 3 Fair Value Measurements  
     Nine Months Ended September 30, 2012  
                 Available-for-sale securities        

(dollar amounts in thousands)

   MSRs     Derivative
instruments
    Municipal
securities
    Private-
label CMO
    Asset-
backed
securities
    Automobile
loans
 

Opening balance

   $ 65,001     $ (169   $ 95,092     $ 72,364     $ 121,698     $ 296,250  

Transfers into Level 3

     —          —          —          —          —          —     

Transfers out of Level 3

     —          —          —          —          —          —     

Total gains/losses for the period:

            

Included in earnings

     (28,380     13,702       —          (912     (97     (1,196

Included in OCI

     —          —          —          7,511       15,663       —     

Purchases

     —          —          —          —          —          —     

Sales

     —          —          —          (15,183     (20,852     —     

Repayments

     —          —          —          —          —          (121,415

Issues

     —          —          —          —          —          —     

Settlements

     —          4,435       (28,756     (12,090     (10,135     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Closing balance

   $ 36,621     $ 17,968     $ 66,336     $ 51,690     $ 106,277     $ 173,639  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (28,380   $ 11,084     $ —        $ 7,511     $ 15,663     $ (1,196
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Level 3 Fair Value Measurements  
     Nine Months Ended September 30, 2011  
                 Available-for-sale securities        

(dollar amounts in thousands)

   MSRs     Derivative
instruments
    Municipal
securities
    Private-
label CMO
    Asset-
backed
securities
    Automobile
loans
 

Opening balance

   $ 125,679     $ 966     $ 149,806     $ 121,925     $ 162,684     $ 522,717  

Transfers into Level 3

     —          —          —          —          —          —     

Transfers out of Level 3

     —          —          —          —          —          —     

Total gains/losses for the period:

            

Included in earnings

     (51,855     7,264       —          (1,255     (3,615     (5,079

Included in OCI

     —          —          —          1,074       3,716       —     

Purchases

     —          —          1,760       —          —          —     

Sales

     —          —          —          (20,958     —          —     

Repayments

     —          —          —          —          —          (173,109

Issues

     —          —          —          —          —          —     

Settlements

     —          (296     (50,139     (21,886     (9,766     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Closing balance

   $ 73,824     $ 7,934     $ 101,427     $ 78,900     $ 153,019     $ 344,529  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (51,855   $ 6,968     $ —        $ 769     $ 3,716     $ (5,079
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 and nine-month periods ended September 30, 2012 and 2011:

 

     Level 3 Fair Value Measurements  
     Three Months Ended September 30, 2012  
           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 (loss)

   $ (8,440   $ 7,481     $ —         $ —        $ —        $ —     

Securities gains (losses)

     —          —          —           (116     —          —     

Interest and fee income

     —          —          —           209       39       (1,451

Noninterest income

     —          —          —           —          —          905  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ (8,440   $ 7,481     $ —         $ 93     $ 39     $ (546
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
     Level 3 Fair Value Measurements  
     Three Months Ended September 30, 2011  
           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 (loss)

   $ (31,173   $ 7,101     $ —         $ —        $ —        $ —     

Securities gains (losses)

     —          —          —           (1,029     (335     —     

Interest and fee income

     —          —          —           157       (19     (3,627

Noninterest income

     —          456       —           —          —          (68
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ (31,173   $ 7,557     $ —         $ (872   $ (354   $ (3,695
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
     Level 3 Fair Value Measurements  
     Nine Months Ended September 30, 2012  
           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 (loss)

   $ (28,380   $ 13,702     $ —         $ —        $ —        $ —     

Securities gains (losses)

     —          —          —           (1,601     —          —     

Interest and fee income

     —          —          —           689       (97     (5,740

Noninterest income

     —          —          —           —          —          4,544  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ (28,380   $ 13,702     $ —         $ (912   $ (97   $ (1,196
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
     Level 3 Fair Value Measurements  
     Nine Months Ended September 30, 2011  
           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 (loss)

   $ (51,855   $ 7,763     $ —         $ —        $ —        $ —     

Securities gains (losses)

     —          —          —           (1,941     (3,771     —     

Interest and fee income

     —          —          —           686       156       (8,852

Noninterest income

     —          (499     —           —          —          3,773  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ (51,855   $ 7,264     $ —         $ (1,255   $ (3,615   $ (5,079
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Assets and liabilities under the fair value option

Huntington has elected the fair value option for certain loans in the held for sale portfolio. The following table presents the fair value and aggregate principal balance of loans held for sale under the fair value option.

 

     September 30, 2012      December 31, 2011  
     Fair value
carrying
amount
     Aggregate
unpaid
principal
     Difference      Fair value
carrying
amount
     Aggregate
unpaid
principal
     Difference  

Assets

                 

Mortgage loans held for sale

     518,659        487,042        31,617        343,588        328,641        14,947  

Automobile loans

     173,639        171,760        1,879        296,250        293,174        3,076  

Liabilities

                 

Securitization trust notes payable

     —           —           —           123,039        121,016        2,023  

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 and nine-month periods ended September 30, 2012 and 2011.

 

     Net gains (losses) from fair value changes  
     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  

(dollar amounts in thousands)

   2012     2011     2012     2011  

Assets

        

Mortgage loans held for sale

   $ 9,224     $ 5,823     $ 12,913     $ 13,725  

Automobile loans

     (546     (3,695     (1,197     (5,079

Liabilities

        

Securitization trust notes payable

     (101     (2,485     (2,023     (6,102

 

     Gains (losses) included  
     in fair value changes associated  
     with instrument specific credit risk  
     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  

(dollar amounts in thousands)

   2012      2011      2012      2011  

Assets

           

Automobile loans

   $ 1,137      $ 2,498      $ 3,715      $ 4,780  

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 on-going basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. At September 30, 2012, assets measured at fair value on a nonrecurring basis were as follows:

 

            Fair Value Measurements Using         
            Quoted Prices      Significant      Significant      Total  
            In Active      Other      Other      Gains/(Losses)  
            Markets for      Observable      Unobservable      For the Nine  
     Fair Value at      Identical Assets      Inputs      Inputs      Months Ended  

(dollar amounts in thousands)

   September 30, 2012      (Level 1)      (Level 2)      (Level 3)      September 30, 2012  

Impaired loans

   $ 129,312      $ —         $ —         $ 129,312      $ (41,322

Accrued income and other assets

     54,206        —           —           54,206        (2,113

 

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Table of Contents

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. At September 30, 2012, Huntington identified $129.3 million of impaired loans for which the fair value is recorded based upon collateral value. For the nine-month period ended September 30, 2012, nonrecurring fair value impairment of $41.3 million was recorded within the provision for credit losses.

Other real estate owned properties are initially valued based on appraisals and third party price opinions, less estimated selling costs. At September 30, 2012, Huntington had $54.2 million of OREO assets. For the nine-month period ended September 30, 2012, fair value losses of $2.1 million were recorded within noninterest expense.

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 September 30, 2012.

Quantitative Information about Level 3 Fair Value Measurements

 

(dollar amounts in thousands,

except net costs to service)

   Fair Value at
September  30,
2012
    

Valuation

Technique

  

Significant

Unobservable

Input

  

Range

(Weighted Average)

MSRs

   $ 36,621      Discounted cash flow    Constant prepayment rate (CPR)    10.0% - 34.0% (22.0%)
        

Spread over forward interest rate

swap rates

   -603 - 4,552 (1,291)

Derivative assets

     18,418      Consensus Pricing    Net market price    -1.0% - 11.7% (4.1%)

Derivative liabilities

     450         Estimated Pull thru %    50.0% - 88.0% (69.0%)

Municipal securities

     66,336      Discounted cash flow    Discount rate    0.6% - 7.0% (2.5%)

Private-label CMO

     51,690      Discounted cash flow    Discount rate    3.1% - 8.8% (6.4%)
         Constant prepayment rate (CPR)    5.1% - 26.7% (14.9%)
         Probability of default    0.1% - 4.0% (1.3%)
         Loss Severity    0.0% - 64.0% (28.5%)

Asset-backed securities

     106,277      Discounted cash flow   

Discount rate

Constant prepayment rate (CPR) Cumulative prepayment rate

Constant default

Cumulative default

Loss given default

Cure given deferral

Loss severity

  

5.3% - 16.6% (9.4%)

5.1% - 9.8% (4.1%)

0.0% - 100.0% (6.9%)

0.3% - 4.0% (2.3%)

0.8% - 100.0% (20.4%)

85.0% - 100.0% (93.3%)

0.0% - 100.0% (37.0%)

20.0% - 72.0% (50.1%)

Automobile loans

     173,639      Discounted cash flow    Absolute prepayment speed (ABS)    1.3%
         Discount rate    0.6% - 9.0% (4.1%)

Impaired loans

     129,312      Appraisal value    NA    NA

Other real estate owned

     54,206      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.

 

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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 default, 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.

Fair values of financial instruments

The following table provides the carrying amounts and estimated fair values of Huntington’s financial instruments that are carried either at fair value or cost at September 30, 2012 and December 31, 2011:

 

     September 30, 2012      December 31, 2011  
     Carrying      Fair      Carrying      Fair  

(dollar amounts in thousands)

   Amount      Value      Amount      Value  

Financial Assets:

           

Cash and short-term assets

   $ 863,236      $ 863,236      $ 1,206,911      $ 1,206,911  

Trading account securities

     91,970        91,970        45,899        45,899  

Loans held for sale

     1,852,919        1,890,882        1,618,391        1,638,276  

Available-for-sale and other securities

     7,778,568        7,778,568        8,078,014        8,078,014  

Held-to-maturity securities

     1,582,150        1,624,970        640,551        660,186  

Net loans and direct financing leases

     39,471,275        37,944,350        37,958,955        36,669,829  

Derivatives

     442,410        442,410        403,002        403,002  

Financial Liabilities:

           

Deposits

     46,741,286         46,833,300         43,279,625         43,406,125   

Short-term borrowings

     1,259,771         1,252,276         1,441,092         1,429,717   

Federal Home Loan Bank advances

     9,406         9,406         362,972         362,972   

Other long-term debt

     185,613         182,703         1,231,517         1,232,975   

Subordinated notes

     1,306,273         1,285,493         1,503,368         1,410,392   

Derivatives

     181,055         181,055         265,316         265,316   

The following table presents the level in the fair value hierarchy for the estimated fair values of only Huntington’s financial instruments that are not already on the Unaudited Condensed Consolidated Balance Sheets at fair value at September 30, 2012 and December 31, 2011:

 

     

Estimated Fair Value Measurements at Reporting Date Using

     Balance at  

(dollar amounts in thousands)

   Level 1      Level 2      Level 3      September 30, 2012  

Financial Assets

           

Loans held for sale

   $ —         $ —         $ 1,369,610      $ 1,369,610  

Held-to-maturity securities

     —           1,624,970        —           1,624,970  

Net loans and direct financing leases

     —           —           37,770,711        37,770,711  

Financial liabilities

           

Deposits

     —           39,291,228         7,542,072         46,833,300   

Short-term borrowings

     —           —           1,252,276         1,252,276   

Other long-term debt

     —           29,038         153,665         182,703   

Subordinated notes

     —           —           1,285,493         1,285,493   

 

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      Estimated Fair Value Measurements at Reporting Date Using      Balance at  

(dollar amounts in thousands)

   Level 1      Level 2      Level 3      December 31, 2011  

Financial Assets

           

Loans held for sale

   $ —         $ —         $ 1,291,755      $ 1,291,755  

Held-to-maturity securities

     —           660,186        —           660,186  

Net loans and direct financing leases

     —           —           36,373,579        36,373,579  

Financial liabilities

           

Deposits

     —           35,049,194         8,356,931         43,406,125   

Short-term borrowings

     —           —           1,429,717         1,429,717   

Other long-term debt

     —           937,959         171,977         1,109,936   

Subordinated notes

     —           —           1,410,392         1,410,392   

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 Huntington’s 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.

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 Huntington’s 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 Huntington’s 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.

14. 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.

 

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Derivatives used in Asset and Liability Management Activities

A variety of derivative financial instruments, principally interest rate swaps, caps, floors, and collars are used in asset and liability management activities to protect against the risk of adverse price or interest rate movements. These instruments provide flexibility in adjusting Huntington’s sensitivity to changes in interest rates without exposure to loss of principal and higher funding requirements. Huntington records derivatives at fair value, as further described in Note 13. Collateral agreements are regularly entered into as part of the underlying derivative agreements with Huntington’s counterparties to mitigate counterparty credit risk. At September 30, 2012 and December 31, 2011, aggregate credit risk associated with these derivatives, net of collateral that has been pledged by the counterparty, was $16.7 million and $36.4 million, respectively. The credit risk associated with interest rate swaps is calculated after considering master netting agreements.

At September 30, 2012, Huntington pledged $155.8 million of investment securities and cash collateral to counterparties, while other counterparties pledged $187.6 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 table presents the gross notional values of derivatives used in Huntington’s asset and liability management activities at September 30, 2012, identified by the underlying interest rate-sensitive instruments:

 

     Fair Value      Cash Flow         

(dollar amounts in thousands )

   Hedges      Hedges      Total  

Instruments associated with:

        

Loans

   $ —         $ 8,411,800      $ 8,411,800  

Deposits

     691,875        —           691,875  

Subordinated notes

     598,000        —           598,000  

Other long-term debt

     35,000        —           35,000  
  

 

 

    

 

 

    

 

 

 

Total notional value at September 30, 2012

   $ 1,324,875      $ 8,411,800      $ 9,736,675  
  

 

 

    

 

 

    

 

 

 

The following table presents additional information about the interest rate swaps used in Huntington’s asset and liability management activities at September 30, 2012:

 

            Average            Weighted-Average  
     Notional      Maturity      Fair     Rate  

(dollar amounts in thousands )

   Value      (years)      Value     Receive     Pay  

Asset conversion swaps

            

Receive fixed — generic

   $ 7,961,000        2.5      $ 72,841       1.11     0.53

Pay fixed — generic

     450,800        2.8        (3,413     0.38       0.70  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total asset conversion swaps

     8,411,800        2.5        69,428       1.07       0.53  

Liability conversion swaps

            

Receive fixed — generic

     1,324,875        3.4        119,368       2.88       0.50  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liability conversion swaps

     1,324,875        3.4        119,368       2.88       0.50  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total swap portfolio

   $ 9,736,675        2.6      $ 188,796       1.31     0.53
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

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 $28.8 million and $27.4 million for the three-month periods ended September 30, 2012, and 2011, respectively. For the nine-month periods ended September 30, 2012 and 2011, the net amounts resulted in an increase to net interest income of $81.2 million and $89.3 million, respectively.

In connection with securitization activities, Huntington purchased interest rate caps with a notional value totaling $0.7 billion. These purchased caps were assigned to the securitization trust for the benefit of the security holders. Interest rate caps were also sold totaling $0.7 billion outside the securitization structure. Both the purchased and sold caps are marked to market through income.

In connection with the sale of Huntington’s 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 September 30, 2012, the fair value of the swap liability of $0.4 million is an estimate of the exposure liability based upon Huntington’s assessment of the probability-weighted potential Visa® litigation losses and certain fixed payments required to be made through the term of the swap.

 

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The following table presents the fair values at September 30, 2012 and December 31, 2011 of Huntington’s financial 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:

 

     September 30,      December 31,  

(dollar amounts in thousands)

   2012      2011  

Interest rate contracts designated as hedging instruments

   $ 188,796      $ 175,932  

Interest rate contracts not designated as hedging instruments

     337,092        309,496  

Foreign exchange contracts not designated as hedging instruments

     6,316        4,885  
  

 

 

    

 

 

 

Total contracts

   $ 532,204      $ 490,313  
  

 

 

    

 

 

 

Liability derivatives included in accrued expenses and other liabilities

 

(dollar amounts in thousands)

   September 30,
2012
     December 31,
2011
 

Interest rate contracts designated as hedging instruments

   $ —         $ —     

Interest rate contracts not designated as hedging instruments

     256,306        252,962  

Foreign exchange contracts not designated as hedging instruments

     4,888        4,318  
  

 

 

    

 

 

 

Total contracts

   $ 261,194      $ 257,280  
  

 

 

    

 

 

 

Fair value hedges are established to convert deposits and subordinated and other long-term debt from fixed-rate obligations to floating rate. The changes in fair value of the derivative 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.

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 and nine-month periods ended September 30, 2012 and 2011:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  

(dollar amounts in thousands)

   2012     2011     2012     2011  

Interest rate contracts

        

Change in fair value of interest rate swaps hedging deposits (1)

   $ (417   $ 2,922     $ (852   $ 3,831  

Change in fair value of hedged deposits (1)

     428       (2,870     840       (3,949

Change in fair value of interest rate swaps hedging subordinated notes (2)

     2,448       41,170       8,207       46,407  

Change in fair value of hedged subordinated notes (2)

     (2,448     (41,170     (8,207     (46,407

Change in fair value of interest rate swaps hedging other long-term debt (2)

     205       2,138       489       2,527  

Change in fair value of hedged other long-term debt (2)

     (205     (2,138     (489     (2,527

 

(1) Effective portion of the hedging relationship is recognized in Interest expense—deposits 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 expense—subordinated 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.

For cash flow hedges, interest rate swap contracts were entered into that pay fixed-rate interest in exchange for the receipt of variable-rate interest without the exchange of the contract’s underlying notional amount, which effectively converts a portion of its floating-rate debt to a fixed-rate debt. This reduces the potentially adverse impact of increases in interest rates on future interest expense. Other LIBOR-based commercial and industrial loans as well as investment securities were effectively converted to fixed-rate by entering into contracts that swap certain variable-rate interest payments for fixed-rate interest payments at designated times.

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.

 

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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 and nine-month periods ended September 30, 2012 and 2011 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  
    September 30,         September 30,  

(dollar amounts in thousands)

  2012     2011         2012     2011  

Interest rate contracts

         

Loans

  $ 14,027     $ 16,091     Interest and fee income - loans and leases   $ (13,428   $ (3,851

Investment Securities

    —          379     Interest and fee income - investment securities     —          —     

FHLB Advances

    —          —        Interest expense - federal home loan bank advances     —          —     

Deposits

    —          —        Interest expense - deposits     —          —     

Subordinated notes

    —          —        Interest expense - subordinated notes and other long-term debt     130       7  

Other long term debt

    —          —        Interest expense - subordinated notes and other long-term debt     —          —     
 

 

 

   

 

 

     

 

 

   

 

 

 

Total

  $ 14,027     $ 16,470       $ (13,298   $ (3,844
 

 

 

   

 

 

     

 

 

   

 

 

 

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)
 
    Nine Months Ended         Nine Months Ended  
    September 30,         September 30,  

(dollar amounts in thousands)

  2012     2011         2012     2011  

Interest rate contracts

         

Loans

  $ 4,031     $ 12,880     Interest and fee income - loans and leases   $ 13,285     $ 3,776  

Investment Securities

    (702     847     Interest and fee income - investment securities     —          —     

FHLB Advances

    —          —        Interest expense - federal home loan bank advances     —          —     

Deposits

    —          —        Interest expense - deposits     —          —     

Subordinated notes

    —          —        Interest expense - subordinated notes and other long-term debt     143       20  

Other long term debt

    —          —        Interest expense - subordinated notes and other long-term debt     —          —     
 

 

 

   

 

 

     

 

 

   

 

 

 

Total

  $ 3,329     $ 13,727       $ 13,428     $ 3,796  
 

 

 

   

 

 

     

 

 

   

 

 

 

During the next twelve months, Huntington expects to reclassify to earnings $35.7 million of after-tax unrealized gains on cash flow hedging derivatives currently in OCI.

 

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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 and nine-month periods ended September 30, 2012 and 2011.

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  

(dollar amounts in thousands)

   2012     2011     2012     2011  

Derivatives in cash flow hedging relationships

        

Interest rate contracts

        

Loans

   $ (215   $ (261   $ (146   $ (147

FHLB Advances

     —          —          —          —     

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 predominantly of interest rate swaps, but also included interest rate caps, floors, and futures, as well as foreign exchange options. 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.

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 September 30, 2012 and December 31, 2011, were $62.4 million and $53.2 million, respectively. The total notional values of derivative financial instruments used by Huntington on behalf of customers, including offsetting derivatives, were $22.6 billion and $10.6 billion at September 30, 2012 and December 31, 2011, respectively. Huntington’s credit risks from interest rate swaps used for trading purposes were $336.9 million and $309.5 million at the same dates, respectively.

Derivatives used in mortgage banking activities

Huntington also uses certain derivative financial instruments to offset changes in value of its MSRs. These derivatives consist primarily of forward interest rate agreements and forward mortgage 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:

 

     September 30,     December 31,  

(dollar amounts in thousands)

   2012     2011  

Derivative assets:

    

Interest rate lock agreements

   $ 18,418     $ 6,770  

Forward trades and options

     199       1  
  

 

 

   

 

 

 

Total derivative assets

     18,617       6,771  
  

 

 

   

 

 

 

Derivative liabilities:

    

Interest rate lock agreements

     (5     (109

Forward trades and options

     (15,472     (7,927
  

 

 

   

 

 

 

Total derivative liabilities

     (15,477     (8,036
  

 

 

   

 

 

 

Net derivative asset (liability)

   $ 3,140     $ (1,265
  

 

 

   

 

 

 

The total notional value of these derivative financial instruments at September 30, 2012 and December 31, 2011, was $1.8 billion and $1.7 billion, respectively. The total notional amount at September 30, 2012, corresponds to trading assets with a fair value of $20.2 million and trading liabilities with a fair value of less than $0.1 million. Total MSR hedging gains and (losses) for the three-month periods ended September 30, 2012 and 2011, were $15.4 million and $30.3 million, respectively and $33.0 million and $39.1 million for the nine-month periods ended September 30, 2012 and 2011, respectively. Included in total MSR hedging gains and losses for the three-month periods ended September 30, 2012 and 2011 were net gains and (losses) related to derivative instruments of $15.4 million and $30.2 million, respectively, and $33.0 million and $39.2 million for the nine-month periods ended September 30, 2012 and 2011, respectively. These amounts are included in mortgage banking income in the Unaudited Condensed Consolidated Statements of Income.

 

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15. VIEs

Consolidated VIEs

Consolidated VIEs at September 30, 2012, consisted of certain loan securitization trusts. These securitizations included automobile loan and lease securitization trusts formed in 2009 and 2006. 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 entity’s 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.

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 September 30, 2012, and December 31, 2011:

 

     September 30, 2012  
     2009      2006     Other         
     Automobile      Automobile     Consolidated         

(dollar amounts in thousands)

   Trust      Trust     Trusts      Total  

Assets:

          

Cash

   $ 13,459      $ 42,333     $ —         $ 55,792  

Loans and leases

     173,639        427,213       —           600,852  

Allowance for loan and lease losses

     —           (3,332     —           (3,332
  

 

 

    

 

 

   

 

 

    

 

 

 

Net loans and leases

     173,639        423,881       —           597,520  

Accrued income and other assets

     738        1,661       287        2,686  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total assets

   $ 187,836      $ 467,875     $ 287      $ 655,998  
  

 

 

    

 

 

   

 

 

    

 

 

 

Liabilities:

          

Other long-term debt

   $ —         $ 28,543     $ —         $ 28,543  

Accrued interest and other liabilities

     —           6       287        293  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total liabilities

   $ —         $ 28,549     $ 287      $ 28,836  
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2011  
     2008     2009      2006     Other         
     Automobile     Automobile      Automobile     Consolidated         

(dollar amounts in thousands)

   Trust     Trust      Trust     Trusts      Total  

Assets:

            

Cash

   $ 12,722     $ 18,212      $ 52,325     $ —         $ 83,259  

Loans and leases

     131,563       296,250        704,345       —           1,132,158  

Allowance for loan and lease losses

     (1,118     —           (5,987     —           (7,105
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net loans and leases

     130,445       296,250        698,358       —           1,125,053  

Accrued income and other assets

     610       1,692        2,959       1,117        6,378  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total assets

   $ 143,777     $ 316,154      $ 753,642     $ 1,117      $ 1,214,690  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Liabilities:

            

Other long-term debt

   $ 18,230     $ 123,039      $ 333,644     $ —         $ 474,913  

Accrued interest and other liabilities

     40       298        88       419        845  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total liabilities

   $ 18,270     $ 123,337      $ 333,732     $ 419      $ 475,758  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The automobile 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.

 

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Unconsolidated VIEs

The following tables provide a summary of the assets and liabilities included in Huntington’s 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 September 30, 2012, and December 31, 2011:

 

     September 30, 2012  

(dollar amounts in thousands)

   Total Assets      Total Liabilities      Maximum Exposure to Loss  

2012 Automobile Trust

   $ 14,625      $ —         $ 14,625  

2011 Automobile Trust

     8,462        —           8,462  

Tower Hill Securities, Inc.

     89,158        65,000        89,158  

Trust Preferred Securities

     14,879        350,009        —     

Low Income Housing Tax Credit Partnerships

     371,891        136,386        371,891  
  

 

 

    

 

 

    

 

 

 

Total

   $  499,015      $  551,395      $  484,136  
     December 31, 2011  

(dollar amounts in thousands)

   Total Assets      Total Liabilities      Maximum Exposure to Loss  

2011 Automobile Trust

   $ 13,377      $ —         $ 13,377  

Tower Hill Securities, Inc.

     90,514        65,000        90,514  

Trust Preferred Securities

     17,364        554,496        —     

Low Income Housing Tax Credit Partnerships

     376,098        157,754        376,098  
  

 

 

    

 

 

    

 

 

 

Total

   $ 497,353      $ 777,250      $ 479,989  

2012 AUTOMOBILE TRUST and 2011 AUTOMOBILE TRUST

During the 2012 first quarter and 2011 third quarter, we transferred automobile loans totaling $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 Huntington’s 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 Huntington’s Unaudited Condensed Consolidated Balance Sheets. The maximum exposure to loss is equal to the carrying value of the municipal securities.

TRUST PREFERRED SECURITIES

Huntington has certain wholly-owned trusts whose assets, liabilities, equity, income, and expenses are not included within Huntington’s 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 Huntington’s Unaudited Condensed Consolidated Balance Sheet as subordinated notes. The trust securities are the obligations of the trusts, and as such, are not consolidated within Huntington’s Unaudited Condensed Consolidated Financial Statements. A list of trust preferred securities outstanding at September 30, 2012, follows:

 

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(dollar amounts in thousands)

   Rate           Principal amount of
subordinated note/
debenture issued to trust (1)
     Investment in
unconsolidated
subsidiary
 

Huntington Capital I

     1.15     (2   $ 111,816      $ 6,186  

Huntington Capital II

     1.01       (3     54,593        3,093  

Sky Financial Capital Trust II

     3.41       (4     30,929        929  

Sky Financial Capital Trust III

     1.86       (5     72,165        2,165  

Sky Financial Capital Trust IV

     1.86       (5     74,320        2,320  

Prospect Trust I

     3.71       (6     6,186        186  
      

 

 

    

 

 

 

Total

       $ 350,009      $ 14,879  
      

 

 

    

 

 

 

 

(1) Represents the principal amount of debentures issued to each trust, including unamortized original issue discount.
(2) Variable effective rate at September 30, 2012, based on three month LIBOR + 0.70.
(3) Variable effective rate at September 30, 2012, based on three month LIBOR + 0.625.
(4) Variable effective rate at September 30, 2012, based on three month LIBOR + 2.95.
(5) Variable effective rate at September 30, 2012, based on three month LIBOR + 1.40.
(6) Variable effective rate at September 30, 2012, based on three month LIBOR + 3.25.

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 Huntington’s 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.

During the first nine-month period of 2012, Huntington redeemed $194.3 million of trust preferred securities. The trust preferred securities were redeemed at the redemption price (as a percentage of the liquidation amount) plus accrued and unpaid distributions to the redemption date. These redemptions were consistent with the capital plan we submitted to the Federal Reserve, were funded from our existing cash and resulted in a net gain of $0.8 million.

Additionally, in October 2012, Huntington redeemed $36.0 million of trust preferred securities. The trust preferred securities were redeemed at par value. These redemptions were consistent with the capital plan we submitted to the Federal Reserve, were funded from our existing cash and resulted in no amount of either gain or loss.

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. The general partner has all the rights, powers and authority granted or permitted to be granted to a general partner of a limited partnership under the Ohio Revised Uniform Limited Partnership Act. 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 partnership’s business, transact any business in the limited partnership’s 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.

 

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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 equity or effective yield method to account for its investments in these entities. These investments are included in accrued income and other assets. At September 30, 2012, and December 31, 2011, Huntington had net investment commitments of $371.9 million and $376.1 million, respectively, of which $361.6 million and $322.5 million, respectively, were funded. The unfunded portion is included in accrued expenses and other liabilities.

16. 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 September 30, 2012, and December 31, 2011, were as follows:

 

     September 30,      December 31,  

(dollar amounts in millions)

   2012      2011  

Contract amount represents credit risk:

     

Commitments to extend credit

     

Commercial

   $ 9,002      $ 8,006  

Consumer

     6,145        5,904  

Commercial real estate

     746        610  

Standby letters-of-credit

     520        586  

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 customer’s 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 $1.4 million and $1.6 million at September 30, 2012, and December 31, 2011, respectively.

Through the Company’s 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 September 30, 2012, Huntington had $520 million of standby letters-of-credit outstanding, of which 80% were collateralized. Included in this $520 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 Company’s 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 September 30, 2012, approximately $69 million of the standby letters-of-credit were rated strong with sufficient asset quality, liquidity, and good debt capacity and coverage; approximately $395 million were rated average with acceptable asset quality, liquidity, and modest debt capacity; and approximately $56 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

Huntington enters into forward contracts relating to its mortgage banking business to hedge the exposures from commitments to make new residential mortgage loans with existing customers and from mortgage loans classified as loans held for sale. At September 30, 2012, and December 31, 2011, Huntington had commitments to sell residential real estate loans of $866.9 million and $629.0 million, respectively. These contracts mature in less than one year.

 

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Income Taxes

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 2007. The Company has appealed certain proposed adjustments resulting from the IRS examination of the 2006 and 2007 tax returns. Management believes the tax positions taken related to such proposed adjustments were correct and supported by applicable statutes, regulations, and judicial authority, and intend to vigorously defend them. In 2011, Management entered into discussions with the Appeals Division of the IRS. It is possible the ultimate resolution of the proposed adjustments, if unfavorable, may be material to the results of operations in the period it occurs. However, although no assurance can be given, Management believes the resolution of these examinations will not, individually or in the aggregate, have a material adverse impact on our consolidated financial position. In the 2011 third quarter, the IRS began its examination of our 2008 and 2009 consolidated federal income tax returns. Various state and other jurisdictions remain open to examination for tax years 2005 and forward.

Huntington accounts for uncertainties in income taxes in accordance with ASC 740, Income Taxes. At September 30, 2012, Huntington had gross unrecognized tax benefits of $6.2 million in income tax liability related to tax positions. Total interest accrued on the unrecognized tax benefits was $2.2 million as of September 30, 2012. Due to the complexity 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. However, any ultimate settlement is not expected to be material to the Unaudited Condensed Consolidated Financial Statements as a whole. 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. Huntington does not anticipate the total amount of gross unrecognized tax benefits to significantly change within the next 12 months.

Litigation

The nature of Huntington’s business ordinarily results in a certain amount of claims, litigation, investigations, and legal and administrative cases 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 will consider settlement of cases when, in Management’s 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 outstanding legal proceedings utilizing the latest information available. For matters where it is 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 matters where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established.

In certain cases, 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 $150.0 million at September 30, 2012. For certain other cases, 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, Management’s estimate will change from time-to-time, and actual losses may be more or less than the current estimate.

While the final outcome of legal 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 Company’s legal proceedings will not have a material negative adverse effect on the Company’s consolidated financial position as a whole. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the Company’s consolidated financial position in a particular period.

The following supplements the discussion of certain matters previously reported in Item 3 (Legal Proceedings) of the 2011 Form 10-K for events occurring through the date of this filing:

The Bank is a defendant in three lawsuits, which collectively may be material, arising from its commercial lending, depository, and equipment leasing relationships with Cyberco Holdings, Inc. (Cyberco), formerly based in Grand Rapids, Michigan. In November 2004, the Federal Bureau of Investigation and the IRS raided the Cyberco facilities and Cyberco’s 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 while, in fact, no computer equipment was ever purchased or leased from Teleservices which proved to be a shell corporation.

 

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On June 22, 2007, a complaint was filed in the United States District Court for the Western District of Michigan (District Court) by El Camino Resources, Ltd, ePlus Group, Inc., and Bank Midwest, N.A., all of whom had lending relationships with Cyberco, against the Bank, alleging that Cyberco defrauded plaintiffs and converted plaintiffs’ property through various means in connection with the equipment leasing scheme and alleges that the Bank aided and abetted Cyberco in committing the alleged fraud and conversion. The complaint further alleges that the Bank’s actions entitle one of the plaintiffs to recover $1.9 million from the Bank as a form of unjust enrichment. In addition, plaintiffs claimed direct damages of approximately $32.0 million and additional consequential damages in excess of $20.0 million. On July 1, 2010, the District Court issued an Opinion and Order adopting in full a federal magistrate’s recommendation for summary judgment in favor of the Bank on all claims except the unjust enrichment claim, and a partial summary judgment was entered on July 1, 2010. The Bank requested an opportunity to file a motion for summary judgment on the remaining unjust enrichment claim against it. A motion for reconsideration filed by the plaintiffs regarding the partial summary judgment was denied. Subsequently, in connection with a pre-motion conference, the District Court, in lieu of allowing the Bank to file a summary judgment motion, ordered the case to be tried in April 2012, in a one day bench trial, and entered a scheduling order governing all pretrial conduct. On February 6, 2012, the District Court dismissed the remaining count for unjust enrichment following a finding by the bankruptcy court that the plaintiff must pursue its rights, if any, with respect to that count in a bankruptcy court. The plaintiffs filed a notice of appeal on March 2, 2012, appealing the District Court’s judgment against them on the aiding and abetting and conversion claims. The plaintiffs appellants’ brief was filed in the Sixth Circuit Court of Appeals on May 17, 2012, and the Bank’s appellee’s brief was filed on July 16, 2012.

The Bank is also involved with the Chapter 7 bankruptcy proceedings of both Cyberco, filed on December 9, 2004, and Teleservices, filed on January 21, 2005. The Cyberco bankruptcy trustee commenced an adversary proceeding against the Bank on December 8, 2006, seeking over $70.0 million he alleges was transferred to the Bank. The Bank responded with a motion to dismiss and all but the preference claims were dismissed on January 29, 2008. The Cyberco bankruptcy trustee alleges preferential transfers in the amount of approximately $1.2 million. The Bankruptcy Court ordered the case to be tried in July 2012, and entered a pretrial order governing all pretrial conduct. The Bank filed a motion for summary judgment based on the Cyberco trustee seeking recovery in connection with the same alleged transfers as the Teleservices trustee in the case described below. The 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 an 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 to be applied to Cyberco’s indebtedness to the Bank, and (2) deposits into Cyberco’s bank accounts with the Bank. A trial was held as to only the Bank’s defenses in the 2010 fourth quarter. 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 the alleged transfers made to the Bank were not received in good faith from the time period of April 30, 2004, through November 2004, and that the Bank failed to show a lack of knowledge of the avoidability of the alleged transfers from September 2003, through April 30, 2004. The trustee then filed an amended motion for summary judgment on her affirmative case and a hearing was held on July 1, 2011.

On March 30, 2012, the Bankruptcy Court issued an Opinion on the trustee’s motion determining the Bank was the initial transferee of the checks made payable to it and was a subsequent transferee of all deposits into Cyberco’s accounts. The Bankruptcy Court ruled Cyberco’s 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 ruled the Bank may be entitled to a credit of approximately $4.0 million for the Cyberco trustee’s recoveries in preference actions filed against third parties that received payments from Cyberco within 90 days preceding Cyberco’s bankruptcy. Lastly, the Bankruptcy Court ruled that it will award prejudgment interest to the Teleservices trustee at a rate to be determined. A trial was held on these remaining issued on April 30, 2012, and the Bankruptcy Court issued a bench opinion on July 23, 2012. In that opinion, the Bankruptcy Court denied the Bank the $4.0 million credit, but ruled that approximately $0.9 million of deposits were either double-counted or were outside of the timeframe in which the Teleservices trustee can recover. The Bankruptcy Court’s recommended award will therefore be reduced by this $0.9 million. The Bankruptcy Court also ruled the interest rate specified in the federal statute governing post-judgment interest, which is based on treasury bill rates, will be the rate of interest for determining prejudgment interest. The rulings of the Bankruptcy Court in its March 2011, March 2012, and July 2012 opinions were not reduced to judgment by the Bankruptcy Court. Rather, the Bankruptcy Court filed a report and recommendation to the District Court for the Western District of Michigan on August 1, 2012. The parties each filed objections with supporting briefs. On October 11, 2012, the Bankruptcy Court delivered its report and recommendation along with the parties’ objections and responses to the District Court, which will conduct a de novo review of the fact findings and legal conclusions in the Bankruptcy Court’s opinions and issue its decision thereafter.

In the pending bankruptcy cases of Cyberco and Teleservices, the Bank moved to substantively consolidate the two bankruptcy estates, principally on the ground that Teleservices was the alter ego and a mere instrumentality of Cyberco at all times. On July 2, 2010, the Bankruptcy Court issued an Opinion denying the Bank’s motions for substantive consolidation of the two bankruptcy estates. The Bank has appealed this ruling and the appeal is pending.

 

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On January 17, 2012, the Company was named a defendant in a putative class action filed on behalf of all 88 counties in Ohio against MERSCORP, Inc. and numerous other financial institutions that participate in the mortgage electronic registration system (MERS). The complaint alleges that recording of mortgages and assignments thereof is mandatory under Ohio law and seeks 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. Although Huntington has not been named as a defendant in the other cases, similar litigation has been initiated against MERSCORP, Inc. and other financial institutions in other jurisdictions throughout the country.

17. PARENT COMPANY FINANCIAL STATEMENTS

The parent company condensed financial statements, which include transactions with subsidiaries, are as follows.

 

Balance Sheets

   September 30,      December 31,  

(dollar amounts in thousands)

   2012      2011  

Assets

     

Cash and cash equivalents

   $ 893,644      $ 917,954  

Due from The Huntington National Bank

     314,281        616,565  

Due from non-bank subsidiaries

     89,156        188,732  

Investment in The Huntington National Bank

     4,632,783        4,073,722  

Investment in non-bank subsidiaries

     787,270        759,532  

Accrued interest receivable and other assets

     127,451        139,076  
  

 

 

    

 

 

 

Total assets

   $ 6,844,585      $ 6,695,581  
  

 

 

    

 

 

 

Liabilities and Shareholders’ Equity

     

Short-term borrowings

   $ —         $ —     

Long-term borrowings

     700,009        899,779  

Dividends payable, accrued expenses, and other liabilities

     336,972        377,702  
  

 

 

    

 

 

 

Total liabilities

     1,036,981        1,277,481  
  

 

 

    

 

 

 

Shareholders’ equity (1)

     5,807,604        5,418,100  
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 6,844,585      $ 6,695,581  
  

 

 

    

 

 

 

 

(1) See Huntington’s Condensed Consolidated Statements of Changes in Shareholders’ Equity.

 

     Three Months Ended     Nine Months Ended  

Statements of Income

   September 30,     September 30,  

(dollar amounts in thousands)

   2012     2011     2012     2011  

Income

        

Dividends from

        

The Huntington National Bank

   $ —        $ —        $ —        $ —     

Non-bank subsidiaries

     5,000       —          13,450       31,000  

Interest from

        

The Huntington National Bank

     8,523       20,248       32,112       60,644  

Non-bank subsidiaries

     1,280       2,007       4,505       6,962  

Other

     251       489       1,068       1,529  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income

     15,054       22,744       51,135       100,135  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expense

        

Personnel costs

     11,186       10,251       31,387       24,581  

Interest on borrowings

     6,621       8,834       24,094       26,256  

Other

     10,784       14,692       25,632       34,722  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expense

     28,591       33,777       81,113       85,559  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and equity in undistributednet income of subsidiaries

     (13,537     (11,033     (29,978     14,576  

Provision (benefit) for income taxes

     (15,572     (8,783     (26,812     (9,798
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in undistributed net income of subsidiaries

     2,035       (2,250     (3,166     24,374  

Increase (decrease) in undistributed net income of:

        

The Huntington National Bank

     168,314       143,140       469,274       402,040  

Non-bank subsidiaries

     (2,582     2,501       7,635       (10,659
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 167,767     $ 143,391     $ 473,743     $ 415,755  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) (1)

     51,435       42,139       89,221       117,092  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 219,202     $ 185,530     $ 562,964     $ 532,847  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) See Condensed Consolidated Statements of Comprehensive Income for other comprehensive income (loss) detail.

 

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     Nine Months Ended  

Statements of Cash Flows

   September 30,  

(dollar amounts in thousands)

   2012     2011  

Operating activities

    

Net income

   $ 473,743     $ 415,755  

Adjustments to reconcile net income to net cash provided by operating activities

    

Equity in undistributed net income of subsidiaries

     (502,659     (434,018

Depreciation and amortization

     197       549  

Other, net

     (25,494     134,089  
  

 

 

   

 

 

 

Net cash provided by (used for) operating activities

     (54,213     116,375  
  

 

 

   

 

 

 

Investing activities

    

Repayments from subsidiaries

     (31,347     (28,415

Advances to subsidiaries

     453,625       99,023  
  

 

 

   

 

 

 

Net cash provided by (used for) investing activities

     422,278       70,608  
  

 

 

   

 

 

 

Financing activities

    

Payment of borrowings

     (199,770     (5,100

Dividends paid on stock

     (127,136     (50,152

Repurchases of common stock

     (65,303     —     

Redemption of Warrant to the Treasury

     —          (49,100

Other, net

     (166     (551
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     (392,375     (104,903
  

 

 

   

 

 

 

Change in cash and cash equivalents

     (24,310     82,080  

Cash and cash equivalents at beginning of period

     917,954       615,167  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 893,644     $ 697,247  
  

 

 

   

 

 

 

Supplemental disclosure:

    

Interest paid

   $ 24,904     $ 26,256  

18. SEGMENT REPORTING

We have four major business segments: Retail and Business Banking, Regional and Commercial Banking, Automobile Finance and Commercial Real Estate, and Wealth Advisors, Government Finance, and Home Lending. A Treasury / Other function includes our insurance business and other unallocated assets, liabilities, revenue, and expense.

Segment results are determined based upon the Company’s management reporting system, which assigns balance sheet and income statement items to each of the business segments. The process is designed around the Company’s organizational and management structure and, accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions. A description of each segment and table of financial results is presented below.

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 and leases. Other financial services available to consumer and small business customers include investments, insurance services, interest rate risk protection products, foreign exchange hedging, and treasury management services. Huntington serves customers primarily through our traditional banking network of over 690 branches as well as our convenience branches located in grocery stores 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 over 1,300 ATMs.

Huntington has established a “Fair Play” banking philosophy and is building a reputation for meeting the banking needs of consumers in a manner which makes them feel supported and appreciated. In 2010, Huntington brought innovation to the checking account by providing consumers with a 24-hour grace period to correct a shortfall in an account and avoid the associated overdraft fees. Huntington believes customers are recognizing this and other efforts as key differentiators and it is earning us more customers and deeper relationships.

 

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Business Banking is a dynamic and growing part of Huntington’s 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 less than $15 million and consists of approximately 130,000 businesses. Huntington continues to develop products and services that are designed specifically to meet the needs of small business. Huntington continues to look for ways to help companies find solutions to their capital needs, from our program helping businesses that had struggled in the economic downturn but are now showing several quarters of profitability, to our participation in the Small Business Administration programs.

Regional and Commercial Banking: This segment provides a wide array of products and services to the middle market and large corporate client base located primarily within our core geographic banking markets. Huntington products in this segment include commercial lending, as well as depository and liquidity management products. Dedicated teams collaborate with our primary bankers to deliver complex and customized treasury management solutions, equipment and technology leasing, international services, capital markets services such as interest rate risk protection products, foreign exchange hedging and sales, trading of securities, mezzanine investment capabilities, and employee benefit programs (insurance, 401(k)). The Commercial Banking team specializes in serving a number of industry segments such as government entities, not-for-profit organizations, health-care entities, and large, publicly traded companies. Commercial bankers personally deliver these products and services directly and with cross-segment product partners. Huntington consistently strives to develop extensive relationships with clients creating defined relationship plans which identify needs and offer solutions.

The primary focus for Regional and Commercial Banking is our ability to gain a deeper relationship with our existing customers and to increase our market share through our unique customer solution strategy. This includes a comprehensive cross-sell approach to capture the untapped opportunities within our customer and prospect community. This strategy embodies a shift from credit-only focus, to a total customer solution approach with an increasing share-of-wallet.

The Regional and Commercial Banking business model includes eleven regional markets driven by local execution. These markets are supported by expertise in large corporate and middle market segments, by capabilities in treasury management and equipment finance, and by vertical strategies within the healthcare and not-for-profit industries.

The commercial portfolio includes a distribution across industries and segments which resembles the market demographics of our footprint. A strategic focus of Regional and Commercial Banking is to target underpenetrated markets within our footprint and capitalize on opportunities in industries such as not-for-profit and healthcare.

In addition, Regional and Commercial Banking expanded the leadership, investment, and capabilities for treasury management and equipment finance. With our investments in treasury management, Huntington differentiated itself through our implementation experience and the speed at which products and services are delivered to our customers. In equipment finance, Huntington distinguished itself through aggressive business development and local service delivery and by strategically aligning with our bank partners to drive market share.

Automobile Finance and Commercial Real Estate: This segment provides lending and other banking products and services to customers outside of our normal retail and commercial banking segments. Our products and services include financing for the purchase of automobiles by customers of automotive dealerships; financing for the purchase of new and used vehicle inventory by 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 our cross segment 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 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 professional real estate developers, REITs, and other customers with lending needs that are secured by commercial properties. Huntington has a clear focus on experienced, well-managed, well-capitalized top tier real estate developers who are capable of operating in all economic phases of the real estate industry. Most of our customers are located within our footprint.

Wealth Advisors, Government Finance, and Home Lending: This segment consists of our wealth management, government banking, and home lending businesses. In wealth management, Huntington provides financial services to high net worth clients in our primary banking markets and Florida. Huntington provides these services through a unified sales team, which consists of former private bankers, trust officers, and investment advisors; Huntington Asset Advisors, which provides investment management services; Huntington Asset Services, which offers administrative and operational support to fund complexes; and retirement plan services. Aligned with the eleven regional commercial banking markets, this coordinated service model delivers products and services directly and through the other segment product partners. A fundamental point of differentiation is our commitment to be in the market, working closely with clients and their other advisors to identify needs, offer solutions and provide ongoing advice in an optimal client experience.

 

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The Government Finance Group provides financial products and services to government and other public sector entities in our primary banking markets. A locally based team of relationship managers works with clients to meet their public finance, brokerage, trust, lending, and treasury management needs.

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. Closely aligned, our Community Development group serves an important role as it focuses on delivering on our commitment to the communities Huntington serves.

The segment also includes the related businesses of investment management, investment servicing, custody, and corporate trust and retirement plan services. Huntington Asset Advisors provides investment management services through a variety of internal and external channels, including advising the Huntington Funds, our proprietary family of funds. Huntington Asset Services offers administrative and operational support to fund complexes, including fund accounting, transfer agency, administration, and distribution services. Our retirement plan services business offers fully bundled and third party distribution of a variety of qualified and non-qualified plan solutions.

Listed below is certain operating basis financial information reconciled to Huntington’s September 30, 2012, December 31, 2011, and September 30, 2011, reported results by business segment:

 

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     Three Months Ended September 30,  
     Retail &      Regional &                            
Income Statements    Business      Commercial                   Treasury/     Huntington  

(dollar amounts in thousands)

   Banking      Banking      AFCRE     WGH      Other     Consolidated  

2012

               

Net interest income

   $ 213,270        69,995        89,573       48,181        9,279     $ 430,298  

Provision for credit losses

     38,347        4,933        (13,948     7,672        —          37,004  

Noninterest income

     99,751        33,320        10,000       82,139        35,857       261,067  

Noninterest expense

     252,241        50,660        38,437       95,049        21,916       458,303  

Income taxes

     7,852        16,703        26,279       9,659        (32,202     28,291  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 14,581      $ 31,019      $ 48,805     $ 17,940      $ 55,422     $ 167,767  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

2011

               

Net interest income

   $ 229,613        61,320        94,380       49,381        (28,216   $ 406,478  

Provision for credit losses

     36,467        16,530        (19,979     10,568        —          43,586  

Noninterest income

     110,756        34,030        28,362       54,565        30,846       258,559  

Noninterest expense

     246,454        50,623        40,348       92,416        9,277       439,118  

Income taxes

     20,107        9,869        35,831       337        (27,202     38,942  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 37,341      $ 18,328      $ 66,542     $ 625      $ 20,555     $ 143,391  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     Nine Months Ended September 30,  
     Retail &      Regional &                            
Income Statements    Business      Commercial                   Treasury/     Huntington  

(dollar amounts in thousands)

   Banking      Banking      AFCRE     WGH      Other     Consolidated  

2012

               

Net interest income

   $ 656,216        202,116        266,765       143,396        7,976     $ 1,276,469  

Provision for credit losses

     103,233        42,542        (61,030     23,185        —          107,930  

Noninterest income

     286,745        100,724        55,018       250,370        107,349       800,206  

Noninterest expense

     727,486        148,219        115,802       279,988        93,753       1,365,248  

Income taxes

     39,285        39,228        93,454       31,708        (73,921     129,754  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 72,957      $ 72,851      $ 173,557     $ 58,885      $ 95,493     $ 473,743  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

2011

               

Net interest income

   $ 702,666        178,787        271,510       145,614        (84,432   $ 1,214,145  

Provision for credit losses

     94,825        23,957        (30,050     40,036        —          128,768  

Noninterest income

     311,598        94,657        57,886       187,443        99,687       751,271  

Noninterest expense

     705,201        143,040        125,652       265,161        59,172       1,298,226  

Income taxes

     74,983        37,256        81,828       9,751        (81,151     122,667  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 139,255      $ 69,191      $ 151,966     $ 18,109      $ 37,234     $ 415,755  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     Assets at      Deposits at  
     September 30,      December 31,      September 30,      December 31,  

(dollar amounts in millions)

   2012      2011      2012      2011  

Retail & Business Banking

   $ 14,318      $ 13,889      $ 28,220      $ 27,536  

Regional & Commercial Banking

     11,333        10,186        6,205        4,683  

AFCRE

     12,758        12,873        922        881  

WGH

     7,834        7,474        9,816        9,115  

Treasury / Other

     10,200        10,029        1,578        1,065  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 56,443      $ 54,451      $ 46,741      $ 43,280  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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19. BUSINESS COMBINATIONS

On March 30, 2012, Huntington acquired the loans, deposits and certain other assets and liabilities of Fidelity Bank located in Dearborn, Michigan from the FDIC. Under the agreement, approximately $520.6 million of loans, a receivable of $95.9 million from the FDIC, and $155.0 million of other assets (primarily cash and due from banks and investment securities) were transferred to Huntington. Assets acquired and liabilities assumed were recorded at fair value in accordance with ASC 805, “Business Combinations”. The fair values for loans were estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms (Level 3). This value was reduced by an estimate of probable losses and the credit risk associated with the loans. The fair values of deposits were estimated by discounting cash flows using interest rates currently being offered on deposits with similar maturities (Level 3). Additionally, approximately $712.5 million of deposits and $45.2 million of other borrowings were assumed. Huntington recognized an $11.4 million bargain purchase gain during the 2012 first quarter, which is included in other noninterest income. This amount is subject to revision, during the measurement period, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of assets and liabilities as of that date.

 

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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 Huntington’s 2011 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 SEC’s 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 issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Huntington’s Management, with the participation of its Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of Huntington’s 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, Huntington’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, Huntington’s disclosure controls and procedures were effective.

There have not been any significant changes in Huntington’s 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, Huntington’s internal controls over financial reporting.

PART II. OTHER INFORMATION

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.

Item 1: Legal Proceedings

Information required by this item is set forth in Note 16 of the Notes to Unaudited Condensed Consolidated Financial Statements included in Item 1 of this report and incorporated herein by reference.

Item 1A: Risk Factors

Information required by this item is set forth in Part 1 Item 2- Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and incorporated herein by reference.

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 (1)
 

July 1, 2012 to July 30, 2012

     —         $ 0.00         —         $ 141,901,105   

August 1, 2012 to August 31, 2012

     1,286,771        6.53        1,286,771        133,498,490  

September 1, 2012 to September 30, 2012

     2,454,918        6.76        3,741,689        116,903,245  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3,741,689      $ 6.78         3,741,689      $ 116,903,245   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) In formation is as of the end of the period.

 

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On March 14, 2012, Huntington Bancshares Incorporated announced that the Federal Reserve did not object to Huntington’s proposed capital actions included in Huntington’s capital plan submitted to the Federal Reserve in January of this year. These actions included the potential repurchase of up to $182 million of common stock and a continuation of Huntington’s current common dividend through the first quarter of 2013. Huntington’s Board of Directors authorized a share repurchase program consistent with Huntington’s capital plan. During the 2012 third quarter, Huntington repurchased a total of 3.7 million shares at a weighted average share price of $6.68.

Item 6. Exhibits

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   
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 18, 2012.    Current Report on Form 8-K dated July 24, 2012.    001-34073      3.1   
4.1    Instruments defining the Rights of Security Holders - reference 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.         
12.1    Ratio of Earnings to Fixed Charges.         
12.2    Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.         
31.1    Rule 13a-14(a) Certification – Chief Executive Officer.         
31.2    Rule 13a-14(a) Certification – Chief Financial Officer.         

 

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32.1    Section 1350 Certification – Chief Executive Officer.         
32.2    Section 1350 Certification – Chief Financial Officer.         
101 **    The following material from Huntington’s Form 10-Q Report for the quarterly period ended September 30, 2012, 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.
** Furnished, not filed.

 

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SIGNATURES

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: October 31, 2012

      /s/ Stephen D. Steinour
          Stephen D. Steinour
          Chairman, Chief Executive Officer and President

Date: October 31, 2012

      /s/ Donald R. Kimble
          Donald R. Kimble
          Sr. Executive Vice President and Chief Financial Officer

 

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