Edgar Filing: HUNTINGTON BANCSHARES INC/MD

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Quarterly Report

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 June 30, 2014

Commission File Number 1-34073

Huntington Bancshares Incorporated


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

41 South High Street, Columbus, Ohio 43287

Registrant’s telephone number (614) 480-8300

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

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

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

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 817,002,296 shares of Registrant’s common stock ($0.01 par value) outstanding on June 30, 2014.

HUNTINGTON BANCSHARES INCORPORATED

INDEX


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets at June 30, 2014 and December 31, 2013			63

Condensed Consolidated Statements of Income for the three months and six months ended June 30, 2014 and 2013			64

Condensed Consolidated Statements of Comprehensive Income for the three months and six months ended June 30, 2014 and 2013			65

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2014 and 2013			66

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013			67

Notes to Unaudited Condensed Consolidated Financial Statements			68

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

Executive Overview			7

Discussion of Results of Operations			9

Risk Management and Capital:
Credit Risk			23
Market Risk			37
Liquidity Risk			38
Operational Risk			42
Compliance Risk			44
Capital			44
Fair Value			47

Business Segment Discussion			48

Additional Disclosures			61

Item 3. Quantitative and Qualitative Disclosures about Market Risk			142

Item 4. Controls and Procedures			142

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			142

Item 1A. Risk Factors			142

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			142

Item 5. Other Information			143

Item 6. Exhibits			143

Signatures			145

Glossary of Acronyms and Terms

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



2013 Form 10-K		Annual Report on Form 10-K for the year ended December 31, 2013

ABL		Asset Based Lending

ACL		Allowance for Credit Losses

AFCRE		Automobile Finance and Commercial Real Estate

AFS		Available-for-Sale

ALCO		Asset-Liability Management Committee

ALLL		Allowance for Loan and Lease Losses

ARM		Adjustable Rate Mortgage

ASC		Accounting Standards Codification

ASU		Accounting Standards Update

ATM		Automated Teller Machine

AULC		Allowance for Unfunded Loan Commitments

AVM		Automated Valuation Methodology

Basel III		Refers to the final rule issued by the FRB and OCC and published in the Federal Register on October 11, 2013

BHC		Bank Holding Companies

C&I		Commercial and Industrial

Camco Financial		Camco Financial Corp.

CCAR		Comprehensive Capital Analysis and Review

CDO		Collateralized Debt Obligations

CDs		Certificate of Deposit

CFPB		Bureau of Consumer Financial Protection

CMO		Collateralized Mortgage Obligations

CRE		Commercial Real Estate

Dodd-Frank Act		Dodd-Frank Wall Street Reform and Consumer Protection Act

EPS		Earnings Per Share

ERISA		Employee Retirement Income Security Act

EVE		Economic Value of Equity

Fannie Mae		(see FNMA)

FASB		Financial Accounting Standards Board

FDIC		Federal Deposit Insurance Corporation

FDICIA		Federal Deposit Insurance Corporation Improvement Act of 1991

FHA		Federal Housing Administration

FHFA		Federal Housing Finance Agency

FHLB		Federal Home Loan Bank

FHLMC		Federal Home Loan Mortgage Corporation

FICA		Federal Insurance Contributions Act

FICO		Fair Isaac Corporation

FNMA		Federal National Mortgage Association

FRB		Federal Reserve Bank

Freddie Mac		(see FHLMC)

FTE		Fully-Taxable Equivalent

FTP		Funds Transfer Pricing

GAAP		Generally Accepted Accounting Principles in the United States of America



HAMP		Home Affordable Modification Program

HARP		Home Affordable Refinance Program

HIP		Huntington Investment and Tax Savings Plan

HQLA		High Quality Liquid Asset

HTM		Held-to-Maturity

IRC		Internal Revenue Code of 1986, as amended

IRS		Internal Revenue Service

ISE		Interest Sensitive Earnings

LCR		Liquidity Coverage Ratio

LIBOR		London Interbank Offered Rate

LGD		Loss-Given-Default

LIHTC		Low Income Housing Tax Credit

LTV		Loan to Value

MD&A		Management’s Discussion and Analysis of Financial Condition and Results of Operations

MSA		Metropolitan Statistical Area

MSR		Mortgage Servicing Rights

NALs		Nonaccrual Loans

NAV		Net Asset Value

NCO		Net Charge-off

NIM		Net Interest Margin

NCUA		National Credit Union Administration

NPAs		Nonperforming Assets

NPR		Notice of Proposed Rulemaking

N.R.		Not relevant. Denominator of calculation is a gain in the current period compared with a loss in the prior period, or vice-versa

NSF / OD		Nonsufficient Funds and Overdraft

OCC		Office of the Comptroller of the Currency

OCI		Other Comprehensive Income (Loss)

OCR		Optimal Customer Relationship

OLEM		Other Loans Especially Mentioned

OREO		Other Real Estate Owned

OTTI		Other-Than-Temporary Impairment

PD		Probability-Of-Default

Plan		Huntington Bancshares Retirement Plan

Problem Loans		Includes nonaccrual loans and leases (Table 15), troubled debt restructured loans (Table 16), accruing loans and leases past due 90 days or more (aging analysis section of Footnote 3), and Criticized commercial loans (credit quality indicators section of Footnote 3).

REIT		Real Estate Investment Trust

Reg E		Regulation E, of the Electronic Fund Transfer Act

RBHPCG		Regional Banking and The Huntington Private Client Group

ROC		Risk Oversight Committee

SAD		Special Assets Division

SBA		Small Business Administration

SEC		Securities and Exchange Commission

SERP		Supplemental Executive Retirement Plan

Sky Financial		Sky Financial Group, Inc.

SRIP		Supplemental Retirement Income Plan



TCE		Tangible Common Equity

TDR		Troubled Debt Restructured Loan

TLGP		Temporary Liquidity Guarantee Program

U.S. Treasury		U.S. Department of the Treasury

UCS		Uniform Classification System

UPB		Unpaid Principal Balance

USDA		U.S. Department of Agriculture

VA		U.S. Department of Veteran Affairs

VIE		Variable Interest Entity

PART I. FINANCIAL INFORMATION

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

Item 2:

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

INTRODUCTION

We are a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through the Bank, we have 148 years of servicing the financial needs of our customers. Through our subsidiaries, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, insurance service programs, and other financial products and services. Our 730 branches are located in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. Selected financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office in Columbus, Ohio and a limited purpose office located in the Cayman Islands and another limited purpose office located in Hong Kong. Our foreign banking activities, in total or with any individual country, are not significant.

This MD&A provides information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows. The MD&A included in our Form 8-K filed on May 28, 2014 should be read in conjunction with this MD&A as this discussion provides only material updates to the Form 8-K. This MD&A should also be read in conjunction with the financial statements, notes and other information contained in this report.

Our discussion is divided into key segments:

•

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

•

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

•

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

•

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

•

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

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

EXECUTIVE OVERVIEW

Summary of 2014 Second Quarter Results

For the quarter, we reported net income of $164.6 million, or $0.19 per common share, compared with $151.0 million, or $0.17 per common share, in the year-ago quarter (see Table 1).

Fully-taxable equivalent net interest income was $466.7 million for the quarter, up $35.2 million, or 8%, from the year-ago quarter. The results reflected a $5.9 billion, or 12%, increase in average earning assets, including a $3.7 billion, or 9%, increase in average loans and leases, as well as a $2.6 billion, or 28%, increase in average securities. These balance increases were partially offset by a 10 basis point decrease in the net interest margin. The primary items affecting the net interest margin were a 15 basis point negative impact from the mix and yield of earning assets, partially offset by a 5 basis point reduction in funding costs. During the 2014 second quarter, the unexpected pay-off of an acquired commercial real estate loan improved net interest income and the net interest margin by $5.1 million and 4 basis points, respectively.

The provision for credit losses increased $4.7 million, or 19%, from the year-ago quarter. This reflected substantial loan growth during the current quarter combined with a slight improvement in asset quality. NCOs decreased $6.1 million, or 18%, to $28.6 million. The consumer loan portfolios drove the majority of the decline, continuing the positive trend exhibited over the past four quarters. NCOs were an annualized 0.25% of average loans and leases in the current quarter, compared to 0.34% in the year-ago quarter.

Noninterest income decreased $1.9 million, or less than 1%, from the year-ago quarter. The results included a $10.9 million, or 33%, decrease in mortgage banking income, reflecting a 49% reduction in origination and secondary marketing revenue, as originations decreased 23%, and gain-on-sale margins compressed. The decline was partially offset by a $7.1 million, or 25%, increase in other income primarily related to commercial loan fees and credit card revenue, as our new credit card products were launched last year. In addition, service charges on deposit accounts increased $4.6 million, or 7%, reflecting an 8% consumer household and 1% commercial relationship growth and changing customer usage patterns.

Noninterest expense increased $12.8 million, or 3%, from the year-ago quarter. The results included an $8.6 million, or 92%, increase in professional services, $4.8 million of which is one-time consulting expense related to strategic planning. Outside data processing and other services increased $4.4 million, or 9%, reflecting higher debit and credit card processing costs and other technology expense. Equipment expense increased $3.8 million, or 15%, reflecting technology investments and the near-complete rollout of enhanced ATMs. The increases were partially offset by a $3.3 million, or 1%, decrease in personnel costs, reflecting the curtailment of the pension plan at the end of 2013, partially offset by annual compensation increases.

The tangible common equity to tangible assets ratio was 8.38%, down 38 basis points from a year ago. Our Tier 1 common risk-based capital ratio was 10.26%, down 45 basis points from a year ago. The regulatory Tier 1 risk-based capital ratio was 11.56%, down 68 basis points from a year ago. All capital ratios were impacted by the repurchase of 28.7 million common shares over the last four quarters, 12.1 million of which were repurchased during the 2014 second quarter, as well as the issuance of 8.7 million common shares as part of the Camco acquisition. The decrease in the regulatory Tier 1 risk-based capital ratio reflected the redemption of $50 million of qualifying preferred securities on December 31, 2013 and an increase in risk-weighted assets caused by organic balance sheet growth, as well as assets acquired from Camco. These declines were partially offset by the increase in retained earnings.

Business Overview

General

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

We are very pleased with our second quarter performance. We have been able to grow both total revenue and net interest income year over year. Net interest income was particularly noteworthy, as average loan growth of 9% allowed us to overcome continued pressure on the net interest margin from the short-term, low, flat yield curve. We also completed $111 million of stock buybacks during the quarter, which demonstrates our belief in the future prospects of the company and our commitment to return capital to our shareholders.

Average loans and leases increased $3.7 billion from the 2013 second quarter, driven by growth in commercial and auto lending, reflecting heightened consumer and business confidence in the economy. During the quarter, we announced and received approval from the OCC for the deposit purchase included with 24 branches in Michigan, which is targeted to close in September. Also during the second quarter, we were the number one SBA lender, by number of loans, in the country for the first nine months of the program’s fiscal year, even though we only lend in our six-state footprint. We also gave customers more convenience during the quarter with the rollout of the Quick Balance feature to our mobile banking—one of the first of its kind in the country.

Economy

We are optimistic about the continued growth in our local economies and the growing benefit from previous investments, which are driving our robust pipelines. In addition, our footprint state unemployment rates have dropped sharply during the recovery and job growth should benefit from rising aggregate demand in the manufacturing sector in the next year. Also, housing activity and prices will likely continue on a moderate upward trend in line with long-term historical growth. Nevertheless, we continue to face a challenging regulatory and competitive environment.

2014 Expectations

Net interest income is expected to increase modestly. We anticipate an increase in earning assets as total loans moderately grow and investment securities increase modestly. However, those benefits to net interest income are expected to be partially offset by continued downward pressure on NIM. We continue to maintain a disciplined approach to loan and deposit pricing; however, asset yields remain under pressure, and the opportunity to reduce funding costs further is diminishing.

Noninterest income, excluding the impact of any net MSR activity, is expected to remain near the current quarter’s level. In July, we will implement the previously announced change in our consumer service charges on deposits that is expected to have an approximate quarterly negative impact of $6 million. We expect that continued organic consumer household and business relationship growth coupled with the completion of the Michigan branch acquisitions will help offset this reduction.

Noninterest expense, excluding one-time items, is expected to remain near the current quarter’s reported level. We will continue to look for ways to reduce expenses, while not impacting our previously announced growth strategies and our high level of customer service.

Asset quality metrics are expected to trend favorably, although moderate quarterly volatility also is expected given the low level of problem assets and credit costs. NPAs are expected to show continued improvement. We anticipate NCOs will remain within or below our long-term normalized range of 35 to 55 basis points.

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

DISCUSSION OF RESULTS OF OPERATIONS

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

Table 1—Selected Quarterly Income Statement Data (1)


	2014						2013
(dollar amounts in thousands, except per share amounts)	Second			First			Fourth			Third			Second
Interest income	$	495,322		$	472,455		$	469,824		$	462,912		$	462,582
Interest expense		35,274			34,949			39,175			38,060			37,645

Net interest income		460,048			437,506			430,649			424,852			424,937
Provision for credit losses		29,385			24,630			24,331			11,400			24,722

Net interest income after provision for credit losses		430,663			412,876			406,318			413,452			400,215

Service charges on deposit accounts		72,633			64,582			69,992			72,918			68,009
Mortgage banking income		22,717			23,089			24,327			23,621			33,659
Trust services		29,581			29,565			30,711			30,470			30,666
Electronic banking		26,491			23,642			24,251			24,282			23,345
Insurance income		15,996			16,496			15,556			17,269			17,187
Brokerage income		17,831			17,071			15,116			16,532			19,546
Bank owned life insurance income		13,865			13,307			13,816			13,740			15,421
Capital markets fees		10,500			9,194			12,332			12,825			12,229
Gain on sale of loans		3,914			3,570			7,144			5,063			3,348
Securities gains (losses)		490			16,970			1,239			98			(410	)
Other income		36,049			30,999			35,407			36,950			28,919

Total noninterest income		250,067			248,485			249,891			253,768			251,919

Personnel costs		260,600			249,477			249,554			229,326			263,862
Outside data processing and other services		54,338			51,490			51,071			49,313			49,898
Net occupancy		28,673			33,433			31,983			35,591			27,656
Equipment		28,749			28,750			28,775			28,191			24,947
Marketing		14,832			10,686			13,704			12,271			14,239
Deposit and other insurance expense		10,599			13,718			10,056			11,155			13,460
Amortization of intangibles		9,520			9,291			10,320			10,362			10,362
Professional services		17,896			12,231			11,567			12,487			9,341
Other expense		33,429			51,045			38,979			34,640			32,100

Total noninterest expense		458,636			460,121			446,009			423,336			445,865

Income before income taxes		222,094			201,240			210,200			243,884			206,269
Provision for income taxes		57,475			52,097			52,029			65,047			55,269

Net income	$	164,619		$	149,143		$	158,171		$	178,837		$	151,000

Dividends on preferred shares		7,963			7,964			7,965			7,967			7,967

Net income applicable to common shares	$	156,656		$	141,179		$	150,206		$	170,870		$	143,033

Average common shares—basic		821,546			829,659			830,590			830,398			834,730
Average common shares—diluted		834,687			842,677			842,324			841,025			843,840
Net income per common share—basic	$	0.19		$	0.17		$	0.18		$	0.21		$	0.17
Net income per common share—diluted		0.19			0.17			0.18			0.20			0.17
Cash dividends declared per common share		0.05			0.05			0.05			0.05			0.05
Return on average total assets		1.07	%		1.01	%		1.09	%		1.27	%		1.08	%
Return on average common shareholders’ equity		10.8			9.9			10.5			12.3			10.4
Return on average tangible common shareholders’ equity (2)		12.4			11.3			12.1			14.2			12.1
Net interest margin (3)		3.28			3.27			3.28			3.34			3.38
Efficiency ratio (4)		62.7			66.4			63.4			60.3			63.7
Effective tax rate		25.9			25.9			24.8			26.7			26.8


Revenue—FTE
Net interest income	$	460,048	$	437,506	$	430,649	$	424,852	$	424,937
FTE adjustment		6,637		5,885		8,196		6,634		6,587

Net interest income (3)		466,685		443,391		438,845		431,486		431,524
Noninterest income		250,067		248,485		249,891		253,768		251,919

Total revenue (3)	$	716,752	$	691,876	$	688,736	$	685,254	$	683,443

⁽¹⁾	Comparisons for presented periods are impacted by a number of factors. Refer to the “Significant Items” for additional discussion regarding these key factors.

⁽²⁾

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

⁽³⁾	On a fully-taxable equivalent (FTE) basis assuming a 35% tax rate.

⁽⁴⁾	Noninterest expense less amortization of intangibles and goodwill impairment divided by the sum of FTE net interest income and noninterest income excluding securities gains.

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


	Six Months Ended June 30,					Change
(dollar amounts in thousands, except per share amounts)	2014		2013			Amount			Percent
Interest income	$	967,777	$	927,901		$	39,876			4	%
Interest expense		70,223		78,794			(8,571	)		(11	)

Net interest income		897,554		849,107			48,447			6
Provision for credit losses		54,015		54,314			(299	)		(1	)

Net interest income after provision for credit losses		843,539		794,793			48,746			6

Service charges on deposit accounts		137,215		128,892			8,323			6
Mortgage banking income		45,807		78,907			(33,100	)		(42	)
Trust services		59,146		61,826			(2,680	)		(4	)
Electronic banking		50,133		44,058			6,075			14
Insurance income		32,492		36,439			(3,947	)		(11	)
Brokerage income		34,903		37,541			(2,638	)		(7	)
Bank owned life insurance income		27,172		28,863			(1,691	)		(6	)
Capital markets fees		19,694		20,063			(369	)		(2	)
Gain on sale of loans		7,484		5,964			1,520			25
Securities gains (losses)		17,460		(919	)		18,379			N.R.
Other income		67,046		66,903			143			—

Total noninterest income		498,552		508,537			(9,985	)		(2	)

Personnel costs		510,077		522,757			(12,680	)		(2	)
Outside data processing and other services		105,828		99,163			6,665			7
Net occupancy		62,106		57,770			4,336			8
Equipment		57,499		49,827			7,672			15
Marketing		25,518		25,210			308			1
Deposit and other insurance expense		24,317		28,950			(4,633	)		(16	)
Amortization of intangibles		18,811		20,682			(1,871	)		(9	)
Professional services		30,127		16,533			13,594			82
Other expense		84,474		67,766			16,708			25

Total noninterest expense		918,757		888,658			30,099			3

Income before income taxes		423,334		414,672			8,662			2
Provision for income taxes		109,572		110,398			(826	)		(1	)

Net income	$	313,762	$	304,274		$	9,488			3	%

Dividends declared on preferred shares		15,927		15,937			(10	)		—

Net income applicable to common shares	$	297,835	$	288,337		$	9,498			3	%

Average common shares—basic		825,603		837,917			(12,314	)		(1	)%
Average common shares—diluted		838,546		846,274			(7,728	)		(1	)
Per common share
Net income per common share—basic	$	0.36	$	0.34		$	0.02			6	%
Net income per common share—diluted		0.36		0.34			0.02			6
Cash dividends declared		0.10		0.09			0.01			11
Revenue—FTE										—
Net interest income	$	897,554	$	849,107		$	48,447			6	%
FTE adjustment		12,522		12,510			12			—

Net interest income (2)		910,076		861,617			48,459			6
Noninterest income		498,552		508,537			(9,985	)		(2	)

Total revenue (2)	$	1,408,628	$	1,370,154		$	38,474			3	%

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

⁽¹⁾	Comparisons for presented periods are impacted by a number of factors. Refer to the “Significant Items” for additional discussion regarding these key factors.

⁽²⁾	On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.

Significant Items

Definition of Significant Items

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

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

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

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

Significant Items Influencing Financial Performance Comparisons

Earnings comparisons were impacted by the Significant Items summarized below:

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

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

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
	June 30, 2014				March 31, 2014						June 30, 2013
(dollar amounts in thousands, except per share amounts)	After-tax		EPS (2)(3)		After-tax			EPS (2)(3)			After-tax		EPS (2)(3)
Net income	$	164,619			$	149,143					$	151,000
Earnings per share, after-tax			$	0.19				$	0.17				$	0.17

Significant Items—favorable (unfavorable) impact:	Earnings (1)		EPS (2)(3)		Earnings (1)			EPS (2)(3)			Earnings (1)		EPS (2)(3)
Camco Financial Acquisition		—		—		(11,823	)		(0.01	)		—		—
Additions to Litigation Reserve		—		—		(9,000	)		(0.01	)		—		—

⁽¹⁾

Pretax.

⁽²⁾	Based on average outstanding diluted common shares

⁽³⁾

After-tax


	Six Months Ended
	June 30, 2014						June 30, 2013
(dollar amounts in thousands)	After-tax			EPS (2)(3)			After-tax		EPS (2)(3)
Net income	$	313,762					$	304,274
Earnings per share, after-tax				$	0.36				$	0.34

Significant Items—favorable (unfavorable) impact:	Earnings (1)			EPS (2)(3)			Earnings (1)		EPS (2)(3)
Camco Financial Acquisition	$	(11,823	)	$	(0.01	)	$	—	$	—
Additions to Litigation Reserve		(9,000	)		(0.01	)		—		—

⁽¹⁾	Pretax unless otherwise noted.

⁽²⁾	Based on average outstanding diluted common shares

⁽³⁾

After-tax

Net Interest Income / Average Balance Sheet

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

Table 4—Consolidated Quarterly Average Balance Sheets


	Average Balances															Change
	2014						2013									2Q14 vs. 2Q13
(dollar amounts in millions)	Second			First			Fourth			Third			Second			Amount			Percent
Assets:
Interest-bearing deposits in banks	$	91		$	83		$	71		$	54		$	84		$	7			8	%
Loans held for sale		288			279			322			379			678			(390	)		(58	)
Securities:
Available-for-sale and other securities:
Taxable		6,662			6,240			5,818			6,040			6,728			(66	)		(1	)
Tax-exempt		1,290			1,115			548			565			591			699			118

Total available-for-sale and other securities		7,952			7,355			6,366			6,605			7,319			633			9
Trading account securities		45			38			76			76			84			(39	)		(46	)
Held-to-maturity securities—taxable		3,677			3,783			3,038			2,139			1,711			1,966			115

Total securities		11,674			11,176			9,480			8,820			9,114			2,560			28

Loans and leases: (1)
Commercial:
Commercial and industrial		18,262			17,631			17,671			17,032			17,033			1,229			7
Commercial real estate:
Construction		702			612			573			565			586			116			20
Commercial		4,345			4,289			4,331			4,345			4,429			(84	)		(2	)

Commercial real estate		5,047			4,901			4,904			4,910			5,015			32			1

Total commercial		23,309			22,532			22,575			21,942			22,048			1,261			6

Consumer:
Automobile		7,349			6,786			6,502			6,075			5,283			2,066			39
Home equity		8,376			8,340			8,346			8,341			8,263			113			1
Residential mortgage		5,608			5,379			5,331			5,256			5,225			383			7
Other consumer		382			386			385			380			461			(79	)		(17	)

Total consumer		21,715			20,891			20,564			20,052			19,232			2,483			13

Total loans and leases		45,024			43,423			43,139			41,994			41,280			3,744			9
Allowance for loan and lease losses		(642	)		(649	)		(668	)		(717	)		(746	)		104			(14	)

Net loans and leases		44,382			42,774			42,471			41,277			40,534			3,848			9

Total earning assets		57,077			54,961			53,012			51,247			51,156			5,921			12

Cash and due from banks		872			904			846			944			940			(68	)		(7	)
Intangible assets		591			535			542			552			563			28			5
All other assets		3,932			3,941			3,917			3,889			3,976			(44	)		(1	)

Total assets	$	61,830		$	59,692		$	57,649		$	55,915		$	55,889		$	5,941			11	%


Liabilities and Shareholders’ Equity:
Deposits:
Demand deposits—noninterest-bearing	$	13,466	$	13,192	$	13,337	$	13,088	$	12,879	$	587		5	%
Demand deposits—interest-bearing		5,945		5,775		5,755	$	5,763	$	5,927		18		—

Total demand deposits		19,411		18,967		19,092		18,851		18,806		605		3
Money market deposits		17,680		17,648		16,827		15,739		15,069		2,611		17
Savings and other domestic deposits		5,086		4,967		4,912		5,007		5,115		(29	)	(1	)
Core certificates of deposit		3,434		3,613		3,916		4,176		4,778		(1,344	)	(28	)

Total core deposits		45,611		45,195		44,747		43,773		43,768		1,843		4
Other domestic time deposits of $250,000 or more		262		284		275		268		324		(62	)	(19	)
Brokered deposits and negotiable CDs		2,070		1,782		1,398		1,553		1,779		291		16
Deposits in foreign offices		315		328		354		376		316		(1	)	—

Total deposits		48,258		47,589		46,774		45,970		46,187		2,071		4
Short-term borrowings		939		883		629		710		701		238		34
Federal Home Loan Bank advances		1,977		1,499		851		549		757		1,220		161
Subordinated notes and other long-term debt		3,395		2,503		2,244		1,753		1,292		2,103		163

Total interest-bearing liabilities		41,103		39,282		37,161		35,894		36,058		5,045		14

All other liabilities		1,033		1,035		1,095		1,054		1,064		(31	)	(3	)
Shareholders’ equity		6,228		6,183		6,056		5,879		5,888		340		6

Total liabilities and shareholders’ equity	$	61,830	$	59,692	$	57,649	$	55,915	$	55,889	$	5,941		11	%

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

Table 5—Consolidated Quarterly Net Interest Margin Analysis


	Average Rates (2)
	2014						2013
Fully-taxable equivalent basis (1)	Second			First			Fourth			Third			Second
Assets
Interest-bearing deposits in banks		0.04	%		0.03	%		0.04	%		0.07	%		0.27	%
Loans held for sale		4.27			3.74			4.46			3.89			3.39
Securities:
Available-for-sale and other securities:
Taxable		2.52			2.47			2.38			2.34			2.29
Tax-exempt		3.15			3.03			6.34			4.04			3.94

Total available-for-sale and other securities		2.63			2.55			2.72			2.48			2.42
Trading account securities		0.70			1.12			0.42			0.23			0.60
Held-to-maturity securities—taxable		2.46			2.47			2.42			2.29			2.29

Total securities		2.57			2.52			2.60			2.41			2.38

Loans and leases: (3)
Commercial:
Commercial and industrial		3.49			3.56			3.54			3.68			3.75
Commercial real estate:
Construction		4.29			3.99			4.04			3.91			3.93
Commercial		4.16			3.84			3.97			4.10			4.13

Commercial real estate		4.17			3.86			3.98			4.08			4.09

Total commercial		3.64			3.63			3.63			3.77			3.83

Consumer:
Automobile		3.47			3.54			3.67			3.80			3.96
Home equity		4.12			4.12			4.11			4.10			4.16
Residential mortgage		3.77			3.78			3.77			3.81			3.82
Other consumer		7.34			6.84			6.64			6.98			6.66

Total consumer		3.87			3.89			3.93			3.99			4.07

Total loans and leases		3.75			3.75			3.77			3.87			3.95

Total earning assets		3.53	%		3.53	%		3.58	%		3.64	%		3.68	%

Liabilities
Deposits:
Demand deposits—noninterest-bearing		—	%		—	%		—	%		—	%		—	%
Demand deposits—interest-bearing		0.04			0.04			0.04			0.04			0.04

Total demand deposits		0.01			0.01			0.01			0.01			0.01
Money market deposits		0.24			0.25			0.27			0.26			0.24
Savings and other domestic deposits		0.17			0.20			0.24			0.25			0.27
Core certificates of deposit		0.81			0.94			1.05			1.05			1.13

Total core deposits		0.25			0.28			0.32			0.32			0.34
Other domestic time deposits of $250,000 or more		0.43			0.41			0.39			0.44			0.50
Brokered deposits and negotiable CDs		0.24			0.28			0.39			0.55			0.62
Deposits in foreign offices		0.13			0.13			0.14			0.14			0.14

Total deposits		0.25			0.28			0.32			0.33			0.36
Short-term borrowings		0.12			0.07			0.08			0.09			0.10
Federal Home Loan Bank advances		0.12			0.12			0.14			0.14			0.14
Subordinated notes and other long-term debt		1.48			1.66			2.10			2.29			2.35

Total interest-bearing liabilities		0.34	%		0.36	%		0.42	%		0.42	%		0.42	%

Net interest rate spread		3.19	%		3.17	%		3.15	%		3.20	%		3.26	%
Impact of noninterest-bearing funds on margin		0.09			0.10			0.13			0.14			0.12

Net interest margin		3.28	%		3.27	%		3.28	%		3.34	%		3.38	%

⁽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.

2014 Second Quarter versus 2013 Second Quarter

Fully-taxable equivalent net interest income increased $35.2 million, or 8%, from the 2013 second quarter. This reflected the benefit from the $3.7 billion, or 9%, of average loan growth and a $2.6 billion, or 28%, increase in securities. This was partially offset by the 10 basis point decrease in the FTE net interest margin to 3.28%. The 15 basis point negative impact on NIM from the mix and yield of earning assets was partially offset by the 5 basis point reduction in funding costs. During the 2014 second quarter, net interest income and the NIM benefitted by $5.1 million and 4 basis points, respectively, from the unexpected pay-off of an acquired commercial real estate loan.

Average loans and leases increased $3.7 billion, or 9%, from the prior year, driven by:

•

$2.1 billion, or 39%, increase in average automobile loans, as originations remained strong and we continued to portfolio all of the production.

•

$1.2 billion, or 7%, increase in average C&I loans and leases. This reflected growth in the international and other specialty lending verticals, automobile dealer floorplan lending, and business banking.

•

$0.4 billion, or 7%, increase in average residential mortgage loans as a result of increased customer demand for adjustable rate mortgages.

Average total core deposits increased $1.9 billion, or 4%, from the year-ago quarter. Average interest-bearing liabilities increased $5.0 billion, or 14%, from the 2013 second quarter, reflecting:

•

$3.6 billion, or 130%, increase in short- and long-term borrowings, which were used to efficiently finance balance sheet growth while continuing to manage the overall cost of funds. Included in the increase are $2.1 billion of bank-level debt and $0.4 billion of parent-level debt issued over the past year.

•

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

•

$0.6 billion, or 5%, increase in noninterest bearing deposits.

Partially offset by:

•

$1.3 billion, or 28%, decrease in average core certificates of deposit due to the strategic focus on changing the funding sources to no-cost demand deposits and lower cost money market deposits.

2014 Second Quarter versus 2014 First Quarter

Compared to the 2014 first quarter, fully-taxable equivalent net interest income increased $23.3 million, or 5%, reflecting a $2.1 billion, or 4% increase in average earnings assets, and a 1 basis point increase in NIM.

Table 6—Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis


	YTD Average Balances												YTD Average Rates (2)
Fully-taxable equivalent basis (1)	Six Months Ended June 30,						Change						Six Months Ended June 30,
(dollar amounts in millions)	2014			2013			Amount			Percent			2014			2013
Assets:
Interest-bearing deposits in banks	$	87		$	78		$	9			12	%		0.03	%		0.22	%
Loans held for sale		283			694			(411	)		(59	)		4.01			3.35
Securities:
Available-for-sale and other securities:
Taxable		6,452			6,845			(393	)		(6	)		2.49			2.30
Tax-exempt		1,203			570			633			111			3.09			3.95

Total available-for-sale and other securities		7,655			7,415			240			3			2.59			2.43
Trading account securities		42			85			(43	)		(51	)		0.89			0.55
Held-to-maturity securities—taxable		3,730			1,714			2,016			118			2.46			2.29

Total securities		11,427			9,214			2,213			24			2.54			2.38

Loans and leases: (3)
Commercial:
Commercial and industrial		17,948			16,994			954			6			3.53			3.79
Commercial real estate:
Construction		657			592			65			11			4.15			3.99
Commercial		4,317			4,561			(244	)		(5	)		4.00			4.06

Commercial real estate		4,974			5,153			(179	)		(3	)		4.02			4.06

Total commercial		22,922			22,147			775			3			3.63			3.85

Consumer:
Automobile		7,069			5,058			2,011			40			3.50			4.11
Home equity		8,358			8,277			81			1			4.12			4.17
Residential mortgage		5,494			5,102			392			8			3.78			3.89
Other consumer		384			488			(104	)		(21	)		7.09			6.76

Total consumer		21,305			18,925			2,380			13			3.88			4.15

Total loans and leases		44,227			41,072			3,155			8			3.75			3.99

Allowance for loan and lease losses		(645	)		(758	)		113			(15	)

Net loans and leases		43,582			40,314			3,268			8

Total earning assets		56,024			51,058			4,966			10			3.53	%		3.71	%

Cash and due from banks		888			922			(34	)		(4	)
Intangible assets		563			567			(4	)		(1	)
All other assets		3,937			4,020			(83	)		(2	)

Total assets	$	60,767		$	55,809		$	4,958			9	%

Liabilities and Shareholders’ Equity:
Deposits:
Demand deposits—noninterest-bearing	$	13,330		$	12,524		$	806			6	%		—	%		—	%
Demand deposits—interest-bearing		5,860			5,952			(92	)		(2	)		0.04			0.04

Total demand deposits		19,190			18,476			714			4			0.01			0.01
Money market deposits		17,664			15,057			2,607			17			0.25			0.23
Savings and other domestic deposits		5,027			5,099			(72	)		(1	)		0.19			0.29
Core certificates of deposit		3,523			5,060			(1,537	)		(30	)		0.88			1.16

Total core deposits		45,404			43,692			1,712			4			0.27			0.36
Other domestic time deposits of $250,000 or more		273			342			(69	)		(20	)		0.42			0.51
Brokered deposits and negotiable CDs		1,927			1,738			189			11			0.26			0.65
Deposits in foreign offices		322			328			(6	)		(2	)		0.13			0.15

Total deposits		47,926			46,100			1,826			4			0.27			0.37
Short-term borrowings		911			732			179			24			0.09			0.11
Federal Home Loan Bank advances		1,740			722			1,018			141			0.12			0.16
Subordinated notes and other long-term debt		2,951			1,320			1,631			124			1.55			2.45

Total interest-bearing liabilities		40,198			36,350			3,848			11			0.35			0.44

All other liabilities		1,034			1,074			(40	)		(4	)
Shareholders’ equity		6,205			5,861			344			6

Total liabilities and shareholders’ equity	$	60,767		$	55,809		$	4,958			9	%

Net interest rate spread														3.18			3.28
Impact of noninterest-bearing funds on margin														0.10			0.12

Net interest margin														3.28	%		3.40	%

⁽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.

2014 First Six Months versus 2013 First Six Months

Fully-taxable equivalent net interest income for the first six-month period of 2014 increased $48.5 million, or 6% reflecting the benefit of a $5.0 billion, or 10%, increase in average total earning assets. The fully-taxable equivalent net interest margin decreased to 3.28% from 3.40%. The increase in average earning assets reflected:

•

$3.2 billion, or 8%, increase in average total loans and leases.

•

$2.2 billion, or 24%, increase in securities that meet the requirement for HQLA as proposed in the LCR rules issued by the regulators in October 2013.

Partially offset by:

•

$0.4 billion, or 59%, decrease in loans held for sale.

The $3.2 billion, or 8%, increase in average total loans and leases primarily reflected:

•

$2.0 billion, or 40%, increase in the average automobile portfolio as originations remained strong and we continued to portfolio all of the production. Investments in our automobile lending business throughout the Northeast and upper Midwest continue to grow as planned.

•

$1.0 billion, or 6%, increase in the average C&I portfolio, primarily reflecting growth in the international and other specialty lending verticals, automobile dealer floorplan lending, and business banking.

The $1.8 billion, or 4%, increase in average total deposits reflected:

•

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

•

$0.7 billion, or 4%, increase in total demand deposits, reflecting our focus on changing our product mix to reduce the overall cost of deposits.

Partially offset by:

•

$1.5 billion, or 30%, decline in core certificates of deposit due to the strategic focus on changing the funding sources to no-cost demand deposits and lower cost money market deposits.

In addition, short- and long-term borrowings increased $2.8 billion, or 102%, which were used to efficiently finance balance sheet growth while continuing to manage the overall cost of funds. Included in the increase are $2.1 billion of bank-level debt and $0.4 billion of parent-level debt.

Provision for Credit Losses

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

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

The provision expense for the quarter was significantly impacted by the substantial loan growth in the quarter, combined with the slight improvement in overall asset quality metrics. The provision for credit losses for the 2014 second quarter was $29.4 million and increased $4.8 million, or 19%, from the prior quarter and increased $4.7 million, or 19%, from the year-ago quarter. The current quarter’s provision for credit losses was $0.7 million more than total NCOs for the same period. On a year-to-date basis, provision for credit losses for the first six-month period of 2014 declined $0.3 million, or 1%, compared to year-ago period. The provision for credit losses for the first six-month period of 2014 was $17.6 million less than total NCOs. (See Credit Quality discussion). Given the low level of the provision for credit losses and the uncertain and uneven nature of the economic recovery, some degree of volatility on a quarter-to-quarter basis is expected.

Noninterest Income

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

Table 7—Noninterest Income


	2014				2013							2Q14 vs 2Q13						2Q14 vs 1Q14
(dollar amounts in thousands)	Second		First		Fourth		Third		Second			Amount			Percent			Amount			Percent
Service charges on deposit accounts	$	72,633	$	64,582	$	69,992	$	72,918	$	68,009		$	4,624			7	%	$	8,051			12	%
Mortgage banking income		22,717		23,089		24,327		23,621		33,659			(10,942	)		(33	)		(372	)		(2	)
Trust services		29,581		29,565		30,711		30,470		30,666			(1,085	)		(4	)		16			0
Electronic banking		26,491		23,642		24,251		24,282		23,345			3,146			13			2,849			12
Insurance income		15,996		16,496		15,556		17,269		17,187			(1,191	)		(7	)		(500	)		(3	)
Brokerage income		17,831		17,071		15,116		16,532		19,546			(1,715	)		(9	)		760			4
Bank owned life insurance income		13,865		13,307		13,816		13,740		15,421			(1,556	)		(10	)		558			4
Capital markets fees		10,500		9,194		12,332		12,825		12,229			(1,729	)		(14	)		1,306			14
Gain on sale of loans		3,914		3,570		7,144		5,063		3,348			566			17			344			10
Securities gains (losses)		490		16,970		1,239		98		(410	)		900			N.R.			(16,480	)		(97	)
Other income		36,049		30,999		35,407		36,950		28,919			7,130			25			5,050			16

Total noninterest income	$	250,067	$	248,485	$	249,891	$	253,768	$	251,919		$	(1,852	)		(1	)%	$	1,582			1	%

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

2014 Second Quarter versus 2013 Second Quarter

In the 2014 second quarter, noninterest income decreased $1.9 million, or 1%, from the year-ago quarter, primarily reflecting:

•

$10.9 million, or 33%, decrease in mortgage banking income, reflecting a 49% reduction in origination and secondary marketing revenue as originations decreased 23% and gain-on-sale margins compressed.

Partially offset by:

•

$7.1 million, or 25%, increase in other income primarily related to commercial loan fees and credit card revenue, as our new credit card products were launched last year.

•

$4.6 million, or 7%, increase in service charges on deposit accounts reflecting 8% consumer household and 1% commercial relationship growth and changing customer usage patterns.

2014 Second Quarter versus 2014 First Quarter

Compared to the 2014 first quarter, noninterest income increased $1.6 million, or 1%. This increase reflected typical seasonality within service charges on deposit accounts, which increased $8.1 million, or 12%, and a $2.8 million, or 12%, increase in electronic banking. These were mostly offset by a $16.5 million, or 97%, decrease in securities gains.

2014 First Six Months versus 2013 First Six Months

Noninterest income for the first six-month period of 2014 decreased $10.0 million, or 2%, from the comparable year-ago period.

Table 8—Noninterest Income—2014 First Six Months vs. 2013 First Six Months


	Six Months Ended June 30,					Change
(dollar amounts in thousands)	2014		2013			Amount			Percent
Service charges on deposit accounts	$	137,215	$	128,892		$	8,323			6	%
Mortgage banking income		45,807		78,907			(33,100	)		(42	)
Trust services		59,146		61,826			(2,680	)		(4	)
Electronic banking		50,133		44,058			6,075			14
Insurance income		32,492		36,439			(3,947	)		(11	)
Brokerage income		34,903		37,541			(2,638	)		(7	)
Bank owned life insurance income		27,172		28,863			(1,691	)		(6	)
Capital markets fees		19,694		20,063			(369	)		(2	)
Gain on sale of loans		7,484		5,964			1,520			25
Securities gains (losses)		17,460		(919	)		18,379			N.M.
Other income		67,046		66,903			143			—

Total noninterest income	$	498,552	$	508,537		$	(9,985	)		(2	)%

N.M. - Not relevant, as numerator of calculation is a loss in current period compared with gain in prior period.

The $10.0 million, or 2%, decrease in total noninterest income reflected:

•

$33.1 million, or 42%, decrease in mortgage banking income. This primarily reflected a $26.4 million, or 48%, decrease in origination and secondary marketing income as originations decreased 32%, gain-on-sale margin compression, and a higher percentage of originations were held on the balance sheet.

Partially offset by:

•

$18.4 million increase in securities gains, as we adjusted the mix of our securities portfolio to prepare for the LCR.

•

$8.3 million, or 6%, increase in service charges on deposit accounts, reflecting consumer household and commercial relationship growth and changing customer usage patterns.

•

$6.1 million, or 14%, increase in electronic banking income, primarily due to continued consumer household growth.

Noninterest Expense

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

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

Table 9—Noninterest Expense


	2014				2013						2Q14 vs 2Q13						2Q14 vs 1Q14
(dollar amounts in thousands)	Second		First		Fourth		Third		Second		Amount			Percent			Amount			Percent
Personnel costs	$	260,600	$	249,477	$	249,554	$	229,326	$	263,862	$	(3,262	)		(1	)%	$	11,123			4	%
Outside data processing and other services		54,338		51,490		51,071		49,313		49,898		4,440			9			2,848			6
Net occupancy		28,673		33,433		31,983		35,591		27,656		1,017			4			(4,760	)		(14	)
Equipment		28,749		28,750		28,775		28,191		24,947		3,802			15			(1	)		(0	)
Marketing		14,832		10,686		13,704		12,271		14,239		593			4			4,146			39
Deposit and other insurance expense		10,599		13,718		10,056		11,155		13,460		(2,861	)		(21	)		(3,119	)		(23	)
Amortization of intangibles		9,520		9,291		10,320		10,362		10,362		(842	)		(8	)		229			2
Professional services		17,896		12,231		11,567		12,487		9,341		8,555			92			5,665			46
Other expense		33,429		51,045		38,979		34,640		32,100		1,329			4			(17,616	)		(35	)

Total noninterest expense	$	458,636	$	460,121	$	446,009	$	423,336	$	445,865	$	12,771			3	%	$	(1,485	)		(0	)%

Number of employees (average full-time equivalent)		12,000		11,848		11,765		12,080		12,063		(63	)		(1	)		152			1

2014 Second Quarter versus 2013 Second Quarter

In the 2014 first quarter, noninterest expense increased $12.8 million, or 3%, from the year-ago quarter, reflecting:

•

$8.6 million, or 92%, increase in professional services, $4.8 million of which is one-time consulting expense related to strategic planning.

•

$4.4 million, or 9%, increase in outside data processing and other services, reflecting higher debit and credit card processing costs and other technology expense.

•

$3.8 million, or 15%, increase in equipment expense, reflecting technology investments and the near-complete rollout of enhanced ATMs.

Partially offset by:

•

$3.3 million, or 1%, decrease in personnel costs, reflecting the curtailment of the pension plan at the end of 2013 partially offset by annual compensation increases.

2014 Second Quarter versus 2014 First Quarter

Noninterest expense decreased $1.5 million, or less than 1%, from the 2014 first quarter. When adjusting for the $21.6 million of Significant Items in the 2014 first quarter, noninterest expense increased $20.1 million. Personnel costs increased $11.1 million, or 4%, primarily reflecting compensation and benefits increases. Marketing increased $4.1 million, or 39%, due to the seasonal increase in campaigns and promotions. Net occupancy expense decreased $4.8 million, or 14%, primarily related to the prior quarter’s snow removal expenses as well as $1.7 million of one-time expenses related to the Camco acquisition and conversion. Other expense decreased $17.6 million, or 35%, as the 2014 first quarter included the $9.0 million addition to litigation reserves and a $3.0 million goodwill impairment.

2014 First Six Months versus 2013 First Six Months

Noninterest expense for the first six-month period of 2014 increased $30.1 million, or 3%, from the comparable year-ago period.

Table 10—Noninterest Expense—2014 First Six Months vs. 2013 First Six Months


	Six Months Ended June 30,				Change
(dollar amounts in thousands)	2014		2013		Amount			Percent
Personnel costs	$	510,077	$	522,757	$	(12,680	)		(2	)%
Outside data processing and other services		105,828		99,163		6,665			7
Net occupancy		62,106		57,770		4,336			8
Equipment		57,499		49,827		7,672			15
Marketing		25,518		25,210		308			1
Deposit and other insurance expense		24,317		28,950		(4,633	)		(16	)
Amortization of intangibles		18,811		20,682		(1,871	)		(9	)
Professional services		30,127		16,533		13,594			82
Other expense		84,474		67,766		16,708			25

Total noninterest expense	$	918,757	$	888,658	$	30,099			3	%

The $30.1 million, or 3%, increase in total noninterest expense reflected:

•

$16.7 million, or 25%, increase in other expense, as the 2014 first quarter included the $9.0 million addition to litigation reserves and $3.0 million goodwill impairment.

•

$13.6 million, or 82%, increase in professional services, of which $6.2 million is one-time consulting expenses related to strategic planning, and $2.2 million of Camco acquisition related costs.

•

$7.7 million, or 15%, increase in equipment, primarily due to technology investments and the near-complete rollout of enhanced ATMs.

•

$6.7 million, or 7%, increase in outside data processing and other services, reflecting $4.3 million of one-time merger related expenses, higher debit and credit card processing costs, and other technology expenses.

•

$4.3 million, or 8%, increase in net occupancy, reflecting $1.7 million of one-time merger related expenses and abnormally high snow removal expenses in the 2014 first quarter.

Partially offset by:

•

$12.7 million, or 2%, decrease in personnel costs, primarily reflecting the curtailment of the pension plan at the end of 2013 that was partially offset by $2.3 million of one-time Camco merger related expenses and annual compensation increases.

•

$4.6 million, or 16%, decrease in deposit and other insurance.

Provision for Income Taxes

The provision for income taxes in the 2014 second quarter was $57.5 million and $55.3 million in the 2013 second quarter. The provision for income taxes for the six month periods ended June 30, 2014 and June 30, 2013 was $109.6 million and $110.4 million, respectively. Both quarters included the benefits from tax-exempt income, tax-advantaged investments, general business credits, and the change in accounting for investments in qualified affordable housing projects. At June 30, 2014, we had a net federal deferred tax asset of $82.0 million and a net state deferred tax asset of $47.3 million. For regulatory capital purposes, there was no disallowed net deferred tax asset at June 30, 2014.

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

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

RISK MANAGEMENT AND CAPITAL

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

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

We believe that our primary risk exposures are credit, market, liquidity, operational, and compliance oriented. More information on risk can be found in the Risk Factors section included in Item 1A of our 2013 Form 10-K and subsequent filings with the SEC. The MD&A included in our Form 8-K filed on May 28, 2014 should be read in conjunction with this MD&A as this discussion provides only material updates to the Form 8-K. This MD&A should also be read in conjunction with the financial statements, notes and other information contained in this report. Our definition, philosophy, and approach to risk management have not materially changed from the discussion presented in this report.

Credit Risk

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

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

Loan and Lease Credit Exposure Mix

At June 30, 2014, loans and leases totaled $46.1 billion, representing a $3.0 billion, or 7%, increase compared to $43.1 billion at December 31, 2013, primarily reflecting growth in the C&I and automobile portfolio. The growth included $559 million in loans from our acquisition of Camco Financial during the 2014 first quarter. The Camco Financial portfolio composition was centered in CRE, home equity and residential mortgage.

At June 30, 2014, commercial loans and leases totaled $23.9 billion and represented 52% of our total loans and leases. The increase compared to December 31, 2013 primarily reflects growth in the international and other specialty lending verticals, automobile dealer floorplan lending, and business banking. Our commercial portfolio is diversified along product type, customer size, and geography across our footprint, and is comprised of the following loan types (see Commercial Credit discussion).

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

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

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

Total consumer loans and leases were $22.2 billion at June 30, 2014, and represented 48% of our total loan and leases. The consumer portfolio is comprised primarily of automobile, home equity loans and lines-of-credit, and residential mortgages (see Consumer Credit discussion). The increase from December 31, 2013 primarily relates to strong consumer demand for automobile originations and adjustable rate residential mortgages (ARMs).

Automobile – Automobile loans are comprised primarily of loans made through automotive dealerships and include exposure in selected states outside of our primary banking markets. The exposure outside of our primary banking markets represents 19% of the total exposure, with no individual state representing more than 5%. Applications are underwritten utilizing an automated underwriting system that applies consistent policies and processes across the portfolio.

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

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

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

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

Table 11—Loan and Lease Portfolio Composition


	2014								2013
(dollar amounts in millions)	June 30,				March 31,				December 31,				September 30,				June 30,
Commercial:⁽¹⁾
Commercial and industrial	$	18,899	41	%	$	18,046	41	%	$	17,594	41	%	$	17,335	41	%	$	17,113	41	%
Commercial real estate:
Construction		757	2			692	2			557	1			544	1			607	1
Commercial		4,233	9			4,339	10			4,293	10			4,328	10			4,286	10

Total commercial real estate		4,990	11			5,031	12			4,850	11			4,872	11			4,893	11

Total commercial		23,889	52			23,077	53			22,444	52			22,207	52			22,006	52

Consumer:
Automobile		7,686	17			6,999	16			6,639	15			6,317	15			5,810	14
Home equity		8,405	18			8,373	19			8,336	18			8,347	20			8,369	20
Residential mortgage		5,707	12			5,542	12			5,321	12			5,307	12			5,168	12
Other consumer		393	1			363	—			380	2			378	1			387	2

Total consumer		22,191	48			21,277	47			20,676	48			20,349	48			19,734	48

Total loans and leases	$	46,080	100	%	$	44,354	100	%	$	43,120	100	%	$	42,556	100	%	$	41,740	100	%

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

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

The table below provides our total loan and lease portfolio segregated by the type of collateral securing the loan or lease: The changes in the collateral composition are consistent with the portfolio growth metrics, with increases noted in the residential and vehicle categories. The increase in the unsecured exposure is centered in high quality commercial credit customers.

Table 12—Loan and Lease Portfolio by Collateral Type


	2014								2013
(dollar amounts in millions)	June 30,				March 31,				December 31,				September 30,				June 30,
Secured loans:
Real estate—commercial	$	8,617	19	%	$	8,612	19	%	$	8,622	20	%	$	8,769	21	%	$	8,749	21	%
Real estate—consumer		14,113	31			13,916	31			13,657	32			13,654	32			13,537	32
Vehicles		9,782	21			9,270	21			8,989	21			8,275	19			7,763	19
Receivables/Inventory		5,932	13			5,717	13			5,534	13			5,367	13			5,260	13
Machinery/Equipment		3,267	7			2,930	7			2,738	6			2,778	7			2,831	7
Securities/Deposits		1,349	3			1,064	2			786	2			905	2			924	2
Other		940	2			870	3			1,016	2			948	2			1,020	2

Total secured loans and leases		44,000	96			42,379	96			41,342	96			40,696	96			40,084	96
Unsecured loans and leases		2,080	4			1,975	4			1,778	4			1,860	4			1,656	4

Total loans and leases	$	46,080	100	%	$	44,354	100	%	$	43,120	100	%	$	42,556	100	%	$	41,740	100	%

Commercial Credit

Refer to the “Commercial Credit” section of our Form 8-K filed on May 28, 2014 for our commercial credit underwriting and on-going credit management processes.

C&I PORTFOLIO

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

CRE PORTFOLIO

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

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

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

Consumer Credit

Refer to the “Consumer Credit” section of our Form 8-K filed on May 28, 2014 for our consumer credit underwriting and on-going credit management processes.

AUTOMOBILE PORTFOLIO

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

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

RESIDENTIAL REAL ESTATE SECURED PORTFOLIOS

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

Table 13—Selected Home Equity and Residential Mortgage Portfolio Data

(dollar amounts in millions)

Home Equity

Residential Mortgage

Secured by first-lien

Secured by junior-lien

06/30/14

12/31/13

06/30/14

12/31/13

06/30/14

12/31/13

Ending balance

4,953

4,842

3,452

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company