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 September 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 814,453,953 shares of Registrant’s common stock ($0.01 par value) outstanding on September 30, 2014.


HUNTINGTON BANCSHARES INCORPORATED INDEX
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets at September 30, 2014 and December 31, 2013	61

	Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2014 and 2013	62

	Condensed Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2014 and 2013	63

	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2014 and 2013	64

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013	65

	Notes to Unaudited Condensed Consolidated Financial Statements	66

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	24
	Market Risk	37
	Liquidity Risk	38
	Operational Risk	42
	Compliance Risk	43
	Capital	43
	Fair Value	46

	Business Segment Discussion	47

	Additional Disclosures	59

Item 3. Quantitative and Qualitative Disclosures about Market Risk		146

Item 4. Controls and Procedures		146

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		146

Item 1A. Risk Factors		146

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		146

Item 5. Other Information

Item 6. Exhibits		147

Signatures		149

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

NAICS		North American Industry Classification System

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 753 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 Third Quarter Results

For the quarter, we reported net income of $155.0 million, or $0.18 per common share, compared with $178.8 million, or $0.20 per common share, in the year-ago quarter (see Table 1).

Fully-taxable equivalent net interest income was $473.8 million for the quarter, up $42.4 million, or 10%, from the year-ago quarter. The results reflected a $7.5 billion, or 15%, increase in average earning assets, including a $4.1 billion, or 10%, increase in average loans and leases, as well as a $3.3 billion, or 38%, increase in average securities. The impact of these balance increases was partially offset by a 14 basis point decrease in net interest margin. The primary items affecting the net interest margin were a 20 basis point negative impact from the mix and yield of earning assets and a 3 basis point reduction in the benefit from the impact of noninterest-bearing funds, partially offset by a 9 basis point reduction in funding costs.

The provision for credit losses was $5.5 million less than total NCOs for the same period, reflecting continued credit quality improvement. Provision expense increased $13.1 million, or 115%, from the year-ago quarter. This reflected the implementation of enhancements to our ALLL model in the year-ago quarter. Consistent with our expectations, NCOs decreased $25.7 million, or 46%, to $30.0 million. The consumer loan portfolios drove the majority of the decline, continuing the positive trend exhibited over the past three quarters. NCOs were an annualized 0.26% of average loans and leases in the current quarter, compared to 0.53% in the year-ago quarter.

Noninterest income decreased $6.4 million, or 3%, from the year-ago quarter. The results included a $6.4 million, or 17%, decrease in other income, primarily related to commercial loan fees and a decline in income from early lease terminations. In addition, service charges on deposit accounts decreased $3.8 million, or 5%, reflecting the late July 2014 implementation of changes in consumer products that were partially offset by an 11% increase in consumer households and changing customer usage patterns. Capital markets fees decreased $2.6 million, or 20%, due to lower interest rate derivative sales. These declines were partially offset by a $3.1 million, or 62%, increase in gain on sale of loans related to strong SBA production and relatively higher premiums and $3.0 million, or 12%, increase in electronic banking due to higher card related income and underlying customer growth.

Noninterest expense in the current and year-ago quarter included several Significant Items, which are further described in the “Discussion of Results of Operations” section. Reported noninterest expense increased $57.0 million, or 13%, from the year-ago quarter. The results included a $46.1 million, or 20%, increase in personnel costs (excluding the impact of Significant Items, personnel costs increased $3.4 million, or 1%), a $4.8 million, or 14%, increase in other expense (excluding the impact of Significant Items, other expenses increased $3.7 million, or 11%, primarily reflecting higher OREO and loss expense), and a $3.8 million, or 8%, increase in outside data processing and other services as we continue to invest in technology supporting our products, services, and our Continuous Improvement initiatives.

The tangible common equity to tangible assets ratio was 8.35%, down 65 basis points from a year ago. Our Tier 1 common risk-based capital ratio was 10.31%, down 54 basis points from a year ago. The regulatory Tier 1 risk-based capital ratio was 11.61%, down 75 basis points from a year ago. All capital ratios were impacted by balance sheet growth and share repurchases that were partially offset by increased retained earnings and the stock issued in the Camco acquisition. The decrease in the regulatory Tier 1 risk-based capital ratio also reflected the redemption of $50 million of qualifying preferred securities on December 31, 2013.

Business Overview

General

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

We continued to deliver solid year-over-year revenue growth through the third quarter, while maintaining a disciplined balance sheet. Performance highlights include ongoing strength in commercial and auto lending. We are also pleased with deposit growth, which is in part supported by our improved distribution network, as evidenced by 50 in-store locations attaining break-even or better status during the 2014 third quarter, and also the successful conversion of 24 acquired Michigan branches, furthering our presence in markets in our service area. Furthermore, our decision during the 2014 third quarter to consolidate 26 branches by year-end demonstrates the ongoing optimization of our distribution channels.

Among other key highlights, we also are pleased with our number one ranking in the country for total number of Small Business Administration 7(a) loans for the fiscal year that concluded in September 2014. We continue to prioritize SBA lending as an integral component of our overall business lending strategy and are gratified to attain a top national ranking, particularly since we only make SBA loans within our core six-state footprint.

Economy

Michigan, Ohio, and Indiana, which had the strongest manufacturing growth of our footprint states, also tended to have the strongest overall economic growth as exemplified by the Philadelphia FRB Economic Activity indexes. Housing activity and prices will likely continue on a moderate upward trend in line with long-term historical growth. Home purchase prices have been rising overall in our footprint states. Price gains were especially strong in the first half of 2014 in Michigan, Ohio, and Kentucky. In addition, industrial vacancy rates in our largest footprint Metropolitan Statistical Areas have been at or below the national average reflecting generally healthy industrial real estate markets.

Expectations – Fourth Quarter 2014

We continue to be pleased with our healthy lending pipeline and the strength of the economies within our footprint. We are looking forward to a solid finish for 2014, as we remain on track to deliver another year with positive operating leverage. We are not expecting a near-term improvement in the interest rate environment. However, we are committing to delivering positive operating leverage again in 2015 as we will continue to prudently manage expenses in alignment with our revenue growth outlook.

Net interest income is expected to increase slightly in the 2014 fourth quarter. 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.

Noninterest income, excluding the impact of any net MSR activity, is expected to remain near the current quarter’s level.

Noninterest expense, excluding Significant Items, is expected to remain near the 2014 third quarter adjusted level. The 2014 fourth quarter is expected to include approximately $10 million of Significant Items related to the already announced franchise repositioning activities. 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.

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

The effective tax rate for 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)

Third

Second

First

Fourth

Third

Interest income

501,060

495,322

472,455

469,824

462,912

Interest expense

34,725

35,274

34,949

39,175

38,060

Net interest income

466,335

460,048

437,506

430,649

424,852

Provision for credit losses

24,480

29,385

24,630

24,331

11,400

Net interest income after provision for credit losses

441,855

430,663

412,876

406,318

413,452

Service charges on deposit accounts

69,118

72,633

64,582

69,992

72,918

Mortgage banking income

25,051

22,717

23,089

24,327

23,621

Trust services

28,045

29,581

29,565

30,711

30,470

Electronic banking

27,275

26,491

23,642

24,251

24,282

Insurance income

16,729

15,996

16,496

15,556

17,269

Brokerage income

17,155

17,905

17,167

15,151

16,636

Bank owned life insurance income

14,888

13,865

13,307

13,816

13,740

Capital markets fees

10,246

10,500

9,194

12,332

12,825

Gain on sale of loans

8,199

3,914

3,570

7,144

5,063

Securities gains (losses)

198

490

16,970

1,239

Other income

30,445

35,975

30,903

35,373

36,845

Total noninterest income

247,349

250,067

248,485

249,892

253,767

Personnel costs

275,409

260,600

249,477

249,554

229,326

Outside data processing and other services

53,073

54,338

51,490

51,071

49,313

Net occupancy

34,405

28,673

33,433

31,983

35,591

Equipment

30,183

28,749

28,750

28,775

28,191

Marketing

12,576

14,832

10,686

13,704

12,271

Deposit and other insurance expense

11,628

10,599

13,718

10,056

11,155

Amortization of intangibles

9,813

9,520

9,291

10,320

10,362

Professional services

13,763

17,896

12,231

11,567

12,487

Other expense

39,468

33,429

51,045

38,979

34,640

Total noninterest expense

480,318

458,636

460,121

446,009

423,336

Income before income taxes

208,886

222,094

201,240

210,201

243,883

Provision for income taxes

53,870

57,475

52,097

52,029

65,047

Net income

155,016

164,619

149,143

158,172

178,836

Dividends on preferred shares

7,964

7,963

7,964

7,965

7,967

Net income applicable to common shares

147,052

156,656

141,179

150,207

170,869

Average common shares—basic

816,497

821,546

829,659

830,590

830,398

Average common shares—diluted

829,623

834,687

842,677

842,324

841,025

Net income per common share—basic

0.18

0.19

0.17

0.18

0.21

Net income per common share—diluted

0.18

0.19

0.17

0.18

0.20

Cash dividends declared per common share

0.05

0.05

Return on average total assets

0.97

1.07

1.01

1.09

1.27

Return on average common shareholders’ equity

9.9

10.8

9.9

10.5

12.3

Return on average tangible common shareholders’ equity (2)

11.4

12.4

11.4

12.1

14.2

Net interest margin (3)

3.20

3.28

3.27

3.28

3.34

Efficiency ratio (4)

65.3

62.7

66.4

63.4

60.3

Effective tax rate

25.8

25.9

24.8

26.7

Revenue—FTE

Net interest income

466,335

460,048

437,506

430,649

424,852

FTE adjustment

7,506

6,637

5,885

8,196

6,634

Net interest income (3)

473,841

466,685

443,391

438,845

431,486

Noninterest income

247,349

250,067

248,485

249,892

253,767

Total revenue (3)

721,190

716,752

691,876

688,737

685,253

⁽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)


	Nine Months Ended September 30,					Change
(dollar amounts in thousands, except per share amounts)	2014		2013			Amount			Percent
Interest income	$	1,468,837	$	1,390,813		$	78,024			6	%
Interest expense		104,948		116,854			(11,906	)		(10	)

Net interest income		1,363,889		1,273,959			89,930			7
Provision for credit losses		78,495		65,714			12,781			19

Net interest income after provision for credit losses		1,285,394		1,208,245			77,149			6

Service charges on deposit accounts		206,333		201,810			4,523			2
Mortgage banking income		70,857		102,528			(31,671	)		(31	)
Trust services		87,191		92,296			(5,105	)		(6	)
Electronic banking		77,408		68,340			9,068			13
Insurance income		49,221		53,708			(4,487	)		(8	)
Brokerage income		52,227		54,473			(2,246	)		(4	)
Bank owned life insurance income		42,060		42,603			(543	)		(1	)
Capital markets fees		29,940		32,888			(2,948	)		(9	)
Gain on sale of loans		15,683		11,027			4,656			42
Securities gains (losses)		17,658		(821	)		18,479			N.R.
Other income		97,323		103,452			(6,129	)		(6	)

Total noninterest income		745,901		762,304			(16,403	)		(2	)

Personnel costs		785,486		752,083			33,403			4
Outside data processing and other services		158,901		148,476			10,425			7
Net occupancy		96,511		93,361			3,150			3
Equipment		87,682		78,018			9,664			12
Marketing		38,094		37,481			613			2
Deposit and other insurance expense		35,945		40,105			(4,160	)		(10	)
Amortization of intangibles		28,624		31,044			(2,420	)		(8	)
Professional services		43,890		29,020			14,870			51
Other expense		123,942		102,406			21,536			21

Total noninterest expense		1,399,075		1,311,994			87,081			7

Income before income taxes		632,220		658,555			(26,335	)		(4	)
Provision for income taxes		163,442		175,445			(12,003	)		(7	)

Net income	$	468,778	$	483,110		$	(14,332	)		(3	)%

Dividends declared on preferred shares		23,891		23,904			(13	)		—

Net income applicable to common shares	$	444,887	$	459,206		$	(14,319	)		(3	)%

Average common shares—basic		820,884		835,410			(14,526	)		(2	)%
Average common shares—diluted		833,927		844,524			(10,597	)		(1	)
Per common share
Net income per common share—basic	$	0.54	$	0.55		$	(0.01	)		(2	)%
Net income per common share—diluted		0.53		0.54			(0.01	)		(2	)
Cash dividends declared		0.15		0.14			0.01			7
Revenue—FTE
Net interest income	$	1,363,889	$	1,273,959		$	89,930			7	%
FTE adjustment		20,028		19,144			884			5

Net interest income (2)		1,383,917		1,293,103			90,814			7
Noninterest income		745,901		762,304			(16,403	)		(2	)

Total revenue (2)	$	2,129,818	$	2,055,407		$	74,411			4	%

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.	Franchise Repositioning Related Expense. Significant events relating to franchise repositioning related expense, and the impacts of those events on our reported results, were as follows:

•

During the 2014 third quarter, $19.3 million of franchise repositioning related expense was recorded for the consolidation of 26 branches and organizational actions. This resulted in a negative impact of $0.02 per common share.

•

During the 2013 third quarter, $16.6 million of franchise repositioning related expense was recorded. This resulted in a negative impact of $0.01 per common share.

2.	Merger and Acquisition. Significant events relating to mergers and acquisitions, and the impacts of those events on our reported results, were as follows:

•

During the 2014 third quarter, $3.5 million of net noninterest expense was recorded related to the acquisition of 24 Bank of America branches and Camco Financial.

•

During the 2014 second quarter, $0.8 million of merger related costs were recorded related to the acquisition of Bank of America branches.

•

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

3.	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.

4.	Pension Curtailment Gain. During the 2013 third quarter, a $33.9 million pension curtailment gain was recorded in personnel costs. This resulted in a positive impact of $0.03 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
	September 30, 2014						June 30, 2014					September 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	$	155,016					$	164,619				$	178,836
Earnings per share, after-tax				$	0.18					$	0.19				$	0.20

Significant Items—favorable (unfavorable) impact:	Earnings (1)			EPS (2)(3)			Earnings (1)			EPS (2)(3)		Earnings (1)			EPS (2)(3)
Pension curtailment gain	$	—		$	—		$	—		$	—	$	33,926		$	0.03
Franchise repositioning related expense		(19,333	)		(0.02	)		—			—		(16,552	)		(0.01	)
Merger and acquisition		(3,490	)		—			(775	)		—		—			—

⁽¹⁾

Pretax.

⁽²⁾	Based on average outstanding diluted common shares.

⁽³⁾	After-tax.


	Nine Months Ended
	September 30, 2014						September 30, 2013
(dollar amounts in thousands)	After-tax			EPS (2)(3)			After-tax			EPS (2)(3)
Net income	$	468,778					$	483,110
Earnings per share, after-tax				$	0.53					$	0.54

Significant Items—favorable (unfavorable) impact:	Earnings (1)			EPS (2)(3)			Earnings (1)			EPS (2)(3)
Pension curtailment gain	$	—		$	—		$	33,926		$	0.03
Franchise repositioning related expense		(19,333	)		(0.02	)		(16,552	)		(0.01	)
Merger and acquisition, net		(16,088	)		(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						3Q14 vs. 3Q13
(dollar amounts in millions)	Third			Second			First			Fourth			Third			Amount			Percent
Assets:
Interest-bearing deposits in banks	$	82		$	91		$	83		$	71		$	54		$	28			52	%
Loans held for sale		351			288			279			322			379			(28	)		(7	)
Securities:
Available-for-sale and other securities:
Taxable		6,935			6,662			6,240			5,818			6,040			895			15
Tax-exempt		1,620			1,290			1,115			548			565			1,055			187

Total available-for-sale and other securities		8,555			7,952			7,355			6,366			6,605			1,950			30
Trading account securities		50			45			38			76			76			(26	)		(34	)
Held-to-maturity securities—taxable		3,556			3,677			3,783			3,038			2,139			1,417			66

Total securities		12,161			11,674			11,176			9,480			8,820			3,341			38

Loans and leases: (1)
Commercial:
Commercial and industrial		18,581			18,262			17,631			17,671			17,032			1,549			9
Commercial real estate:
Construction		775			702			612			573			565			210			37
Commercial		4,188			4,345			4,289			4,331			4,345			(157	)		(4	)

Commercial real estate		4,963			5,047			4,901			4,904			4,910			53			1

Total commercial		23,544			23,309			22,532			22,575			21,942			1,602			7

Consumer:
Automobile		8,012			7,349			6,786			6,502			6,075			1,937			32
Home equity		8,412			8,376			8,340			8,346			8,341			71			1
Residential mortgage		5,747			5,608			5,379			5,331			5,256			491			9
Other consumer		398			382			386			385			380			18			5

Total consumer		22,569			21,715			20,891			20,564			20,052			2,517			13

Total loans and leases		46,113			45,024			43,423			43,139			41,994			4,119			10
Allowance for loan and lease losses		(633	)		(642	)		(649	)		(668	)		(717	)		84			(12	)

Net loans and leases		45,480			44,382			42,774			42,471			41,277			4,203			10

Total earning assets		58,707			57,077			54,961			53,012			51,247			7,460			15

Cash and due from banks		887			872			904			846			944			(57	)		(6	)
Intangible assets		583			591			535			542			552			31			6
All other assets		3,929			3,932			3,941			3,917			3,889			40			1

Total assets	$	63,473		$	61,830		$	59,692		$	57,649		$	55,915		$	7,558			14	%

Liabilities and Shareholders’ Equity:
Deposits:
Demand deposits—noninterest-bearing	$	14,090		$	13,466		$	13,192		$	13,337		$	13,088		$	1,002			8	%
Demand deposits—interest-bearing		5,913			5,945			5,775			5,755			5,763			150			3

Total demand deposits		20,003			19,411			18,967			19,092			18,851			1,152			6
Money market deposits		17,929			17,680			17,648			16,827			15,739			2,190			14
Savings and other domestic deposits		5,020			5,086			4,967			4,912			5,007			13			—
Core certificates of deposit		3,167			3,434			3,613			3,916			4,176			(1,009	)		(24	)

Total core deposits		46,119			45,611			45,195			44,747			43,773			2,346			5
Other domestic time deposits of $250,000 or more		223			262			284			275			268			(45	)		(17	)
Brokered deposits and negotiable CDs		2,262			2,070			1,782			1,398			1,553			709			46
Deposits in foreign offices		374			315			328			354			376			(2	)		(1	)

Total deposits		48,978			48,258			47,589			46,774			45,970			3,008			7
Short-term borrowings		1,092			939			883			629			710			382			54
Federal Home Loan Bank advances		2,489			1,977			1,499			851			549			1,940			353
Subordinated notes and other long-term debt		3,579			3,395			2,503			2,244			1,753			1,826			104

Total interest-bearing liabilities		42,048			41,103			39,282			37,161			35,894			6,154			17

All other liabilities		1,043			1,033			1,035			1,095			1,054			(11	)		(1	)
Shareholders’ equity		6,292			6,228			6,183			6,056			5,879			413			7

Total liabilities and shareholders’ equity	$	63,473		$	61,830		$	59,692		$	57,649		$	55,915		$	7,558			14	%

(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)

Third

Second

First

Fourth

Third

Assets:

Interest-bearing deposits in banks

0.19

0.04

0.03

0.04

0.07

Loans held for sale

3.98

4.27

3.74

4.46

3.89

Securities:

Available-for-sale and other securities:

Taxable

2.48

2.52

2.47

2.38

2.34

Tax-exempt

3.02

3.15

3.03

6.34

4.04

Total available-for-sale and other securities

2.59

2.63

2.55

2.72

2.48

Trading account securities

0.85

0.70

1.12

0.42

0.23

Held-to-maturity securities—taxable

2.45

2.46

2.47

2.42

2.29

Total securities

2.54

2.57

2.52

2.60

2.41

Loans and leases: (3)

Commercial:

Commercial and industrial

3.45

3.49

3.56

3.54

3.68

Commercial real estate:

Construction

4.38

4.29

3.99

4.04

3.91

Commercial

3.60

4.16

3.84

3.97

4.10

Commercial real estate

3.72

4.17

3.86

3.98

4.08

Total commercial

3.51

3.64

3.63

3.63

3.77

Consumer:

Automobile

3.41

3.47

3.54

3.67

3.80

Home equity

4.07

4.12

4.11

4.10

Residential mortgage

3.78

3.77

3.78

3.77

3.81

Other consumer

7.31

7.34

6.82

6.64

6.98

Total consumer

3.82

3.87

3.89

3.93

3.99

Total loans and leases

3.66

3.75

3.77

3.87

Total earning assets

3.44

3.53

3.58

3.64

Liabilities:

Deposits:

Demand deposits—noninterest-bearing

—

Demand deposits—interest-bearing

0.04

0.04

Total demand deposits

0.01

0.01

Money market deposits

0.23

0.24

0.25

0.27

0.26

Savings and other domestic deposits

0.16

0.17

0.20

0.24

0.25

Core certificates of deposit

0.74

0.81

0.94

1.05

Total core deposits

0.23

0.25

0.28

0.32

Other domestic time deposits of $250,000 or more

0.44

0.43

0.41

0.39

0.44

Brokered deposits and negotiable CDs

0.20

0.24

0.28

0.39

0.55

Deposits in foreign offices

0.13

0.14

Total deposits

0.23

0.25

0.28

0.32

0.33

Short-term borrowings

0.11

0.12

0.07

0.08

0.09

Federal Home Loan Bank advances

0.15

0.12

0.14

Subordinated notes and other long-term debt

1.45

1.48

1.66

2.10

2.29

Total interest-bearing liabilities

0.33

0.34

0.36

0.42

Net interest rate spread

3.11

3.19

3.17

3.16

3.22

Impact of noninterest-bearing funds on margin

0.09

0.10

0.12

Net interest margin

3.20

3.28

3.27

3.28

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.

2014 Third Quarter versus 2013 Third Quarter

Fully-taxable equivalent net interest income increased $42.4 million, or 10%, from the 2013 third quarter. This reflected the benefit from the $4.1 billion, or 10%, of average loan growth and a $3.3 billion, or 38%, increase in average securities. This was partially offset by the 14 basis point decrease in the FTE net interest margin to 3.20%. The NIM contraction reflected a 20 basis point decrease related to the mix and yield of earning assets and 3 basis point reduction in benefit from the impact of noninterest-bearing funds, partially offset by the 9 basis point reduction in funding costs.

Average earning assets increased $7.5 billion, or 15%, from the year-ago quarter, driven by:

•

$3.3 billion, or 38%, increase in average securities, reflecting $2.7 billion of Liquidity Coverage Ratio (LCR) Level 1 qualified securities and $1.2 billion of direct purchase municipal instruments, which in the year-ago quarter were classified as C&I loans.

•

$1.9 billion, or 32%, increase in average Automobile loans, as originations remained strong and we continued to portfolio all of the production.

•

$1.5 billion, or 9%, increase in average C&I loans and leases, reflecting growth in trade finance in support of our middle market and corporate customers, business banking, and automobile dealer floorplan lending.

•

$0.5 billion, or 9%, increase in average Residential mortgage loans as a result of a decrease in the rate of payoffs due to lower levels of refinancing and the Camco acquisition.

Average total core deposits increased $2.3 billion, or 5%, from the year-ago quarter, including a $1.0 billion, or 8%, increase in noninterest bearing deposits. Average interest-bearing liabilities increased $6.2 billion, or 17%, from the year-ago quarter, reflecting:

•

$4.1 billion, or 138%, 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. While no additional long-term debt was issued in the 2014 third quarter, this increase included $2.1 billion of bank-level debt and $0.4 billion of parent-level debt issued during the prior four quarters.

•

$2.2 billion, or 14%, 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 46%, increase in brokered deposits and negotiated CDs, which are a cost-effective method of funding incremental LCR-related securities growth.

Partially offset by:

•

$1.0 billion, or 24%, 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 Third Quarter versus 2014 Second Quarter

Compared to the 2014 second quarter, FTE net interest income increased $7.2 million, or 6% annualized. While the NIM decreased 8 basis points, earning assets increased $1.6 billion, or 11% annualized. 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.

Table 6—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)	2014			2013			Amount			Percent			2014			2013
Assets:
Interest-bearing deposits in banks	$	85		$	70		$	15			21	%		0.08	%		0.18	%
Loans held for sale		306			588			(282	)		(48	)		3.99			3.47
Securities:
Available-for-sale and other securities:
Taxable		6,615			6,574			41			1			2.49			2.31
Tax-exempt		1,344			568			776			137			3.06			3.98

Total available-for-sale and other securities		7,959			7,142			817			11			2.59			2.45
Trading account securities		45			82			(37	)		(45	)		0.87			0.45
Held-to-maturity securities—taxable		3,671			1,857			1,814			98			2.46			2.29

Total securities		11,675			9,081			2,594			29			2.54			2.39

Loans and leases: (3)
Commercial:
Commercial and industrial		18,161			17,007			1,154			7			3.50			3.75
Commercial real estate:
Construction		697			583			114			20			4.24			3.96
Commercial		4,274			4,488			(214	)		(5	)		3.87			4.08

Commercial real estate		4,971			5,071			(100	)		(2	)		3.92			4.06

Total commercial		23,132			22,078			1,054			5			3.59			3.82

Consumer:
Automobile		7,387			5,402			1,985			37			3.47			3.99
Home equity		8,376			8,299			77			1			4.10			4.15
Residential mortgage		5,579			5,154			425			8			3.78			3.86
Other consumer		389			451			(62	)		(14	)		7.16			6.82

Total consumer		21,731			19,306			2,425			13			3.86			4.09

Total loans and leases		44,863			41,384			3,479			8			3.72			3.95

Allowance for loan and lease losses		(641	)		(745	)		104			(14	)

Net loans and leases		44,222			40,639			3,583			9

Total earning assets		56,929			51,123			5,806			11			3.50	%		3.69	%

Cash and due from banks		888			930			(42	)		(5	)
Intangible assets		570			562			8			1
All other assets		3,934			3,974			(40	)		(1	)

Total assets	$	61,680		$	55,844		$	5,836			10	%

Liabilities and Shareholders’ Equity:
Deposits:
Demand deposits—noninterest-bearing	$	13,586		$	12,714		$	872			7	%		—	%		—	%
Demand deposits—interest-bearing		5,878			5,888			(10	)		—			0.04			0.04

Total demand deposits		19,464			18,602			862			5			0.01			0.01
Money market deposits		17,753			15,287			2,466			16			0.24			0.24
Savings and other domestic deposits		5,025			5,068			(43	)		(1	)		0.18			0.27
Core certificates of deposit		3,403			4,761			(1,358	)		(29	)		0.83			1.13

Total core deposits		45,645			43,718			1,927			4			0.26			0.35
Other domestic time deposits of $250,000 or more		256			317			(61	)		(19	)		0.43			0.49
Brokered deposits and negotiable CDs		2,040			1,676			364			22			0.24			0.62
Deposits in foreign offices		339			344			(5	)		(1	)		0.13			0.15

Total deposits		48,280			46,055			2,225			5			0.26			0.36
Short-term borrowings		972			724			248			34			0.10			0.11
Federal Home Loan Bank advances		1,992			663			1,329			200			0.14			0.15
Subordinated notes and other long-term debt		3,163			1,467			1,696			116			1.51			2.39

Total interest-bearing liabilities		40,821			36,195			4,626			13			0.34			0.43

All other liabilities		1,038			1,068			(30	)		(3	)
Shareholders’ equity		6,235			5,867			368			6

Total liabilities and shareholders’ equity	$	61,680		$	55,844		$	5,836			10	%

Net interest rate spread														3.15			3.26
Impact of noninterest-bearing funds on margin														0.10			0.12

Net interest margin														3.25	%		3.38	%

⁽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 Nine Months versus 2013 First Nine Months

Fully-taxable equivalent net interest income for the first nine-month period of 2014 increased $90.8 million, or 7% reflecting the benefit of a $5.8 billion, or 11%, increase in average total earning assets. The fully-taxable equivalent net interest margin decreased to 3.25% from 3.38%. The increase in average earning assets reflected:

•

$3.5 billion, or 8%, increase in average total loans and leases.

•

$2.6 billion, or 29%, 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:

•

$0.3 billion, or 48%, decrease in loans held for sale.

The $3.5 billion, or 8%, increase in average total loans and leases reflected:

•

$2.0 billion, or 37%, 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.

•

$1.2 billion, or 7%, 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 $2.2 billion, or 5%, increase in average total deposits reflected:

•

$2.5 billion, or 16%, increase in money market deposits, reflecting the strategic focus on customer growth and increased share-of-wallet among both consumer and commercial customers.

•

$0.9 billion, or 5%, increase in total demand deposits, reflecting our focus on changing our product mix to reduce the overall cost of deposits.

Partially offset by:

•

$1.4 billion, or 29%, 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, FHLB advances increased $1.3 billion, or 200%, along with an increase in short- and long-term borrowings of $1.9 billion, or 89%, 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 for credit losses for the 2014 third quarter was $24.5 million and was $5.5 million less than total NCOs for the same period reflecting continued credit quality improvement. Provision expense increased $13.1 million, or 115%, compared to the year-ago quarter, reflecting the prior year’s implementation of enhancements to our allowance for loan and lease losses (ALLL) model and decreased $4.9 million, or 17%, from the prior quarter. On a year-to-date basis, provision for credit losses for the first nine-month period of 2014 increased $12.8 million, or 19%, compared to year-ago period. The provision for credit losses for the first nine-month period of 2014 was $23.2 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				3Q14 vs 3Q13						3Q14 vs 2Q14
(dollar amounts in thousands)	Third		Second		First		Fourth		Third		Amount			Percent			Amount			Percent
Service charges on deposit accounts	$	69,118	$	72,633	$	64,582	$	69,992	$	72,918	$	(3,800	)		(5	)%	$	(3,515	)		(5	)%
Mortgage banking income		25,051		22,717		23,089		24,327		23,621		1,430			6			2,334			10
Trust services		28,045		29,581		29,565		30,711		30,470		(2,425	)		(8	)		(1,536	)		(5	)
Electronic banking		27,275		26,491		23,642		24,251		24,282		2,993			12			784			3
Insurance income		16,729		15,996		16,496		15,556		17,269		(540	)		(3	)		733			5
Brokerage income		17,155		17,905		17,167		15,151		16,636		519			3			(750	)		(4	)
Bank owned life insurance income		14,888		13,865		13,307		13,816		13,740		1,148			8			1,023			7
Capital markets fees		10,246		10,500		9,194		12,332		12,825		(2,579	)		(20	)		(254	)		(2	)
Gain on sale of loans		8,199		3,914		3,570		7,144		5,063		3,136			62			4,285			109
Securities gains (losses)		198		490		16,970		1,239		98		100			102			(292	)		(60	)
Other income		30,445		35,975		30,903		35,373		36,845		(6,400	)		(17	)		(5,530	)		(15	)

Total noninterest income	$	247,349	$	250,067	$	248,485	$	249,892	$	253,767	$	(6,418	)		(3	)%	$	(2,718	)		(1	)%

2014 Third Quarter versus 2013 Third Quarter

Noninterest income decreased $6.4 million, or 3%, from the year-ago quarter, primarily reflecting:

•

$6.4 million, or 17%, decrease in other income, primarily related to commercial loan fees and early lease terminations.

•

$3.8 million, or 5%, decrease in service charges on deposit accounts, reflecting the late July 2014 implementation of changes in consumer products that were partially offset by an 11% increase in consumer households and changing customer usage patterns.

•

$2.6 million, or 20%, decrease in capital markets fees related to lower interest rate derivative sales.

Partially offset by:

•

$3.1 million, or 62%, increase in gain on sale of loans related to strong SBA production and relatively higher premiums.

•

$3.0 million, or 12%, increase in electronic banking due to higher card related income and underlying customer growth.

2014 Third Quarter versus 2014 Second Quarter

In the 2014 third quarter, noninterest income decreased $2.7 million, or 1%, from the 2014 second quarter, primarily reflecting:

•

$5.5 million, or 15%, decrease in other income, reflecting a mezzanine lending gain in the 2014 second quarter.

•

$3.5 million, or 5%, decrease in service charges on deposit accounts, reflecting a seasonal increase during the 2014 second quarter and the late July 2014 implementation of changes in consumer products.

Partially offset by:

•

$4.3 million, or 109%, increase in gain on sale of loans from SBA and other loan sales.

•

$2.3 million, or 10%, increase in mortgage banking income, reflecting a $1.3 million, or 9%, increase in origination and secondary marketing income and a positive net impact of MSR hedging.

2014 First Nine Months versus 2013 First Nine Months

Noninterest income for the first nine-month period of 2014 decreased $16.4 million, or 2%, from the comparable year-ago period.

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


	Nine Months Ended September 30,					Change
(dollar amounts in thousands)	2014		2013			Amount			Percent
Service charges on deposit accounts	$	206,333	$	201,810		$	4,523			2	%
Mortgage banking income		70,857		102,528			(31,671	)		(31	)
Trust services		87,191		92,296			(5,105	)		(6	)
Electronic banking		77,408		68,340			9,068			13
Insurance income		49,221		53,708			(4,487	)		(8	)
Brokerage income		52,227		54,473			(2,246	)		(4	)
Bank owned life insurance income		42,060		42,603			(543	)		(1	)
Capital markets fees		29,940		32,888			(2,948	)		(9	)
Gain on sale of loans		15,683		11,027			4,656			42
Securities gains (losses)		17,658		(821	)		18,479			N.R.
Other income		97,323		103,452			(6,129	)		(6	)

Total noninterest income	$	745,901	$	762,304		$	(16,403	)		(2	)%

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

The $16.4 million, or 2%, decrease in total noninterest income reflected:

•

$31.7 million, or 31%, decrease in mortgage banking income. This primarily reflected a $26.5 million, or 37%, decrease in origination and secondary marketing income as originations decreased 26%, gain-on-sale margin compressed, and the percentage of originations held on the balance sheet was higher.

•

$6.1 million, or 6%, decrease in other income, primarily due to a gain on the sale of LIHTC investments in the 2013 first quarter.

•

$5.1 million, or 6%, decrease in trust services, primarily related to the institutional trust business.

Partially offset by:

•

$18.5 million increase in securities gains, as we adjusted the mix of our securities portfolio to prepare for the LCR requirements.

•

$9.1 million, or 13%, 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, 2, 3 and 4.)

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

Table 9—Noninterest Expense


	2014						2013				3Q14 vs 3Q13						3Q14 vs 2Q14
(dollar amounts in thousands)	Third		Second		First		Fourth		Third		Amount			Percent			Amount			Percent
Personnel costs	$	275,409	$	260,600	$	249,477	$	249,554	$	229,326	$	46,083			20	%	$	14,809			6	%
Outside data processing and other services		53,073		54,338		51,490		51,071		49,313		3,760			8			(1,265	)		(2	)
Net occupancy		34,405		28,673		33,433		31,983		35,591		(1,186	)		(3	)		5,732			20
Equipment		30,183		28,749		28,750		28,775		28,191		1,992			7			1,434			5
Marketing		12,576		14,832		10,686		13,704		12,271		305			2			(2,256	)		(15	)
Deposit and other insurance expense		11,628		10,599		13,718		10,056		11,155		473			4			1,029			10
Amortization of intangibles		9,813		9,520		9,291		10,320		10,362		(549	)		(5	)		293			3
Professional services		13,763		17,896		12,231		11,567		12,487		1,276			10			(4,133	)		(23	)
Other expense		39,468		33,429		51,045		38,979		34,640		4,828			14			6,039			18

Total noninterest expense	$	480,318	$	458,636	$	460,121	$	446,009	$	423,336	$	56,982			13	%	$	21,682			5	%

Number of employees (average full-time equivalent)		11,946		12,000		11,848		11,765		12,080		(134	)		(1	)		(54	)		—

Impacts of Significant Items:


	2014				2013
(dollar amounts in thousands)	Third		Second		Third
Personnel costs	$	15,344	$	1	$	(27,301	)
Outside data processing and other services		292		618		470
Net occupancy		5,202		60		7,939
Equipment		110		—		1,518
Marketing		783		29		—
Professional services		6		50		—
Other expense		1,086		17		—

Total noninterest expense adjustments	$	22,823	$	775	$	(17,374	)

Adjusted Noninterest Expense (Non-GAAP):


	2014				2013		3Q14 vs 3Q13						3Q14 vs 2Q14
(dollar amounts in thousands)	Third		Second		Third		Amount			Percent			Amount			Percent
Personnel costs	$	260,065	$	260,599	$	256,627	$	3,438			1	%	$	(534	)		—	%
Outside data processing and other services		52,781		53,720		48,843		3,938			8			(939	)		(2	)
Net occupancy		29,203		28,613		27,652		1,551			6			590			2
Equipment		30,073		28,749		26,673		3,400			13			1,324			5
Marketing		11,793		14,803		12,271		(478	)		(4	)		(3,010	)		(20	)
Deposit and other insurance expense		11,628		10,599		11,155		473			4			1,029			10
Amortization of intangibles		9,813		9,520		10,362		(549	)		(5	)		293			3
Professional services		13,757		17,846		12,487		1,270			10			(4,089	)		(23	)
Other expense		38,382		33,412		34,640		3,742			11			4,970			15

Total adjusted noninterest expense	$	457,495	$	457,861	$	440,710	$	16,785			4	%	$	(366	)		—	%

2014 Third Quarter versus 2013 Third Quarter

Reported noninterest expense increased $57.0 million, or 13%, from the year-ago quarter, reflecting:

•

$46.1 million, or 20%, increase in personnel costs. Excluding the impact of Significant Items, personnel costs increased $3.4 million, or 1%, related to annual compensation increases.

•

$4.8 million, or 14%, increase in other expense. Excluding the impact of Significant Items, other expenses increased $3.7 million, or 11%, primarily reflecting higher OREO and litigation expense.

•

$3.8 million, or 8%, increase in outside data processing and other services as we continue to invest in technology supporting our products, services, and our Continuous Improvement initiatives.

2014 Third Quarter versus 2014 Second Quarter

Noninterest expense increased $21.7 million, or 5%, from the 2014 second quarter. When adjusting for the $22.8 million of Significant Items in the 2014 third quarter, noninterest expense decreased $0.4 million. Personnel costs increased $14.8 million, or 6%, reflecting the franchise repositioning actions. Other expense increased $6.0 million, or 18%, reflecting higher OREO and litigation and settlement expense. Net occupancy expense increased $5.7 million, or 20%, primarily related to $5.2 million of franchise repositioning actions. Partially offsetting these increases was a $4.1 million, or 23%, decrease in professional services primarily related to reduced consulting expense.

2014 First Nine Months versus 2013 First Nine Months

Noninterest expense for the first nine-month period of 2014 increased $87.1 million, or 7%, from the comparable year-ago period.

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


	Nine Months Ended September 30,				Change
(dollar amounts in thousands)	2014		2013		Amount			Percent
Personnel costs	$	785,486	$	752,083	$	33,403			4	%
Outside data processing and other services		158,901		148,476		10,425			7
Net occupancy		96,511		93,361		3,150			3
Equipment		87,682		78,018		9,664			12
Marketing		38,094		37,481		613			2
Deposit and other insurance expense		35,945		40,105		(4,160	)		(10	)
Amortization of intangibles		28,624		31,044		(2,420	)		(8	)
Professional services		43,890		29,020		14,870			51
Other expense		123,942		102,406		21,536			21

Total noninterest expense	$	1,399,075	$	1,311,994	$	87,081			7	%

Impacts of Significant Items:


	Nine Months Ended September 30,
(dollar amounts in thousands)	2014		2013
Personnel costs	$	17,685	$	(27,301	)
Outside data processing and other services		5,201		470
Net occupancy		7,003		7,939
Equipment		245		1,518
Marketing		1,343		—
Professional services		2,228		—
Other expense		11,496		—

Total noninterest expense adjustments	$	45,201	$	(17,374	)

Adjusted Noninterest Expense (Non-GAAP):


	Nine Months Ended September 30,				Change
(dollar amounts in thousands)	2014		2013		Amount			Percent
Personnel costs	$	767,801	$	779,384	$	(11,583	)		(1	)%
Outside data processing and other services		153,700		148,006		5,694			4
Net occupancy		89,508		85,422		4,086			5
Equipment		87,437		76,500		10,937			14
Marketing		36,751		37,481		(730	)		(2	)
Deposit and other insurance expense		35,945		40,105		(4,160	)		(10	)
Amortization of intangibles		28,624		31,044		(2,420	)		(8	)
Professional services		41,662		29,020		12,642			44
Other expense		112,446		102,406		10,040			10

Total noninterest expense adjustments	$	1,353,874	$	1,329,368	$	24,506			2	%

The $87.1 million, or 7%, increase in total noninterest expense reflected:

•

$33.4 million, or 4%, increase in personnel costs. Excluding the impact of significant items, personnel expense decreased $11.6 million, or 1%, primarily related to a reduction in benefit costs, partially offset by an increase in technology salary expense.

•

$21.5 million, or 21%, increase in other expense. Excluding the impact of significant items, other expense increased $10.0 million, or 10%, primarily related to an increase in franchise taxes, protective advances, and litigation expense.

•

$14.9 million, or 51%, increase in professional services, of which $9.0 million is consulting expenses related to strategic planning.

•

$10.4 million, or 7%, increase in outside data processing and other services, reflecting higher debit and credit card processing costs and other technology expenses.

•

$9.7 million, or 12%, increase in equipment, primarily due to technology investments and the near-complete rollout of enhanced ATMs.

Provision for Income Taxes

The provision for income taxes in the 2014 third quarter was $53.9 million and $65.0 million in the 2013 third quarter. The provision for income taxes for the nine month periods ended September 30, 2014 and September 30, 2013 was $163.4 million and $175.4 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 September 30, 2014, we had a net federal deferred tax asset of $70.9 million and a net state deferred tax asset of $48.0 million. For regulatory capital purposes, there was no disallowed net deferred tax asset at September 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 Ohio, Kentucky, Indiana, Michigan, Pennsylvania, West Virginia, and Illinois.

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 September 30, 2014, loans and leases totaled $46.7 billion, representing a $3.6 billion, or 8%, increase compared to $43.1 billion at December 31, 2013, primarily reflecting growth in the automobile and C&I portfolios. 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 September 30, 2014, commercial loans and leases totaled $23.8 billion and represented 51% 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 “vertical specialties” to ensure that new products or lending types are embedded within a structured, centralized Commercial Lending area with designated experienced credit officers. These specialties comprise of either targeted industries (for example, Healthcare, Food & Agribusiness, Energy, etc) and/or lending disciplines (Rail, Aircraft, ABL, etc), all of which requires a high degree of expertise and oversight to effectively mitigate and monitor risk. As such, we have dedicated colleagues and teams focused on bringing value added expertise to these specialty clients.

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 $22.9 billion at September 30, 2014, and represented 49% 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). ARMs primarily consist of a fixed-rate of interest for the first 3 to 5 years, and then adjust annually.

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

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

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

Other consumer – Primarily consists of consumer loans not secured by real estate, including personal unsecured loans, overdraft balances, and credit cards. We introduced a consumer credit card product during 2013, utilizing a centralized underwriting system 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)	September 30,				June 30,				March 31,				December 31,				September 30,
Commercial:
Commercial and industrial	$	18,791	40	%	$	18,899	41	%	$	18,046	41	%	$	17,594	41	%	$	17,335	41	%
Commercial real estate:
Construction		850	2			757	2			692	2			557	1			544	1
Commercial		4,141	9			4,233	9			4,339	10			4,293	10			4,328	10

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