UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 20162018
or
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¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number 1-34073
Huntington Bancshares Incorporated
(Exact name of registrant as specified in its charter)
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Maryland | | 31-0724920 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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41 S. High Street, Columbus, Ohio | | 43287 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code (614) 480-8300480-2265
Securities registered pursuant to Section 12(b) of the Act:
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Title of class | | Name of exchange on which registered |
8.50% Series A non-voting, perpetual convertible preferred stock | | NASDAQ |
5.875% Series C Non-Cumulative, perpetual preferred stock | | NASDAQ |
6.250% Series D Non-Cumulative, perpetual preferred stock | | NASDAQ |
Common Stock—Par Value $0.01 per Share | | NASDAQ |
Securities registered pursuant to Section 12(g) of the Act:
Title of class
Floating Rate Series B Non-Cumulative Perpetual Preferred Stock
Depositary Shares (each representing a 1/40th interest in a share of Floating Rate Series B Non-Cumulative Perpetual Preferred Stock)
Depositary Shares (each representing a 1/100th interest in a share of 5.700% Series E Fixed-to-Floating Non-Cumulative Perpetual Preferred Stock)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Exchange Act. x Yes ¨ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. ¨ Yes x No
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 (or for such shorter period that the registrant was required to file such reports), 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitionthe definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | x | | Accelerated filer | ¨ |
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Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | | | |
| | | | Smaller reporting company | ¨ |
| | | | Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) ¨ Yes x No
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2016,2018, determined by using a per share closing price of $8.94,$14.76, as quoted by NASDAQ on that date, was $6,959,125,311.$16,029,310,082. As of January 31, 2017,2019, there were 1,085,887,4041,046,813,306 shares of common stock with a par value of $0.01 outstanding.
Documents Incorporated By Reference
Part III of this Form 10-K incorporates by reference certain information from the registrant’s definitive Proxy Statement for the 20172019 Annual Shareholders’ Meeting.
HUNTINGTON BANCSHARES INCORPORATED
INDEX
Glossary of Acronyms and Terms
The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:
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ABS | Asset-Backed Securities |
ACL | Allowance for Credit Losses |
AFS | Available-for-Sale |
ALCO | Asset-Liability Management Committee |
ALLL | Allowance for Loan and Lease Losses |
AML | Anti-Money Laundering |
ANPR | Advance Notice of Proposed Rulemaking |
AOCI | Accumulated Other Comprehensive Income |
ASC | Accounting Standards Codification |
ASR | Accelerated Share Repurchase |
ATM | Automated Teller Machine |
AULC | Allowance for Unfunded Loan Commitments |
Basel IIIBank Secrecy Act | Refers to the final rule issued by the FRBFinancial Recordkeeping and OCCReporting of Currency and published in the Federal Register on October 11, 2013Foreign Transactions Act of 1970 |
BHC | Bank Holding CompaniesCompany |
BHC Act | Bank Holding Company Act of 1956 |
C&I | Commercial and Industrial |
Camco Financial | Camco Financial Corp. |
CCAR | Comprehensive Capital Analysis and Review |
CDOCCPA | Collateralized Debt ObligationsCalifornia Consumer Privacy Act of 2018 |
CDs | CertificateCertificates of Deposit |
CET1 | Common equity tier 1 on a transitional Basel III basis |
CFPB | Consumer Financial Protection Bureau |
CISA | Cybersecurity Information Sharing Act |
CMO | Collateralized Mortgage Obligations |
CRA | Community Reinvestment Act |
CRE | Commercial Real Estate |
CREVF | Commercial Real Estate and Vehicle Finance |
DIF | Deposit Insurance Fund |
Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act |
Economic Growth Act | Economic Growth, Regulatory Relief and Consumer Protection Act |
EPS | Earnings Per Share |
EVE | Economic Value of Equity |
FASB | Financial Accounting Standards Board |
FCRA | Fair Credit Reporting Act |
FDIA | Federal Deposit Insurance Act |
FDIC | Federal Deposit Insurance Corporation |
FDICIAFederal Reserve | Board of Governors of the Federal Deposit Insurance Corporation Improvement Act of 1991Reserve System |
FHA | Federal Housing Administration |
FHC | Financial Holding Company |
FHLB | Federal Home Loan Bank |
FICO | Fair Isaac Corporation |
FIRSTMERITFinCEN | Financial Crimes Enforcement Network |
FINRA | Financial Industry Regulatory Authority, Inc. |
FirstMerit | FirstMerit Corporation |
FRB | Federal Reserve Bank |
FTE | Fully-Taxable Equivalent |
FTP | Funds Transfer Pricing |
FVO | Fair Value Option |
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GAAP | Generally Accepted Accounting Principles in the United States of America |
HAAGLBA | Huntington Asset Advisors, Inc.Gramm-Leach-Bliley Act |
HASIGSE | Huntington Asset Services, Inc.Government Sponsored Enterprise |
HQLAHMDA | High-Quality Liquid AssetsHome Mortgage Disclosure Act |
HSE | Hutchinson, Shockey, Erley & Co. |
HTM | Held-to-Maturity |
IRS | Internal Revenue Service |
LCR | Liquidity Coverage Ratio |
LGD | Loss Given Default |
LIBOR | London Interbank Offered Rate |
LGDLFI Rating System | Loss-Given-DefaultLarge Financial Institution Rating System |
LIHTC | Low Income Housing Tax Credit |
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LTD | Long Term Debt |
LTV | Loan to Value |
NAICS | North American Industry Classification System |
Macquarie | Macquarie Equipment Finance, Inc. (U.S. Operations) |
MBS | Mortgage-Backed Securities |
MD&A | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
MSA | Metropolitan Statistical Area |
MSR | Mortgage Servicing RightsRight |
NAICS | North American Industry Classification System |
NALs | Nonaccrual Loans |
NCO | Net Charge-off |
NII | Noninterest Income |
NIM | Net Interest Margin |
NOW | Negotiable Order of Withdrawal |
NPAs | Nonperforming Assets |
N.R.NSF | Not relevant. Denominator of calculation is a gain in the current period compared with a loss in the prior period, or vice-versaNon-Sufficient Funds |
OCC | Office of the Comptroller of the Currency |
OCI | Other Comprehensive Income (Loss) |
OCR | Optimal Customer Relationship |
OFAC | Office of Foreign Assets Control |
OIS | Overnight Indexed Swaps |
OLEM | Other Loans Especially Mentioned |
OREO | Other Real Estate Owned |
OTTI | Other-Than-Temporary Impairment |
Patriot Act | Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 |
PD | Probability-Of-DefaultProbability Of Default |
Plan | Huntington Bancshares Retirement Plan |
Problem Loans | Includes nonaccrual loans and leases, (Table 13), accruing loans and leases past due 90 days or more, (Table 14), troubled debt restructured loans, (Table 15), and criticized commercial loans (credit quality indicators section of Footnote 4). |
Proposed Capital and Liquidity Tailoring Rule | Refers to the proposed rule, Proposed changes to applicability thresholds for regulatory and capital and liquidity requirements, issued by the OCC, the Federal Reserve and the FDIC on October 31, 2018 |
Proposed EPS Tailoring Rule | Refers to the proposed rule, Prudential Standards for Large Bank Holding Companies and Savings and Loan Holding, issued by the Federal Reserve on October 31, 2018 |
Proposed Tailoring Rules | Refers to the Proposed Capital and Liquidity Tailoring Rule and the Proposed EPS Tailoring Rule |
RBHPCG | Regional Banking and The Huntington Private Client Group |
REIT | Real Estate Investment Trust |
Riegle-Neal Act | The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 |
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ROC | Risk Oversight Committee |
RWA | Risk-Weighted Assets |
SAD | Special Assets Division |
SBA | Small Business Administration |
SEC | Securities and Exchange Commission |
SERP | Supplemental Executive Retirement Plan |
SIFMA | Securities Industry and Financial Markets Association |
SOFR | Secured Overnight Financing Rate |
SRIP | Supplemental Retirement Income Plan |
TCETCJA | Tangible Common EquityH.R. 1, Originally known as the Tax Cuts and Jobs Act |
TDR | Troubled Debt Restructured loanRestructuring |
U.S. Basel III | Refers to the final rule issued by the Federal Reserve and OCC and published in the Federal Register on October 11, 2013 |
U.S. Treasury | U.S. Department of the Treasury |
UCS | Uniform Classification System |
Unified | Unified Financial Securities, Inc. |
UPB | Unpaid Principal Balance |
USDA | U.S. Department of Agriculture |
VA | U.S. Department of Veteran Affairs |
VIE | Variable Interest Entity |
XBRL | eXtensible Business Reporting Language |
Huntington Bancshares Incorporated
PART I
When we refer to "Huntington", "we", "our", "us",“Huntington,” “we,” “our,” “us,” and "the Company"“the Company” 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"“Bank” in this report, we mean our only bank subsidiary, The Huntington National Bank, and its subsidiaries.
Item 1: Business
We are a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. We have 15,99315,693 average full-time equivalent employees. Through the Bank, we have over 150 years of serving the financial needs of our customers. Through our subsidiaries, we provide full-service commercial, andsmall business, consumer banking services, mortgage banking services, automobile financing, recreational vehicle and marine financing, equipment leasing, investment management, trust services, brokerage services, insurance programs, and other financial products and services. The Bank, organized in 1866, is our only bank subsidiary. At December 31, 2016,2018, the Bank had 2410 private client group offices and 1,091944 branches as follows:
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| • 523451 branches in Ohio | | • 3937 branches in Illinois | |
| • 353300 branches in Michigan | | • 3731 branches in Wisconsin | |
| • 5349 branches in Pennsylvania | | • 3025 branches in West Virginia | |
| • 4641 branches in Indiana | | • 10 branches in Kentucky | |
Select financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office in Columbus, Ohio. Our foreign banking activities, in total or with any individual country, are not significant.
Our business segments are based on our internally-aligned segment leadership structure, which is how we monitor results and assess performance. For each of our fivefour business segments, we expect the combination of our business model and exceptional service to provide a competitive advantage that supports revenue and earnings growth. Our business model emphasizes the delivery of a complete set of banking products and services offered by larger banks but distinguished by local delivery and customer service.
A key strategic emphasis has been for our business segments to operate in cooperation to provide products and services to our customers and to build stronger and more profitable relationships using our OCR sales and service process. The objectives of OCR are to:
1.•Use a consultative sales approach to provide solutions that are specific to each customer.
2.•Leverage each business segment in terms of its products and expertise to benefit customers.
3.•Develop prospects who may want to have multiple products and services as part of their relationship with us.
Following is a description of our fivefour business segments and athe Treasury / Other function:
Consumer and Business Banking: The Consumer and Business Banking segment provides a wide array of financial products and services to consumer and small business customers including but not limited to checking accounts, savings accounts, money market accounts, certificates of deposit, investments, consumer loans, credit cards, and small business loans. Other financial services available to consumer and small business customers include mortgages, insurance, interest rate risk protection, foreign exchange, and treasury management. Huntington serves customers through our network of branches in Ohio, Illinois, Indiana, Kentucky, Michigan, Pennsylvania, West Virginia, and Wisconsin.branches. In addition to our extensive branch network, customers can access Huntington through online banking, mobile banking, telephone banking, and ATMs.
We have a "Fair Play"“Fair Play” banking philosophy; providing differentiated products and services, built on a strong foundation of customer advocacy. Our brand resonates with consumers and businesses; earning us new customers and deeper relationships with current customers.
Business Banking is a dynamic part of our business and we are committed to being the bank of choice for businesses in our markets. Business Banking is defined as serving companies with revenues up to $20 million and consists of approximately 254,000 businesses.million. Huntington continues to develop products and services that are designed specifically to meet the needs of small business and look for ways to help companies find solutions to their financing needs.
Home Lending, an operating unit of Consumer and Business Banking, originates consumer loans and mortgages for customers who are generally located in our primary banking markets. Consumer and mortgage lending products are primarily distributed through the Consumer and Business Banking and Regional Banking and The Huntington Private
Client Group segments, as well as through commissioned loan originators. Home Lending earns interest on portfolio loans and loans held-for-sale, earns fee income from the origination and servicing of mortgage loans, and recognizes gains or losses from the sale of mortgage loans. Home Lending supports the origination of mortgage loans across all segments.
Commercial Banking: Through a relationship banking model, this segment provides a wide array of products and services to the middle market, large corporate, real estate and government public sector customers located primarily within our geographic footprint. The segment is divided into sevensix business units: middle market, large corporate, specialty banking, asset finance, capital markets, treasury management,Middle Market, Specialty Banking, Asset Finance, Capital Markets/Institutional Corporate Banking, Commercial Real Estate, and insurance.Treasury Management.
Middle Market Banking primarily focuses on providing banking solutions to companies with annual revenues of $20 million to $500 million. Through a relationship management approach, various products, capabilities, and solutions are seamlessly delivered in a client centric way.
Large Corporate Banking works with larger, often more complex companies with revenues greater than $500 million. These entities, many of which are publicly traded, require a different and customized approach to their banking needs.
Specialty Banking offers tailored products and services to select industries that have a foothold in the Midwest. Each team is comprised of industry experts with a dynamic understanding of the market and industry. Many of these industries are experiencing tremendous change, which creates opportunities for Huntington to leverage our expertise and help clients navigate, adapt, and succeed.
Asset Finance is a combination of our Huntington Equipment Finance, Huntington Public Capital Asset Based Lending,®, Technology and Healthcare Equipment Leasing, and Lender Finance divisions that focus on providing financing solutions against these respective asset classes.
Capital MarketsMarkets/Institutional Corporate Banking has twothree distinct product offerings: 1) corporate risk management services, and2) institutional sales, trading, and underwriting.underwriting, 3) institutional corporate banking. The Capital Markets Group offers a full suite of risk management tools including commodities, foreign exchange, and interest rate hedging services. The Institutional Sales, Trading, & Underwriting team provides access to capital and investment solutions for both municipal and corporate institutions.
Treasury Management teams help businesses manage their working capital programs Institutional Corporate Banking works with larger, often more complex companies with revenues greater than $500 million. These entities, many of which are publicly traded, require a different and reduce expenses. Our liquidity solutions help customers save and invest wisely, while our payables and receivables capabilities help them manage purchases and the receipt of payments for goods and services. All of this is provided while helping customers take a sophisticatedcustomized approach to managing their overhead, inventory, equipment, and labor.
Insurance brokerage business specializes in commercial property and casualty, employee benefits, personal lines, life, disability and specialty lines of insurance. The group also provides brokerage and agency services for residential and commercial title insurance and excess and surplus product lines of insurance. As an agent and broker, this business does not assume underwriting risks but alternatively provides our customers with access to quality, noninvestment insurance contracts.
Commercial Real Estate and Vehicle Finance: This segment provides lending and other banking products and services to customers outside of our traditional retail and commercial banking segments. Our products and services include providing financing for land, buildings, and other commercial real estate owned or constructed by real estate developers, automobile dealerships, or other customers with real estate project financing needs, and financing for the purchase of automobiles, light-duty trucks, recreational vehicles and marine craft at franchised dealerships, financing the acquisition of new and used vehicle inventory of franchised automotive dealerships. Products and services are delivered through highly specialized relationship-focused bankers and product partners. Huntington creates well-defined relationship plans which identify needs where solutions are developed and customer commitments are obtained.
needs.The Commercial Real Estate team serves real estate developers, REITs, and other customers with lending needs that are secured by commercial properties. Most of these customers are located within our footprint. Within Commercial Real Estate, Huntington Community Development focuses on improving the quality of life for our communities and the residents of low-to moderate-income neighborhoods by developing and delivering innovative products and services to support affordable housing and neighborhood stabilization.
Treasury Management teams help businesses manage their working capital programs and reduce expenses. Our liquidity solutions help customers save and invest wisely, while our payables and receivables capabilities help them manage purchases and the receipt of payments for goods and services. All of this is provided while helping customers take a sophisticated approach to managing their overhead, inventory, equipment, and labor.
Vehicle Finance: Our products and services include providing financing to consumers for the purchase of automobiles, light-duty trucks, recreational vehicles, and marine craft at franchised and other select dealerships, and providing financing to franchised dealerships for the acquisition of new and used inventory. Products and services are delivered through highly specialized relationship-focused bankers and product partners. Huntington creates well-defined relationship plans which identify needs where solutions are developed and customer commitments are obtained.
The Vehicle Finance team services automobile dealerships, its owners, and consumers buying automobiles through these franchised dealerships. Huntington has provided new and used automobile financing and dealer services throughout the Midwest since the early 1950s. This consistency in the market and our focus on working with strong dealerships has allowed us to expand into select markets outside of the Midwest and to actively deepen relationships while building a strong reputation. RVHuntington also provides financing for the purchase by consumers of recreational vehicles and marine loans are originatedcraft on an indirect basis through a series of dealerships.
Regional Banking and The Huntington Private Client Group: Regional Banking and The Huntington Private Client Group is closely aligned with our regional banking markets. A fundamental point of differentiation is our commitment to be actively engaged within our local markets - building connections with community and business leaders and offering a uniquely personal experience delivered by colleagues working within those markets.
The core business of The Huntington Private Client Group is The Huntington Private Bank, which consists of Private Banking, Wealth & Investment Management, and Retirement plan services.Plan Services. The Huntington Private Bank provides high net-worth customers with deposit, lending (including specialized lending options), and banking services. The Huntington Private Bank also delivers wealth management and legacy planning through investment and portfolio management, fiduciary administration, and trust services. This group also provides retirement plan services to corporate
businesses. The Huntington Private Client Group also provides corporate trust services and institutional and mutual fund custody services.
Home Lending:Treasury/Other: Home Lending originates and services consumer loans and mortgages for customers who are generally located in our primary banking markets. Consumer and mortgage lending products are primarily distributed through the Consumer and Business Banking and Regional Banking and The Huntington Private Client Group segments, as well as through commissioned loan originators. Home Lending earns interest on portfolio loans and loans held-for-sale, earns fee income from the origination and servicing of mortgage loans, and recognizes gains or losses from the sale of mortgage loans. Home Lending supports the origination and servicing of mortgage loans across all segments.
The Treasury / Other function includes technology and operations, other unallocated assets, liabilities, revenue, and expense.
The financial results for each of these business segments are included in Note 2423 of Notes to Consolidated Financial Statements and are discussed in the Business Segment Discussion of our MD&A.
Business Combination
On August 16, 2016, Huntington completed its acquisition of FirstMerit Corporation in a stock and cash transaction valued at approximately $3.7 billion. FirstMerit Corporation was a diversified financial services company headquartered in Akron, Ohio, with operations in Ohio, Michigan, Wisconsin, Illinois and Pennsylvania. Post acquisition, Huntington now operates across an eight-state Midwestern footprint. The acquisition resulted in a combined company with a larger market presence and more diversified loan portfolio, as well as a larger core deposit funding base and economies of scale associated with a larger financial institution. For further discussion, see Note 3 of the Notes to Consolidated Financial Statements.
Competition
We compete with other banks and financial services companies such as savings and loans, credit unions, and finance and trust companies, as well as mortgage banking companies, automobile and equipment financing companies (including captive automobile finance companies), insurance companies, mutual funds, investment advisors, and brokerage firms, both within and outside of our primary market areas. FinTech startupsFinancial Technology Companies, or FinTechs, are also providing nontraditional, but increasingly strong, competition for our borrowers, depositors, and other customers.
We compete for loans primarily on the basis of a combination of value and service by building customer relationships as a result of addressing our customers’ entire suite of banking needs, demonstrating expertise, and providing convenience to our customers. We also consider the competitive pricing pressures in each of our markets.
We compete for deposits similarly on a basis of a combination of value and service and by providing convenience through a banking network of branches and ATMs within our markets and our website at www.huntington.com. We have also institutedemploy customer friendly practices, such as our 24-Hour Grace® account feature, which gives customers an additional business day to cover overdrafts to their consumer account without being charged overdraft fees.
The table below shows our combined Huntington and FirstMerit competitive ranking and market share based on deposits of FDIC-insured institutions as of June 30, 2016,2018, in the top 10 metropolitan statistical areas (MSA) in which we compete:
| | MSA | | Rank | | Deposits (in millions) | | Market Share | | Rank | | Deposits (in millions) | | Market Share |
Columbus, OH | | 1 |
| | $ | 20,453 |
| | 32 | % | | 1 |
| | $ | 24,746 |
| | 37 | % |
Cleveland, OH | | 5 |
| | 8,976 |
| | 14 |
| | 2 |
| | 9,718 |
| | 14 |
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Detroit, MI | | 7 |
| | 6,542 |
| | 5 |
| | 6 |
| | 7,737 |
| | 6 |
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Akron, OH | | 1 |
| | 5,611 |
| | 39 |
| | 1 |
| | 3,937 |
| | 28 |
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Indianapolis, IN | | 4 |
| | 3,272 |
| | 7 |
| | 4 |
| | 3,452 |
| | 7 |
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Cincinnati, OH | | 4 |
| | 2,727 |
| | 3 |
| | 5 |
| | 3,365 |
| | 3 |
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Pittsburgh, PA | | 9 |
| | 2,689 |
| | 2 |
| | 9 |
| | 2,955 |
| | 2 |
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Chicago, IL | | 16 |
| | 2,581 |
| | 1 |
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Toledo, OH | | 1 |
| | 2,474 |
| | 25 |
| | 2 |
| | 2,491 |
| | 22 |
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Grand Rapids, MI | | 2 |
| | 2,466 |
| | 12 |
| | 2 |
| | 2,416 |
| | 11 |
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Source: FDIC.gov, based on June 30, 2016 survey. | | | | | | | |
Chicago, IL | | | 20 |
| | 2,303 |
| | 1 |
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Source: FDIC.gov, based on June 30, 2018 survey. | | | | | | | |
Many of our nonfinancial institution competitors have fewer regulatory constraints, broader geographic service areas, greater capital, and, in some cases, lower cost structures. In addition, competition for quality customers has intensified as a result of changes in regulation, advances in technology and product delivery systems, consolidation among financial service providers, and bank failures.
Financial Technology, or FinTech, startups are emergingFinTechs continue to emerge in key areas of banking. In response, we are monitoring activity in marketplace lending along with businesses engaged in money transfer, investment advice, and money management tools. Our strategy involves assessing the marketplace and determining our near term plan, while developing a longer term approach to effectively service our existing customers and attract new customers. This includes evaluating which products we develop in-house, as well as evaluating partnership options, where applicable.
Regulatory Matters
GeneralRegulatory Environment
The banking industry is highly regulated. We are subject to supervision, regulation, and examination by various federal and state regulators, including the Federal Reserve, OCC, SEC, CFPB, FDIC, FINRA, and various state regulatory agencies. The
statutory and regulatory framework that governs us is generally intended to protect depositors and customers, the DIF, the U.S. banking and financial system, and financial markets as a whole.
Banking statutes, regulations, and policies are continually under review by Congress, state legislatures, and federal and state regulatory agencies. In addition to laws and regulations, state and federal bank regulatory agencies may issue policy statements, interpretive letters, and similar written guidance applicable to Huntington and its subsidiaries. Any change in the statutes, regulations, or regulatory policies applicable to us, including changes in their interpretation or implementation, could have a material effect on our business or organization.
TheBoth the scope of the laws and regulations and the intensity of the supervision to which we are subject increased in response to the financial crisis, as well as other factors, such as technological and market changes. Regulatory enforcement and fines have also increased across the banking industry is highly regulated. During the past several years, there has been a significant increase in regulation and regulatory oversight of U.S. financial services firms, primarily resulting from the Dodd-Frank Act. The Dodd-Frank Act implements numerous and far-reaching changes that affect financial companies, including banking organizations.sector. Many of the provisionsthese changes have occurred as a result of the Dodd-Frank Act and other lawsits implementing regulations, most of which are now in place. While the regulatory environment has entered a period of rebalancing of the post financial crisis framework, we expect that our business will remain subject to further rulemaking, guidanceextensive regulation and interpretationsupervision.
On May 24, 2018, the Economic Growth Act was signed into law. Among other regulatory changes, the Economic Growth Act amends various sections of the Dodd-Frank Act, including section 165 of Dodd-Frank Act, which was revised to raise the asset thresholds for determining the application of enhanced prudential standards for BHCs. Under the Economic Growth Act, BHCs with consolidated assets below $100 billion were immediately exempted from all of the enhanced prudential standards, except risk committee requirements, which will now apply to publicly-traded BHCs with $50 billion or more of consolidated assets. BHCs with consolidated assets between $100 billion and $250 billion, including Huntington, will continue to be subject to the enhanced prudential standards that applied to them before enactment of the Economic Growth Act for 18 months after the date of enactment, unless the Federal Reserve acts earlier to exempt these BHCs from enhanced prudential standards or to continue to subject these BHCs to some form of enhanced prudential standards. Following that 18-month period, BHCs with consolidated assets between $100 billion and $250 billion will be exempt from all enhanced prudential standards that the Federal Reserve has not made applicable to them, with the exception of risk committee requirements. As discussed immediately below, the Federal Reserve has proposed a rule to implement the Economic Growth Act under which Huntington would remain subject to certain enhanced prudential standards.
On October 31, 2018, the Federal Reserve issued the Proposed EPS Tailoring Rule pursuant to the Economic Growth Act to adjust the thresholds at which certain enhanced prudential standards apply to U.S. BHCs with $100 billion or more in total consolidated assets. Also on October 31, 2018, the Federal Reserve, OCC, and FDIC issued the Proposed Capital and Liquidity Tailoring Rule to similarly adjust the thresholds at which certain other capital and liquidity standards apply to U.S. BHCs and banks with $100 billion or more in total consolidated assets. Under the Proposed Tailoring Rules, these BHCs and banks, including Huntington and the Bank, would be placed into one of four risk-based categories based on the banking organization’s size, status as a global systemically important bank (or not), cross-jurisdictional activity, weighted short-term wholesale funding, nonbank assets, and off-balance sheet exposure. The extent to which enhanced prudential standards and certain other capital and liquidity standards would apply to these BHCs and banks would depend on the banking organization’s category. Under the Proposed Tailoring Rules, which remain subject to finalization and may be revised, Huntington and the Bank would each qualify as a Category IV banking organization subject to the least restrictive of the proposed requirements applicable to firms with $100 billion or more in total consolidated assets.
The ultimate benefits or consequences of the Economic Growth Act for Huntington, the Bank, Huntington’s other subsidiaries, and Huntington’s activities will depend on the final form of the Proposed Tailoring Rules and additional rulemakings to implement the Act that are expected to be issued by the applicable federal regulators. SomeU.S. banking agencies, which we cannot predict.
We are also subject to the disclosure and regulatory requirements of the regulations relatedSecurities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, both as administered by the SEC, as well as the rules of Nasdaq that apply to these reforms are still incompanies with securities listed on the implementation stage and, as a result, there is significant uncertainty concerning their ultimate impact on us.Nasdaq Global Select Market.
The following discussion describes certain elements of the comprehensive regulatory framework applicable to us. This discussion is not intended to describe all laws and regulations applicable to Huntington, the Bank, and Huntington’s other subsidiaries.
Supervision, Regulation and ExaminationHuntington as a Bank Holding Company
Huntington is registered as a BHC with the Federal Reserve under the BHC Act and qualifies for and has elected to become a FHC under the Gramm-Leach-Bliley Act of 1999.GLBA. As a FHC, Huntington is subject to primary supervision, regulation and examination by the Federal Reserve, and is permitted to engage in, and be affiliated with companies engaging in, a broader range of activities than those permitted for a BHC,BHC. BHCs are generally restricted to engaging in the business of banking, managing or controlling banks, and certain other activities determined by the Federal Reserve to be closely related to banking. FHCs may also engage in activities that are considered to be financial in nature, as well as those incidental or complementary to financial activities, including underwriting, dealing and making markets in securities, and making merchant banking investments in non-financial companies. Huntington and the Bank must each remain “well-capitalized” and “well-managed”“well managed” in order for
Huntington to maintain its status as a FHC. In addition, the Bank must receive a CRA rating of at least “Satisfactory” at its most recent examination for Huntington to engage in the full range of activities permissible for FHCs.
The Bank is a national banking association chartered under the laws of the United States andHuntington is subject to comprehensive primary supervision, regulation and examination by the OCC. As a national bank, the activities of the Bank are limited to those specifically authorized under the National Bank Act and related regulations and interpretations by the OCC. As a member of the DIF, the Bank is also subject to regulation and examination by the FDIC. In addition, the Bank is subject to supervision, regulation and examination by the CFPB, which is the primary administrator of most federal consumer financial statutes and the primary consumer financial regulator of banking organizations with $10 billion or more in assets.
Under the system of “functional regulation” established under the BHC Act, the Federal Reserve, which serves as the primary regulator of our consolidated organization. The primary regulators of our non-bank subsidiaries directly regulate the activities of those subsidiaries, with the Federal Reserve exercising a supervisory role. Such “functionally regulated” non-bank subsidiaries include, for example, broker-dealers registered with the SEC and investment advisers registered with the SEC with respect to their investment advisory activities.
The Bank as a National Bank
The Bank is a national banking association chartered under the laws of the United States. As a national bank, the activities of the Bank are limited to those specifically authorized under the National Bank Act and OCC regulations. The Bank is subject to comprehensive primary supervision, regulation, and examination by the OCC. As a member of the DIF, the Bank is also subject to regulation and examination by the FDIC.
Supervision, Examination and Enforcement
A principal objective of the U.S. bank regulatory regime is to protect depositors and customers, the DIF, the U.S. banking and financial system, and financial markets as a whole by ensuring the financial safety and soundness of BHCs and banks, including Huntington and the Bank. Bank regulators regularly examine the operations of BHCs and banks. In addition, BHCs and banks are subject to periodic reporting and filing requirements.
The Federal Reserve, OCC, and FDIC have broad supervisory and enforcement authority with regard to BHCs and banks, including the power to conduct examinations and investigations, impose nonpublic supervisory agreements, issue cease and desist orders, impose fines and other civil and criminal penalties, terminate deposit insurance, and appoint a conservator or receiver. In addition, Huntington, the Bank and other Huntington subsidiaries are subject to supervision, regulation, and examination by the CFPB, which is the primary administrator of most federal consumer financial statutes and Huntington’s primary consumer financial regulator. Supervision and examinations are confidential, and the outcomes of these actions may not be made public.
Bank regulators have various remedies available if they determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of a banking organization’s operations are unsatisfactory. The regulators may also take action if they determine that the banking organization or its management is violating or has violated any law or regulation. The regulators have the power to, among other things, prohibit unsafe or unsound practices, require affirmative actions to correct any violation or practice, issue administrative orders that can be judicially enforced, direct increases in capital, direct the sale of subsidiaries or other assets, limit dividends and distributions, restrict growth, assess civil monetary penalties, remove officers and directors, and terminate deposit insurance.
Engaging in unsafe or unsound practices or failing to comply with applicable laws, regulations, and supervisory agreements could subject the Company, its subsidiaries, and their respective officers, directors, and institution-affiliated parties to the remedies described above, and other sanctions. In addition, the FDIC may terminate a bank’s deposit insurance upon a finding that the bank’s financial condition is unsafe or unsound or that the bank has engaged in unsafe or unsound practices or has violated an applicable rule, regulation, order, or condition enacted or imposed by the bank’s regulatory agency.
In November 2018, the Federal Reserve adopted a new rating system, the LFI Rating System, to align its supervisory rating system for large financial institutions, including Huntington, with its current supervisory programs for these firms. As compared to the rating system it replaces, which will continue to be used for smaller BHCs, the LFI Rating System places a greater emphasis on capital and liquidity, including related planning and risk management practices. Huntington will receive its first rating under the LFI Rating System in 2020. These ratings will remain confidential.
Bank Acquisitions by Huntington
BHCs, such as Huntington, must obtain prior approval of the Federal Reserve in connection with any acquisition that results in the BHC owning or controlling 5% or more of any class of voting securities of a bank or another BHC.
Acquisitions of Ownership of the Company
Acquisitions of Huntington’s voting stock above certain thresholds are subject to prior regulatory notice or approval under federal banking laws, including the BHC Act and the Change in Bank Control Act of 1978. Under the Change in Bank Control Act, a person or entity generally must provide prior notice to the Federal Reserve before acquiring the power to vote 10% or more of our outstanding common stock. Investors should be aware of these requirements when acquiring shares in our stock.
Interstate Banking
Under the Riegle-Neal Act, a BHC may acquire banks in states other than its home state, subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the
BHC not control, prior to or following the proposed acquisition, more than 10% of the total amount of deposits of insured depository institutions nationwide or, unless the acquisition is the BHC’s initial entry into the state, more than 30% of such deposits in the state (or such lesser or greater amount set by the state). The Riegle-Neal Act also authorizes banks to merge across state lines, thereby creating interstate branches. A national bank, such as the Bank, with the approval of the OCC may open a branch in any state if the law of that state would permit a state bank chartered in that state to establish the branch.
Regulatory Capital Requirements
Huntington and the Bank are subject to certain risk-based capital and leverage ratio requirements. Therequirements under the U.S. Basel III capital rules adopted by the Federal Reserve, establishes capital and leverage requirements for Huntington, and evaluates its compliance with such requirements. Theby the OCC, establishes similar capital and leverage requirements for the Bank. In 2013,These rules implement the Basel III international regulatory capital standards in the United States, as well as certain provisions of the Dodd-Frank Act. These quantitative calculations are minimums, and the Federal Reserve and OCC issued final rules (and the FDIC issued interim final rules that were adopted as final rules in April 2014) to implement the Basel III capital accord, as well as certain requirements of the Dodd-Frank Act. The final capital rules made a number of significant changes to the regulatory capital ratios applicable to Huntington and the Bank, as well as all other banks and BHCs of their size. In addition, the capital rules modified the types of capital instruments that may be included in regulatory capital and how certain assets are risk-weighted for purposes of these calculations.
Under the final capital rules, Huntington and the Bank must maintain a minimum CET1 risk-based ratio, a minimum Tier I risk-based capital ratio, a minimum total risk-based capital ratio, and a minimum leverage ratio. The final capital rules also limit capital distributions and certain discretionary bonuses if a banking organization does not maintain certain capital ratios. The preamble to the final capital rules states that these quantitative calculations are minimums and that the agencies may determine that a banking organization, based on its size, complexity, or risk profile, must maintain a higher level of capital in order to be operate in a safe and sound manner.
Under the U.S. Basel III capital rules, Huntington’s and the Bank’s assets, exposures, and certain off-balance sheet items are subject to risk weights used to determine the institutions’ risk-weighted assets. These risk-weighted assets are used to calculate the following minimum capital ratios for Huntington and the Bank:
CET1 Risk-Based Capital Ratio, equal to the ratio of CET1 capital to risk-weighted assets. CET1 capital primarily includes common shareholders’ equity subject to certain regulatory adjustments and deductions, including with respect to goodwill, intangible assets, certain deferred tax assets, and AOCI. Certain of these adjustments and deductions were subject to phase-in periods that began on January 1, 2015, and was scheduled to end on January 1, 2018. Together with the FDIC, the Federal Reserve and OCC have issued proposed rules that would simplify the capital treatment of certain capital deductions and adjustments, and the final phase-in period for these capital deductions and adjustments has been indefinitely delayed. In addition, in December 2018, the finalU.S. federal banking agencies finalized rules that would permit BHCs and banks to phase-in, for regulatory capital rules generally provide that trust preferred securities and certain preferred securities no longer count as purposes, the day-one impact of the new current expected credit loss accounting rule on retained earnings over a period of three years. For further discussion of the new current expected credit loss accounting rule, see Note 2 of the Notes to Consolidated Financial Statements.
Tier I capital. Banking organizations with more than $15 billion in total consolidated assets were required1 Risk-Based Capital Ratio, equal to phase-outthe ratio of additional Tier 1 capital any non-qualifyingto risk-weighted assets. Tier 1 capital instruments (such asis primarily comprised of CET1 capital, perpetual preferred stock, and certain qualifying capital instruments.
Total Risk-Based Capital Ratio, equal to the ratio of total capital, including CET1 capital, Tier 1 capital, and Tier 2 capital, to risk-weighted assets. Tier 2 capital primarily includes qualifying subordinated debt and qualifying ALLL. Tier 2 capital also includes, among other things, certain trust preferred securities and cumulative preferred shares) issued before September 12, 2010. We have phased outsecurities.
Tier 1 Leverage Ratio, equal to the additional tierratio of Tier 1 capital treatmentto quarterly average assets (net of our trust preferred securities but are including these instruments in tier 2 capital as allowed by Basel III.goodwill, certain other intangible assets, and certain other deductions).
The finaltotal minimum regulatory capital rules takeratios and well-capitalized minimum ratios are reflected on the following page. The Federal Reserve has not yet revised the well-capitalized standard for BHCs to reflect the higher capital requirements imposed under the U.S. Basel III capital rules. For purposes of the Federal Reserve’s Regulation Y, including determining whether a BHC meets the requirements to be an FHC, BHCs, such as Huntington, must maintain a Tier 1 Risk-Based Capital Ratio of 6.0% or greater and a Total Risk-Based Capital Ratio of 10.0% or greater. If the Federal Reserve were to apply the same or a very similar well-capitalized standard to BHCs as that applicable to the Bank, Huntington’s capital ratios as of December 31, 2018 would exceed such revised well-capitalized standard. The Federal Reserve may require BHCs, including Huntington, to maintain capital ratios substantially in excess of mandated minimum levels, depending upon general economic conditions and a BHC’s particular condition, risk profile, and growth plans.
Failure to be well-capitalized or to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our operations or financial condition. Failure to be well-capitalized or to meet minimum capital requirements could also result in phases.restrictions on Huntington’s or the Bank’s ability to pay dividends or otherwise distribute capital or to receive regulatory approval of applications.
In addition to meeting the minimum capital requirements, under the U.S. Basel III capital rules, Huntington and the Bank weremust also maintain the required Capital Conservation Buffer to beavoid becoming subject to restrictions on capital distributions and certain discretionary bonus payments to management. The Capital Conservation Buffer is calculated as a ratio of CET1 capital to risk-weighted assets, and it effectively increases the required minimum risk-based capital ratios. The Capital Conservation Buffer requirement was phased in compliance with certain calculation requirements and begin transitioning to other requirements byover a three-year period that began on January 1, 2015, with full2016. The phase-in period ended on January 1, 2019, and the Capital Conservation Buffer is now at its fully phased-in level of 2.5%. Throughout 2018, the required Capital Conservation Buffer was 1.875%. The Tier 1 Leverage Ratio is not impacted by the Capital Conservation Buffer, and a banking institution may be considered well-capitalized while remaining out of compliance with the modified calculations on January 1, 2019. Capital Conservation Buffer. In April 2018, the Federal Reserve issued a proposal that would, among other things, replace the Capital Conservation Buffer with stress
buffer requirements for certain large BHCs, including Huntington. Please refer to the Proposed Stress Buffer Requirements section below for further details.
The rules concerningtable below summarizes the capital conservationrequirements that Huntington and countercyclical capital buffers became effective on January 1, 2016.
The following are the
minimum Basel III regulatory capital levels that weBank must satisfy to avoid limitations on capital distributions and
certain discretionary bonus payments
(i.e., the required minimum capital ratios plus the Capital Conservation Buffer) during the
applicableremaining transition period
from January 1, 2016, until January 1, 2019:for the Capital Conservation Buffer: |
| | | | | |
| Minimum Basel III Regulatory Capital Ratio Plus Capital Conservation Buffer |
| January 1, 2018 | | January 1, 2019 |
CET 1 risk-based capital ratio | 6.375 | % | | 7.00 | % |
Tier 1 risk-based capital ratio | 7.875 |
| | 8.50 |
|
Total risk-based capital ratio | 9.875 |
| | 10.50 |
|
The following table presents the minimum regulatory capital ratios, minimum ratio plus capital conservation buffer, and well capitalized minimums compared with Huntington’s and the Bank’s regulatory capital ratios as of December 31, 2018, calculated using the regulatory capital methodology applicable during 2018.
|
| | | | | | | | | | | |
| Minimum Basel III Regulatory Capital Levels |
| January 1, 2016 | | January 1, 2017 | | January 1, 2018 | | January 1, 2019 |
Common equity tier 1 risk-based capital ratio | 5.125 | % | | 5.75 | % | | 6.375 | % | | 7.0 | % |
Tier 1 risk-based capital ratio | 6.625 | % | | 7.25 | % | | 7.875 | % | | 8.5 | % |
Total risk-based capital ratio | 8.625 | % | | 9.25 | % | | 9.875 | % | | 10.5 | % |
Failure to meet applicable capital guidelines may subject a financial institution to a variety of enforcement remedies available to the federal regulatory authorities. These include limitations on the ability to pay dividends, the issuance by the regulatory authority of a directive to increase capital, and the termination of deposit insurance by the FDIC. In addition, the financial institution could be subject to the measures described below under “Prompt Corrective Action” as applicable to under-capitalized institutions.
Huntington’s regulatory capital ratios and those of the Bank were in excess of the levels established for well-capitalized institutions throughout 2016. An institution is deemed to be “well-capitalized” if it meets or exceeds the well-capitalized minimums listed below, and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure.
| | | | | | | At December 31, 2016 | | Minimum Regulatory Capital Ratio | Minimum Ratio + Capital Conservation Buffer (1) | Well-Capitalized Minimums (2) | | At December 31, 2018 |
(dollar amounts in billions) | | | Well-capitalized minimums | | Actual | | Excess Capital (1) | | Actual |
Ratios: | | | | | | | | | | |
Tier 1 leverage ratio | Consolidated | | N/A |
| | 8.70 | % | | N/A |
| |
| Bank | | 5.00 | % | | 9.29 |
| | $ | 4.2 |
| |
Common equity tier 1 risk-based capital ratio | Consolidated | | N/A |
| | 9.56 |
| | N/A |
| |
CET 1 risk-based capital ratio | | Consolidated | 4.50 | % | 6.375 | % | N/A |
| | 9.65 | % |
| Bank | | 6.50 |
| | 10.42 |
| | 3.1 |
| Bank | 4.50 |
| 6.375 |
| 6.50 | % | | 10.19 |
|
Tier 1 risk-based capital ratio | Consolidated | | 6.00 |
| | 10.92 |
| | 2.7 |
| Consolidated | 6.00 |
| 7.875 |
| 6.00 |
| | 11.06 |
|
| Bank | | 8.00 |
| | 11.61 |
| | 1.3 |
| Bank | 6.00 |
| 7.875 |
| 8.00 |
| | 11.21 |
|
Total risk-based capital ratio | Consolidated | | 10.00 |
| | 13.05 |
| | 2.4 |
| Consolidated | 8.00 |
| 9.875 |
| 10.00 |
| | 12.98 |
|
| Bank | | 10.00 |
| | 13.83 |
| | 3.0 |
| Bank | 8.00 |
| 9.875 |
| 10.00 |
| | 13.42 |
|
Tier 1 leverage ratio | | Consolidated | 4.00 |
| N/A |
| N/A |
| | 9.10 |
|
| | Bank | 4.00 |
| N/A |
| 5.00 |
| | 9.23 |
|
| |
(1) | Amount greater thanReflects the capital conservation buffer of 1.875% applicable during 2018. Huntington and the Bank already meet the Capital Conservation Buffer at the fully phased-in level of 2.5%. |
| |
(2) | Reflects the well-capitalized minimum percentage.standard applicable to Huntington under Federal Reserve Regulation Y and the well-capitalized standard applicable to the Bank. |
Huntington has the ability to provide additional capital to the Bank to maintain the Bank’s risk-based capital ratios at levels which would be considered well-capitalized.
As of December 31, 2018, Huntington’s and the Bank’s regulatory capital ratios were above the well-capitalized standards and met the then-applicable Capital Conservation Buffer and the Capital Conservation Buffer on a fully phased-in basis. Based on current estimates, we believe that Huntington and the Bank will continue to exceed all applicable well-capitalized regulatory capital requirements and the Capital Conservation Buffer, on a fully phased-in basis.
Liquidity Requirements
BHCs with total consolidated assets of $250 billion or more are subject to a minimum LCR, and BHCs with at least $100 billion but less than $250 billion in total consolidated assets, including Huntington, are currently subject to a less stringent modified version of the LCR. The LCR requires Huntington to meet certain liquidity measures by holding an adequate amount of unencumbered high-quality liquid assets, such as Treasury securities and other sovereign debt, to cover its projected net cash outflows over a 30 calendar-day stress scenario window. Because the LCR assigns less severe outflow assumptions to certain types of customer deposits, banks’ demand for and the cost of these deposits may increase. Additionally, the LCR has increased the demand for direct U.S. government and U.S. government-guaranteed debt that, while high quality, generally carry lower yields than other securities BHCs hold in their investment portfolios. Under the Proposed Capital and Liquidity Tailoring Rule, Huntington, as a Category IV banking organization, would be exempt from the LCR.
In addition, in May 2016, the federal bank regulatory agencies proposed a Net Stable Funding Ratio rule, which would require large financial firms to meet certain net stable funding measures by funding themselves with adequate amounts of medium- and long-term funding. As initially proposed, Huntington would be subject to a less stringent modified version of the Net Stable Funding Ratio. Under the Proposed Capital and Liquidity Tailoring Rule, however, Huntington, as a Category IV banking organization, would be exempt from the proposed Net Stable Funding Ratio.
We cannot predict whether the final form of the Proposed Capital and Liquidity Tailoring Rule will exempt Huntington from the LCR and the proposed Net Stable Funding Ratio.
Enhanced Prudential Standardsand Early Remediation Requirements
Under the Dodd-Frank Act, as modified by the Economic Growth Act, BHCs with consolidated assets of more than $50$100 billion, such as Huntington, are currently subject to certain enhanced prudential standards and early remediation requirements.standards. As a result, Huntington is subject to more stringent standards, and requirements, including liquidity and capital requirements, leverage limits, stress testing, resolution planning, and risk management standards, than those applicable to smaller institutions. With regardCertain larger banking organizations are subject to resiliency, we are expectedadditional enhanced prudential standards.
A rule to ensureimplement one other enhanced prudential standard—early remediation requirements—is still under consideration by the Federal Reserve. In June 2018, the Federal Reserve adopted a final rule that established single counterparty credit limits. The new single counterparty credit limits do not apply to BHCs like Huntington that do not have at least $250 billion of total consolidated assets.
As discussed in the Regulatory Environment section above, following the 18-month period after the enactment of the Economic Growth Act, BHCs with consolidated assets between $100 billion and $250 billion, such as Huntington, will be exempt from all enhanced prudential standards that the Federal Reserve has not made applicable to them, with the exception of risk committee requirements. Under the Proposed EPS Tailoring Rule, Huntington, as a Category IV banking organization, would be subject to the least restrictive enhanced prudential standards applicable to firms with $100 billion or more in total consolidated organizationassets. As compared to enhanced prudential standards currently applicable to Huntington, under the Proposed EPS Tailoring Rule, Huntington would no longer be subject to company-run stress testing requirements and its core business lines can survive under a broad range ofwould be subject to less frequent supervisory stress tests, less frequent internal or external stresses. This requires financial resilience by maintaining sufficient capitalliquidity stress tests, and reduced liquidity and operational resilience by maintaining effective corporate governance, risk management and recovery planning. With respectrequirements. We cannot predict whether the Proposed EPS Tailoring Rule will be adopted as proposed or whether any changes will be made to loweringit that would affect the probability of failure, we are expectedenhanced prudential standards applicable to ensureHuntington. In addition, future rulemakings to implement the sustainability of our critical operations and banking offices under a broad range of internal or external stresses.Economic Growth Act may further change the enhanced prudential standards applicable to Huntington.
Comprehensive Capital Analysis and ReviewPlanning
Huntington is required to submit a capital plan annually to the Federal Reserve for supervisory review in connection with its annual CCAR process. Huntington is required to include within its capital plan an assessment of the expected uses and sources of capital and a description of all planned capital actions over the nine-quarter planning horizon, a detailed description of the process for assessing capital adequacy, its capital policy, and a discussion of any expected changes to its business plan that are likely to have a material impact on its capital adequacy. The planning horizon for the most recently completed capital planning and stress testing cycle encompassed the nine-quarter period from the first quarter of 2016 through the first quarter of 2018.
Currently, the Federal Reserve may object to a BHC’s capital plan based on either quantitative or qualitative grounds. If the Federal Reserve objects to a BHC’s capital plan, the BHC may not make any capital distribution unless the Federal Reserve indicates in writing that it does not object to the distribution. Under CCAR, the Federal Reserve makes a qualitative assessment of capital adequacy on a forward-looking basis and reviews the strength of a BHC’s capital adequacy process. The Federal Reserve also makes a quantitative assessment of capital based on supervisory-run stress tests that assess the ability to maintain capital levels above certain minimum ratios, after taking all capital actions included in a BHC’s capital plan, under baseline and stressful conditions throughout a nine-quarter planning horizon. As part of CCAR, the Federal Reserve evaluates whether BHCs have sufficient capital to continue operations throughout times of economic and financial market stress and whether they have robust, forward-looking capital planning processes that account for their unique risks.
The Federal Reserve expects BHCs subject to CCAR, such as Huntington, to have sufficient capital to withstand a highly adverse operating environment and to be able to continue operations, maintain ready access to funding, meet obligations to creditors and counterparties, and serve as credit intermediaries. In addition, the Federal Reserve evaluates the planned capital actions of these BHCs, including planned capital distributions such as dividend payments or stock repurchases. This involves a quantitative assessment of capital based on supervisory-run stress tests that assess the ability to maintain capital levels above certain minimum ratios, after taking all capital actions included in a BHC’s capital plan, under baseline and stressful conditions throughout the nine-quarter planning horizon. As part of CCAR, the Federal Reserve evaluates whether BHCs have sufficient capital to continue operations throughout times of economic and financial market stress and whether they have robust, forward-looking capital planning processes that account for their unique risks. We generally may pay dividends and repurchase stock only in accordance with a capital plan that has been reviewed by the Federal Reserve and as to which the Federal Reserve has not objected. In addition, we are generally prohibited from making a capital distribution unless, after giving effect to the distribution, we will meet all minimum regulatory capital ratios.
On September 30, 2016,Under revised CCAR rules that became effective on March 6, 2017, the Federal Reserve issued a proposed ruleis no longer allowed to amendobject to the capital plan and stress test rules for large and non-complex BHCs, such as Huntington, to provide, among other things, that beginning with the 2017 CCAR cycle, such BHCs would continue to submit a capital plan for quantitative assessment but would no longer be subject to a non-objection from a qualitative aspect. The Federal Reserve is proposing to evaluate the strength of a large and non-complex company’sBHC, such as Huntington, on a qualitative, as opposed to quantitative, basis. Instead, the Federal Reserve may evaluate the strength of Huntington’s qualitative capital planning process through the regular supervisory process and targeted horizontal reviews of particular aspects of capital planning. A finalIn April 2018, the Federal Reserve issued a proposal to integrate its annual capital planning and stress testing requirements with certain ongoing regulatory capital requirements, which would make changes to capital planning and stress testing processes for BHCs subject to the proposed rule, implementingincluding Huntington. Please refer to the changes described above was issued on February 3, 2017.Proposed Stress Buffer Requirements section below for further details. In addition, the Federal Reserve has stated that, as part of a future rulemaking to implement the Economic Growth Act, it may further streamline the CCAR rules and other capital planning requirements applicable to certain BHCs with consolidated assets between $100 billion and $250 billion, including Huntington.
Huntington submitted its 20162018 capital plan to the Federal Reserve in April 2016.2018. The Federal Reserve did not object to Huntington’s 20162018 capital plan. Huntington is required and intends to submit toOn February 5, 2019, the Federal Reserve itsannounced that certain less-complex U.S. BHCs with less than $250 billion in total consolidated assets, including Huntington, would not be subject to supervisory stress testing,
company-run stress testing, or the CCAR process for the 2019 capital plan for 2017and stress test cycle. Those BHCs, including Huntington, remain subject to the requirement to develop and maintain a capital plan, and the board of directors (or designated subcommittee thereof) at those BHCs remain subject to the requirement to review and approve the BHC’s capital plan. If Huntington chooses to submit a capital plan to the FRB in the 2019 capital plan cycle, it will be subject to a supervisory stress test by April 5, 2017.the FRB. There can be no assurance that the Federal Reserve will respond favorably to Huntington’s 2017future capital plan,plans, capital actions, or stress test results.
Stress Testing
The Dodd-Frank Act requires a semi-annualHuntington is subject to annual supervisory stress test of BHCs, including Huntington, with $50 billion or more of total consolidated assets. This Dodd-Frank Acttests. These supervisory stress testing is atests are forward-looking quantitative evaluationevaluations of the impact of stressful economic and financial market conditions on BHCHuntington’s capital. The Dodd-Frank ActHuntington also requires BHCs tomust conduct semi-annual company-run annual and semi-annual stress tests, the results of which are filed with the Federal Reserve and publicly disclosed. A BHC’s ability to make capital distributions is limited to the extent the BHC’s actual capital levels are less than the amount indicated in its capital plan submission.
The Dodd-Frank Act also requires a national bank, such as the Bank, with total consolidated assets of more than $10 billion to conduct annual company-run stress tests. The objective of the annual company-run stress test is to ensure that covered institutions have robust, forward-looking capital planning processes that account for their unique risks and to help ensure that covered institutions have sufficient capital to continue operations throughout times of economic and financial stress. A covered institutionThe results of these annual stress tests must be publicly disclosed.
As noted above, Huntington is requirednot subject to publishsupervisory stress testing or company-run stress testing for the 2019 stress test cycle.
Under the Proposed EPS Tailoring Rule, Huntington, as a summaryCategory IV banking organization, would no longer be subject to company-run stress testing requirements and would be subject to supervisory stress tests every two years, instead of annually. In addition, on December 18, 2018, the OCC proposed a rule to implement the Economic Growth Act that would change the minimum threshold at which company-run stress test requirements apply for national banks to $250 billion in total consolidated assets. Under this proposed rule, the Bank would no longer be subject to company-run stress testing requirements. We cannot predict whether the Proposed EPS Tailoring Rule or the OCC’s proposed rule will be adopted as proposed or whether any changes will be made to either rule that would affect the stress testing requirements applicable to Huntington or the Bank.
Proposed Stress Buffer Requirements
On April 10, 2018, the Federal Reserve issued a proposal to integrate its annual capital planning and stress testing requirements with certain ongoing regulatory capital requirements. The proposal, which would apply to certain BHCs, including Huntington, would introduce a stress capital buffer and a stress leverage buffer, or stress buffer requirements, and related changes to the capital planning and stress testing processes.
For risk-based capital requirements, the stress capital buffer would replace the existing Capital Conservation Buffer, which is 2.5% as of January 1, 2019. The stress capital buffer would equal the greater of (i) the maximum decline in our CET1 Risk-Based Capital Ratio under the severely adverse scenario over the supervisory stress test measurement period, plus the sum of the ratios of the dollar amount of our planned common stock dividends to our projected risk-weighted assets for each of the fourth through seventh quarters of the supervisory stress test projection period, and (ii) 2.5%.
Like the stress capital buffer, the stress leverage buffer would be calculated based on the results of its annualour most recent supervisory stress tests. The stress leverage buffer would equal the maximum decline in our Tier 1 Leverage Ratio under the severely adverse scenario, plus the sum of the ratios of the dollar amount of our planned common stock dividends to our projected leverage ratio denominator for each of the fourth through seventh quarters of the supervisory stress test projection period. No floor would be established for the stress leverage buffer, which would apply in addition to the current minimum Tier 1 Leverage Ratio of 4%.
Liquidity Coverage Ratio
On September 3, 2014, the U.S. banking regulators approved a final rulewhich became effective on January 1, 2015The proposal would make related changes to implement a minimum LCR requirementcapital planning and stress testing processes for banking organizations with total consolidated assets of $250 billion or more, and a less stringent modified LCR requirement to depository institution holding companies, such as Huntington, below the threshold but with total consolidated assets of $50 billion or more. The LCR requires covered banking organizations to maintain HQLA equal to projected stressed cash outflows over a 30 calendar-day stress scenario. Huntington is covered by the “modified LCR” requirement and thereforeBHCs subject to the phase-instress buffer requirements. In particular, the proposal would limit projected capital actions to planned common stock dividends in the fourth through seventh quarters of the rule beginning January 2016 at 90%supervisory stress test projection period and January 2017 at 100%. Huntington is required to calculatewould assume that BHCs maintain a constant level of assets and risk-weighted assets throughout the LCR monthly. The LCR assigns less severe outflow assumptions to certain types of customer deposits, which should increasesupervisory stress test projection period.
In November 2018, the demand,Federal Reserve’s Vice Chairman for Supervision stated that the Federal Reserve does not expect that the proposed stress buffer requirements will go into effect before 2020, and perhaps the cost, among banks for these deposits. Additionally, the HQLA requirements has increased the demand for direct U.S. government and U.S. government-guaranteed debt that, while high quality, generally carry lower yields thanthe Federal Reserve expects to finalize certain elements of those requirements as proposed, other securities that banks hold in their investment portfolios.elements of the proposal will be re-proposed and again subject to public comment.
Restrictions on Dividends
At the holding company level, Huntington relies on dividends, distributionsis a legal entity separate and other paymentsdistinct from its banking and non-banking subsidiaries. Since our consolidated net income consists largely of net income of Huntington’s subsidiaries, particularlyour ability to pay dividends and repurchase shares depends upon our receipt of dividends from these subsidiaries. Under federal law, there are various limitations on the extent to which the Bank can declare and pay dividends to fundHuntington, including those related to regulatory capital requirements, general regulatory oversight to prevent unsafe or unsound practices, and federal banking law requirements concerning the payment of dividends paid to its shareholders, as well as to satisfy its debtout
of net profits, surplus, and other obligations.available earnings. Certain federal and state statutes, regulations and contractual restrictions also may limit the ability of our subsidiaries, including the Bank to pay dividends to us.Huntington. No assurances can be given that the Bank will, in any circumstances, pay dividends to Huntington.
Huntington’s ability to declare and pay dividends to our shareholders is similarly limited by federal banking law and Federal Reserve regulations and policy. As discussed in the Capital Planning section above, a BHC may pay dividends and repurchase stock only in accordance with a capital plan that has been reviewed by the Federal Reserve and as to which the Federal Reserve has not objected.
Huntington and the Bank must maintain the applicable CET1 Capital Conservation Buffer to avoid becoming subject to restrictions on capital distributions, including dividends. As of January 1, 2019, the fully phased in Capital Conservation Buffer is 2.5%. For more information on the Capital Conservation Buffer and the stress buffer requirements that the Federal Reserve has proposed that would replace the Capital Conservation Buffer for BHCs, see the Regulatory Capital Requirements section and Proposed Stress Buffer Requirements sections above, respectively.
Federal Reserve policy provides that a BHC should not pay dividends unless (1) the BHC’s net income over the last four quarters (net of dividends paid) is sufficient to fully fund the dividends, (2) the prospective rate of earnings retention appears consistent with the capital needs, asset quality, and overall financial condition of the BHC and its subsidiaries, and (3) the BHC will continue to meet minimum required capital adequacy ratios. Accordingly, a BHC should not pay cash dividends that can only be funded in ways that weaken the BHC’s financial health, such as by borrowing. The OCC has authoritypolicy also provides that a BHC should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in a material adverse change to the BHC’s capital structure. BHCs also are required to consult with the Federal Reserve before increasing dividends or redeeming or repurchasing capital instruments. Additionally, the Federal Reserve could prohibit or limit the payment of dividends by the Banka BHC if in the OCC’s view,it determines that payment of athe dividend would constitute an unsafe or unsound practice in light of the financial condition of the Bank.
In addition, Huntington’s ability to pay dividends or return capital to its shareholders, whether through an increase in common stock dividends or through a share repurchase program, is subject to the oversight of the Federal Reserve. The dividend and share repurchase policies of certain BHCs, such as Huntington, are reviewed by the Federal Reserve through the CCAR process, based on capital plans and stress tests submitted by the BHC, and are assessed against, among other things, the BHC’s ability to meet and exceed minimum regulatory capital ratios under stressed scenarios, its expected sources and uses of capital over the planning horizon under baseline and stressed scenarios, and any potential impact of changes to its business plan and activities on its capital adequacy and liquidity. The Federal Reserve’s capital planning rule includes a limitation on capital distributions to the extent that actual capital issuances are less than the amount indicated in the capital plan submission.
practice.
Volcker Rule
The Dodd-Frank Act introduced restrictions to prohibit or restrictUnder the ability of banking entitiesVolcker Rule, we are prohibited from (1) engaging in short-term proprietary trading for our own account and sponsoring of or investing in private equity and hedge funds (the “Volcker Rule”). The final regulations implementing the Volcker Rule were adopted by the regulatory agencies on December 10, 2013.
The Volcker Rule and final regulations contain a number of exceptions to the prohibition on proprietary trading and sponsoring or acquiring any ownership interest in private equity or hedge funds (“covered funds”). The Volcker Rule permits banking entities to engage in(2) having certain activities such as underwriting, market-making and risk-mitigation hedging, and exempts from the definition of a covered fund certain entities, such as wholly-owned subsidiaries, joint ventures, and acquisitions vehicles, as well as SEC registered investment companies. In addition, the Volcker Rule limits certain types of transactions between a banking entity and any covered fund forwhich it serves as investment manager or investment advisor.
The final rules implementing the Volcker Rule extended the conformance period generally until July 21, 2015. On December 18, 2014, the Federal Reserve announced that it would give banking entities an additional one year, until July 21, 2016, to conform investments in and relationships with covered funds that were in place prior to December 31, 2013 (“legacy covered funds”). On July 7, 2016, the Federal Reserve granted banking entities an additional one-year extension of the conformance period until July 21, 2017, to conform ownership interests in and relationships with hedge funds or private equity funds (covered funds). The Volcker Rule regulations contain exemptions for market-making, hedging, underwriting, trading in U.S. government and agency obligations, and also permit certain ownership interests in certain types of covered funds to legacybe retained. They also permit the offering and sponsoring of covered funds under certain conditions. The Volcker Rule regulations impose significant compliance and reporting obligations on banking entities, such as us. We have put in place the compliance programs required by the Volcker Rule and have either divested or received extensions for any holdings in illiquid covered funds. In February 2017, the Federal Reserve approved our application for an extended transition period with respect to certain legacy illiquid fund investments.
On January 14, 2014, theThe five federal agencies implementing the Volcker Rule regulations have approved an interim final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities from the investment prohibitions of the Volcker Rule. Under the interim final rule, the agencies permit the retention of an interest in or sponsorship of covered funds by banking entities if certain qualifications are met. In addition, the agencies released a non-exclusive list of issuers that meet the requirements of the interim final rule. AtAs of December 31, 2016,2018, we had no investments in seven different pools of trust preferred securities. Six
In May 2018, the five federal agencies with rulemaking authority with respect to the Volcker Rule released a proposal to revise the Volcker Rule. The proposal would tailor the Volcker Rule’s compliance requirements to the amount of our pools are includeda firm’s trading activity, revise the definition of trading account, clarify certain key provisions in the list of non-exclusive issuers. We have analyzed the other pool that was not included on the list and believe that we will continue to be able to own this investment under the final Volcker Rule, regulations as well.and modify the information companies are required to provide the federal agencies. If adopted, the proposed changes to the definition of trading account would likely expand the scope of investing and trading activities subject to the Volcker Rule’s restrictions. We are currently evaluating the potential impact that this proposed rule would have on our investing and trading activities.
Recovery and Resolution Planning
As a BHC with assets of $50 billion or more, Huntington is currently required to submit annually to the Federal Reserve and the FDIC a resolution plan for the orderly resolution of Huntington and its significant legal entities under the U.S. Bankruptcy Code or other applicable insolvency laws in a rapid and orderly fashion in the event of future material financial distress or failure (a “resolution plan”).failure. If the Federal Reserve and the FDIC jointly determine that the resolution plan is not credible and the deficiencies are not cured in a timely manner, they may jointly impose on us more stringent capital, leverage, or liquidity requirements, or restrictions on our growth, activities, or operations. In addition,If we were to fail to address the FDIC requires each insured depository institution with $50 billion or moredeficiencies in assets, such the Bank, periodically to file aour resolution plan with the FDIC.
In July 2016,when required, we were informed that the FDIC extended the date for submission of the Bank’s 2016could eventually be required to divest certain assets or operations. Huntington submitted its resolution plan to December 31, 2017. In August 2016, we were informed that the Federal Reserve and the FDIC also hadon December 21, 2017. The Federal Reserve and FDIC have extended the datefiling deadline for certain BHCs, including Huntington, and as a result Huntington’s next resolution plan is not due to the submissionFederal Reserve and FDIC until December 31, 2019. In addition, the Bank is required to periodically file a separate resolution plan with the FDIC. The public versions of the resolution plans previously submitted by Huntington and the Bank are available on the FDIC’s website and, in the case of Huntington’s 2016resolution plans, also on the Federal Reserve’s website.
The Economic Growth Act raised the threshold for BHC resolution plans to $250 billion in consolidated assets, but BHCs with consolidated assets between $100 billion and $250 billion, including Huntington, continue to be subject to this requirement
for 18 months after the Economic Growth Act’s date of enactment, and the Federal Reserve and FDIC may require such BHCs to remain subject to these requirements. The Federal Reserve and the FDIC have stated that they will propose a rule to amend the applicability of resolution planning requirements for BHCs with between $100 billion and $250 billion in consolidated assets. We cannot predict whether and to what extent Huntington will continue to be subject to the resolution plan requirements as a result of any final rule resulting from this proposal.
The Economic Growth Act did not change the FDIC’s rules that require the Bank to December 31, 2017. In each case, we were informedperiodically file a separate resolution plan. The FDIC’s Chairman, however, has indicated that the submissionFDIC intends to release an advanced notice of aproposed rulemaking with respect to the FDIC’s bank resolution plan in 2017 will satisfyrequirements meant to better tailor bank resolution plans to a firm’s size, complexity, and risk profile. Until the 2016FDIC’s revisions to its bank resolution plan requirement.requirement are finalized, no bank resolution plans will be required to be filed.
On September 29, 2016, the OCC published final guidelines establishing standards for recovery planning by insured national bankswith average total consolidated assets of $50 billion or more, including the Bank. The final guidelines provide, among other things, that a covered bank shouldBank had previously been required to develop and maintain a recovery plan that is appropriate for its individual size, risk profile, activities, and complexity, including the complexity of its organizational and legal entity structure.structure under OCC examiners will assess the appropriateness and adequacy of a covered bank’s ongoingguidelines that establish enforceable standards for recovery planning processfor insured national banks. On December 27, 2018, the OCC finalized an amendment to its guidelines that, among other things, raised the threshold at which banks become subject to the OCC’s recovery planning guidelines to $250 billion in total consolidated assets. This increased threshold became effective on January 28, 2019, and as part ofa result, the agency’s regular supervisory activities. Our compliance dateBank is within 18 months from January 1, 2017.no longer subject to the OCC’s recovery planning guidelines.
Source of Strength
Huntington is required to serve as a source of financial and managerial strength to the Bank and, under appropriate conditions, to commit resources to support the Bank. This support may be required by the Federal Reserve at times when we might otherwise determine not to provide it or when doing so is not otherwise in the interests of Huntington or our stockholdersshareholders or creditors. The Federal Reserve may require a BHC to make capital injections into a troubled subsidiary bank and may charge the BHC with engaging in unsafe and unsound practices if the BHC fails to commit resources to such a subsidiary bank or if it undertakes actions that the Federal Reserve believes might jeopardize the BHC’s ability to commit resources to such subsidiary bank.
Prompt Corrective Action
FDICIA requiresUnder these requirements, Huntington may in the future be required to provide financial assistance to the Bank should it experience financial distress. Capital loans by Huntington to the Bank would be subordinate in right of payment to deposits and certain other debts of the Bank. In the event of Huntington’s bankruptcy, any commitment by Huntington to a federal banking agenciesbank regulatory agency to take “prompt corrective action” against banks that do not meet minimum capital requirements. Under this regime, the FDICIA imposes progressively more restrictive constraints on a bank’s operations, management and capital distributions, depending onmaintain the capital category in which an institution is classified. For instance, onlyof the Bank would be assumed by the bankruptcy trustee and entitled to a well-capitalized bank may accept brokered deposits without prior regulatory approval and an adequately capitalized bank may only do so with such prior approval.priority of payment.
Under FDICIA, five capital levelsFDIC as Receiver or categories are established: well capitalized; adequately capitalized; undercapitalized; significantly undercapitalized; and critically undercapitalized. These capital categories are determined solely for purposesConservator of applying the prompt corrective action provisions, and such capital categories may not constitute an accurate representation of our overall financial condition or prospects. An institution may be downgraded to, or deemed to be in, a capital category that is lower than is indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, as the capital category of an institution declines. Failure to meet the capital requirements could also require a depository institution to raise capital. Ultimately, critically undercapitalized institutions are subject to the appointment of a receiver or conservator.Huntington
Upon the insolvency of an insured depository institution, such as the Bank, the FDIC may be appointed as the conservator or receiver of the institution. TheUnder the Orderly Liquidation Authority, upon the insolvency of a BHC, such as Huntington, the FDIC hasmay be appointed as conservator or receiver of the BHC, if certain findings are made by the FDIC, the Federal Reserve, and the Secretary of the Treasury, in consultation with the President. Acting as a conservator or receiver, the FDIC would have broad powers to transfer any assets andor liabilities of the institution without the approval of the institution’s creditors.
Depositor Preference
The FDIA provides that, in the event of the liquidation or other resolution of an insured depository institution, including the Bank, the claims of depositors of the institution (including the claims of the FDIC as subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver would have priority over other general unsecured claims against the institution. If the Bank were to fail, insured and uninsured depositors, along with the FDIC, would have priority in payment ahead of unsecured, non-deposit creditors, including Huntington, with respect to any extensions of credit they have made to such insured depository institution.
Transactions between a Bank and its Affiliates
Federal banking laws and regulations impose qualitative standards and quantitative limitations upon certain transactions between a bank and its affiliates, including between a bank and its holding company and companies that the BHC may be deemed to control for these purposes. Transactions covered by these provisions must be on arm’s-length terms and cannot exceed certain amounts which are determined with reference to the bank’s regulatory capital. Moreover, if the transaction is a loan or other extension of credit, it must be secured by collateral in an amount and quality expressly prescribed by statute, and if the affiliate is unable to pledge sufficient collateral, the BHC may be required to provide it. The Dodd-Frank Act expanded the coverage and scope of these regulations, including by applying them to the credit exposure arising under derivative transactions, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions. Federal banking laws also place similar restrictions on loans and other extensions of credit by FDIC-insured banks, such as the Bank, and their subsidiaries to their directors, executive officers, and principal shareholders.
Lending Standards and Guidance
The federal bank regulatory agencies have adopted uniform regulations prescribing standards for extensions of credit that are secured by liens or interests in real estate or made for the purpose of financing permanent improvements to real estate. Under these regulations, all insured depository institutions, such as the Bank, must adopt and maintain written policies establishing appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards, prudent underwriting standards (including loan-to-value limits) that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements. The real estate lending policies must reflect consideration of the federal bank regulatory agencies’ Interagency Guidelines for Real Estate Lending Policies.
Heightened Governance and Risk Management Standards
The OCC has published final guidelines to update expectations for the governance and risk management practices of certain large financial institutions, including national banks with $50 billion or more in average total consolidated assets, such as the Bank. The guidelines which became effective on November 10, 2014, require covered banksinstitutions to establish and adhere to a written governance framework in order to manage and control their risk-taking activities. In addition, the guidelines provide standards for the institutions’ boards of directors to oversee the risk governance framework. Given its size and the phased implementation schedule, the Bank became subject to these heightened standards effective May 2016. As discussed in Item 1A:the Risk Factors,Management and Capital section of the MDA, the Bank currently has a written governance framework and associated controls.
Anti-Money Laundering
The Bank Secrecy Act and the Patriot Act contain anti-money laundering and financial transparency provisions intended to detect and prevent the use of the U.S. financial system for money laundering and terrorist financing activities. The Bank Secrecy Act, as amended by the Patriot Act, contains anti-money launderingrequires depository institutions and financial transparency lawstheir holding companies to undertake activities including maintaining an AML program, verifying the identity of clients, monitoring for and mandated the implementation of various regulations applicablereporting suspicious transactions, reporting on cash transactions exceeding specified thresholds, and responding to all financial institutions, including standardsrequests for verifying client identification at account opening,information by regulatory authorities and obligations to monitor client transactions and report suspicious activities.
The Patriot Act is intended to strengthen the ability of U.S. law enforcement agenciesagencies. The Bank is subject to the Bank Secrecy Act and, intelligence communitiestherefore, is required to cooperate inprovide its employees with AML training, designate an AML compliance officer, and undergo an annual, independent audit to assess the prevention, detection and prosecutioneffectiveness of international money laundering and the financing of terrorism.its AML program. The Patriot Act contains anti-money laundering measures requiring insured depository institutions, broker-dealers, and certain other financial institutions to haveBank has implemented policies, procedures, and internal controls to detect, prevent, and report money laundering and terrorist financing. Failurethat are designed to comply with these AML requirements. In May 2016, FinCEN, which is a unit of the Treasury Department that drafts regulations implementing the Patriot Act and other AML legislation, issued final rules governing enhanced customer due diligence. The rules impose several new obligations on covered financial institutions with respect to their “legal entity customers,” including corporations, limited liability companies, and other similar entities. For each such customer that opens an account (including an existing customer opening a new account), the covered financial institution must identify and verify the customer’s “beneficial owners,” who are specifically defined in the rules. The rules contain an exemption for insurance premium financing transactions, but cash refunds issued in connection with such transactions are not exempt, thus requiring verification of beneficial ownership before cash refunds may result in fines, penalties, lawsuits, regulatory sanctions, reputation damage, or restrictionsbe issued to borrowers. Bank regulators are focusing their examinations on business. FederalAML compliance, and we will continue to monitor and augment, where necessary, our AML compliance programs. The federal banking regulatorsagencies are required, when reviewing bank holding companyand BHC acquisition and bankor merger applications, to take into account the effectiveness of the anti-money launderingAML activities of the applicants.applicant.
OFAC Regulation
OFAC is responsible for administering economic sanctions that affect transactions with designated foreign countries, nationals, and others, as defined by various Executive Orders and in various legislation. OFAC-administered sanctions take many different forms. For example, sanctions may include: (1) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on U.S. persons engaging in financial transactions relating to, making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (2) a blocking of assets in which the government or “specially designated nationals” of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction, including property in the possession or control of U.S. persons. OFAC also publishes lists of persons, organizations, and countries suspected of aiding, harboring, or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. Blocked assets, for example property and bank deposits, cannot be paid out, withdrawn, set off, or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.
Data Privacy
Federal and state law contains extensive consumer privacy protection provisions, including substantial consumerprovisions. The GLBA requires financial institutions to periodically disclose their privacy protections provided under the Gramm-Leach-Bliley Act of 1999. Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship and generally annually thereafter, the institution’s policies and procedures regarding the handling and safeguarding of customers’ nonpublic personal information. These provisions also provide that, except for certain limited exceptions, an institution may not provide such nonpublic personal informationpractices relating to unaffiliated third parties unless the institution discloses to the customer thatsharing such information may be so provided and the customer is given the opportunityenables retail customers to opt out of such disclosure.our ability to share information with unaffiliated third parties under certain circumstances. Other federal and state laws and regulations impact our ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact customers with marketing offers. The GLBA also requires financial institutions to implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer records and information. These security and privacy policies and procedures for the protection of
personal and confidential information are in effect across all businesses and geographic locations as applicable. Federal law also makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means.
Data privacy and data protection are areas of increasing state legislative focus. For example, in June of 2018, the Governor of California signed into law the CCPA. The CCPA, which becomes effective on January 1, 2020, applies to for-profit businesses that conduct business in California and meet certain revenue or data collection thresholds. The CCPA will give consumers the right to request disclosure of information collected about them, and whether that information has been sold or shared with others, the right to request deletion of personal information (subject to certain exceptions), the right to opt out of the sale of the consumer’s personal information, and the right not to be discriminated against for exercising these rights. The CCPA contains several exemptions, including an exemption applicable to information that is collected, processed, sold, or disclosed pursuant to the GLBA. The California Attorney General has not yet proposed or adopted regulations implementing the CCPA, and the California State Legislature has amended the Act since its passage. In California the CCPA may be interpreted or applied in a manner inconsistent with our understanding or similar laws may be adopted by other states where we operate. We are continuing to assess the impact of the CCPA on our business. The federal government may also pass data privacy or data protection legislation.
Like other lenders, the Bank and other of our subsidiaries use credit bureau data in their underwriting activities. Use of such data is regulated under the FCRA, and the FCRA also regulates reporting information to credit bureaus, prescreening individuals for credit offers, sharing of information between affiliates, and using affiliate data for marketing purposes. Similar state laws may impose additional requirements on us and our subsidiaries.
FDIC Insurance
The DIF provides insurance coverage for certain deposits, whichup to a standard maximum deposit insurance amount of $250,000 per depositor and is funded through assessments on banks.insured depository institutions, based on the risk each institution poses to the DIF. The Bank accepts customer deposits that are insured by the DIF. As a DIF member, the Bankand, therefore, must pay insurance premiums. The FDIC may take action to increase the Bank’s insurance premiums based on various factors, including the FDIC’s assessment of its risk profile. The Dodd-Frank Act required the FDIC to change the deposit insurance assessment base from deposits to average consolidated total assets minus average tangible equity. In March 2016, the FDIC issued a final rule to increase the DIF from 1.15% to the statutorily required minimum level of 1.35%. Under the Dodd-Frank Act,Until September 30, 2018, banks with $10 billion or more in total assets, such as the Bank, are responsible for funding this increase.were required to pay an assessment surcharge. This requirement ended effective September 30, 2018, as a result of the FDIC’s reserve ratio exceeding 1.35%.
On November 15, 2016,The FDIC issued a rule that requires large insured depository institutions, including the FDIC adopted a final ruleBank, to enhance their deposit account recordkeeping and related information technology system capabilities to facilitate prompt payment of FDIC-insuredinsured deposits when large insured depository institutions (thoseif such an institution were to fail. We must comply with more than two million deposit accounts) fail. The final rule, which is expected to become effective onthese new requirements by April 1, 2017, requires us to configure our information technology system to be capable of calculating the insured and uninsured amount in each deposit account by ownership right and capacity, which would be used by the FDIC to make deposit insurance determinations in the event of our failure, and maintain complete and accurate information needed by the FDIC to determine deposit insurance coverage with respect to each deposit account, except as otherwise provided. We will have three years after the effective date for implementation.2020.
Compensation
Our compensation practices are subject to oversight by the Federal Reserve and, with respect to some of our subsidiaries and employees, by other financial regulatory bodies. The scope and content of compensation regulation in the financial industry are continuing to develop, and we expect that these regulations and resulting market practices will continue to evolve over a number of years.
The federal bank regulatory agencies have providedissued joint guidance on executive compensation designed to ensure that the incentive compensation arrangements atpolicies of banking organizations, take into accountsuch as Huntington and the Bank, do not encourage imprudent risk taking and are consistent with safe and sound practices. The guidance provides that supervisory findings with respect to incentive compensation will be incorporated, as appropriate, into the organization’s supervisory ratings, which can affect its ability to make acquisitions or perform other actions. The guidance also provides that enforcement actions may be taken against a banking organization if its incentive compensation arrangements or related risk management, control or governance processes pose a risk to the organization’s safety and soundness.
In 2016 the federal banking regulatory agencies, including the Federal Reserve, the OCC and the SEC, jointly proposed a rule to implement Section 956soundness of the organization. In addition, the Dodd-Frank Act. Section 956 generallyAct requires the federal bank regulatory agencies and the SEC to jointly issue regulations or guidelines: (1) prohibitingguidelines requiring covered financial institutions, including Huntington and the Bank, to prohibit incentive-based payment arrangements that the agencies determine encourage inappropriate risks by certain financial institutions by providing compensation that is excessive compensation or that could lead to material financial loss;loss to the institution. A proposed rule was issued in 2016. Also pursuant to the Dodd-Frank Act, in 2015, the SEC proposed rules that would direct stock exchanges to require listed companies to implement clawback policies to recover incentive-based compensation from current or former executive officers in the event of certain financial restatements and (2) requiring those financial institutionswould also require companies to disclose information concerning incentive-based compensation arrangementstheir clawback policies and their actions under those policies. Huntington continues to evaluate the appropriate federal regulator.proposed rules, both of which are subject to further rulemaking procedures.
Cyber SecurityCybersecurity
The CISA which became effective on December 18, 2015, is intended to improve cyber securitycybersecurity in the United States by enhanced sharing of information about security threats among the U.S. government and private sector entities, including financial institutions. The CISA also authorizes companies to monitor their own systems notwithstanding any other provision of law and allows companies to carry out defensive measures on their own systems from cyber-attacks. The law includes liability protections for companies that share cyber threat information with third parties so long as such sharing activity is conducted in accordance with CISA.
Enhanced Cyber Risk Management Standards
On November 22,In October 2016, the federal bankingbank regulatory agencies releasedissued an ANPR regarding enhanced cyber risk management standards (enhanced standards) forwhich would apply to a wide range of large financial institutions and interconnected entities under their supervision. third-party service providers, including us and the Bank.
The agencies stated that they were considering establishing enhancedproposed standards would expand existing cybersecurity regulations and guidance to increase the operational resilience of covered entities and reduce the impactfocus on the financial system in case of a cyber event experienced by a covered entity. The ANPR describes potential enhanced cyber standards that are divided into five general categories: cyber risk governance; cyber risk management;governance and management, management of internal dependency management;and external dependency management;dependencies, and incident response, cyber resilience, and situational awareness. The agencies are considering implementingIn addition, the enhanced standards in a tiered manner, imposingproposal contemplates more stringent standards on thefor institutions with systems of those entities that are critical to the functioning of the financial sector. The Federal Reserve is considering applying the enhanced standards on an enterprise-wide basis to all BHCs, such as us, with total consolidated assets of $50 billion or more. The OCC is considering applying the standards to any national bank, such as the Bank, that is a subsidiary of a bank holding company with total consolidated assets of $50 billion or more.
Community Reinvestment Act
The CRA requiresis intended to encourage banks to help meet the Bank’s primarycredit needs of their service areas, including low- and moderate-income neighborhoods, consistent with safe and soundness practices. The relevant federal bank regulatory agency, the OCC in the Bank’s case, examines each bank and assigns it a public CRA rating. A bank’s record of fair lending compliance is part of the resulting CRA examination report.
The CRA requires the relevant federal bank regulatory agency to assessconsider a bank’s CRA assessment when considering the bank’s record in meeting the credit needs of the communities served by the Bank, including low- and moderate-income neighborhoods and persons. Institutions are assigned one of four ratings: “Outstanding,” “Satisfactory,” “Needsapplication to Improve”conduct certain mergers or “Substantial Noncompliance.” This assessment is reviewed for any bank that applies to merge or consolidate with or acquire the assets or assume the liabilities of an insured depository institution,acquisitions or to open or relocate a branch office. The Federal Reserve also must consider the CRA record of each subsidiary bank of a BHC such as the Bank, also is assessed by the Federal Reserve in connection with any acquisition or merger application.application filed by the BHC. An unsatisfactory CRA record could substantially delay or result in the denial of an approval or application by Huntington or the Bank. The Bank received a CRA rating of “Outstanding” in its most recent examination.
CFPBLeaders of the federal banking agencies recently have indicated their support for revising the CRA regulatory framework, and on August 28, 2018, the OCC issued an ANPR to solicit ideas for building a new CRA framework. It is too early to tell whether any changes will be made to applicable CRA requirements.
Transaction Account Reserves
Federal Reserve rules require depository institutions to maintain reserves against their transaction accounts, primarily negotiable order of withdrawal (NOW) and regular checking accounts. For 2019, the first $16.3 million of covered balances are exempt from the reserve requirement, aggregate balances between $16.3 million and $124.2 million are subject to a 3% reserve requirement, and aggregate balances above $124.2 million are subject to a 10% reserve requirement. These reserve requirements are subject to annual adjustment by the Federal Reserve. The Bank is in compliance with these requirements.
Debit Interchange Fees
We are subject to a statutory requirement that interchange fees for electronic debit transactions that are paid to or charged by payment card issuers, including the Bank, be reasonable and proportional to the cost incurred by the issuer. Interchange fees for electronic debit transactions are limited to 21 cents plus 0.05% of the transaction, plus an additional one cent per transaction fraud adjustment. These fees impose requirements regarding routing and exclusivity of electronic debit transactions, and generally require that debit cards be usable in at least two unaffiliated networks.
Consumer Protection Regulation and Supervision
We are subject to supervision and regulation by the CFPB with respect to federal consumer protection laws. We are also subject to certain state consumer protection laws, includingand under the Dodd-Frank Act, state attorneys general and other state officials are empowered to enforce certain federal consumer protection laws and regulations. State authorities have increased their focus on and enforcement of consumer protection rules. These federal and state consumer protection laws apply to a broad range of our activities and to various aspects of our business and include laws relating to interest rates, fair lending, disclosures of credit terms and estimated transaction costs to consumer borrowers, debt collection practices, the use of and the provision of information to consumer reporting agencies, and the prohibition of unfair, deceptive, or abusive acts or practices in connection with the offer, sale, or provision of consumer financial products and services.
On October 3, 2015, the CFPB’sThe CFPB has promulgated many mortgage-related final rules on integrated mortgage disclosuressince it was established under the TruthDodd-Frank Act, including rules related to the ability to repay and qualified mortgage standards, mortgage servicing standards, loan originator compensation standards, high-cost mortgage requirements, HMDA requirements, and appraisal and escrow standards for higher priced mortgages. The mortgage-related final rules issued by the CFPB have materially restructured the origination, servicing, and securitization of residential mortgages in Lending Actthe United States. These rules have impacted, and will continue to impact, the Real Estate Settlement Procedures Act became effective. On January 1, 2016, mostbusiness practices of mortgage lenders, including the Company.
Available Information
We are subject to the informational requirements of the OCC’s Final RuleExchange Act and, in Loans in Areas Having Special Flood Hazards (the Flood Final Rule) became effective, including the requirement that flood insurance premiums and fees for most mortgage loans be escrowed subject to certain exceptions. The Flood Final Rule also incorporated other existing flood insurance requirements and exceptions (e.g. the exemption from flood insurance requirements for non-residential detached structures - a discretionary item) with those portions of the Flood Final Rule becoming effective on October 1, 2015.
Throughout 2016, the CFPB continued its focus on fair lending practices of indirect automobile lenders. This focus led to some lenders to enter into consent ordersaccordance with the CFPBExchange Act, we file annual, quarterly, and Department of Justice. Indirect automobile lenders have also received continued pressure fromcurrent reports, proxy statements, and other information with the CFPB to limit or eliminate discretionary pricing by dealers. Finally, the CFPB has implemented its larger participant rule for indirect automobile lending which brings larger non-bank indirect automobile lenders under CFPB supervision.
Banking regulatory agencies have increasingly used their authority under Section 5 of the Federal Trade Commission Act to take supervisory or enforcement action with respect to unfair or deceptive acts or practices by banks under standards developed many years ago by the Federal Trade Commission in order to address practices that may not necessarily fall within the scope of a specific banking or consumer finance law.SEC. The Dodd-Frank Act also gave to the CFPB similar authority to take action in connection with unfair, deceptive, or abusive acts or practices by entities subject to CFPB supervisory or enforcement authority. Banks face considerable uncertainty as to the regulatory interpretation of “abusive” practices.
Available Information
This information may be read and copied at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet web site that contains reports, proxy statements, and other information about issuers, like us, who file electronically with the SEC. The address of the site is http://www.sec.gov.www.sec.gov. The reports and other information, including any related amendments, filed by us with, or furnished by us to, the SEC are also available free of charge at our Internet web site.site as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The address of the site is http://www.huntington.com.www.huntington.com. Except as specifically incorporated by reference into this Annual Report on Form 10-K, information on those web sites is not part of this
report. You also should be able to inspect reports, proxy statements, and other information about us at the offices of the NASDAQNasdaq National Market at 33 Whitehall Street, New York, New York.
York 10004.
Item 1A: Risk Factors
Risk Governance
We use a multi-faceted approach to risk governance. It begins with the board of directors defining our risk appetite as aggregate moderate-to-low. This does not preclude engagement in select higher risk activities. Rather, the definition is intended to represent an aggregate view of where we want our overall risk to be managed.
Three board committees primarily oversee implementation of this desired risk appetite and monitoring of our risk profile:
The Audit Committee oversees the integrity of the consolidated financial statements, including policies, procedures, and practices regarding the preparation of financial statements, the financial reporting process, disclosures, and internal control over financial reporting. The Audit Committee also provides assistance to the board in overseeing the internal audit division and the independent registered public accounting firm’s qualifications and independence; compliance with our Financial Code of Ethics for the chief executive officer and senior financial officers; and compliance with corporate securities trading policies.
The Risk Oversight Committee assists the board of directors in overseeing management of material risks, the approval and monitoring of the Company’s capital position and plan supporting our overall aggregate moderate-to-low risk profile, the risk governance structure, compliance with applicable laws and regulations, and determining adherence to the board’s stated risk appetite. The committee has oversight responsibility with respect to the full range of inherent risks: market, credit, liquidity, legal, compliance/regulatory, operational, strategic, and reputational. This committee also oversees our capital management and planning process, ensures that the amount and quality of capital are adequate in relation to expected and unexpected risks, and that our capital levels exceed “well-capitalized” requirements.
The Technology Committee assists the board of directors in fulfilling its oversight responsibilities with respect to all technology, cyber security, and third-party risk management strategies and plans. The committee is charged with evaluating Huntington’s capability to properly perform all technology functions necessary for its business plan, including projected growth, technology capacity, planning, operational execution, product development, and management capacity. The committee provides oversight of technology investments and plans to drive efficiency as well as to meet defined standards for risk, security, and redundancy. The Committee oversees the allocation of technology costs and ensures that they are understood by the board of directors. The Technology Committee monitors and evaluates innovation and technology trends that may affect the Company’s strategic plans, including monitoring of overall industry trends. The Technology Committee reviews and provides oversight of the company’s continuity and disaster recovery planning and preparedness.
The Audit and Risk Oversight Committees routinely hold executive sessions with our key officers engaged in accounting and risk management. On a periodic basis, the two committees meet in joint session to cover matters relevant to both, such as the construct and appropriateness of the ACL, which is reviewed quarterly. All directors have access to information provided to each committee and all scheduled meetings are open to all directors.
Further, through its Compensation Committee, the board of directors seeks to ensure its system of rewards is risk-sensitive and aligns the interests of management, creditors, and shareholders. We utilize a variety of compensation-related tools to induce appropriate behavior, including common stock ownership thresholds for the chief executive officer and certain members of senior management, a requirement to hold until retirement or exit from the Company, a portion of net shares received upon exercise of stock options or release of restricted stock awards (50% for executive officers and 25% for other award recipients), equity deferrals, recoupment provisions, and the right to terminate compensation plans at any time.
Management has implemented an Enterprise Risk Management and Risk Appetite Framework. Critically important is our self-assessment process, in which each business segment produces an analysis of its risks and the strength of its risk controls. The segment analyses are combined with assessments by our risk management organization of major risk sectors (e.g., credit, market, liquidity, operational, legal, compliance, reputational, and strategic) to produce an overall enterprise risk assessment. Outcomes of the process include a determination of the quality of the overall control process, the direction of risk, and our position compared to the defined risk appetite.
Management also utilizes a wide series of metrics (key risk indicators) to monitor risk positions throughout the Company. In general, a range for each metric is established, which allows the Company, in aggregate, to operate within an aggregate moderate-to-low risk profile. Deviations from the range will indicate if the risk being measured exceeds desired tolerance, which may then necessitate corrective action.
We also have four executive level committees to manage risk: ALCO, Credit Policy and Strategy, Risk Management, and Capital Management. Each committee focuses on specific categories of risk and is supported by a series of subcommittees that are tactical in nature. We believe this structure helps ensure appropriate escalation of issues and overall communication of strategies.
Huntington utilizes three lines of defense with regard to risk management: (1) business segments, (2) corporate risk management, and (3) internal audit and credit review. To induce greater ownership of risk within its business segments, segment risk officers have been embedded in the business to identify and monitor risk, elevate and remediate issues, establish controls, perform self-testing, and oversee the self-assessment process. Corporate Risk Management establishes policies, sets operating limits, reviews new or modified products/processes, ensures consistency and quality assurance within the segments, and produces the enterprise risk assessment. The Chief Risk Officer has significant input into the design and outcome of incentive compensation plans as they apply to risk. Internal Audit and Credit Review provide additional assurance that risk-related functions are operating as intended.
Risk Overview
We, like other financial companies, are subject to a number of risks that may adversely affect our financial condition or results of operations, many of which are outside of our direct control, though efforts are made to manage thosecontrol. Among these risks while optimizing returns. Among the risks assumed are:
•Credit risk, which is the risk of loss due to loan and lease customers or other counterparties not being able to meet their financial obligations under agreed upon terms;
•Market risk, which occurs when fluctuations in interest rates impact earnings and capital. Financial impacts are realized through changes in the interest rates of balance sheet assets and liabilities (net interest margin) or directly through valuation changes of capitalized MSR and/or trading assets (noninterest income);
•Liquidity risk, which is the risk to current or anticipated earnings or capital arising from an inability to meet obligations when they come due. Liquidity risk includes the inability to access funding sources or manage fluctuations in funding levels. Liquidity risk also results from the failure to recognize or address changes in market conditions that affect the Bank’sour ability to liquidate assets quickly and with minimal loss in value;
•Operational and legalLegal risk, which is the risk of loss arising from inadequate or failed internal processes or systems, human errors or misconduct, or adverse external events. Operational losses result from internal fraud;fraud, external fraud, inadequate or inappropriate employment practices and workplace safety, failure to meet professional obligations involving customers, products, and business practices, damage to physical assets, business disruption and systems failures, and failures in execution, delivery, and process management. Legal risk includes, but is not limited to, exposure to orders, fines, penalties, or punitive damages resulting from litigation, as well as regulatory actions;
•Compliance risk, which exposes us to money penalties, enforcement actions, or other sanctions as a result of non-conformance with laws, rules, and regulations that apply to the financial services industry; and
•Strategic risk, which is defined as risk to current or anticipated earnings, capital, or enterprise value arising from adverse business decisions, improper implementation of business decisions or lack of responsiveness to industry / market changes.changes; and
We also expend considerable effort to protect our reputation. Reputation risk does, which is the risk that negative publicity regarding an institution’s business practices, whether true or not, easily lend itself to traditional methods of measurement. Rather, we closely monitor it through processes such as new product / initiative reviews, colleague and client surveys, monitoring media tone, periodic discussions between management and our board, and other such efforts.will cause a decline in the customer base, costly litigation, or revenue reductions.
In addition to the other information included or incorporated by reference into this report, readers should carefully consider that the following important factors, among others, could negatively impact our business, future results of operations, and future cash flows materially.
Credit Risks:
1. Our ACL level may prove to not be inappropriateadequate or be negatively affected by credit risk exposures which could adversely affect our net income and capital.
Our business depends on the creditworthiness of our customers. Our ACL of $736$868 million at December 31, 2016,2018, represented Management’s estimate of probable losses inherent in our loan and lease portfolio (ALLL) as well as our unfunded loan commitments and letters of credit.credit (AULC). We regularly review our ACL for appropriateness. In doing so, we consider economic conditions and trends, collateral values, and credit quality indicators, such as past charge-off experience, levels of past due loans, and NPAs. There is no certainty that our ACL will be appropriate over time to cover losses in the portfolio because of unanticipated adverse changes in the economy, market conditions, or events adversely affecting specific customers, industries, or markets. If the credit quality of our customer base materially decreases, if the risk profile of a market, industry, or group of customers changes materially, or if the ACL is not appropriate, our net income and capital could be materially adversely affected, which could have a material adverse effect on our financial condition and results of operations.
In addition, regulatory review of risk ratings and loan and lease losses may impact the level of the ACL and could have a material adverse effect on our financial condition and results of operations.
Furthermore, in June 2016, the FASB issued a new current expected credit loss rule, which will require banks to record, at the time of origination, credit losses expected throughout the life of the asset portfolio on loans and held-to-maturity securities, as opposed to the current practice of recording losses when it is probable that a loss event has occurred. We are required to adopt the current expected credit loss rule in 2020 and expect to recognize a one-time cumulative effect adjustment to our ACL and retained earnings as of January 1, 2020. The current expected credit loss model could materially affect how we determine our ACL and report our financial condition and results of operations. For further discussion, see Note 2 of the Notes to Consolidated Financial Statements
2. Weakness in economic conditions could adversely affect our business.
Our performance could be negatively affected to the extent there is deterioration in business and economic conditions which have direct or indirect material adverse impacts on us, our customers, and our counterparties. These conditions could result in one or more of the following:
A decrease in the demand for loans and other products and services offered by us;
A decrease in customer savings generally and in the demand for savings and investment products offered by us; and
An increase in the number of customers and counterparties who become delinquent, file for protection under bankruptcy laws, or default on their loans or other obligations to us.
An increase in the number of delinquencies, bankruptcies, or defaults could result in a higher level of NPAs, NCOs, provision for credit losses, and valuation adjustments on loans held for sale. The markets we serve are dependent on industrial and manufacturing businesses and, thus, are particularly vulnerable to adverse changes in economic conditions affecting these sectors.
Market Risks:
1. Changes in interest rates could reduce our net interest income, reduce transactional income, and negatively impact the value of our loans, securities, and other assets. This could have an adverse impact on our cash flows, financial condition, results of operations, and capital.
Our results of operations depend substantially on net interest income, which is the difference between interest earned on interest earning assets (such as investments and loans) and interest paid on interest bearing liabilities (such as deposits and borrowings). Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. Conditions such as inflation, deflation, recession, unemployment, money supply, and other factors beyond our control may also affect interest rates. In addition, after an extended period during which the Federal Reserve increased the size of its balance sheet substantially above historical levels through the purchase of debt securities, the Federal Reserve has begun to reduce the size of its balance sheet from these elevated levels, which might also affect interest rates. If our interest earning assets mature or reprice faster than interest bearing liabilities in a declining interest rate environment, net interest income could be materially adversely impacted. Likewise, if interest bearing liabilities mature or reprice more quickly than interest earning assets in a rising interest rate environment, net interest income could be adversely impacted.
After a prolonged period of low and relatively stable interest rates, interest rates rose over the course of 2017 and 2018, although interest rates continue to remain low by historical standards.
Changes in interest rates can affect the value of loans, securities, assets under management, and other assets, including mortgage and nonmortgage servicing rights. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans and leases may lead to an increase in NPAs and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows. When we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. However, we continue to incur interest expense as a cost of funding NALs without any corresponding interest income. In addition, transactional income, including trust income, brokerage income, and gain on sales of loans can vary significantly from period-to-period based on a number of factors, including the interest rate environment. A decline in interest rates along with a flattening yield curve limits our ability to reprice deposits given the current historically low level of interest rates and could result in declining net interest margins if longer duration assets reprice faster than deposits.
Rising interest rates reduce the value of our fixed-rate securities and cash flow hedging derivatives portfolio.securities. Any unrealized loss from these portfolios impacts OCI, shareholders’ equity, and the Tangible Common Equity ratio. Any realized loss from these portfolios impacts regulatory capital ratios. In a rising interest rate environment, pension and other post-retirement obligations somewhat mitigate negative OCI impacts from securities and financial instruments. For more information, refer to “Market Risk” of the MD&A.
Certain investment securities, notably mortgage-backed securities, are very sensitive to rising and falling rates. Generally, when rates rise, prepayments of principal and interest will decrease and the duration of mortgage-backed securities will increase. Conversely, when rates fall, prepayments of principal and interest will increase and the duration of mortgage-backed securities will decrease. In either case, interest rates have a significant impact on the value of mortgage-backed securities.
MSR fair values are sensitive to movements in interest rates, as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be reduced by prepayments. Prepayments usually increase when mortgage interest rates decline and decrease when mortgage interest rates rise.
In addition to volatility associated with interest rates, the Company also has exposure to equity markets related to the investments within the benefit plans and other income from client based transactions.
2. Industry competition may have an adverse effect on our success.
Our profitability depends on our ability to compete successfully. We operate in a highly competitive environment, and we expect competition to intensify. Certain of our competitors are larger and have more resources than we do, enabling them to be more aggressive than us in competing for loans and deposits. In our market areas, we face competition from other banks and financial service companies that offer similar services. Some of our non-bank competitors are not subject to the same extensive regulations we are and, therefore, may have greater flexibility in competing for business. Technological advances have made it possible for our non-bank competitors to offer products and services that traditionally were banking products and for financial institutions and other
companies to provide electronic and internet-based financial solutions, including mobile payments, online deposit accounts, electronic payment processing, and marketplace lending, without having a physical presence where their customers are located. Legislative or regulatory changes also could lead to increased competition in the financial services sector. For example, the Economic Growth Act and, if adopted, the Proposed Tailoring Rules reduce the regulatory burden of certain large BHCs and raise the asset thresholds at which more onerous requirements apply, which could cause certain large BHCs to become more competitive or to more aggressively pursue expansion. Our ability to compete successfully depends on a number of factors, including customer convenience, quality of service by investing in new products and services, electronic platforms, personal contacts, pricing, and range of products. If we are unable to successfully compete for new customers and retain our current customers, our business, financial condition, or results of operations may be adversely affected. In particular, if we experience an outflow of deposits as a result of our customers seeking investments with higher yields or greater financial stability, or a desire to do business with our competitors, we may be forced to rely more heavily on borrowings and other sources of funding to operate our business and meet withdrawal demands, thereby adversely affecting our net interest margin. For more information, refer to “Competition” section of Item 1:1. Business.
Uncertainty about the future of LIBOR may adversely affect our business.
LIBOR and certain other interest rate “benchmarks” are the subject of recent national, international, and other regulatory guidance and proposals for reform. These reforms may cause such benchmarks to perform differently than in the past or have other consequences which cannot be predicted. On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit information to the administrator of LIBOR after 2021. The announcement indicates that the continuation of LIBOR on the current basis cannot be guaranteed after 2021. While there is no consensus on what rate or rates may become accepted alternatives to LIBOR, a group of market participants convened by the Federal Reserve, the Alternative Reference Rate Committee, has selected the Secured Overnight Finance Rate as its recommended alternative to LIBOR. The Federal Reserve Bank of New York started to publish the Secured Overnight Financing Rate in April 2018. The Secured Overnight Financing Rate is a broad measure of the cost of overnight borrowings collateralized by Treasury securities that was selected by the Alternative Reference Rate Committee due to the depth and robustness of the U.S. Treasury repurchase market. At this time, it is impossible to predict whether the Secured Overnight Financing Rate will become an accepted alternative to LIBOR.
The market transition away from LIBOR to an alternative reference rate, such as the Secured Overnight Financing Rate, is complex and could have a range of adverse effects on our business, financial condition and results of operations. In particular, any such transition could:
adversely affect the interest rates paid or received on, the revenue and expenses associated with or the value of Huntington’s LIBOR-based assets and liabilities, which include certain variable rate loans, Huntington’s Series B preferred stock, certain of Huntington’s junior subordinated debentures, certain of the Bank’s senior notes and certain other securities or financial arrangements;
adversely affect the interest rates paid or received on, the revenue and expenses associated with or the value of other securities or financial arrangements, given LIBOR’s role in determining market interest rates globally;
prompt inquiries or other actions from regulators in respect of Huntington’s preparation and readiness for the replacement of LIBOR with an alternative reference rate; and
result in disputes, litigation or other actions with counterparties regarding the interpretation and enforceability of certain fallback language in LIBOR-based contracts and securities.
The transition away from LIBOR to an alternative reference rate will require the transition to or development of appropriate systems and analytics to effectively transition Huntington’s risk management and other processes from LIBOR-based products to those based on the applicable alternative reference rate, such as the Secured Overnight Financing Rate. Huntington has developed a LIBOR transition team and project plan that outlines timelines and priorities to prepare its processes, systems and people to support this transition. Timelines and priorities include assessing the impact on our customers, as well as assessing system requirements for operational processes. There can be no guarantee that these efforts will successfully mitigate the operational risks associated with the transition away from LIBOR to an alternative reference rate.
The manner and impact of the transition from LIBOR to an alternative reference rate, as well as the effect of these developments on our funding costs, loan and investment and trading securities portfolios, asset-liability management, and business, is uncertain.
Liquidity Risks:
1. Changes in either Huntington’s financial condition or in the general banking industry could result in a loss of depositor confidence.
Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. The Bank uses its liquidity to extend credit and to repay liabilities as they become due or as demanded by customers. The board of directors establishes liquidity policies, including contingency funding plans, and limits, and management establishes operating guidelines for liquidity.
Our primary source of liquidity is our large supply of deposits from consumer and commercial customers. The continued availability of this supply depends on customer willingness to maintain deposit balances with banks in general and us in particular. The availability of deposits can also be impacted by regulatory changes (e.g., changes in FDIC insurance, the Liquidity Coverage Ratio,LCR, etc.), changes in the financial condition of Huntington, other banks, or the banking industry in general, changes in the interest rates our competitors pay on their deposits, and other events which can impact the perceived safety or economic benefits of bank deposits. Recently, competition for deposits has increased and interest rates paid on deposits have generally risen. While we make significant efforts to consider and plan for hypothetical disruptions in our deposit funding, market related, geopolitical, or other events could impact the liquidity derived from deposits.
2. We are a holding company and depend on dividends by our subsidiaries for most of our funds.
Huntington is an entity separate and distinct from the Bank. The Bank conducts most of our operations, and Huntington depends upon dividends from the Bank to service Huntington'sHuntington’s debt and to pay dividends to Huntington'sHuntington’s shareholders. The availability of dividends from the Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition including liquidity and capital adequacy of the Bank and other factors, that the OCC could limit the payment of dividends or other payments to Huntington by the Bank. In addition, the payment of dividends by our other subsidiaries is also subject to the laws of the subsidiary’s state of incorporation, and regulatory capital and liquidity requirements applicable to such subsidiaries. In the event that the Bank was unable to pay dividends to us, we in turn would likely have to reduce or stop paying dividends on our Preferred and Common Stock. Our failure to pay dividends on our Preferred and Common Stock could have a material adverse effect on the market price of our Preferred and Common Stock. Additional information regarding dividend restrictions is provided in Item 1. Regulatory Matters.
3. If we lose access to capital markets, we may not be able to meet the cash flow requirements of our depositors, creditors, and borrowers, or have the operating cash needed to fund corporate expansion and other corporate activities.
Wholesale funding sources include securitization, federal funds purchased, securities sold under repurchase agreements, non-core deposits, and long-term debt. The Bank is also a member of the Federal Home Loan Bank of Cincinnati, which provides members access to funding through advances collateralized with mortgage-related assets. We maintain a portfolio of highly-rated, marketable securities that is available as a source of liquidity.
Capital markets disruptions can directly impact the liquidity of Huntington and the Bank. The inability to access capital markets funding sources as needed could adversely impact our financial condition, results of operations, cash flows, and level of regulatory-qualifying capital. We may, from time-to-time, consider using our existing liquidity position to opportunistically retire outstanding securities in privately negotiated or open market transactions.
4. A reduction in our credit rating could adversely affect our abilityaccess to raise funds including capital and/or the holdersand could increase our cost of our securities.funds.
The credit rating agencies regularly evaluate Huntington and the Bank, and credit ratings are based on a number of factors, including our financial strength and ability to generate earnings, as well as factors not entirely within our control, including conditions affecting the financial services industry, the economy, and changes in rating methodologies. There can be no assurance that we will maintain our current credit ratings. A downgrade of the credit ratings of Huntington or the Bank could adversely affect our access to liquidity and capital, and could significantly increase our cost of funds, trigger additional collateral or funding requirements, and decrease the number of investors and counterparties willing to lend to us or purchase our securities. This could affect our growth, profitability, and financial condition, including liquidity.
Operational and Legal Risks:
1. Our operational or security systems or infrastructure, or those of third parties, could fail or be breached, which could disrupt our business and adversely impact our results of operations, liquidity, and financial condition, as well as cause legal or reputational harm.
The potential for operational risk exposure exists throughout our business and, as a result of our interactions with, and reliance on, third parties, is not limited to our own internal operational functions. Our operational and security systems and infrastructure, including our computer systems, data management, and internal processes, as well as those of third parties, are integral to our performance. We rely on our employees and third parties in our day-to-day and ongoing operations, who may, as a result of human
error, misconduct, malfeasance, or failure, or breach of our or of third-party systems or infrastructure, expose us to risk. For example, our ability to conduct business may be adversely affected by any significant disruptions to us or to third parties with whom we interact or upon whom we rely. In addition, our ability to implement backup systems and other safeguards with respect to third-party systems is more limited than with respect to our own systems. Our financial, accounting, data processing, backup, or other operating or security systems and infrastructure may fail to operate properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond our control, which could adversely affect our ability to process transactions or provide services. Such events may include sudden increases in customer transaction volume; electrical, telecommunications, or other major physical infrastructure outages; natural disasters such as earthquakes, tornadoes, hurricanes, and floods; disease pandemics; cyber-attacks; and events arising from local or larger scale political or social matters, including wars and terrorist acts. In addition, we may need to take our systems offline if they become infected with malware or a computer virus or as a result of another form of cyber-attack. In the event that backup systems are utilized, they may not process data as quickly as our primary systems and some data might not have been saved to backup systems, potentially resulting in a temporary or permanent loss of such data. We frequently update our systems to support our operations and growth and to remain compliant with applicable laws, rules, and regulations. This updating entails significant costs and creates risks associated with implementing new systems and integrating them with existing ones, including business interruptions. Implementation and testing of controls related to our computer systems, security monitoring, and retaining and training personnel required to operate our systems also entail significant costs. Operational risk exposures could adversely impact our operations, liquidity, and financial condition, as well as cause reputational harm. In addition, we may not have adequate insurance coverage to compensate for losses from a major interruption.
We face security risks, including denial of service attacks, hacking, social engineering attacks targeting our colleagues and customers, malware intrusion or data corruption attempts, and identity theft that could result in the disclosure of confidential information, adversely affect our business or reputation, and create significant legal and financial exposure.
Our computer systems and network infrastructure and those of third parties, on which we are highly dependent, are subject to security risks and could be susceptible to cyber-attacks, such as denial of service attacks, hacking, terrorist activities, or identity theft. FinancialOur business relies on the secure processing, transmission, storage, and retrieval of confidential, proprietary, and other information in our computer and data management systems and networks, and in the computer and data management systems and networks of third parties. In addition, to access our network, products, and services, our customers and other third parties may use personal mobile devices or computing devices that are outside of our network environment and are subject to their own cybersecurity risks.
We, our customers, regulators, and other third parties, including other financial services institutions and companies engaged in data processing, have reportedbeen subject to, and are likely to continue to be the target of, cyber-attacks. These cyber-attacks include computer viruses, malicious or destructive code, phishing attacks, denial of service or information, ransomware, improper access by employees or vendors, attacks on personal email of employees, ransom demands to not expose security vulnerabilities in our systems or the systems of third parties or other security breaches that could result in the securityunauthorized release, gathering, monitoring, misuse, loss, or destruction of their websitesconfidential, proprietary, and other information of ours, our employees, our customers, or of third parties, damage our systems or otherwise materially disrupt our or our customers’ or other third parties’ network access or business operations. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities or incidents. Despite efforts to ensure the integrity of our systems some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacksimplement controls, processes, policies, and other means. Denial of service attacks have been launchedprotective measures, we may not be able to anticipate all security breaches, nor may we be able to implement guaranteed preventive measures against a number of large financial services institutions, including us. None of these events against us resulted in a breach of our client data or account information; however, the performance of our website, www.huntington.com, was adversely affected, and in some instances customers were prevented from accessing our website. We expect to be subject to similar attacks in the future. While events to date primarily resulted in inconvenience, future cyber-attacks could be more disruptive and damaging. Hacking and identity theft risks, in particular, could cause serious reputational harm.such security breaches. Cyber threats are rapidly evolving, and we may not be able to anticipate or prevent all such attacks and could be held liable for any security breach or loss.
Despite effortsCybersecurity risks for banking organizations have significantly increased in recent years in part because of the proliferation of new technologies, and the use of the internet and telecommunications technologies to ensure the integrity of our systems, we may not be able to anticipate all security breaches of these types, nor may we be able to implement guaranteed preventive measures against such security breaches. Persistent attackers may succeed in penetrating defenses given enough resources, time, and motive. The techniques used by cyber criminals change frequently, may not be recognized until launched and can originate from a wide variety of sources, including outside groups such as external service providers, organized crime affiliates, terrorist organizations or hostile foreign governments. Theseconduct financial transactions. For example, cybersecurity risks may increase in the future as we continue to increase our mobile-payment and other internet-based product offerings and expand our internal usage of web-based products and applications.
In addition, cybersecurity risks have significantly increased in recent years in part due to the increased sophistication and activities of organized crime affiliates, terrorist organizations, hostile foreign governments, disgruntled employees or vendors, activists, and other external parties, including those involved in corporate espionage. Even the most advanced internal control environment may be vulnerable to compromise. Targeted social engineering attacks and "spear phishing"“spear phishing” attacks are becoming more sophisticated and are extremely difficult to prevent. The successful social engineerIn such an attack, an attacker will attempt to fraudulently induce colleagues, customers, or other users of our systems to disclose sensitive information in order to gain access to its data or that of its clients. Persistent attackers may succeed in penetrating defenses given enough resources, time, and motive. The techniques used by cyber criminals change frequently, may not be recognized until launched, and may not be recognized until well after a breach has occurred. The risk of a security breach caused by a cyber-attack at a vendor or by unauthorized vendor access has also increased in recent years. Additionally, the existence of cyber-attacks or security breaches at third-party vendors with access to our data may not be disclosed to us in a timely manner.
We also face indirect technology, cybersecurity, and operational risks relating to the customers, clients, and other third parties with whom we do business or upon whom we rely to facilitate or enable our business activities, including, for example, financial counterparties, regulators, and providers of critical infrastructure such as internet access and electrical power. As a result of increasing
consolidation, interdependence, and complexity of financial entities and technology systems, a technology failure, cyber-attack, or other information or security breach that significantly degrades, deletes, or compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including us. This consolidation, interconnectivity, and complexity increases the risk of operational failure, on both individual and industry-wide bases, as disparate systems need to be integrated, often on an accelerated basis. Any third-party technology failure, cyber-attack, or other information or security breach, termination, or constraint could, among other things, adversely affect our ability to effect transactions, service our clients, manage our exposure to risk, or expand our business.
Cyber-attacks or other information or security breaches, whether directed at us or third parties, may result in a material loss or have material consequences. Furthermore, the public perception that a cyber-attack on our systems has been successful, whether or not this perception is correct, may damage our reputation with customers and third parties with whom we do business. Hacking of personal information and identity theft risks, in particular, could cause serious reputational harm. A successful penetration or circumvention of system security could cause us serious negative consequences, including our loss of customers and business opportunities, costs associated with maintaining business relationships after an attack or breach; significant business disruption to our operations and business, misappropriation, exposure, or destruction of operations, misappropriation ofour confidential information, intellectual property, funds, and/or those of our customers; or damage to our or our customers’ and/or third parties’ computers or systems, or those of our customers and counterparties. A successful security breach could result in violationsa violation of applicable privacy laws and other laws, financial loss to uslitigation exposure, regulatory fines, penalties or to our customers,intervention, loss of confidence in our security measures, significant litigation exposure,reputational damage, reimbursement or other compensatory costs, additional compliance costs, and harmcould adversely impact our results of operations, liquidity and financial condition. In addition, we may not have adequate insurance coverage to our reputation, all of which could havecompensate for losses from a material adverse effect on the Company.cybersecurity event.
2. The resolution of significant pending litigation, if unfavorable, could have an adverse effect on our results of operations for a particular period.
We face legal risks in our businesses, and the volume of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remain high. Substantial legal liability against us could have material adverse financial effects or cause significant reputational harm to us, which in turn could seriously harm our business prospects. It is possible that the ultimate resolution of these matters, if unfavorable, may be material to the results of operations for a particular reporting period.
For more information on litigation risks, see Note 21 of20 to the Notes to Consolidated Financial Statements updates the status of certain material litigation including litigation related to the bankruptcy of Cyberco Holdings, Inc.Statements.
3. We face significant operational risks which could lead to financial loss, expensive litigation, and loss of confidence by our customers, regulators, and capital markets.
We are exposed to many types of operational risks, including the risk of fraud or theft by colleagues or outsiders, unauthorized transactions by colleagues or outsiders, operational errors by colleagues, business disruption, and system failures. Huntington executes against a significant number of controls, a large percent of which are manual and dependent on adequate execution by colleagues and third-party service providers. There is inherent risk that unknown single points of failure through the execution chain could give rise to material loss through inadvertent errors or malicious attack. These operational risks could lead to financial loss, expensive litigation, and loss of confidence by our customers, regulators, and the capital markets.
Moreover, negative public opinion can result from our actual or alleged conduct in any number of activities, including clients, products, and business practices; corporate governance; acquisitions; and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to attract and retain customers and can also expose us to litigation and regulatory action.
Relative to acquisitions, we incur risks and challenges associated with the integration of employees, accounting systems, and technology platforms from acquired businesses and institutions in a timely and efficient manner, and we cannot guarantee that we will be successful in retaining existing customer relationships or achieving anticipated operating efficiencies expected from such acquisitions. Acquisitions may be subject to the receipt of approvals from certain governmental authorities, including the Federal Reserve, the OCC, and the United States Department of Justice, as well as the approval of our shareholders and the shareholders of companies that we seek to acquire. These approvals for acquisitions may not be received, may take longer than expected, or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the acquisitions. Subject to requisite regulatory approvals, future business acquisitions may result in the issuance and payment of additional shares of stock, which would dilute current shareholders’ ownership interests. Additionally, acquisitions may involve the payment of a premium over book and market values. Therefore, dilution of our tangible book value and net income per common share could occur in connection with any future transaction.
4. Failure to maintain effective internal controls over financial reporting could impair our ability to accurately and timely report our financial results or prevent fraud, resulting in loss of investor confidence and adversely affecting our business and our stock price.
Effective internal controls over financial reporting are necessary to provide reliable financial reports and prevent fraud. We are subject to regulation that focuses on effective internal controls and procedures. Such controls and procedures are modified,
supplemented, and changed from time-to-time as necessitated by our growth and in reaction to external events and developments. Any failure to maintain an effective internal control environment could impact our ability to report our financial results on an accurate and timely basis, which could result in regulatory actions, loss of investor confidence, and an adverse impact on our business and our stock price.
5. We rely on quantitative models to measure risks and to estimate certain financial values.
Quantitative models may be used to help manage certain aspects of our business and to assist with certain business decisions, including estimating probable loan losses, measuring the fair value of financial instruments when reliable market prices are unavailable, estimating the effects of changing interest rates and other market measures on our financial condition and results of operations, managing risk, and for capital planning purposes (including during the CCAR capital planning and capital adequacy process). Our measurement methodologies rely on many assumptions, historical analyses, and correlations. These assumptions may not capture or fully incorporate conditions leading to losses, particularly in times of market distress, and the historical correlations on which we rely may no longer be relevant. Additionally, as businesses and markets evolve, our measurements may not accurately reflect this evolution. Even if the underlying assumptions and historical correlations used in our models are adequate, our models may be deficient due to errors in computer code, inaccurate data, misuse of data, or the use of a model for a purpose outside the scope of the model’s design.
All models have certain limitations. Reliance on models presents the risk that our business decisions based on information incorporated from models will be adversely affected due to incorrect, missing, or misleading information. In addition, our models may not capture or fully express the risks we face, may suggest that we have sufficient capitalization when we do not, or may lead us to misjudge the business and economic environment in which we will operate. If our models fail to produce reliable results on an ongoing basis, we may not make appropriate risk management, capital planning, or other business or financial decisions. Strategies that we employ to manage and govern the risks associated with our use of models may not be effective or fully reliable. Also, information that we provide to the public or regulators based on poorly designed models could be inaccurate or misleading.
Banking regulators continue to focus on the models used by banks and bank holding companies in their businesses. Some of our decisions that the regulators evaluate, including distributions to our shareholders, could be affected adversely due to their perception that the quality of the models used to generate the relevant information is insufficient.
6. We rely on third parties to provide key components of our business infrastructure.
We rely on third-party service providers to leverage subject matter expertise and industry best practice, provide enhanced products and services, and reduce costs. Although there are benefits in entering into third-party relationships with vendors and others, there are risks associated with such activities. When entering a third-party relationship, the risks associated with that activity are not passed to the third-party but remain our responsibility. The Technology Committee of the board of directors provides oversight related to the overall risk management process associated with third-party relationships. Management is accountable for the review and evaluation of all new and existing third-party relationships. Management is responsible for ensuring that adequate controls are in place to protect us and our customers from the risks associated with vendor relationships.
Increased risk could occur based on poor planning, oversight, control, and inferior performance or service on the part of the third-party, and may result in legal costs or loss of business. While we have implemented a vendor management program to actively manage the risks associated with the use of third-party service providers, any problems caused by third-party service providers could adversely affect our ability to deliver products and services to our customers and to conduct our business. Replacing a third-party service provider could also take a long period of time and result in increased expenses.
7. Changes in accounting policies, standards, and interpretations could affect how we report our financial condition and results of operations.
The FASB, regulatory agencies, and other bodies that establish accounting standards periodically change the financial accounting and reporting standards governing the preparation of our financial statements. Additionally, those bodies that establish and interpret the accounting standards (such as the FASB, SEC, and banking regulators) may change prior interpretations or positions on how these standards should be applied. These changes can be difficult to predict and can materially affect how we record and report our financial condition and results of operations.
For further discussion, see Note 2 ofto the Notes to Consolidated Financial Statements.
8. Impairment of goodwill could require charges to earnings, which could result in a negative impact on our results of operations.
Our goodwill could become impaired in the future. If goodwill were to become impaired, it could limit the ability of the Bank to pay dividends to Huntington, Bancshares Incorporated, adversely impacting Huntington Bancshares Incorporated's liquidity and ability to pay dividends or repay debt. The most significant assumptions affecting our goodwill impairment evaluation are variables including the market price of our Common Stock, projections of earnings, the discount rates used in the income approach to fair value, and the control premium above our current stock price that an acquirer would pay to obtain control of us. We are required to test goodwill for impairment at least annually or when impairment indicators are present. If an impairment determination is made in a future reporting period, our earnings and book value of goodwill will be reduced by the amount of the impairment. If an impairment loss is recorded, it will have little or no impact on the
tangible book value of our Common Stock, or our regulatory capital levels, but such an impairment loss could significantly reduce the Bank’s earnings and thereby restrict the Bank'sBank’s ability to make dividend payments to us without prior regulatory approval, because Federal Reserve policy states the bank holding company dividends should be paid from current earnings. At December 31, 2016,2018, the book value of our goodwill was $2.0 billion, substantially all of which was recorded at the Bank. Any such write down of goodwill or other acquisition related intangibles will reduce Huntington’s earnings, as well.
9. Negative publicity could damage our reputation and could significantly harm our business.
Our ability to attract and retain customers, clients, investors, and highly-skilled management and employees is affected by our reputation. Public perception of the financial services industry in general was damaged as a result of the creditfinancial crisis that started in 2008. We face increased public and regulatory scrutiny resulting from the creditfinancial crisis and economic downturn. Significant harm to our reputation can also arise from other sources, including employee misconduct, actual or perceived unethical behavior, conflicts of interest, litigation, GSE or regulatory actions, failing to deliver minimum or required standards of service and quality, failing to address customer and agency complaints, compliance failures, unauthorized release of confidential information due to cyber-attacks or otherwise, and the activities of our clients, customers, and counterparties, including vendors. Actions by the financial service industry generally or by institutions or individuals in the industry can adversely affect our reputation, indirectly by association. All of these could adversely affect our growth, results of operation, and financial condition.
We depend on our executive officers and key personnel to continue the implementation of our long-term business strategy and could be harmed by the loss of their services.
We believe that our continued growth and future success will depend in large part on the skills of our management team and our ability to motivate and retain these individuals and other key personnel. The loss of service of one or more of our executive officers or key personnel could reduce our ability to successfully implement our long-term business strategy, our business could suffer, and the value of our stock could be materially adversely affected. Leadership changes will occur from time to time, and we cannot predict whether significant resignations will occur or whether we will be able to recruit additional qualified personnel. We believe our management team possesses valuable knowledge about the banking industry and that their knowledge and relationships would be very difficult to replicate. Our success also depends on the experience of our branch managers and lending officers and on their relationships with the customers and communities they serve. The loss of these key personnel could negatively impact our banking operations. The loss of key personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition, or operating results.
Compliance Risks:
1. We operate in a highly regulated industry, and the laws and regulations that govern our operations, corporate governance, executive compensation and financial accounting, or reporting, including changes in them, or our failure to comply with them, may adversely affect us.
The banking industry is highly regulated. We are subject to supervision, regulation, and examination by various federal and state regulators, including the Federal Reserve, OCC, SEC, CFPB, FDIC, FINRA, and various state regulatory agencies. The statutory and regulatory framework that governs us is generally intended to protect depositors and customers, the DIF, the U.S. banking and financial system, and financial markets as a whole-not to protect shareholders. These laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on our business activities (including foreclosure and collection practices), limit the dividend or distributions that we can pay, restrict the ability of institutions to guarantee our debt, and impose certain specific accounting requirements that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than accounting principles generally accepted in the United States. Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional compliance costs. Both the scope of the laws and regulations and the intensity of the supervision to which we are subject have increased in recent years in response to the financial crisis, as well as other factors such as technological and market changes. Such regulation and supervision may increase our costs and limit our ability to pursue business opportunities. Further, our failure to comply with these laws and regulations, even if the failure was inadvertent or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines, and other penalties, any of which could adversely affect our results of operations, capital base, and the price of our securities. Further, any new laws, rules, and regulations could make compliance more difficult or expensive or otherwise adversely affect our business and financial condition.
Bank regulations regarding capital and liquidity, including the annual CCAR assessment process and the U.S. Basel III capital and liquidity standards, could require higher levels of capital and liquidity. Among other things, these regulations could impact our ability to pay common stock dividends, repurchase common stock, attract cost-effective sources of deposits, or require the retention of higher amounts of low yielding securities.
The Federal Reserve administers the annual CCAR, an annual forward-looking quantitative assessment of theHuntington’s capital adequacy of bank holding companies with consolidated assets of $50 billion or more and planned capital distributions and a review of the strength of Huntington’s practices used by covered banks to assess capital needs. Under CCAR,We generally may pay dividends and repurchase stock only in accordance with a capital plan that has been reviewed by the Federal Reserve makes a qualitative assessment of capital adequacy on a forward-looking basis and reviewsas to which the strength of a bank holding company’s capital adequacy process.Federal Reserve has not objected. The Federal Reserve also makes a quantitative assessment of capital based on supervisory-run stress tests that assess the ability to maintain capital levels above each minimum regulatory capital ratio and above a CET1 ratio of 4.5%, after making all capital actions included in a bank holding company’sHuntington’s capital plan, under baseline and stressful conditions throughout a nine-quarter planning horizon. Capital plans for 2017 are required to be submitted by April 5, 2017, and the Federal Reserve will either object to the capital plan and/or planned capital actions, or provide a notice of non-objection, no later than June 30, 2017. We intend to submit our capital plan to the Federal Reserve on or before April 5, 2017. The Bank also must submit a capital plan to the OCC on or before April 5, 2017. There can be no assurance that the Federal Reserve or OCC will respond favorably to our capital plan,plans, planned capital actions or stress test results, and the Federal Reserve, OCC, or other regulatory capital requirements may limit or otherwise restrict how we utilize our capital, including common stock dividends and stock repurchases.
In 2013,We are also required to maintain minimum capital ratios and the Federal Reserve and OCC may determine that Huntington and/or the OCC adopted final rulesBank, based on size, complexity, or risk profile, must maintain capital ratios above these minimums in order to implementoperate in a safe and sound manner. In the Basel IIIevent we are required to raise capital rules for U.S. Banking organizations. The final rules establish an integrated regulatory capital framework and will implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changesto maintain required by the Dodd-Frank Act. Under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. As a Standardized Approach institution, the Basel III minimum capital requirements became effective forand leverage ratios or ratios above the required applicable minimums, we may be forced to do so when market conditions are undesirable or on terms that are less favorable to us than we would otherwise require. Furthermore, in order to prevent becoming subject to restrictions on our ability to distribute capital or make certain discretionary bonus payments to management, we must maintain a Capital Conservation Buffer (of 1.875% in 2018 and 2.5% as of January 1, 2015, and will be fully phased-in on January 1, 2019.2019), which is in addition to our required minimum capital ratios.
On September 3, 2014, the U.S. banking regulators approvedWe are also currently subject to a final rule to implement a minimum LCR requirement for banking organizations with total consolidated assets of $250 billion or more, and a less stringent modified LCR requirement to depository institution holding companies below the threshold but with total consolidated assets of $50 billion or more. The LCRthat requires covered banking organizationsHuntington to maintain HQLA equalan adequate amount of unencumbered high-quality liquid assets, such as Treasury securities and other sovereign debt, to cover projected stressednet cash outflows over a 30 calendar-day stress scenario. We are covered byscenario window. Because the modified LCR requirement and therefore subject to the phase-in of the rule which, as of January 2017, is at 100%. We will also be required to calculate the LCR monthly. The LCR assigns less severe outflow assumptions to certain types of customer deposits, which should increase thebanks’ demand for and perhaps the cost among banks forof these deposits.deposits may increase. Additionally, the HQLA requirements will increaseLCR has increased the demand for direct USU.S. government and US government- guaranteedU.S. government-guaranteed debt that, while high quality, generally carry lower yields than other securities that banksBHCs hold in their investment portfolios.
2. For more information regarding CCAR, stress testing, and capital and liquidity requirements, including several proposed rules that would alter, reduce, or eliminate certain of these requirements as they apply to Huntington, refer to Item 1: Business - Regulatory Matters.
If our regulators deem it appropriate, they can take regulatory actions that could result in a material adverse impact on our financial results, ability to compete for new business, or preclude mergers or acquisitions. In addition, regulatory actions could constrain our ability to fund our liquidity needs or pay dividends. Any of these actions could increase the cost of our services.
We are subject to the supervision and regulation of various state and federal regulators, including the OCC, Federal Reserve, FDIC, SEC, CFPB, Financial Industry Regulatory Authority,FINRA, and various state regulatory agencies. As such, we are subject to a wide variety of laws and regulations, many of which are discussed in Item 1. Regulatory Matters. As part of their supervisory process, which includes periodic examinations and continuous monitoring, the regulators have the authority to impose restrictions or conditions on our activities and the manner in which we manage the organization. Such actions could negatively impact us in a variety of ways, including charging monetary fines, impacting our ability to pay dividends, precluding mergers or acquisitions, limiting our ability to offer certain products or services, or imposing additional capital requirements.
Under the supervision of the CFPB, our consumerConsumer and Business Banking products and services are subject to increasingheightened regulatory oversight and scrutiny with respect to compliance under consumer laws and regulations. We may face a greater number or wider scope of investigations, enforcement actions, and litigation in the future related to consumer practices, thereby increasing costs associated with responding to or defending such actions. Also, federal and state regulators have been increasingly focused on sales practices of branch personnel, including taking regulatory action against other financial institutions. In addition, increased regulatory inquiries and investigations, as well as any additional legislative or regulatory developments affecting our consumer businesses, and any required changes to our business operations resulting from these developments, could result in significant loss of revenue, require remuneration to our customers, trigger fines or penalties, limit the products or services we offer, require us to increase our prices and, therefore, reduce demand for our products, impose additional compliance costs on us, increase the cost of collection, cause harm to our reputation, or otherwise adversely affect our consumer businesses.
In addition, we are allowed to conduct certain activities that are financial in nature by virtue of Huntington’s status as an FHC, as discussed in more detail in Item 1. Regulatory Matters. If Huntington or the Bank cease to meet the requirements necessary for Huntington to continue to qualify as an FHC, the Federal Reserve may impose upon us corrective capital and managerial requirements, and may place limitations on our ability to conduct all of the business activities that we conduct as a FHC. If the failure to meet these standards persists, we could be required to divest our Bank, or cease all activities other than those activities that may be conducted by a BHC but not an FHC.
3. Legislative and regulatory actions taken now or in the future that impact the financial industry may materially adversely affect us by increasing our costs, adding complexity in doing business, impeding the efficiency of our internal business processes, negatively impacting the recoverability of certain of our recorded assets, requiring us to increase our regulatory capital, limiting our ability to pursue business opportunities, and otherwise resulting in a material adverse impact on our financial condition, results of operation, liquidity, or stock price.
The Dodd-Frank Act was a comprehensive overhaulBoth the scope of the laws and regulations and the intensity of the supervision to which we are subject increased in response to the financial crisis as well as other factors such as technological and market changes. Regulatory enforcement and fines have also increased across the banking and financial services industry within the United States, established the CFPB, and required the CFPB and other federal agencies to implement many new and significant rules and regulations.sector. Compliance with these new laws and regulations have resulted in and will continue to result in additional costs, which could be significant, and may have a material and adverse effect on our results of operations. In addition, if we do not appropriately comply with current or future legislation and regulations, especially those that apply to our consumer operations, which has been an area of heightened focus, we may be subject to fines, penalties or judgments, or material regulatory restrictions on our businesses, which could adversely affect operations and, in turn, financial results.
4. We may become subject to more stringent regulatory requirements and activity restrictions if the Federal Reserve and FDIC determine that our resolution plan is not credible.
The Dodd-Frank Act and implementing regulations jointly issued by Federal Reserve and the FDIC require bank holding companies with more than $50 billion in assetsHuntington is required to annually submit a resolution planannually to the Federal Reserve and the FDIC that, in the event of material financial distress or failure, establish the rapid,a resolution plan for its orderly resolution of the Company under the U.S. Bankruptcy Code. If the Federal Reserve and the FDIC jointly determine that our 2015 resolution plan is not “credible,”credible, we could become subjected to more stringent capital, leverage or liquidity requirements or restrictions, or restrictions on our growth, activities, or operations, andoperations. If we were to fail to address deficiencies in our resolution plan when required, we could eventually be required to divest certain assets or operations in ways that could negatively impact itsour operations and strategy.
5. OurFor more information regarding resolution planning requirements, refer to Item 1: Business - Regulatory Matters.
Noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations could cause us material financial loss.
The Bank Secrecy Act and the Patriot Act contain anti-money laundering and financial transparency provisions intended to detect and prevent the use of the U.S. financial system for money laundering and terrorist financing activities. The Bank Secrecy Act, as amended by the Patriot Act, requires depository institutions and their holding companies to undertake activities including maintaining an anti-money laundering program, verifying the identity of clients, monitoring for and reporting suspicious transactions, reporting on cash transactions exceeding specified thresholds, and responding to requests for information by regulatory authorities and law enforcement agencies. FinCEN, a unit of the Treasury Department that administers the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the federal bank regulatory agencies, as well as the United States Department of Justice, Drug Enforcement Administration, and IRS.
There is also increased scrutiny of compliance with the rules enforced by the OFAC. If our policies, procedures, and systems are deemed deficient or the policies, procedures, and systems of the financial institutions that we have already acquired or may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain planned business activities, including acquisition plans, which would negatively impact our business, financial condition, and results of operationsoperations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.
For more information regarding the Bank Secrecy Act, Patriot Act, anti-money laundering requirements and OFAC-administered sanctions, refer to Item 1: Business - Regulatory Matters.
Cybersecurity and data privacy are areas of heightened legislative and regulatory focus.
As cybersecurity and data privacy risks for banking organizations and the broader financial system have significantly increased in recent years, cybersecurity and data privacy issues have become the subject of increasing legislative and regulatory focus. The federal bank regulatory agencies have proposed enhanced cyber risk management standards, which would apply to a wide range of large financial institutions and their third-party service providers, including us and the Bank, and would focus on cyber risk governance and management, management of internal and external dependencies, and incident response, cyber resilience, and situational awareness. Several states have also proposed or adopted cybersecurity legislation and regulations, which require, among other things, notification to affected individuals when there has been a security breach of their personal data. For more information regarding cybersecurity, refer to Item 1: Business - Regulatory Matters.
We receive, maintain, and store non-public personal information of our customers and counterparties, including, but not limited to, personally identifiable information and personal financial information. The sharing, use, disclosure, and protection of this information are governed by federal and state law. Both personally identifiable information and personal financial information is increasingly subject to legislation and regulation, the intent of which is to protect the privacy of personal information that is collected and handled. For example, in June of 2018, the Governor of California signed into law the CCPA. The CCPA, which becomes effective on January 1, 2020, applies to for-profit businesses that conduct business in California and meet certain revenue or data
collection thresholds. For more information regarding data privacy laws and regulations, refer to Item 1: Business - Regulatory Matters.
We may become subject to new legislation or regulation concerning cybersecurity or the privacy of personally identifiable information and personal financial information or of any other information we may store or maintain. We could be adversely affected if we lose our financial holding company status.
In order for us to maintain our status as a financial holding company, we and the Bank must remain “well capitalized,” and “well managed.” If wenew legislation or our Bank cease to meet the requirements necessary for us to continue to qualify as a financial holding company, the Federal Reserve may impose upon us corrective capital and managerial requirements, and may place limitations on our ability to conduct all of the business activitiesregulations are adopted or if existing legislation or regulations are modified such that we conduct as a financial holding company. If the failure to meet these standards persists, we could beare required to divestalter our Bank,systems or cease all activities other than those activities thatrequire changes to our business practices or privacy policies. If cybersecurity, data privacy, data protection, data transfer, or data retention laws are implemented, interpreted, or applied in a manner inconsistent with our current practices, we may be conducted by bank holding companiessubject to fines, litigation, or regulatory enforcement actions or ordered to change our business practices, policies, or systems in a manner that are not financial holding companies. In addition,adversely impacts our ability to commence or engage in certain activities as a financial holding company will be restricted if the Bank fails to maintain at least a “Satisfactory” rating on its most recent Community Reinvestment Act examination.
operating results.
Item 1B: Unresolved Staff Comments
None.
Item 2: Properties
Our headquarters, as well as the Bank’s, is located in the Huntington Center, a thirty seven story office building located in Columbus, Ohio. Of the building’s total office space available, we lease approximately 22%. The lease term expires in 2030, with six five-year renewal options for up to 30 years but with no purchase option. The Bank has an indirect minority equity interest of 18.4% in the building.
Our other major properties consist of the following:
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Description | | Location | | Own | | Lease |
13 story office building, located adjacent to the Huntington CenterIndianapolis Main | Columbus, Ohio | Indianapolis, IN | | ü | | |
12 story officeFlint South (own building, located adjacent to the Huntington Center | Columbus, Ohiolease portion of land, own portion of land) | | üFlint, MI | | ü
| | ü
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3 story officeFlint West (own building, - the Crosswoods building (1)lease land) | Columbus, Ohio | Flint, MI | | ü
| | ü
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Holland Operations Center | | Holland, MI | | | | ü
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A portion of 200 Public Square Building | Cleveland, OhioDowntown Saginaw | | Saginaw, MI | | ü |
12 story office building | Youngstown, Ohio | | ü
| | |
10 story office building | Warren, OhioTower Building - Office | | Akron, OH | | ü |
10 story office building | Toledo, Ohio | | ü
| | |
A portion of the Grant Building | Pittsburgh, PennsylvaniaCascade III (own building, lease land) | | Akron, OH | | ü |
18 story office building | Charleston, West Virginia
| | ü
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Operations Center | | ü |
3 story office building | Holland, MichiganAkron, OH | | | | ü |
2 building office complex | Troy, Michigan | | | | ü |
Data processing and operations center (Easton) | Columbus, Ohio | | ü
| | |
Data processing and operations center (Northland) (1) | Columbus, OhioCleveland - Public Square (lease a portion of building) | | | | ü |
Data processing and operations center (Parma) | Cleveland, Ohio | | | | ü |
8 story office building | Indianapolis, Indiana | | ü | | |
A portion of Huntington Center at 525 Vine | Cincinnati, OH | | | | ü
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A portion of 222 LaSalle St.Easton - HNB Business Service Center | Chicago, IL | Columbus, OH | | ü
| | |
Capitol Square | | ü |
A portion of Two Towne SquareColumbus, OH | Southfield, MI | ü
| | |
Gateway Center | | Columbus, OH | | ü
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7 story office buildingHuntington Center (lease a portion of building) | Akron, | Columbus, OH | | | | ü
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27 story office buildingNorthland Center | Akron, | Columbus, OH | | | | ü
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Operations CenterHuntington Plaza | Akron, | Columbus, OH | | ü
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Crosswoods - Mortgage Group | | Columbus, OH | | | | ü
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12 story office buildingCourt Street | Saginaw, MI | Elyria, OH | | ü
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Parma NORC | | Parma, OH | | | | ü
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2 building office complexToledo Corporate Building | Flint, MI | Toledo, OH | | ü
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Mahoning Federal Plaza Building | | Youngstown, OH | | ü
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New Castle Building | | New Castle, PA | | ü
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Pittsburgh Main (lease a portion of building) | | Pittsburgh, PA | | | | ü
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4 story office buildingCharleston Main | Melrose Park, IL | Charleston, WV | | | | ü
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(1) DuringThe major properties occupied by the 2016 fourth quarter, we announced our intent to vacate these propertiesCompany are used across all of the business segments and invest in a facility in Columbus, Ohio.
for corporate purposes.
Item 3: Legal Proceedings
Information required by this item is set forth in Note 2120 of the Notes to Consolidated Financial Statements under the caption "Litigation"“Litigation and Regulatory Matters” and is incorporated into this Item by reference.
Item 4: Mine Safety Disclosures
Not applicable.
PART II
Item 5: Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
The common stock of Huntington Bancshares Incorporated is traded on the NASDAQ Stock Market under the symbol “HBAN”. The stock is listed as “HuntgBcshr” or “HuntBanc” in most newspapers. As of January 31, 2017,2019, we had 34,83128,724 shareholders of record.
Information regarding the high and low sale prices of our common stock and cash dividends declared on such shares, as required by this Item, is set forth in Tables 46 and 48 Selected Quarterly Income Statement Data and is incorporated into this Item by reference. Information regarding restrictions on dividends, as required by this Item, is set forth in Item 1: Business - Regulatory Matters and in Note 2221 of the Notes to Consolidated Financial Statements and incorporated into this Item by reference.
The following graph shows the changes, over the five-year period, in the value of $100 invested in (i) shares of Huntington’s Common Stock; (ii) the Standard & Poor’s 500 Stock Index (the S&P 500 Index) and (iii) Keefe, Bruyette & Woods Bank Index, for the period December 31, 2011,2013, through December 31, 2016.2018. The KBW Bank Index is a market capitalization-weighted bank stock index published by Keefe, Bruyette & Woods. The index is composed of the largest banking companies and includes all money center banks and regional banks, including Huntington. An investment of $100 on December 31, 2011,2013, and the reinvestment of all dividends, are assumed. The plotted points represent the cumulative total return on the last trading day of the fiscal year indicated.
![](https://files.docoh.com/10-K/0000049196-17-000009/hban20161231_xchart-50299.jpg)
![chart-e292327b1efb5983b5e.jpg](https://files.docoh.com/10-K/0000049196-19-000018/chart-e292327b1efb5983b5e.jpg)
| | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 |
HBAN | $100 | | $116 | | $180 | | $200 | | $215 | | $265 | $100 | | $111 | | $120 | | $147 | | $166 | | $141 |
S&P 500 | $100 | | $114 | | $151 | | $172 | | $174 | | $195 | $100 | | $114 | | $115 | | $129 | | $157 | | $150 |
KBW Bank Index | $100 | | $129 | | $177 | | $194 | | $195 | | $251 | $100 | | $109 | | $110 | | $141 | | $167 | | $138 |
For information regarding securities authorized for issuance under Huntington'sHuntington’s equity compensation plans, see Part III, Item 12.
DuringThe following table provides information regarding Huntington’s purchases of its Common Stock during the three-month period ended December 31, 2016, Huntington did not repurchase any of its common stock. The approximate dollar value of common stock that may yet be purchased under publicly announced stock repurchase authorizations was $166 million.2018.
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Period | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Maximum Number of Shares (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans or Programs (2) |
October 1, 2018 to October 31, 2018 | 7,149,221 |
| | $ | 14.55 |
| | $ | 273,010,029 |
|
November 1, 2018 to November 30, 2018 | 194,400 |
| | 14.43 |
| | 270,204,137 |
|
December 1, 2018 to December 31, 2018 | 7,622,627 |
| | 12.23 |
| | 177,010,035 |
|
Total | 14,966,248 |
| | $ | 13.36 |
| | $ | 177,010,035 |
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(1) | | | | | The reported shares were repurchased pursuant to Huntington’s publicly-announced share repurchase authorization. |
| |
(2) | The number shown represents, as of the end of each period, the approximate dollar value of Common Stock that may yet be purchased under publicly-announced share repurchase authorizations. The shares may be purchased, from time-to-time, depending on market conditions. |
On June 29, 2016,28, 2018, Huntington announced thatwas notified by the Federal Reserve did not objectthat it had no objection to theHuntington’s proposed capital actions included in Huntington'sHuntington’s capital plan submitted toin the Federal Reserve in April 2016 as part of the 20162018 CCAR. These actions included ana 27% increase in the quarterly dividend per common share to $0.08,$0.14, starting in the third quarter of 2018, the repurchase of up to $1.068 billion of common stock over the next four quarters (July 1, 2018 through June 30, 2019), and maintaining dividends on the outstanding classes of preferred stock and trust preferred securities. Any capital actions, including those contemplated in the above announced actions, are subject to consideration and evaluation by Huntington’s Board of Directors.
On July 17, 2018, the Board authorized the repurchase of up to $1.068 billion of common shares over the four quarters through the 2019 second quarter. During the 2018 fourth quarter, Huntington repurchased a total of 2016. Huntington’s capital plan also included the issuance15 million shares at a weighted average share price of capital in connection with the acquisition of FirstMerit Corporation and continues the previously announced suspension of the company’s 2015 share repurchase program.$13.36.
| | Item 6: Selected Financial Data | | | | | | | | | | | | | | | | | | | |
Table 1 - Selected Annual Income Statement Data (1) | (dollar amounts in thousands, except per share amounts) | |
| Year Ended December 31, | |
| 2016 | | 2015 | | 2014 | | 2013 | | 2012 | |
(dollar amounts in millions, share amounts in thousands) | | Year Ended December 31, |
| 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
Interest income | $ | 2,632,113 |
| | $ | 2,114,521 |
| | $ | 1,976,462 |
| | $ | 1,860,637 |
| | $ | 1,930,263 |
| $ | 3,949 |
| | $ | 3,433 |
| | $ | 2,632 |
| | $ | 2,115 |
| | $ | 1,976 |
|
Interest expense | 262,795 |
| | 163,784 |
| | 139,321 |
| | 156,029 |
| | 219,739 |
| 760 |
| | 431 |
| | 263 |
| | 164 |
| | 139 |
|
Net interest income | 2,369,318 |
| | 1,950,737 |
| | 1,837,141 |
| | 1,704,608 |
| | 1,710,524 |
| 3,189 |
| | 3,002 |
| | 2,369 |
| | 1,951 |
| | 1,837 |
|
Provision for credit losses | 190,802 |
| | 99,954 |
| | 80,989 |
| | 90,045 |
| | 147,388 |
| 235 |
| | 201 |
| | 191 |
| | 100 |
| | 81 |
|
Net interest income after provision for credit losses | 2,178,516 |
| | 1,850,783 |
| | 1,756,152 |
| | 1,614,563 |
| | 1,563,136 |
| 2,954 |
| | 2,801 |
| | 2,178 |
| | 1,851 |
| | 1,756 |
|
Noninterest income | 1,149,731 |
| | 1,038,730 |
| | 979,179 |
| | 1,012,196 |
| | 1,106,321 |
| 1,321 |
| | 1,307 |
| | 1,150 |
| | 1,039 |
| | 979 |
|
Noninterest expense | 2,408,485 |
| | 1,975,908 |
| | 1,882,346 |
| | 1,758,003 |
| | 1,835,876 |
| 2,647 |
| | 2,714 |
| | 2,408 |
| | 1,976 |
| | 1,882 |
|
Income before income taxes | 919,762 |
| | 913,605 |
| | 852,985 |
| | 868,756 |
| | 833,581 |
| 1,628 |
| | 1,394 |
| | 920 |
| | 914 |
| | 853 |
|
Provision for income taxes | 207,941 |
| | 220,648 |
| | 220,593 |
| | 227,474 |
| | 202,291 |
| 235 |
| | 208 |
| | 208 |
| | 221 |
| | 221 |
|
Net income | 711,821 |
| | 692,957 |
| | 632,392 |
| | 641,282 |
| | 631,290 |
| 1,393 |
| | 1,186 |
| | 712 |
| | 693 |
| | 632 |
|
Dividends on preferred shares | 65,274 |
| | 31,873 |
| | 31,854 |
| | 31,869 |
| | 31,989 |
| 70 |
| | 76 |
| | 65 |
| | 32 |
| | 32 |
|
Net income applicable to common shares | $ | 646,547 |
| | $ | 661,084 |
| | $ | 600,538 |
| | $ | 609,413 |
| | $ | 599,301 |
| $ | 1,323 |
| | $ | 1,110 |
| | $ | 647 |
| | $ | 661 |
| | $ | 600 |
|
Net income per common share—basic | $ | 0.72 |
| | $ | 0.82 |
| | $ | 0.73 |
| | $ | 0.73 |
| | $ | 0.70 |
| $ | 1.22 |
| | $ | 1.02 |
| | $ | 0.72 |
| | $ | 0.82 |
| | $ | 0.73 |
|
Net income per common share—diluted | 0.70 |
| | 0.81 |
| | 0.72 |
| | 0.72 |
| | 0.69 |
| 1.20 |
| | 1.00 |
| | 0.70 |
| | 0.81 |
| | 0.72 |
|
Cash dividends declared per common share | 0.29 |
| | 0.25 |
| | 0.21 |
| | 0.19 |
| | 0.16 |
| 0.50 |
| | 0.35 |
| | 0.29 |
| | 0.25 |
| | 0.21 |
|
Balance sheet highlights | | | | | | | | | | | | | | | | | | |
Total assets (period end) | $ | 99,714,097 |
| | $ | 71,018,301 |
| | $ | 66,283,130 |
| | $ | 59,454,113 |
| | $ | 56,131,660 |
| $ | 108,781 |
| | $ | 104,185 |
| | $ | 99,714 |
| | $ | 71,018 |
| | $ | 66,283 |
|
Total long-term debt (period end) | 8,309,159 |
| | 7,041,364 |
| | 4,321,082 |
| | 2,445,493 |
| | 1,356,570 |
| 8,625 |
| | 9,206 |
| | 8,309 |
| | 7,042 |
| | 4,321 |
|
Total shareholders’ equity (period end) | 10,308,146 |
| | 6,594,606 |
| | 6,328,170 |
| | 6,090,153 |
| | 5,778,500 |
| 11,102 |
| | 10,814 |
| | 10,308 |
| | 6,595 |
| | 6,328 |
|
Average total assets | 83,054,283 |
| | 68,560,023 |
| | 62,483,232 |
| | 56,289,181 |
| | 55,661,162 |
| 104,982 |
| | 101,021 |
| | 83,054 |
| | 68,560 |
| | 62,483 |
|
Average total long-term debt | 8,048,477 |
| | 5,585,458 |
| | 3,479,438 |
| | 1,661,169 |
| | 1,975,990 |
| 8,992 |
| | 8,862 |
| | 8,048 |
| | 5,585 |
| | 3,479 |
|
Average total shareholders’ equity | 8,391,361 |
| | 6,536,018 |
| | 6,269,884 |
| | 5,914,914 |
| | 5,671,455 |
| 11,059 |
| | 10,611 |
| | 8,391 |
| | 6,536 |
| | 6,270 |
|
Key ratios and statistics | | | | | | | | | | | | | | | | | | |
Margin analysis—as a % of average earnings assets | | | | | | | | | | | | | | | | | | |
Interest income(2) | 3.50 | % | | 3.41 | % | | 3.47 | % | | 3.66 | % | | 3.85 | % | |
Interest income (2) | | 4.12 | % | | 3.77 | % | | 3.50 | % | | 3.41 | % | | 3.47 | % |
Interest expense | 0.34 |
| | 0.26 |
| | 0.24 |
| | 0.30 |
| | 0.44 |
| 0.79 |
| | 0.47 |
| | 0.34 |
| | 0.26 |
| | 0.24 |
|
Net interest margin(2) | 3.16 | % | | 3.15 | % | | 3.23 | % | | 3.36 | % | | 3.41 | % | |
Net interest margin (2) | | 3.33 | % | | 3.30 | % | | 3.16 | % | | 3.15 | % | | 3.23 | % |
Return on average total assets | 0.86 | % | | 1.01 | % | | 1.01 | % | | 1.14 | % | | 1.13 | % | 1.33 | % | | 1.17 | % | | 0.86 | % | | 1.01 | % | | 1.01 | % |
Return on average common shareholders’ equity | 8.6 |
| | 10.7 |
| | 10.2 |
| | 11.0 |
| | 11.3 |
| 13.4 |
| | 11.6 |
| | 8.6 |
| | 10.7 |
| | 10.2 |
|
Return on average tangible common shareholders’ equity(3), (7) | 10.7 |
| | 12.4 |
| | 11.8 |
| | 12.7 |
| | 13.3 |
| |
Efficiency ratio(4) | 66.8 |
| | 64.5 |
| | 65.1 |
| | 62.6 |
| | 63.2 |
| |
Return on average tangible common shareholders’ equity (3), (7) | | 17.9 |
| | 15.7 |
| | 10.7 |
| | 12.4 |
| | 11.8 |
|
Efficiency ratio (4) | | 56.9 |
| | 60.9 |
| | 66.8 |
| | 64.5 |
| | 65.1 |
|
Dividend payout ratio | 40.3 |
| | 30.5 |
|
| 28.8 |
|
| 26.0 |
|
| 22.9 |
| 41.0 |
| | 34.3 |
|
| 40.3 |
|
| 30.5 |
|
| 28.8 |
|
Average shareholders’ equity to average assets | 10.10 |
| | 9.53 |
| | 10.03 |
| | 10.51 |
| | 10.19 |
| 10.53 |
| | 10.50 |
| | 10.10 |
| | 9.53 |
| | 10.03 |
|
Effective tax rate | 22.6 |
| | 24.2 |
| | 25.9 |
| | 26.2 |
| | 24.3 |
| 14.5 |
| | 14.9 |
| | 22.6 |
| | 24.2 |
| | 25.9 |
|
Non-regulatory capital | | | | | | | | | | | | | | | | | | |
Tangible common equity to tangible assets (period end) (5), (7) | 7.16 |
| | 7.82 |
| | 8.17 |
| | 8.82 |
| | 8.74 |
| 7.21 |
| | 7.34 |
| | 7.16 |
| | 7.82 |
| | 8.17 |
|
Tangible equity to tangible assets (period end)(6), (7) | 8.26 |
| | 8.37 |
| | 8.76 |
| | 9.48 |
| | 9.44 |
| |
Tier 1 common risk-based capital ratio (period end)(7), (8) | N.A. |
| | N.A. |
| | 10.23 |
| | 10.90 |
| | 10.48 |
| |
Tier 1 leverage ratio (period end)(9), (10) | N.A. |
| | N.A. |
| | 9.74 |
| | 10.67 |
| | 10.36 |
| |
Tier 1 risk-based capital ratio (period end)(9), (10) | N.A. |
| | N.A. |
| | 11.50 |
| | 12.28 |
| | 12.02 |
| |
Total risk-based capital ratio (period end)(9), (10) | N.A. |
| | N.A. |
| | 13.56 |
| | 14.57 |
| | 14.50 |
| |
Tangible equity to tangible assets (period end) (6), (7) | | 8.34 |
| | 8.39 |
| | 8.26 |
| | 8.37 |
| | 8.76 |
|
Tier 1 common risk-based capital ratio (period end) (7), (8) | | N.A. |
| | N.A. |
| | N.A. |
| | N.A. |
| | 10.23 |
|
Tier 1 leverage ratio (period end) (8) | | N.A. |
| | N.A. |
| | N.A. |
| | N.A. |
| | 9.74 |
|
Tier 1 risk-based capital ratio (period end) (8) | | N.A. |
| | N.A. |
| | N.A. |
| | N.A. |
| | 11.50 |
|
Total risk-based capital ratio (period end) (8) | | N.A. |
| | N.A. |
| | N.A. |
| | N.A. |
| | 13.56 |
|
Capital under current regulatory standards (Basel III) | | | | | | | | | | | | | | | | | | |
Common equity tier 1 risk-based capital ratio | 9.56 |
| | 9.79 | % | | N.A. |
| | N.A. |
| | N.A. |
| |
CET 1 risk-based capital ratio | | 9.65 | % | | 10.01 | % | | 9.56 | % | | 9.79 | % | | N.A. |
|
Tier 1 leverage ratio (period end) | 8.70 |
| | 8.79 | % | | N.A. |
| | N.A. |
| | N.A. |
| 9.10 |
| | 9.09 |
| | 8.70 |
| | 8.79 |
| | N.A. |
|
Tier 1 risk-based capital ratio (period end) | 10.92 |
| | 10.53 | % | | N.A. |
| | N.A. |
| | N.A. |
| 11.06 |
| | 11.34 |
| | 10.92 |
| | 10.53 |
| | N.A. |
|
Total risk-based capital ratio (period end) | 13.05 |
| | 12.64 | % | | N.A. |
| | N.A. |
| | N.A. |
| 12.98 |
| | 13.39 |
| | 13.05 |
| | 12.64 |
| | N.A. |
|
Other data | | | | | | | | | | | | | | | | | | |
Full-time equivalent employees (average) | 15,993 |
| | 12,243 |
| | 11,873 |
| | 11,964 |
| | 11,494 |
| 15,693 |
| | 15,770 |
| | 13,858 |
| | 12,243 |
| | 11,873 |
|
Domestic banking offices (period end) | 1,115 |
| | 777 |
| | 729 |
| | 711 |
| | 705 |
| 954 |
| | 966 |
| | 1,115 |
| | 777 |
| | 729 |
|
| |
(1) | Comparisons for presented periods are impacted by a number of factors. Refer to the "Significant Items"“Significant Items” in the Discussion of Results of Operations for additional discussion regarding these key factors. |
| |
(2) | On an FTE basis assuming a 21% tax rate and a 35% tax rate.rate for periods prior to January 1, 2018. |
| |
(3) | Net income applicable to common shares excluding expense for amortization of intangibles for the period divided by average tangible shareholders’ equity. Average tangible shareholders’ equity equals average total 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.tax. |
| |
(4) | Noninterest expense less amortization of intangibles divided by the sum of FTE net interest income and noninterest income excluding securities gains. (Non-GAAP) |
| |
(5) | Tangible common equity (total common equity less goodwill and other intangible assets) divided by tangible assets (total assets less goodwill and other intangible assets). Other intangible assets are net of deferred tax and calculated assuming a 35% tax rate. (Non-GAAP)tax. |
| |
(6) | Tangible equity (total equity less goodwill and other intangible assets) divided by tangible assets (total assets less goodwill and other intangible assets). Other intangible assets are net of deferred tax and calculated assuming a 35% tax rate.tax. |
| |
(7) | Tier 1 common equity, tangible equity, tangible common equity, and tangible assets are non-GAAP financial measures. Additionally, any ratios utilizing these financial measures are also non-GAAP. These financial measures have been included as they are considered to be critical metrics with which to analyze and evaluate financial condition and capital strength. Other companies may calculate these financial measures differently. |
| |
(8) | In accordance with applicable regulatory reporting guidance, we are not required to retrospectively update historical filings for newly adopted accounting principles. Therefore, tier 1 capital, tier 1 common equity, and risk-weighted assets have not been updated for the adoption of ASU 2014-01. |
| |
(9) | In accordance with applicable regulatory reporting guidance, we are not required to retrospectively update historical filings for newly adopted accounting principles. Therefore, regulatory capital data has not been updated for the adoption of ASU 2014-01. |
| |
(10) | Ratios are calculated on the Basel I basis. |
| |
N.A. | On January 1, 2015, we became subject to the Basel III capital requirements and the standardized approach for calculating risk-weighted assets in accordance with subpart D of the final capital rule. |
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
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 should be read in conjunction with the Consolidated Financial Statements, Notes to Consolidated Financial Statements, and other information contained in this report. The forward-looking statements in this section and other parts of this report involve assumptions, risks, uncertainties, and other factors, including statements regarding our plans, objectives, goals, strategies, and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under the caption "Forward-Looking Statements"“Forward-Looking Statements” and those set forth in Item 1A.
EXECUTIVE OVERVIEW
Business Combinations
On August 16, 2016, Huntington completed its acquisition of FirstMerit Corporation in a stock and cash transaction valued at approximately $3.7 billion. FirstMerit Corporation was a diversified financial services company headquartered in Akron, Ohio, with operations in Ohio, Michigan, Wisconsin, Illinois and Pennsylvania. Post acquisition, Huntington now operates across an eight-state Midwestern footprint. The acquisition resulted in a combined company with a larger market presence and more diversified loan portfolio, as well as a larger core deposit funding base and economies of scale associated with a larger financial institution. For further discussion, see Note 3 of the Notes to Consolidated Financial Statements.
20162018 Financial Performance Review
In 2016,2018, we reported net income of $712 million,$1.4 billion, a 3%17% increase from the prior year. Earnings per common share on a diluted basis for the year was $0.70, down 14%$1.20, up 20% from the prior year. Reported net income was impacted by FirstMerit acquisition related expenses totaling $282 million pre-tax, or $0.20 per common share and a reduction to the litigation reserve totaling $42 million pre-tax, or $0.03 per common share.
Fully-taxable equivalent net interest income was $2.4 billion, up $0.4 billion,for 2018 increased $167 million, or 22%.5%, from 2017. This reflected the impact of 21%4% average earning asset growth, 22% interest-bearing liability growth, and a 1three basis point increase in the NIM to 3.16%. The3.33%, partially offset by 7% average interest-bearing liability growth. Average earning asset growth included an $8.8a $4.4 billion, or 18%6%, increase in average loans and leases, andpartially offset by a $4.1$0.4 billion, or 30%2%, increasedecrease in average securities, both of which were impacted by the FirstMerit acquisition. securities.The net interest marginNIM expansion reflected a 935 basis point positive impact from the mix and yield on earning assets and a 310 basis point increase in the benefit from noninterest-bearing funds,funding, partially offset by an 11a 42 basis point increase in funding costs.
The provision for credit losses was $191$235 million, up $91$34 million, or 91%17%. The higherincrease in provision expense was dueover the prior year are primarily attributed to several factors, includingloan balance growth across the migration of the acquired portfolio to the originated portfolio, and the corresponding reserve build, portfolio growth and transitioning the FirstMerit portfolio to Huntington’s reserving methodology. Net charge-offs represented an annualized 0.19% of average loans and leases, which remains below our long-term target of 35 to 55 basis points.portfolio.
Noninterest income was $1.1$1.3 billion, up $111$14 million, or 11%1%, from the prior year. Card and payment processing income increased $18 million, or 9%, due to higher check card interchange income and underlying customer growth. Trust and investment management services increased $15 million, or 10%, primarily reflecting increased sales production and year over year market growth. Capital markets fees increased $15 million, or 20%, reflecting increased sales of interest rate, foreign exchange and commodity derivatives as well as fees as a result of the acquisition of Hutchinson, Shockey, Erley & Co. (HSE). Service charges on deposit accounts increased $44$11 million, or 16%, reflecting the benefit of continued new customer acquisition. In addition, cards and payment processing income increased $26 million, or 18%3%, due to higher card related incomean increase in both personal and underlying customer growth. Also,corporate service charges. These increases were partially offset by a $23 million, or 18% decrease in mortgage banking income, increased $16due to lower margin on loans sold, $17 million, or 15%425%, reflecting a 24% increase in mortgage origination volume. Finally, gain on sale of loans increased $14securities losses reflecting portfolio repositioning completed in the 2018 fourth quarterand a $5 million, or 43%3%, decrease in other income primarily reflecting an increase of $6 million in SBA loan sales gains and the $7 million gains on non-relationship C&I and CRE loan sales, both of which were related to the balance sheet optimization strategy completed in the 2016 fourth quarter.unfavorable Visa Class B derivative fair value adjustment.
Noninterest expense was $2.4$2.6 billion, up $433down $67 million, or 22%.2%, from the prior year. Reported noninterest expense was impacted by FirstMerit acquisition-related expenses totaling $282 million. Personnel costs increased $227$154 million, offset by branch and facility consolidation-related expenses and personnel costs. Net occupancy expense decreased $28 million, or 20%13%, primarily reflecting $76$52 million of prior year acquisition-related expense, lower occupancy related expenses and a 31% increase in the numberreserves, partially offset by $28 million of average full-time equivalent employees largely related to the in-store branch expansion and the addition of colleagues from FirstMerit. In addition, outsidefacility consolidation-related expense. Outside data processing and other services professional services, equipment expense, and net occupancy expense all increased as a result of acquisition-related expenses. Also, other expense decreased $17$19 million, or 8%6%, primarily reflecting a $42$24 million reduction to litigation reserves, which was mostlyof acquisition-related expense in the year-ago period, partially offset by a $40higher technology investment costs. Deposit and other insurance expense decreased $15 million, contributionor 19%, primarily due to the discontinuation of the FDIC surcharge in the 20162018 fourth quarterquarter. Other noninterest expense decreased $14 million, or 6%, reflecting $9 million of acquisition-related expense in the year-ago period, as well as declines in franchise and other taxes. Professional services decreased $9 million, or 13%, primarily reflecting $10 million of acquisition-related expense in the year-ago period. Equipment decreased $7 million, or 4%, primarily due to achieve$16 million in acquisition-related costs in the philanthropic plans related to FirstMerit.
year-ago period, partially offset by $7 million of branch and facility consolidation-related expense in the 2018 fourth quarter. Marketing decreased $7 million, or 12%, driven by a decrease in promotional expense, partially offset by an increase in advertising. Partially offsetting these decreases, personnel costs increased $35 million, or 2%, primarily reflecting higher benefit costs and merit increases.
The tangible common equity to tangible assets ratio was 7.16%7.21%, down 6613 basis points. The CET1regulatory Common Equity Tier 1 (CET1) risk-based capital ratio was 9.56%9.65%, down 2336 basis points. The regulatory tierTier 1 risk-based capital ratio was 10.92%11.06%, up 39down 28 basis points. All
Consistent with the 2018 CCAR capital ratios were impacted byplan, the $1.3 billion of goodwill created and the issuance of $2.8 billionCompany repurchased $939 million of common stock as partduring 2018 at an average cost of $15.23 per share. Included in the share repurchase activity, the Company completed a $400 million ASR which effectively offset the impact of the FirstMerit acquisition. The regulatory Tier 1 risk-based and total risk-based capital ratios benefited from the issuance of $600$363 million of Class DSeries A preferred equity and separately, the issuance of $100 million of Class C preferred equity in exchange for FirstMerit preferred equity in conjunction with the acquisition. The total risk-based capital ratio was impacted by the repurchase of $65 million of trust preferred securities. In addition, $5 million of trust preferred securities acquiredconversion in the FirstMerit acquisition were subsequently redeemed. There were no common shares repurchased during 2016.2018 first quarter.
Business Overview
General
Our general business objectives are: (1) grow net interest income
•Consistent organic revenue and fee income, (2) deliverbalance sheet growth.
•Invest in our businesses, particularly technology and risk management.
•Deliver positive operating leverage, (3) increase primary relationships across all business segments, (4) continue to strengthenleverage.
•Maintain aggregate moderate-to-low risk management, and (5) maintainappetite.
•Disciplined capital and liquidity positionsmanagement.
Economy
Our view of 2019 from a balance sheet growth perspective remains unchanged, generally consistent with our view of overall economic activity. The underlying fundamentals of our local economies are positive, and businesses are generally performing well and we are optimistic about 2019. Our loan pipelines remain steady, and credit metrics remain strong. We are executing on our new strategic plan and continue to invest to drive organic growth. The plan entails low execution risk appetite. Additionally,and builds on the success of the past two strategic plans. At the same time, given recent market volatility, we are reverting to our historic practice of assuming no interest rate hikes in our revenue expectation and are adjusting our expense expectation as a result. We are focused on the successful integration of FirstMerit in 2017.
Economy
Looking forward into 2017,what we are optimistic that improved consumer confidence and jobs growth will translate into overall economic growth in the markets where we do business. Operationally, we expectcan control to realize the full financial benefits of integration completion within the second half of the year, meeting our commitment for cost savings. We are driving revenue synergies and organic revenue growth, leveraging our expanded footprint and customer base. We will see minor benefits from the Federal Reserve’s December interest rate action, and any additional rate increases in 2017 would be additive to our bottom line.drive long-term performance.
Legislative and Regulatory
A comprehensive discussion of legislative and regulatory matters affecting us can be found in the Regulatory Matters section included in Item 1 of this Form 10-K.
| | Table 2 - Selected Annual Income Statements (1) | (dollar amounts in thousands, except per share amounts) | |
(dollar amounts in millions, share amounts in thousands) | | (dollar amounts in millions, share amounts in thousands) |
| Year Ended December 31, | Year Ended December 31, |
| | | Change from 2015 | | | | Change from 2014 | | | | | Change from 2017 | | | | Change from 2016 | | |
| 2016 | | Amount | | Percent | | 2015 | | Amount | | Percent | | 2014 | 2018 | | Amount | | Percent | | 2017 | | Amount | | Percent | | 2016 |
Interest income | $ | 2,632,113 |
| | $ | 517,592 |
| | 24 | % | | $ | 2,114,521 |
| | $ | 138,059 |
| | 7 | % | | $ | 1,976,462 |
| $ | 3,949 |
| | $ | 516 |
| | 15 | % | | $ | 3,433 |
| | $ | 801 |
| | 30 | % | | $ | 2,632 |
|
Interest expense | 262,795 |
| | 99,011 |
| | 60 |
| | 163,784 |
| | 24,463 |
| | 18 |
| | 139,321 |
| 760 |
| | 329 |
| | 76 |
| | 431 |
| | 168 |
| | 64 |
| | 263 |
|
Net interest income | 2,369,318 |
| | 418,581 |
| | 21 |
| | 1,950,737 |
| | 113,596 |
| | 6 |
| | 1,837,141 |
| 3,189 |
| | 187 |
| | 6 |
| | 3,002 |
| | 633 |
| | 27 |
| | 2,369 |
|
Provision for credit losses | 190,802 |
| | 90,848 |
| | 91 |
| | 99,954 |
| | 18,965 |
| | 23 |
| | 80,989 |
| 235 |
| | 34 |
| | 17 |
| | 201 |
| | 10 |
| | 5 |
| | 191 |
|
Net interest income after provision for credit losses | 2,178,516 |
| | 327,733 |
| | 18 |
| | 1,850,783 |
| | 94,631 |
| | 5 |
| | 1,756,152 |
| 2,954 |
| | 153 |
| | 5 |
| | 2,801 |
| | 623 |
| | 29 |
| | 2,178 |
|
Service charges on deposit accounts | 324,299 |
| | 43,950 |
| | 16 |
| | 280,349 |
| | 6,608 |
| | 2 |
| | 273,741 |
| 364 |
| | 11 |
| | 3 |
| | 353 |
| | 29 |
| | 9 |
| | 324 |
|
Cards and payment processing income | 169,064 |
| | 26,349 |
| | 18 |
| | 142,715 |
| | 37,314 |
| | 35 |
| | 105,401 |
| |
Card and payment processing income | | 224 |
| | 18 |
| | 9 |
| | 206 |
| | 37 |
| | 22 |
| | 169 |
|
Trust and investment management services | | 171 |
| | 15 |
| | 10 |
| | 156 |
| | 33 |
| | 27 |
| | 123 |
|
Mortgage banking income | 128,257 |
| | 16,404 |
| | 15 |
| | 111,853 |
| | 26,966 |
| | 32 |
| | 84,887 |
| 108 |
| | (23 | ) | | (18 | ) | | 131 |
| | 3 |
| | 2 |
| | 128 |
|
Trust services | 108,274 |
| | 2,441 |
| | 2 |
| | 105,833 |
| | (10,139 | ) | | (9 | ) | | 115,972 |
| |
Capital markets fees | | 91 |
| | 15 |
| | 20 |
| | 76 |
| | 16 |
| | 27 |
| | 60 |
|
Insurance income | 64,523 |
| | (741 | ) | | (1 | ) | | 65,264 |
| | (209 | ) | | — |
| | 65,473 |
| 82 |
| | 1 |
| | 1 |
| | 81 |
| | (3 | ) | | (4 | ) | | 84 |
|
Brokerage income | 61,834 |
| | 1,629 |
| | 3 |
| | 60,205 |
| | (8,072 | ) | | (12 | ) | | 68,277 |
| |
Capital markets fees | 59,527 |
| | 5,911 |
| | 11 |
| | 53,616 |
| | 9,885 |
| | 23 |
| | 43,731 |
| |
Bank owned life insurance income | 57,567 |
| | 5,167 |
| | 10 |
| | 52,400 |
| | (4,648 | ) | | (8 | ) | | 57,048 |
| 67 |
| | — |
| | — |
| | 67 |
| | 9 |
| | 16 |
| | 58 |
|
Gain on sale of loans | 47,153 |
| | 14,116 |
| | 43 |
| | 33,037 |
| | 11,946 |
| | 57 |
| | 21,091 |
| |
Gain on sale of loans and leases | | 55 |
| | (1 | ) | | (2 | ) | | 56 |
| | 9 |
| | 19 |
| | 47 |
|
Securities gains (losses) | (84 | ) | | (828 | ) | | (111 | ) | | 744 |
| | (16,810 | ) | | (96 | ) | | 17,554 |
| (21 | ) | | (17 | ) | | (425 | ) | | (4 | ) | | (4 | ) | | (100 | ) | | — |
|
Other income | 129,317 |
| | (3,397 | ) | | (3 | ) | | 132,714 |
| | 6,710 |
| | 5 |
| | 126,004 |
| 180 |
| | (5 | ) | | (3 | ) | | 185 |
| | 28 |
| | 18 |
| | 157 |
|
Total noninterest income | 1,149,731 |
| | 111,001 |
| | 11 |
| | 1,038,730 |
| | 59,551 |
| | 6 |
| | 979,179 |
| 1,321 |
| | 14 |
| | 1 |
| | 1,307 |
| | 157 |
| | 14 |
| | 1,150 |
|
Personnel costs | 1,349,124 |
| | 226,942 |
| | 20 |
| | 1,122,182 |
| | 73,407 |
| | 7 |
| | 1,048,775 |
| 1,559 |
| | 35 |
| | 2 |
| | 1,524 |
| | 175 |
| | 13 |
| | 1,349 |
|
Outside data processing and other services | 304,743 |
| | 73,390 |
| | 32 |
| | 231,353 |
| | 18,767 |
| | 9 |
| | 212,586 |
| 294 |
| | (19 | ) | | (6 | ) | | 313 |
| | 8 |
| | 3 |
| | 305 |
|
Net occupancy | | 184 |
| | (28 | ) | | (13 | ) | | 212 |
| | 59 |
| | 39 |
| | 153 |
|
Equipment | 164,839 |
| | 39,882 |
| | 32 |
| | 124,957 |
| | 5,294 |
| | 4 |
| | 119,663 |
| 164 |
| | (7 | ) | | (4 | ) | | 171 |
| | 6 |
| | 4 |
| | 165 |
|
Net occupancy | 153,090 |
| | 31,209 |
| | 26 |
| | 121,881 |
| | (6,195 | ) | | (5 | ) | | 128,076 |
| |
Deposit and other insurance expense | | 63 |
| | (15 | ) | | (19 | ) | | 78 |
| | 24 |
| | 44 |
| | 54 |
|
Professional services | 105,266 |
| | 54,975 |
| | 109 |
| | 50,291 |
| | (9,264 | ) | | (16 | ) | | 59,555 |
| 60 |
| | (9 | ) | | (13 | ) | | 69 |
| | (36 | ) | | (34 | ) | | 105 |
|
Marketing | 62,957 |
| | 10,744 |
| | 21 |
| | 52,213 |
| | 1,653 |
| | 3 |
| | 50,560 |
| 53 |
| | (7 | ) | | (12 | ) | | 60 |
| | (3 | ) | | (5 | ) | | 63 |
|
Deposit and other insurance expense | 54,107 |
| | 9,498 |
| | 21 |
| | 44,609 |
| | (4,435 | ) | | (9 | ) | | 49,044 |
| |
Amortization of intangibles | 30,456 |
| | 2,589 |
| | 9 |
| | 27,867 |
| | (11,410 | ) | | (29 | ) | | 39,277 |
| 53 |
| | (3 | ) | | (5 | ) | | 56 |
| | 26 |
| | 87 |
| | 30 |
|
Other expense | 183,903 |
| | (16,652 | ) | | (8 | ) | | 200,555 |
| | 25,745 |
| | 15 |
| | 174,810 |
| 217 |
| | (14 | ) | | (6 | ) | | 231 |
| | 47 |
| | 26 |
| | 184 |
|
Total noninterest expense | 2,408,485 |
| | 432,577 |
| | 22 |
| | 1,975,908 |
| | 93,562 |
| | 5 |
| | 1,882,346 |
| 2,647 |
| | (67 | ) | | (2 | ) | | 2,714 |
| | 306 |
| | 13 |
| | 2,408 |
|
Income before income taxes | 919,762 |
| | 6,157 |
| | 1 |
| | 913,605 |
| | 60,620 |
| | 7 |
| | 852,985 |
| 1,628 |
| | 234 |
| | 17 |
| | 1,394 |
| | 474 |
| | 52 |
| | 920 |
|
Provision for income taxes | 207,941 |
| | (12,707 | ) | | (6 | ) | | 220,648 |
| | 55 |
| | — |
| | 220,593 |
| 235 |
| | 27 |
| | 13 |
| | 208 |
| | — |
| | — |
| | 208 |
|
Net income | 711,821 |
| | 18,864 |
| | 3 |
| | 692,957 |
| | 60,565 |
| | 10 |
| | 632,392 |
| 1,393 |
| | 207 |
| | 17 |
| | 1,186 |
| | 474 |
| | 67 |
| | 712 |
|
Dividends on preferred shares | 65,274 |
| | 33,401 |
| | 105 |
| | 31,873 |
| | 19 |
| | — |
| | 31,854 |
| 70 |
| | (6 | ) | | (8 | ) | | 76 |
| | 11 |
| | 17 |
| | 65 |
|
Net income applicable to common shares | $ | 646,547 |
| | $ | (14,537 | ) | | (2 | )% | | $ | 661,084 |
| | $ | 60,546 |
| | 10 | % | | $ | 600,538 |
| $ | 1,323 |
| | $ | 213 |
| | 19 | % | | $ | 1,110 |
| | $ | 463 |
| | 72 | % | | $ | 647 |
|
Average common shares—basic | 904,438 |
| | 101,026 |
| | 13 | % | | 803,412 |
| | (16,505 | ) | | (2 | )% | | 819,917 |
| 1,081,542 |
| | (3,144 | ) | | — | % | | 1,084,686 |
| | 180,248 |
| | 20 | % | | 904,438 |
|
Average common shares—diluted | 918,790 |
| | 101,661 |
| | 12 |
| | 817,129 |
| | (15,952 | ) | | (2 | ) | | 833,081 |
| 1,105,985 |
| | (30,201 | ) | | (3 | ) | | 1,136,186 |
| | 217,396 |
| | 24 |
| | 918,790 |
|
Per common share: | | | | |
| | | | | |
| | | | | | |
| | | | | |
| | |
Net income—basic | $ | 0.72 |
| | $ | (0.10 | ) | | (12 | )% | | $ | 0.82 |
| | $ | 0.09 |
| | 12 | % | | $ | 0.73 |
| $ | 1.22 |
| | $ | 0.20 |
| | 20 | % | | $ | 1.02 |
| | $ | 0.30 |
| | 42 | % | | $ | 0.72 |
|
Net income—diluted | 0.70 |
| | (0.11 | ) | | (14 | ) | | 0.81 |
| | 0.09 |
| | 13 |
| | 0.72 |
| 1.20 |
| | 0.20 |
| | 20 |
| | 1.00 |
| | 0.30 |
| | 43 |
| | 0.70 |
|
Cash dividends declared | 0.29 |
| | 0.04 |
| | 16 |
| | 0.25 |
| | 0.04 |
| | 19 |
| | 0.21 |
| 0.50 |
| | 0.15 |
| | 43 |
| | 0.35 |
| | 0.06 |
| | 21 |
| | 0.29 |
|
Revenue—FTE | | | | |
| | | | | |
| | | | | | |
| | | | | |
| | |
Net interest income | $ | 2,369,318 |
| | $ | 418,581 |
| | 21 | % | | $ | 1,950,737 |
| | $ | 113,596 |
| | 6 | % | | $ | 1,837,141 |
| $ | 3,189 |
| | $ | 187 |
| | 6 | % | | $ | 3,002 |
| | $ | 633 |
| | 27 | % | | $ | 2,369 |
|
FTE adjustment | 42,408 |
| | 10,293 |
| | 32 |
| | 32,115 |
| | 4,565 |
| | 17 |
| | 27,550 |
| 30 |
| | (20 | ) | | (40 | ) | | 50 |
| | 7 |
| | 16 |
| | 43 |
|
Net interest income(2) | 2,411,726 |
| | 428,874 |
| | 22 |
| | 1,982,852 |
| | 118,161 |
| | 6 |
| | 1,864,691 |
| 3,219 |
| | 167 |
| | 5 |
| | 3,052 |
| | 640 |
| | 27 |
| | 2,412 |
|
Noninterest income | 1,149,731 |
| | 111,001 |
| | 11 |
| | 1,038,730 |
| | 59,551 |
| | 6 |
| | 979,179 |
| 1,321 |
| | 14 |
| | 1 |
| | 1,307 |
| | 157 |
| | 14 |
| | 1,150 |
|
Total revenue(2) | $ | 3,561,457 |
| | $ | 539,875 |
| | 18 | % | | $ | 3,021,582 |
| | $ | 177,712 |
| | 6 | % | | $ | 2,843,870 |
| $ | 4,540 |
| | $ | 181 |
| | 4 | % | | $ | 4,359 |
| | $ | 797 |
| | 22 | % | | $ | 3,562 |
|
| |
(1) | Comparisons for presented periods are impacted by a number of factors. Refer to “Significant Items” in the Discussion of Results of Operations. |
| |
(2) | On a fully-taxable equivalent (FTE) basis assuming a 21% tax rate and a 35% tax rate.rate for periods prior to January 1, 2018. |
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 consolidated balance sheet and income statement 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.”
Significant Items
Earnings comparisons among the three years ended December 31, 2016, 2015,2018, 2017, and 20142016 were impacted by a number of Significant Items summarized below.
There were no Significant Items in 2018.
Significant Items included in 2017 and 2016 were:
| |
1. | Mergers and Acquisitions. Significant events relating to mergers and acquisitions, and the impacts of those events on our reported results, were as follows: |
During 2017, $154 million of noninterest expense and $2 million of noninterest income was recorded related to the acquisition of FirstMerit. This resulted in a negative impact of $0.09 per common share in 2017.
During 2016, $282 million of noninterest expense and $1 million of noninterest income was recorded related to the acquisition of FirstMerit. This resulted in a negative impact of $0.20 per common share in 2016.
| |
2. | Federal tax reform-related tax benefit. Significant events relating to federal tax reform-related tax benefits, and the impacts of those events on our reported results, were as follows: |
During 2015, $92017, $123 million of noninterest expensefederal tax reform-related tax benefit was recorded related to the acquisition of Macquarie Equipment Finance, which was rebranded Huntington Technology Finance. Also during 2015, $4 million of noninterest expense and $3 million of noninterestas provision for income was recorded related to the sale of HAA, HASI, and Unified.taxes. This resulted in a negativepositive impact of $0.01$0.11 per common share in 2015.
During 2014, $16 million of net noninterest expense was recorded related to the acquisition of 24 Bank of America branches and Camco Financial. This resulted in a net negative impact of $0.01 per common share in 2014.2017.
| |
2.3. | Litigation Reserve. Significant events relating to our litigation reserve, and the impacts of those events on our reported results, were as follows: |
During 2016, a $42 million reduction to litigation reserves was recorded as other noninterest expense. This resulted in a positive impact of $0.03 per common share in 2016.
During 2015 and 2014, $38 million and $21 million of net additions to litigation reserves were recorded as other noninterest expense, respectively. This resulted in a negative impact of $0.03 and $0.02 per common share in 2015 and 2014, respectively.
| |
3. | Franchise Repositioning Related Expense. Significant events relating to franchise repositioning, and the impacts of those events on our reported results, were as follows:
|
During 2015, $8 million of franchise repositioning related expense was recorded. This resulted in a negative impact of $0.01 per common share in 2015.
During 2014, $28 million of franchise repositioning related expense was recorded. This resulted in a negative impact of $0.02 per common share in 2014.
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 | (dollar amounts in thousands, except per share amounts) | | | |
| | | | | | | | | | | | |
| 2016 | | 2015 | | 2014 | |
| Amount | | EPS (1) | | Amount | | EPS (1) | | Amount | | EPS (1) | |
(dollar amounts in millions, except per share data) | | 2018 | | 2017 | | 2016 |
| Amount | | EPS (1) | | Amount | | EPS (1) | | Amount | | EPS (1) |
Net income | $ | 711,821 |
| | | | $ | 692,957 |
| | | | $ | 632,392 |
| | | $ | 1,393 |
| | | | $ | 1,186 |
| | | | $ | 712 |
| | |
Earnings per share, after-tax | | | $ | 0.70 |
| | | | $ | 0.81 |
| | | | $ | 0.72 |
| | | $ | 1.20 |
| | | | $ | 1.00 |
| | | | $ | 0.70 |
|
| | | | | | | | | | | | |
Significant items—favorable (unfavorable) impact: | Earnings | | EPS | | Earnings | | EPS | | Earnings | | EPS | Earnings | | EPS | | Earnings | | EPS | | Earnings | | EPS |
| | | | | | | | | | | | |
Federal tax reform-related tax benefit | | $ | — |
| | | | $ | — |
| | | | $ | — |
| | |
Tax impact | | — |
| | | | 123 |
| | | | — |
| | |
Federal tax reform-related tax benefit, after-tax | | $ | — |
| | $ | — |
| | $ | 123 |
| | $ | 0.11 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | |
Mergers and acquisitions, net expenses | $ | (282,086 | ) | | | | $ | (9,323 | ) | | | | $ | (15,818 | ) | | | $ | — |
| | | | $ | (152 | ) | | | | $ | (282 | ) | | |
Tax impact | 94,709 |
| | | | 3,263 |
| | | | 5,436 |
| | | — |
| | | | 53 |
| | | | 95 |
| | |
Mergers and acquisitions, after-tax | $ | (187,377 | ) | | $ | (0.20 | ) | | $ | (6,060 | ) | | $ | (0.01 | ) | | $ | (10,382 | ) | | $ | (0.01 | ) | $ | — |
| | $ | — |
| | $ | (99 | ) | | $ | (0.09 | ) | | $ | (187 | ) | | $ | (0.20 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Litigation reserves | $ | 41,587 |
| | | | $ | (38,186 | ) | | | | $ | (20,909 | ) | | | $ | — |
| | | | $ | — |
| | | | $ | 42 |
| | |
Tax impact | (14,888 | ) | | | | 13,365 |
| | | | 7,318 |
| | | — |
| | | | — |
| | | | (15 | ) | | |
Litigation reserves, after-tax | $ | 26,699 |
| | $ | 0.03 |
| | $ | (24,821 | ) | | $ | (0.03 | ) | | $ | (13,591 | ) | | $ | (0.02 | ) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 27 |
| | $ | 0.03 |
|
| | | | | | | | | | | | |
Franchise repositioning related expense | $ | — |
| | | | $ | (7,588 | ) | | | | $ | (27,976 | ) | | | |
Tax impact | — |
| | | | 2,656 |
| | | | 9,792 |
| | | |
Franchise repositioning related expense, after-tax | $ | — |
| | $ | — |
| | $ | (4,932 | ) | | $ | (0.01 | ) | | $ | (18,184 | ) | | $ | (0.02 | ) | |
| |
(1) | Based upon the annual average outstanding diluted common shares. |
Net Interest Income / Average Balance Sheet
Our primary source of revenue is net interest income, which is the difference between interest income from earning assets (primarily loans, securities, and direct financing leases), and interest expense of funding sources (primarily interest-bearing deposits and borrowings). Earning asset balances and related funding sources, as well as changes in the levels of interest rates, impact net interest income. The difference between the average yield on earning assets and the average rate paid for interest-bearing liabilities is the net interest spread. Noninterest-bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. The impact of the noninterest-bearing sources of funds, often referred to as “free” funds, is captured in the net interest margin, which is calculated as net interest income divided by average earning assets. Both the net interest margin and net interest spread are presented on a fully-taxable equivalent basis, which means that tax-free interest income has been adjusted to a pretax equivalent income, assuming a 21% tax rate and a 35% tax rate.
rate for periods prior to January 1, 2018.
The following table shows changes in fully-taxable equivalent interest income, interest expense, and net interest income due to volume and rate variances for major categories of earning assets and interest-bearing liabilities:
| | Table 4 - Change in Net Interest Income Due to Changes in Average Volume and Interest Rates (1) | | | 2018 | | 2017 |
(dollar amounts in millions) | (dollar amounts in millions) | Increase (Decrease) From Previous Year Due To | | Increase (Decrease) From Previous Year Due To |
| 2016 | | 2015 | |
| Increase (Decrease) From Previous Year Due To | | Increase (Decrease) From Previous Year Due To | |
Fully-taxable equivalent basis(2) | Volume | | Yield/ Rate | | Total | | Volume | | Yield/ Rate | | Total | Volume | | Yield/ Rate | | Total | | Volume | | Yield/ Rate | | Total |
Loans and leases | $ | 332.3 |
| | $ | 87.0 |
| | $ | 419.3 |
| | $ | 117.6 |
| | $ | (35.1 | ) | | $ | 82.5 |
| $ | 189 |
| | $ | 274 |
| | $ | 463 |
| | $ | 423 |
| | $ | 234 |
| | $ | 657 |
|
Investment securities | 104.7 |
| | (7.0 | ) | | 97.7 |
| | 45.8 |
| | 3.2 |
| | 49.0 |
| (10 | ) | | 35 |
| | 25 |
| | 157 |
| | 6 |
| | 163 |
|
Other earning assets | 12.5 |
| | (1.7 | ) | | 10.8 |
| | 10.4 |
| | 0.7 |
| | 11.1 |
| 5 |
| | 3 |
| | 8 |
| | (14 | ) | | 2 |
| | (12 | ) |
Total interest income from earning assets | 449.5 |
| | 78.3 |
| | 527.8 |
| | 173.8 |
| | (31.2 | ) | | 142.6 |
| 184 |
| | 312 |
| | 496 |
| | 566 |
| | 242 |
| | 808 |
|
Deposits | 16.3 |
| | 3.5 |
| | 19.8 |
| | 5.6 |
| | (9.9 | ) | | (4.3 | ) | 16 |
| | 195 |
| | 211 |
| | 29 |
| | 49 |
| | 78 |
|
Short-term borrowings | 0.2 |
| | 3.3 |
| | 3.5 |
| | (1.6 | ) | | 0.3 |
| | (1.3 | ) | (2 | ) | | 25 |
| | 23 |
| | 7 |
| | 13 |
| | 20 |
|
Long-term debt | 42.2 |
| | 33.5 |
| | 75.7 |
| | 30.1 |
| | — |
| | 30.1 |
| 3 |
| | 92 |
| | 95 |
| | 17 |
| | 53 |
| | 70 |
|
Total interest expense of interest-bearing liabilities | 58.7 |
| | 40.3 |
| | 99.0 |
| | 34.1 |
| | (9.6 | ) | | 24.5 |
| 17 |
| | 312 |
| | 329 |
| | 53 |
| | 115 |
| | 168 |
|
Net interest income | $ | 390.8 |
| | $ | 38.0 |
| | $ | 428.8 |
| | $ | 139.7 |
| | $ | (21.6 | ) | | $ | 118.1 |
| $ | 167 |
| | $ | — |
| | $ | 167 |
| | $ | 513 |
| | $ | 127 |
| | $ | 640 |
|
| |
(1) | The change in interest rates due to both rate and volume has been allocated between the factors in proportion to the relationship of the absolute dollar amounts of the change in each. |
| |
(2) | Calculated assuming a 21% tax rate and a 35% tax rate.rate for periods prior to January 1, 2018. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Table 5 - Consolidated Average Balance Sheet and Net Interest Margin Analysis (3) |
(dollar amounts in millions) | | | | | | | | | | | | | |
| Average Balances |
| | | Change from 2015 | | | | Change from 2014 | | |
Fully-taxable equivalent basis (1) | 2016 | | Amount | | Percent | | 2015 | | Amount | | Percent | | 2014 |
Assets | | | | | | | | | | | | | |
Interest-bearing deposits in banks | $ | 100 |
| | $ | 10 |
| | 11 | % | | $ | 90 |
| | $ | 5 |
| | 6 | % | | $ | 85 |
|
Loans held for sale | 1,054 |
| | 400 |
| | 61 |
| | 654 |
| | 331 |
| | 102 |
| | 323 |
|
Available-for-sale and other securities: | | | | | | | | | | | | | |
Taxable | 9,278 |
| | 1,279 |
| | 16 |
| | 7,999 |
| | 1,214 |
| | 18 |
| | 6,785 |
|
Tax-exempt | 2,716 |
| | 641 |
| | 31 |
| | 2,075 |
| | 646 |
| | 45 |
| | 1,429 |
|
Total available-for-sale and other securities | 11,994 |
| | 1,920 |
| | 19 |
| | 10,074 |
| | 1,860 |
| | 23 |
| | 8,214 |
|
Trading account securities | 67 |
| | 21 |
| | 46 |
| | 46 |
| | — |
| | — |
| | 46 |
|
Held-to-maturity securities—taxable | 5,693 |
| | 2,180 |
| | 62 |
| | 3,513 |
| | (99 | ) | | (3 | ) | | 3,612 |
|
Total securities | 17,754 |
| | 4,121 |
| | 30 |
| | 13,633 |
| | 1,761 |
| | 15 |
| | 11,872 |
|
Loans and leases: (2) | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | |
Commercial and industrial | 23,684 |
| | 3,950 |
| | 20 |
| | 19,734 |
| | 1,392 |
| | 8 |
| | 18,342 |
|
Commercial real estate: | | | | | | | | | | | | | |
Construction | 1,088 |
| | 71 |
| | 7 |
| | 1,017 |
| | 289 |
| | 40 |
| | 728 |
|
Commercial | 4,919 |
| | 709 |
| | 17 |
| | 4,210 |
| | (61 | ) | | (1 | ) | | 4,271 |
|
Commercial real estate | 6,007 |
| | 780 |
| | 15 |
| | 5,227 |
| | 228 |
| | 5 |
| | 4,999 |
|
Total commercial | 29,691 |
| | 4,730 |
| | 19 |
| | 24,961 |
| | 1,620 |
| | 7 |
| | 23,341 |
|
Consumer: | | | | | | | | | | | | | |
Automobile loans and leases | 10,540 |
| | 1,780 |
| | 20 |
| | 8,760 |
| | 1,090 |
| | 14 |
| | 7,670 |
|
Home equity | 9,058 |
| | 564 |
| | 7 |
| | 8,494 |
| | 99 |
| | 1 |
| | 8,395 |
|
| | Table 5 - Consolidated Average Balance Sheet and Net Interest Margin Analysis | | Table 5 - Consolidated Average Balance Sheet and Net Interest Margin Analysis |
(dollar amounts in millions) | | Average Balances |
| | | | Change from 2017 | | | | Change from 2016 | | |
Fully-taxable equivalent basis (1) | | 2018 | | Amount | | Percent | | 2017 | | Amount | | Percent | | 2016 |
Assets | | | | | | | | | | | | | | |
Interest-bearing deposits in Federal Reserve Bank (2) | | $ | 122 |
| | $ | 122 |
| | 100 | % | | $ | — |
| | $ | — |
| | — | % | | $ | — |
|
Interest-bearing deposits in banks | | 88 |
| | (11 | ) | | (11 | ) | | 99 |
| | (1 | ) | | (1 | ) | | 100 |
|
Securities: | | | | | | | | | | | | | | |
Trading account securities | | 96 |
| | (6 | ) | | (6 | ) | | 102 |
| | 35 |
| | 52 |
| | 67 |
|
Available-for-sale securities: | | | | | | | | | | | | | | |
Taxable | | 10,700 |
| | (1,203 | ) | | (10 | ) | | 11,903 |
| | 3,042 |
| | 34 |
| | 8,861 |
|
Tax-exempt | | 3,463 |
| | 282 |
| | 9 |
| | 3,181 |
| | 465 |
| | 17 |
| | 2,716 |
|
Total available-for-sale securities | | 14,163 |
| | (921 | ) | | (6 | ) | | 15,084 |
| | 3,507 |
| | 30 |
| | 11,577 |
|
Held-to-maturity securities—taxable | | 8,643 |
| | 535 |
| | 7 |
| | 8,108 |
| | 2,415 |
| | 42 |
| | 5,693 |
|
Other securities | | 584 |
| | — |
| | — |
| | 584 |
| | 167 |
| | 40 |
| | 417 |
|
Total securities | | 23,486 |
| | (392 | ) | | (2 | ) | | 23,878 |
| | 6,124 |
| | 34 |
| | 17,754 |
|
Loans held for sale | | 635 |
| | 80 |
| | 14 |
| | 555 |
| | (499 | ) | | (47 | ) | | 1,054 |
|
Loans and leases: (3) | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | |
Commercial and industrial | | 28,887 |
| | 1,138 |
| | 4 |
| | 27,749 |
| | 4,065 |
| | 17 |
| | 23,684 |
|
Commercial real estate: | | | | | | | | | | | | | | |
Construction | | 1,146 |
| | (52 | ) | | (4 | ) | | 1,198 |
| | 110 |
| | 10 |
| | 1,088 |
|
Commercial | | 6,049 |
| | 39 |
| | 1 |
| | 6,010 |
| | 1,091 |
| | 22 |
| | 4,919 |
|
Commercial real estate | | 7,195 |
| | (13 | ) | | — |
| | 7,208 |
| | 1,201 |
| | 20 |
| | 6,007 |
|
Total commercial | | 36,082 |
| | 1,125 |
| | 3 |
| | 34,957 |
| | 5,266 |
| | 18 |
| | 29,691 |
|
Consumer: | | | | | | | | | | | | | | |
Automobile loans and leases | | 12,292 |
| | 773 |
| | 7 |
| | 11,519 |
| | 979 |
| | 9 |
| | 10,540 |
|
Home equity | | 9,915 |
| | (79 | ) | | (1 | ) | | 9,994 |
| | 936 |
| | 10 |
| | 9,058 |
|
Residential mortgage | 6,730 |
| | 780 |
| | 13 |
| | 5,950 |
| | 327 |
| | 6 |
| | 5,623 |
| 9,907 |
| | 1,662 |
| | 20 |
| | 8,245 |
| | 1,515 |
| | 23 |
| | 6,730 |
|
RV and marine finance | 693 |
| | 693 |
| | — |
| | — |
| | — |
| | — |
| | — |
| 2,847 |
| | 692 |
| | 32 |
| | 2,155 |
| | 1,462 |
| | 211 |
| | 693 |
|
Other consumer | 742 |
| | 261 |
| | 54 |
| | 481 |
| | 85 |
| | 21 |
| | 396 |
| 1,203 |
| | 182 |
| | 18 |
| | 1,021 |
| | 279 |
| | 38 |
| | 742 |
|
Total consumer | 27,763 |
| | 4,078 |
| | 17 |
| | 23,685 |
| | 1,601 |
| | 7 |
| | 22,084 |
| 36,164 |
| | 3,230 |
| | 10 |
| | 32,934 |
| | 5,171 |
| | 19 |
| | 27,763 |
|
Total loans and leases | 57,454 |
| | 8,808 |
| | 18 |
| | 48,646 |
| | 3,221 |
| | 7 |
| | 45,425 |
| 72,246 |
| | 4,355 |
| | 6 |
| | 67,891 |
| | 10,437 |
| | 18 |
| | 57,454 |
|
Allowance for loan and lease losses | (614 | ) | | (8 | ) | | 1 |
| | (606 | ) | | 32 |
| | (5 | ) | | (638 | ) | (747 | ) | | (80 | ) | | 12 |
| | (667 | ) | | (53 | ) | | 9 |
| | (614 | ) |
Net loans and leases | 56,840 |
| | 8,800 |
| | 18 |
| | 48,040 |
| | 3,253 |
| | 7 |
| | 44,787 |
| 71,499 |
| | 4,275 |
| | 6 |
| | 67,224 |
| | 10,384 |
| | 18 |
| | 56,840 |
|
Total earning assets | 76,362 |
| | 13,339 |
| | 21 |
| | 63,023 |
| | 5,318 |
| | 9 |
| | 57,705 |
| 96,577 |
| | 4,154 |
| | 4 |
| | 92,423 |
| | 16,061 |
| | 21 |
| | 76,362 |
|
Cash and due from banks | 1,220 |
| | (3 | ) | | — |
| | 1,223 |
| | 325 |
| | 36 |
| | 898 |
| 1,184 |
| | (269 | ) | | (19 | ) | | 1,453 |
| | 233 |
| | 19 |
| | 1,220 |
|
Intangible assets | 1,359 |
| | 656 |
| | 93 |
| | 703 |
| | 125 |
| | 22 |
| | 578 |
| 2,311 |
| | (55 | ) | | (2 | ) | | 2,366 |
| | 1,007 |
| | 74 |
| | 1,359 |
|
All other assets | 4,727 |
| | 510 |
| | 12 |
| | 4,217 |
| | 276 |
| | 7 |
| | 3,941 |
| 5,657 |
| | 211 |
| | 4 |
| | 5,446 |
| | 719 |
| | 15 |
| | 4,727 |
|
Total assets | $ | 83,054 |
| | $ | 14,494 |
| | 21 | % | | $ | 68,560 |
| | $ | 6,076 |
| | 10 | % | | $ | 62,484 |
| $ | 104,982 |
| | $ | 3,961 |
| | 4 | % | | $ | 101,021 |
| | $ | 17,967 |
| | 22 | % | | $ | 83,054 |
|
Liabilities and Shareholders’ Equity | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Demand deposits—noninterest-bearing | $ | 19,045 |
| | $ | 2,703 |
| | 17 | % | | $ | 16,342 |
| | $ | 2,354 |
| | 17 | % | | $ | 13,988 |
| $ | 20,391 |
| | $ | (1,308 | ) | | (6 | )% | | $ | 21,699 |
| | $ | 2,654 |
| | 14 | % | | $ | 19,045 |
|
Demand deposits—interest-bearing | 10,985 |
| | 4,412 |
| | 67 |
| | 6,573 |
| | 677 |
| | 11 |
| | 5,896 |
| 19,295 |
| | 1,715 |
| | 10 |
| | 17,580 |
| | 6,595 |
| | 60 |
| | 10,985 |
|
Total demand deposits | 30,030 |
| | 7,115 |
| | 31 |
| | 22,915 |
| | 3,031 |
| | 15 |
| | 19,884 |
| 39,686 |
| | 407 |
| | 1 |
| | 39,279 |
| | 9,249 |
| | 31 |
| | 30,030 |
|
Money market deposits | 19,069 |
| | (314 | ) | | (2 | ) | | 19,383 |
| | 1,466 |
| | 8 |
| | 17,917 |
| 21,446 |
| | 1,711 |
| | 9 |
| | 19,735 |
| | 666 |
| | 3 |
| | 19,069 |
|
Savings and other domestic deposits | 7,981 |
| | 2,761 |
| | 53 |
| | 5,220 |
| | 189 |
| | 4 |
| | 5,031 |
| 11,083 |
| | (614 | ) | | (5 | ) | | 11,697 |
| | 3,716 |
| | 47 |
| | 7,981 |
|
Core certificates of deposit | 2,300 |
| | (303 | ) | | (12 | ) | | 2,603 |
| | (712 | ) | | (21 | ) | | 3,315 |
| 4,188 |
| | 2,069 |
| | 98 |
| | 2,119 |
| | (181 | ) | | (8 | ) | | 2,300 |
|
Total core deposits | 59,380 |
| | 9,259 |
| | 18 |
| | 50,121 |
| | 3,974 |
| | 9 |
| | 46,147 |
| 76,403 |
| | 3,573 |
| | 5 |
| | 72,830 |
| | 13,450 |
| | 23 |
| | 59,380 |
|
Other domestic time deposits of $250,000 or more | 408 |
| | 152 |
| | 59 |
| | 256 |
| | 14 |
| | 6 |
| | 242 |
| 280 |
| | (165 | ) | | (37 | ) | | 445 |
| | 37 |
| | 9 |
| | 408 |
|
Brokered time deposits and negotiable CDs | 3,499 |
| | 746 |
| | 27 |
| | 2,753 |
| | 614 |
| | 29 |
| | 2,139 |
| 3,503 |
| | (172 | ) | | (5 | ) | | 3,675 |
| | 176 |
| | 5 |
| | 3,499 |
|
Deposits in foreign offices | 204 |
| | (298 | ) | | (59 | ) | | 502 |
| | 127 |
| | 34 |
| | 375 |
| — |
| | — |
| | — |
| | — |
| | (204 | ) | | (100 | ) | | 204 |
|
Total deposits | 63,491 |
| | 9,859 |
| | 18 |
| | 53,632 |
| | 4,729 |
| | 10 |
| | 48,903 |
| 80,186 |
| | 3,236 |
| | 4 |
| | 76,950 |
| | 13,459 |
| | 21 |
| | 63,491 |
|
Short-term borrowings | 1,530 |
| | 184 |
| | 14 |
| | 1,346 |
| | (1,415 | ) | | (51 | ) | | 2,761 |
| 2,748 |
| | (175 | ) | | (6 | ) | | 2,923 |
| | 1,393 |
| | 91 |
| | 1,530 |
|
Long-term debt | 8,048 |
| | 2,463 |
| | 44 |
| | 5,585 |
| | 2,105 |
| | 60 |
| | 3,480 |
| 8,992 |
| | 130 |
| | 1 |
| | 8,862 |
| | 814 |
| | 10 |
| | 8,048 |
|
Total interest-bearing liabilities | 54,024 |
| | 9,803 |
| | 22 |
| | 44,221 |
| | 3,065 |
| | 7 |
| | 41,156 |
| 71,535 |
| | 4,499 |
| | 7 |
| | 67,036 |
| | 13,012 |
| | 24 |
| | 54,024 |
|
All other liabilities | 1,594 |
| | 133 |
| | 9 |
| | 1,461 |
| | 391 |
| | 37 |
| | 1,070 |
| 1,997 |
| | 322 |
| | 19 |
| | 1,675 |
| | 81 |
| | 5 |
| | 1,594 |
|
Shareholders’ equity | 8,391 |
| | 1,855 |
| | 28 |
| | 6,536 |
| | 266 |
| | 4 |
| | 6,270 |
| 11,059 |
| | 448 |
| | 4 |
| | 10,611 |
| | 2,220 |
| | 26 |
| | 8,391 |
|
Total liabilities and shareholders’ equity | $ | 83,054 |
| | $ | 14,494 |
| | 21 | % | | $ | 68,560 |
| | $ | 6,076 |
| | 10 | % | | $ | 62,484 |
| $ | 104,982 |
| | $ | 3,961 |
| | 4 | % | | $ | 101,021 |
| | $ | 17,967 |
| | 22 | % | | $ | 83,054 |
|
| |
(1) | FTE yields are calculated assuming a 21% tax rate and a 35% tax rate for periods prior to January 1, 2018. |
| |
(2) | Deposits in Federal Reserve Bank were treated as nonearning assets prior to 4Q 2018. |
| |
(3) | For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans. |
|
| | | | | | | | | | | | | | | | | | | | |
Table 5 - Consolidated Average Balance Sheet and Net Interest Margin Analysis (Continued) |
(dollar amounts in millions) | | | | | | | | | | | |
| Interest Income / Expense | | Average Rate (4) |
Fully-taxable equivalent basis (1) | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
Assets | | | | | | | | | | | |
Interest-bearing deposits in Federal Reserve Bank (2) | $ | 3 |
| | $ | — |
| | $ | — |
| | 2.33 | % | | — | % | | — | % |
Interest-bearing deposits in banks | 2 |
| | 2 |
| | — |
| | 1.97 |
| | 1.56 | % | | 0.44 |
|
Securities: | | | | | | | | | | | |
Trading account securities | 1 |
| | — |
| | — |
| | 0.80 |
| | 0.18 |
| | 0.42 |
|
Available-for-sale securities: | | | | | | | | | | | |
Taxable | 280 |
| | 283 |
| | 210 |
| | 2.61 |
| | 2.38 |
| | 2.36 |
|
Tax-exempt | 122 |
| | 118 |
| | 91 |
| | 3.53 |
| | 3.71 |
| | 3.35 |
|
Total available-for-sale securities | 402 |
| | 401 |
| | 301 |
| | 2.84 |
| | 2.66 |
| | 2.60 |
|
Held-to-maturity securities—taxable | 211 |
| | 193 |
| | 138 |
| | 2.44 |
| | 2.38 |
| | 2.43 |
|
Other securities | 25 |
| | 20 |
| | 12 |
| | 4.34 |
| | 3.42 |
| | 2.95 |
|
Total securities | 639 |
|
| 614 |
|
| 451 |
| | 2.72 |
| | 2.57 |
| | 2.54 |
|
Loans held for sale | 26 |
| | 21 |
| | 35 |
| | 4.15 |
| | 3.75 |
| | 3.27 |
|
Loans and leases: (3) | | | | | | | | | | | |
Commercial: | | | | | | | | | | | |
Commercial and industrial | 1,337 |
| | 1,142 |
| | 879 |
| | 4.63 |
| | 4.12 |
| | 3.71 |
|
Commercial real estate: | | | | | | | | | | | |
Construction | 60 |
| | 52 |
| | 40 |
| | 5.26 |
| | 4.36 |
| | 3.72 |
|
Commercial | 283 |
| | 240 |
| | 176 |
| | 4.67 |
| | 4.00 |
| | 3.57 |
|
Commercial real estate | 343 |
| | 292 |
| | 216 |
| | 4.77 |
| | 4.06 |
| | 3.60 |
|
Total commercial | 1,680 |
| | 1,434 |
| | 1,095 |
| | 4.66 |
| | 4.11 |
| | 3.69 |
|
Consumer: | | | | | | | | | | | |
Automobile loans and leases | 456 |
| | 412 |
| | 351 |
| | 3.71 |
| | 3.58 |
| | 3.32 |
|
Home equity | 512 |
| | 463 |
| | 381 |
| | 5.16 |
| | 4.63 |
| | 4.21 |
|
Residential mortgage | 371 |
| | 301 |
| | 244 |
| | 3.74 |
| | 3.65 |
| | 3.63 |
|
RV and marine finance | 145 |
| | 118 |
| | 39 |
| | 5.09 |
| | 5.46 |
| | 5.67 |
|
Other consumer | 145 |
| | 118 |
| | 79 |
| | 12.04 |
| | 11.53 |
| | 10.62 |
|
Total consumer | 1,629 |
| | 1,412 |
| | 1,094 |
| | 4.50 |
| | 4.28 |
| | 3.94 |
|
Total loans and leases | 3,309 |
| | 2,846 |
| | 2,189 |
| | 4.58 |
| | 4.19 |
| | 3.81 |
|
Total earning assets | $ | 3,979 |
| | $ | 3,483 |
| | $ | 2,675 |
| | 4.12 | % | | 3.77 | % | | 3.50 | % |
Liabilities and Shareholders’ Equity | | | | | | | | | | | |
Deposits: | | | | | | | | | | | |
Demand deposits—noninterest-bearing | $ | — |
| | $ | — |
| | $ | — |
| | — | % | | — | % | | — | % |
Demand deposits—interest-bearing | 78 |
| | 38 |
| | 11 |
| | 0.40 |
| | 0.21 |
| | 0.10 |
|
Total demand deposits | 78 |
| | 38 |
| | 11 |
| | 0.20 |
| | 0.10 |
| | 0.04 |
|
Money market deposits | 148 |
| | 66 |
| | 46 |
| | 0.69 |
| | 0.33 |
| | 0.24 |
|
Savings and other domestic deposits | 24 |
| | 24 |
| | 15 |
| | 0.22 |
| | 0.21 |
| | 0.19 |
|
Core certificates of deposit | 72 |
| | 13 |
| | 13 |
| | 1.72 |
| | 0.60 |
| | 0.56 |
|
Total core deposits | 322 |
| | 141 |
| | 85 |
| | 0.57 |
| | 0.27 |
| | 0.21 |
|
Other domestic time deposits of $250,000 or more | 3 |
| | 2 |
| | 2 |
| | 1.25 |
| | 0.52 |
| | 0.40 |
|
Brokered time deposits and negotiable CDs | 66 |
| | 37 |
| | 15 |
| | 1.88 |
| | 1.00 |
| | 0.43 |
|
Deposits in foreign offices | — |
| | — |
| | — |
| | — |
| | — |
| | 0.13 |
|
Total deposits | 391 |
| | 180 |
| | 102 |
| | 0.65 |
| | 0.33 |
| | 0.23 |
|
Short-term borrowings | 48 |
| | 25 |
| | 5 |
| | 1.74 |
| | 0.86 |
| | 0.34 |
|
Long-term debt | 321 |
| | 226 |
| | 156 |
| | 3.57 |
| | 2.56 |
| | 1.93 |
|
Total interest-bearing liabilities | 760 |
| | 431 |
| | 263 |
| | 1.06 |
| | 0.64 |
| | 0.48 |
|
Net interest income | $ | 3,219 |
| | $ | 3,052 |
| | $ | 2,412 |
| | | | | | |
| | | | | | | | | | | |
Net interest rate spread | | | | | | | 3.06 |
| | 3.13 |
| | 3.02 |
|
Impact of noninterest-bearing funds on margin | | | | | | | 0.27 |
| | 0.17 |
| | 0.14 |
|
Net interest margin | | | | | | | 3.33 | % | | 3.30 | % | | 3.16 | % |
| |
(1) | FTE yields are calculated assuming a 21% tax rate and a 35% tax rate for periods prior to January 1, 2018. |
| |
(2) | Deposits in Federal Reserve Bank were treated as nonearning assets prior to 4Q 2018 and associated interest income was not material. |
| |
(3) | For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans. |
| |
(4) | Yield/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories. |
|
| | | | | | | | | | | | | | | | | | | | |
Table 6 - Consolidated Average Balance Sheet and Net Interest Margin Analysis (Continued) (3) |
(dollar amounts in thousands) | | | | | | | | | | | |
| Interest Income / Expense | | Average Rate (2) |
Fully-taxable equivalent basis (1) | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
Assets | | | | | | | | | | | |
Interest-bearing deposits in banks | $ | 443 |
| | $ | 90 |
| | $ | 103 |
| | 0.44 | % | | 0.10 | % | | 0.12 | % |
Loans held for sale | 34,480 |
| | 23,812 |
| | 12,728 |
| | 3.27 |
| | 3.64 |
| | 3.94 |
|
Securities: | | | | | | | | | | | |
Available-for-sale and other securities: | | | | | | | | | | | |
Taxable | 221,782 |
| | 202,104 |
| | 171,080 |
| | 2.39 |
| | 2.53 |
| | 2.52 |
|
Tax-exempt | 90,972 |
| | 64,637 |
| | 44,562 |
| | 3.35 |
| | 3.11 |
| | 3.12 |
|
|
| | | | | | | | | | | | | | | | | | | | |
Total available-for-sale and other securities | 312,754 |
| | 266,741 |
| | 215,642 |
| | 2.61 |
| | 2.65 |
| | 2.63 |
|
Trading account securities | 284 |
| | 493 |
| | 421 |
| | 0.42 |
| | 1.06 |
| | 0.92 |
|
Held-to-maturity securities—taxable | 138,312 |
| | 86,614 |
| | 88,724 |
| | 2.43 |
| | 2.47 |
| | 2.46 |
|
Total securities | 451,350 |
| | 353,848 |
| | 304,787 |
| | 2.54 |
| | 2.60 |
| | 2.57 |
|
Loans and leases: (2) | | | | | | | | | | | |
Commercial: | | | | | | | | | | | |
Commercial and industrial | 878,873 |
| | 700,139 |
| | 643,484 |
| | 3.71 |
| | 3.55 |
| | 3.51 |
|
Commercial real estate: | | | | | | | | | | | |
Construction | 40,467 |
| | 36,956 |
| | 31,414 |
| | 3.72 |
| | 3.63 |
| | 4.31 |
|
Commercial | 175,491 |
| | 146,526 |
| | 163,192 |
| | 3.57 |
| | 3.48 |
| | 3.82 |
|
Commercial real estate | 215,958 |
| | 183,482 |
| | 194,606 |
| | 3.60 |
| | 3.51 |
| | 3.89 |
|
Total commercial | 1,094,831 |
| | 883,621 |
| | 838,090 |
| | 3.69 |
| | 3.54 |
| | 3.59 |
|
Consumer: | | | | | | | | | | | |
Automobile loans and leases | 350,358 |
| | 282,379 |
| | 262,931 |
| | 3.32 |
| | 3.22 |
| | 3.43 |
|
Home equity | 381,002 |
| | 340,342 |
| | 343,281 |
| | 4.21 |
| | 4.01 |
| | 4.09 |
|
Residential mortgage | 244,077 |
| | 220,678 |
| | 213,268 |
| | 3.63 |
| | 3.71 |
| | 3.79 |
|
RV and marine finance | 39,243 |
| | — |
| | — |
| | 5.67 |
| | — |
| | — |
|
Other consumer | 78,737 |
| | 41,866 |
| | 28,824 |
| | 10.62 |
| | 8.71 |
| | 7.30 |
|
Total consumer | 1,093,417 |
| | 885,265 |
| | 848,304 |
| | 3.94 |
| | 3.74 |
| | 3.84 |
|
Total loans and leases | 2,188,248 |
| | 1,768,886 |
| | 1,686,394 |
| | 3.81 |
| | 3.64 |
| | 3.71 |
|
Total earning assets | $ | 2,674,521 |
| | $ | 2,146,636 |
| | $ | 2,004,012 |
| | 3.50 | % | | 3.41 | % | | 3.47 | % |
Liabilities and Shareholders’ Equity | | | | | | | | | | | |
Deposits: | | | | | | | | | | | |
Demand deposits—noninterest-bearing | $ | — |
| | $ | — |
| | $ | — |
| | — | % | | — | % | | — | % |
Demand deposits—interest-bearing | 11,278 |
| | 4,278 |
| | 2,272 |
| | 0.10 |
| | 0.07 |
| | 0.04 |
|
Total demand deposits | 11,278 |
| | 4,278 |
| | 2,272 |
| | 0.04 |
| | 0.02 |
| | 0.01 |
|
Money market deposits | 45,411 |
| | 43,406 |
| | 42,156 |
| | 0.24 |
| | 0.22 |
| | 0.24 |
|
Savings and other domestic deposits | 15,337 |
| | 7,340 |
| | 8,779 |
| | 0.19 |
| | 0.14 |
| | 0.17 |
|
Core certificates of deposit | 12,961 |
| | 20,646 |
| | 26,998 |
| | 0.56 |
| | 0.79 |
| | 0.81 |
|
Total core deposits | 84,987 |
| | 75,670 |
| | 80,205 |
| | 0.21 |
| | 0.22 |
| | 0.25 |
|
Other domestic time deposits of $250,000 or more | 1,624 |
| | 1,078 |
| | 1,036 |
| | 0.40 |
| | 0.42 |
| | 0.43 |
|
Brokered time deposits and negotiable CDs | 15,125 |
| | 4,767 |
| | 4,728 |
| | 0.43 |
| | 0.17 |
| | 0.22 |
|
Deposits in foreign offices | 268 |
| | 659 |
| | 483 |
| | 0.13 |
| | 0.13 |
| | 0.13 |
|
Total deposits | 102,004 |
| | 82,174 |
| | 86,452 |
| | 0.23 |
| | 0.22 |
| | 0.25 |
|
Short-term borrowings | 5,140 |
| | 1,584 |
| | 2,940 |
| | 0.34 |
| | 0.12 |
| | 0.11 |
|
Long-term debt | 155,651 |
| | 80,026 |
| | 49,929 |
| | 1.93 |
| | 1.43 |
| | 1.43 |
|
Total interest-bearing liabilities | 262,795 |
| | 163,784 |
| | 139,321 |
| | 0.48 |
| | 0.37 |
| | 0.34 |
|
Net interest income | $ | 2,411,726 |
| | $ | 1,982,852 |
| | $ | 1,864,691 |
| | | | | | |
Net interest rate spread | | | | | | | 3.02 |
| | 3.04 |
| | 3.13 |
|
Impact of noninterest-bearing funds on margin | | | | | | | 0.14 |
| | 0.11 |
| | 0.10 |
|
Net interest margin | | | | | | | 3.16 | % | | 3.15 | % | | 3.23 | % |
| |
(1) | FTE yields are calculated assuming a 35% tax rate. |
| |
(2) | For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans. |
| |
(3) | Yield/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories. |
2016 vs. 20152018 versus 2017
Fully-taxable equivalentFTE net interest income for 20162018 increased $429$167 million, or 22%5%, from 2015.2017. This reflected the impact of 21%4% average earning asset growth, a 1three basis point increase in the NIM to 3.16%3.33%, partially offset by 22%7% average interest-bearing liability growth.
Average earning assets increased $13.3asset growth included a $4.4 billion, or 21%, from the prior year, driven by:
$4.1 billion, or 30%6%, increase in average securities, primarily reflecting the FirstMerit acquisition, as well as the reinvestment of cash flows and additional investment in LCR Level 1 qualifying securities. The 2016 average balance also included $2.1 billion of direct purchase municipal instruments in our Commercial segment, up from $1.7 billion in the year-ago period.
$4.0 billion, or 20%, increase in average C&I loans and leases was impacted by the FirstMerit acquisition. The increaseand a $0.4 billion, or 2%, decrease in average C&I loans and leases also reflects organic growth in equipment finance leases, automobile dealer floorplan lending, and corporate banking.
securities.$1.8 billion, or 20%, increase in average automobile loans, which reflects continued strength in new and used automobile originations, while maintaining our underwriting consistency and discipline. This increase was also impacted by the FirstMerit acquisition and was partially offset by the $1.5 billion auto loan securitization during the 2016 fourth quarter.
Average noninterest-bearing demand deposits increased $2.7 billion, or 17%, while average total interest-bearing liabilities increased $9.8 billion, or 22%, primarily reflecting:
$4.4 billion, or 67%, increase in average interest-bearing demand deposits.
$2.8 billion, or 53%, increase in savings and other domestic deposits, reflecting continued banker focus across all segments on obtaining our customers' full deposit relationship.
$2.4 billion, or 44% increase in average long-term debt, reflecting the issuance of $2.0 billion of senior debt during 2016, as well as $0.5 billion of subordinate debt assumed during the acquisition of FirstMerit.
The 1 basis point increase in NIM primary reflected:
9expansion reflected a 35 basis point positive impact from the mix and yield on earning assets and a 310 basis point increase in the benefit from noninterest-bearing funds,funding, partially offset by an 11a 42 basis point increase in funding costs.
Average earning assets for 2018 increased $4.2 billion, or 4%, from the prior year, reflecting loan growth of $4.4 billion, or 6%, partially offset by decline in average securities. Average C&I loans and leases increased $1.1 billion, or 4%, reflecting broad-based growth. Residential mortgages increased $1.7 billion, or 20%, driven by increase in lending officers and expansion into the Chicago market. Average RV and marine finance loans increased $0.7 billion, or 32%, reflecting the success of the expansion of the business over the past two years while maintaining our commitment to super prime originations. Average automobile loans increased $0.8 billion, or 7%, driven by originations consistent with the current market dynamics and our commitment to high quality borrowers, while optimizing yield and production in a rising rate environment over the past year. Average securities decreased $0.4 billion, or 2%.
Average total deposits for 2018 increased $3.2 billion, or 4%, from the prior year, while average total core deposits increased $3.6 billion, or 5%. Average core CDs increased $2.1 billion, or 98%, reflecting consumer growth initiatives primarily in the first three quarters of 2018. Average money market deposits increased $1.7 billion, or 9%, reflecting growth in both commercial and consumer deposits. Average total interest-bearing liabilities increased $4.5 billion, or 7%, from the prior year as deposits shifted from non-interest bearing to interest bearing with the increase in rates.
2015 vs. 20142017 versus 2016
Fully-taxable equivalentFTE net interest income for 20152017 increased $118$640 million, or 6%27%, from 2014.2016. This reflected the impact of 9%21% average earning asset growth, partially offset by 7% interest-bearing liability growth and an 8a 14 basis point decreaseincrease in the NIM to 3.15%.3.30%, partially offset by 24% average interest-bearing liability growth. Average earning asset growth included a $10.4 billion, or 18%, increase in average loans and leases and a $6.1 billion, or 34%, increase in average securities.The NIM expansion reflected a 27 basis point positive impact from the mix and yield on earning assets and a three basis point increase in the benefit from noninterest-bearing funding, partially offset by a 16 basis point increase in funding costs.
Average earning assets for 2017 increased $5.3$16.1 billion, or 9%21%, from the prior year, driven by:
$1.8primarily reflecting the full year impact of the FirstMerit acquisition. Average loans and leases increased $10.4 billion, or 15%18%, increase in average securities, primarily reflecting additional investment in LCR Level 1 qualifying securities. The 2015 average balance also included $1.7 billion of direct purchase municipal instruments originated by our Commercial segment, up from $1.0 billion in the year-ago period.
$1.4including a $4.1 billion, or 8%17%, increase in average C&I loans and leases primarily driven by an increase in commercial middle market and specialty banking, a $1.5 billion, or 23%, increase in residential mortgage loans reflecting the $0.9benefit of the ongoing expansion of the home lending business, a $1.5 billion or 211%, increase in assetRV and marine finance includingloans reflecting the $0.8success of the expansion of the acquired business into 17 new states over the past year and a $1.0 billion, or 9%, increase in automobile loans reflecting continued strength in new and used automobile originations across our 23-state auto finance lending footprint. Average securities increased $6.1 billion, or 34%, which included $2.9 billion of equipment finance leases acquireddirect purchase municipal instruments in our commercial banking segment, up from $2.1 billion in the Huntington Technology Finance transaction at the end of the 2015 first quarter.year-ago period.
$1.1Average total deposits for 2017 increased $13.5 billion, or 14%21%, from the prior year, while average total core deposits increased $13.5 billion, or 23%, including a $9.2 billion, or 31%, increase in average Automobile loans, as originations remained strong.
$0.3demand deposits and a $3.7 billion, or 6%47%, increase in average Residential mortgage loans.
savings and other domestic deposits. Average noninterest-bearing demand deposits increased $2.4 billion, or 17%, while average total interest-bearing liabilities increased $3.1$13.0 billion, or 7%24%, from the prior year. These increases primarily reflecting:
$1.5reflect the full year impact of the FirstMerit acquisition. Average long-term borrowings increased $0.8 billion, or 8%10%, increase in money market deposits, reflecting continued banker focus across all segments on obtaining our customers’ full deposit relationship.
$0.7 billion, or 11%, increase in average interest-bearing demand deposits. The increase reflected growth in both consumer and commercial accounts.
$0.7 billion, or 11%, increase in average total debt, reflecting a $2.1 billion, or 60%, increase in average long-term debt partially offset by a $1.4 billion, or 51%, reduction in average short-term borrowings. The increase in average long-term debt reflected the issuance of $3.1$1.7 billion and maturity of bank-level$0.8 billion of senior debt during 2015, including $0.9 billion during the 2015 fourth quarter, as well as $0.5 billion of debt assumed in the Huntington Technology Finance acquisition at the end of the 2015 first quarter.2017.
$0.6 billion, or 29%, increase in brokered deposits and negotiated CDs, which were used to efficiently finance balance sheet growth while continuing to manage the overall cost of funds.
Partially offset by:
$0.7 billion, or 21%, decrease in average core certificates of deposit due to the strategic focus on changing the funding sources to low- and no-cost demand deposits and money market deposits.
The primary items impacting the decrease in the NIM were:
6 basis point negative impact from the mix and yield on earning assets, primarily reflecting lower rates on loans and the impact of an increase in total securities balances.
3 basis point negative impact from the mix and yield of total interest-bearing liabilities.
Partially offset by:
1 basis point increase in the benefit to the margin of noninterest-bearing funds.
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 inherent in the loan and lease portfolio and the portfolio of unfunded loan commitments and letters-of-credit.
The provision for credit losses in 20162018 was $191$235 million, up $91$34 million, or 91%17%, from 2015.2017. The higherincrease in provision expense was dueover the prior year is primarily attributed to several factors, includingloan balance growth across the migration of the acquired loan portfolio to the originated portfolio, which requires a reserve build, portfolio growth and transitioning the FirstMerit portfolio to our reserve methodology. NCOs represented 19 basis points of average loans and leases, consistent with 2015, and below our long-term target of 35 to 55 basis points.portfolio.
The provision for credit losses in 20152017 was $100$201 million, up $19$10 million, or 23%5%, from 2014, reflecting a $37 million, or 30%, decrease2016. The increase in NCOs. The provision for credit losses in 2015expense over the prior year was $12 million more than total NCOs.primarily the result of loan growth.
Noninterest Income
The following table reflects noninterest income for the past three years:
| | Table 7 - Noninterest Income | |
(dollar amounts in thousands) | | | | | | | | | | | | | | |
Table 6 - Noninterest Income | | Table 6 - Noninterest Income |
| Year Ended December 31, | Year Ended December 31, |
| | | Change from 2015 | | | | Change from 2014 | | | |
(dollar amounts in millions) | | | | Change from 2017 | | | | Change from 2016 | | |
| 2016 | | Amount | | Percent | | 2015 | | Amount | | Percent | | 2014 | 2018 | | Amount | | Percent | | 2017 | | Amount | | Percent | | 2016 |
Service charges on deposit accounts | $ | 324,299 |
| | $ | 43,950 |
| | 16 | % | | $ | 280,349 |
| | $ | 6,608 |
| | 2 | % | | $ | 273,741 |
| $ | 364 |
| | $ | 11 |
| | 3 | % | | $ | 353 |
| | $ | 29 |
| | 9 | % | | $ | 324 |
|
Cards and payment processing income | 169,064 |
| | 26,349 |
| | 18 |
| | 142,715 |
| | 37,314 |
| | 35 |
| | 105,401 |
| |
Card and payment processing income | | 224 |
| | 18 |
| | 9 |
| | 206 |
| | 37 |
| | 22 |
| | 169 |
|
Trust and investment management services | | 171 |
| | 15 |
| | 10 |
| | 156 |
| | 33 |
| | 27 |
| | 123 |
|
Mortgage banking income | 128,257 |
| | 16,404 |
| | 15 |
| | 111,853 |
| | 26,966 |
| | 32 |
| | 84,887 |
| 108 |
| | (23 | ) | | (18 | ) | | 131 |
| | 3 |
| | 2 |
| | 128 |
|
Trust services | 108,274 |
| | 2,441 |
| | 2 |
| | 105,833 |
| | (10,139 | ) | | (9 | ) | | 115,972 |
| |
Capital markets fees | | 91 |
| | 15 |
| | 20 |
| | 76 |
| | 16 |
| | 27 |
| | 60 |
|
Insurance income | 64,523 |
| | (741 | ) | | (1 | ) | | 65,264 |
| | (209 | ) | | — |
| | 65,473 |
| 82 |
| | 1 |
| | 1 |
| | 81 |
| | (3 | ) | | (4 | ) | | 84 |
|
Brokerage income | 61,834 |
| | 1,629 |
| | 3 |
| | 60,205 |
| | (8,072 | ) | | (12 | ) | | 68,277 |
| |
Capital markets fees | 59,527 |
| | 5,911 |
| | 11 |
| | 53,616 |
| | 9,885 |
| | 23 |
| | 43,731 |
| |
Bank owned life insurance income | 57,567 |
| | 5,167 |
| | 10 |
| | 52,400 |
| | (4,648 | ) | | (8 | ) | | 57,048 |
| 67 |
| | — |
| | — |
| | 67 |
| | 9 |
| | 16 |
| | 58 |
|
Gain on sale of loans | 47,153 |
| | 14,116 |
| | 43 |
| | 33,037 |
| | 11,946 |
| | 57 |
| | 21,091 |
| |
Gain on sale of loans and leases | | 55 |
| | (1 | ) | | (2 | ) | | 56 |
| | 9 |
| | 19 |
| | 47 |
|
Securities gains (losses) | (84 | ) | | (828 | ) | | (111 | ) | | 744 |
| | (16,810 | ) | | (96 | ) | | 17,554 |
| (21 | ) | | (17 | ) | | (425 | ) | | (4 | ) | | (4 | ) | | (100 | ) | | — |
|
Other income | 129,317 |
| | (3,397 | ) | | (3 | ) | | 132,714 |
| | 6,710 |
| | 5 |
| | 126,004 |
| 180 |
| | (5 | ) | | (3 | ) | | 185 |
| | 28 |
| | 18 |
| | 157 |
|
Total noninterest income | $ | 1,149,731 |
| | $ | 111,001 |
| | 11 | % | | $ | 1,038,730 |
| | $ | 59,551 |
| | 6 | % | | $ | 979,179 |
| $ | 1,321 |
| | $ | 14 |
| | 1 | % | | $ | 1,307 |
| | $ | 157 |
| | 14 | % | | $ | 1,150 |
|
2018 versus 2017
Noninterest income for 2018 increased $14 million, or 1%, from the prior year. Card and payment processing income increased $18 million, or 9%, due to higher check card interchange income and underlying customer growth. Trust and investment management services increased $15 million, or 10%, primarily reflecting increased sales production and year over year market growth. Capital markets fees increased $15 million, or 20%, reflecting increased sales of interest rate, foreign exchange and commodity derivatives as well as fees as a result of the acquisition of HSE. Service charges on deposit accounts increased $11 million, or 3%, due to an increase in both personal and corporate service charges. These increases were partially offset by a $23 million, or 18% decrease in mortgage banking income, due to lower margin on loans sold, $17 million, or 425%, increase in securities losses reflecting portfolio repositioning completed in the 2018 fourth quarterand a $5 million, or 3%, decrease in other income primarily reflecting an unfavorable Visa Class B derivative fair value adjustment.
2017 versus 2016 vs. 2015
Noninterest income for 2017 increased $111$157 million, or 11%14%, from the prior year, primarily reflecting:
$44 million, or 16%, increase in service charges on deposit accounts, reflecting the benefitfull year impact of continued new customerthe FirstMerit acquisition.
$26 million, or 18%, increase in cards Card and payment processing income increased $37 million, or 22%, due to higher credit and debit card related income and underlying customer growth.
$16 Trust and investment management services increased $33 million, or 15%27%, increase in mortgage banking income, reflecting a 24% increase in mortgage origination volume.
$14and service charges on deposit accounts increased $29 million, or 43%9%, increasereflecting market growth and ongoing customer acquisition. Other income increased $28 million, or 18%, primarily reflecting increases in gainservicing income, mezzanine lending, loan syndication fees and commitment fees. Capital markets fees increased $16 million, or 27%, reflecting our ongoing strategic focus on expanding the business. Bank owned life insurance increased $9 million, or 16%. Gain on sale of loans primarily reflecting an increaseincreased $9 million, or 19%, as a result of $6 millioncontinued expansion of our SBA lending business during 2017 which more than offset gains in SBA loan sales gains. In addition, there was a $7 million gain on non-relationship C&I and CRE loan sales, which was related to the prior year from our balance sheet optimization strategy and the auto securitization completed in the 2016 fourth quarter. These increases were partially offset by a $4 million decline in securities gains and a $3 million decline in insurance income.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Noninterest Expense | | | | | | | | | | | | | |
(This section should be read in conjunction with Significant Items section.) | | | | |
| | | | |
The following table reflects noninterest expense for the past three years: | | | | |
| | | | | | | | | | | | | |
Table 7 - Noninterest Expense |
| Year Ended December 31, |
(dollar amounts in millions) | | | Change from 2017 | | | | Change from 2016 | | |
| 2018 | | Amount | | Percent | | 2017 | | Amount | | Percent | | 2016 |
Personnel costs | $ | 1,559 |
| | $ | 35 |
| | 2 | % | | $ | 1,524 |
| | $ | 175 |
| | 13 | % | | $ | 1,349 |
|
Outside data processing and other services | 294 |
| | (19 | ) | | (6 | ) | | 313 |
| | 8 |
| | 3 |
| | 305 |
|
Net occupancy | 184 |
| | (28 | ) | | (13 | ) | | 212 |
| | 59 |
| | 39 |
| | 153 |
|
Equipment | 164 |
| | (7 | ) | | (4 | ) | | 171 |
| | 6 |
| | 4 |
| | 165 |
|
Deposit and other insurance expense | 63 |
| | (15 | ) | | (19 | ) | | 78 |
| | 24 |
| | 44 |
| | 54 |
|
Professional services | 60 |
| | (9 | ) | | (13 | ) | | 69 |
| | (36 | ) | | (34 | ) | | 105 |
|
Marketing | 53 |
| | (7 | ) | | (12 | ) | | 60 |
| | (3 | ) | | (5 | ) | | 63 |
|
Amortization of intangibles | 53 |
| | (3 | ) | | (5 | ) | | 56 |
| | 26 |
| | 87 |
| | 30 |
|
Other expense | 217 |
| | (14 | ) | | (6 | ) | | 231 |
| | 47 |
| | 26 |
| | 184 |
|
Total noninterest expense | $ | 2,647 |
| | $ | (67 | ) | | (2 | )% | | $ | 2,714 |
| | $ | 306 |
| | 13 | % | | $ | 2,408 |
|
Number of employees (average full-time equivalent) | 15,693 |
| | (77 | ) | | — | % | | 15,770 |
| | 1,912 |
| | 14 | % | | 13,858 |
|
|
| | | | | | | | | | | | | |
Impact of Significant Items: | | | | | | | |
| Year Ended December 31, |
(dollar amounts in millions) | 2018 | | | | 2017 | | 2016 |
Personnel costs | $ | — |
| | | | $ | 42 |
| | $ | 76 |
|
Outside data processing and other services | — |
| | | | 24 |
| | 46 |
|
Net occupancy | — |
| | | | 52 |
| | 15 |
|
Equipment | — |
| | | | 16 |
| | 25 |
|
Professional services | — |
| | | | 10 |
| | 58 |
|
Marketing | — |
| | | | 1 |
| | 5 |
|
Other expense | — |
| | | | 9 |
| | 14 |
|
Total impact of significant items on noninterest expense | $ | — |
| | | | $ | 154 |
| | $ | 239 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted Noninterest Expense (See Non-GAAP Financial Measures in the Additional Disclosures section): |
| Year Ended December 31, |
| | | Change from 2017 | | | | Change from 2016 | | |
(dollar amounts in millions) | 2018 | | Amount | | Percent | | 2017 | | Amount | | Percent | | 2016 |
Personnel costs | $ | 1,559 |
| | $ | 77 |
| | 5 | % | | $ | 1,482 |
| | $ | 209 |
| | 16 | % | | $ | 1,273 |
|
Outside data processing and other services | 294 |
| | 5 |
| | 2 |
| | 289 |
| | 30 |
| | 12 |
| | 259 |
|
Net occupancy | 184 |
| | 24 |
| | 15 |
| | 160 |
| | 22 |
| | 16 |
| | 138 |
|
Equipment | 164 |
| | 9 |
| | 6 |
| | 155 |
| | 15 |
| | 11 |
| | 140 |
|
Deposit and other insurance expense | 63 |
| | (15 | ) | | (19 | ) | | 78 |
| | 24 |
| | 44 |
| | 54 |
|
Professional services | 60 |
| | 1 |
| | 2 |
| | 59 |
| | 12 |
| | 26 |
| | 47 |
|
Marketing | 53 |
| | (6 | ) | | (10 | ) | | 59 |
| | 1 |
| | 2 |
| | 58 |
|
Amortization of intangibles | 53 |
| | (3 | ) | | (5 | ) | | 56 |
| | 26 |
| | 87 |
| | 30 |
|
Other expense | 217 |
| | (5 | ) | | (2 | ) | | 222 |
| | 52 |
| | 31 |
| | 170 |
|
Total adjusted noninterest expense (Non-GAAP) | $ | 2,647 |
| | $ | 87 |
| | 3 | % | | $ | 2,560 |
| | $ | 391 |
| | 18 | % | | $ | 2,169 |
|
2015 vs. 20142018 versus 2017
Noninterest income increased $60Reported noninterest expense for 2018 decreased $67 million, or 6%2%, from the prior year, primarily reflecting:
$37reflecting the $154 million of acquisition-related Significant Items in the year-ago period, offset by branch and facility consolidation-related expenses and personnel costs. Net occupancy expense decreased $28 million, or 35%13%, increaseprimarily reflecting $52 million of prior year acquisition-related expense, lower occupancy related expenses and reserves, partially offset by $28 million of branch and facility consolidation-related expense. Outside data processing and other services decreased $19 million, or 6%, primarily reflecting $24 million of acquisition-related expense in cardsthe year-ago period, partially offset by higher technology investment costs. Deposit and payment processing incomeother insurance expense decreased $15 million, or 19%, primarily due to higher card related income and underlying customer growth.
$27the discontinuation of the FDIC surcharge in the 2018 fourth quarter. Other noninterest expense decreased $14 million, or 32%6%, increasereflecting $9 million of acquisition-related expense in mortgage banking incomethe year-ago period, as well as declines in franchise and other taxes. Professional services decreased $9 million, or 13%, primarily reflecting $10 million of acquisition-related expense in the year-ago period. Equipment decreased $7 million, or 4%, primarily due to $16 million in acquisition-related costs in the year-ago period, partially offset by $7 million of branch and facility consolidation-related expense in the 2018 fourth quarter. Marketing decreased $7 million, or 12%, driven by a $33decrease in promotional expense, partially offset by an increase in advertising. Partially offsetting these decreases, personnel costs increased $35 million, or 58%2%, increase in originationprimarily reflecting higher benefit costs and secondary marketing revenue.merit increases.
$122017 versus 2016
Reported noninterest expense for 2017 increased $306 million, or 57%13%, increase in gain on salefrom the prior year, reflecting the full year impact of loansthe First Merit acquisition. Personnel costs increased $175 million, or 13%, primarily reflecting an increasethe full year impact of $7 million in SBA loan sales gains and the $5 million automobile loan securitization gain during the 2015 second quarter.
$10 million, or 23%, increase in capital market fees primarily related to customer foreign exchange and commodities derivatives products.
Partially offset by:
$17 million, or 96% decrease in securities gains as we adjusted the mix of our securities portfolio to prepare for the LCR requirements during the 2014 first quarter.
$10 million, or 9%, decrease in trust services primarily related to our fiduciary trust businesses moving to a more open architecture platform and a decline in assets under management in proprietary mutual funds. During the 2015 fourth quarter, Huntington sold HAA, HASI, and Unified.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Noninterest Expense | | | | | | | | | | | | | |
(This section should be read in conjunction with Significant Items section.) | | | | |
| | | | |
The following table reflects noninterest expense for the past three years: | | | | |
| | | | | | | | | | | | | |
Table 8 - Noninterest Expense |
(dollar amounts in thousands) | | | | | | | | | | | | | |
| Year Ended December 31, |
| | | Change from 2015 | | | | Change from 2014 | | |
| 2016 | | Amount | | Percent | | 2015 | | Amount | | Percent | | 2014 |
Personnel costs | $ | 1,349,124 |
| | $ | 226,942 |
| | 20 | % | | $ | 1,122,182 |
| | $ | 73,407 |
| | 7 | % | | $ | 1,048,775 |
|
Outside data processing and other services | 304,743 |
| | 73,390 |
| | 32 |
| | 231,353 |
| | 18,767 |
| | 9 |
| | 212,586 |
|
Equipment | 164,839 |
| | 39,882 |
| | 32 |
| | 124,957 |
| | 5,294 |
| | 4 |
| | 119,663 |
|
Net occupancy | 153,090 |
| | 31,209 |
| | 26 |
| | 121,881 |
| | (6,195 | ) | | (5 | ) | | 128,076 |
|
Professional services | 105,266 |
| | 54,975 |
| | 109 |
| | 50,291 |
| | (9,264 | ) | | (16 | ) | | 59,555 |
|
Marketing | 62,957 |
| | 10,744 |
| | 21 |
| | 52,213 |
| | 1,653 |
| | 3 |
| | 50,560 |
|
Deposit and other insurance expense | 54,107 |
| | 9,498 |
| | 21 |
| | 44,609 |
| | (4,435 | ) | | (9 | ) | | 49,044 |
|
Amortization of intangibles | 30,456 |
| | 2,589 |
| | 9 |
| | 27,867 |
| | (11,410 | ) | | (29 | ) | | 39,277 |
|
Other expense | 183,903 |
| | (16,652 | ) | | (8 | ) | | 200,555 |
| | 25,745 |
| | 15 |
| | 174,810 |
|
Total noninterest expense | $ | 2,408,485 |
| | $ | 432,577 |
| | 22 | % | | $ | 1,975,908 |
| | $ | 93,562 |
| | 5 | % | | $ | 1,882,346 |
|
Number of employees (average full-time equivalent) | 15,993 |
| | 3,750 |
| | 31 | % | | 12,243 |
| | 370 |
| | 3 | % | | 11,873 |
|
|
| | | | | | | | | | | |
Impact of Significant Items: | | | | | |
| Year Ended December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | | 2014 |
Personnel costs | $ | 76,020 |
| | $ | 5,457 |
| | $ | 19,850 |
|
Outside data processing and other services | 46,467 |
| | 4,365 |
| | 5,507 |
|
Equipment | 24,742 |
| | 110 |
| | 2,248 |
|
Net occupancy | 14,772 |
| | 4,587 |
| | 11,153 |
|
Professional services | 57,817 |
| | 5,087 |
| | 2,228 |
|
Marketing | 5,520 |
| | 28 |
| | 1,357 |
|
Other expense | 14,010 |
| | 38,733 |
| | 23,140 |
|
Total impact of significant items on noninterest expense | $ | 239,348 |
| | $ | 58,367 |
| | $ | 65,483 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted Noninterest Expense (See Non-GAAP Financial Measures in the Additional Disclosures section): | | | | | | | | |
| | | | | | | | | |
| Year Ended December 31, | | Change from 2015 | | Change from 2014 |
(dollar amounts in thousands) | 2016 | | 2015 | | 2014 | | Amount | | Percent | | Amount | | Percent |
Personnel costs | 1,273,104 |
| | 1,116,725 |
| | 1,028,925 |
| | 156,379 |
| | 14 |
| | 87,800 |
| | 9 |
|
Outside data processing and other services | 258,276 |
| | 226,988 |
| | 207,079 |
| | 31,288 |
| | 14 |
| | 19,909 |
| | 10 |
|
Equipment | 140,097 |
| | 124,847 |
| | 117,415 |
| | 15,250 |
| | 12 |
| | 7,432 |
| | 6 |
|
Net occupancy | 138,318 |
| | 117,294 |
| | 116,923 |
| | 21,024 |
| | 18 |
| | 371 |
| | — |
|
Professional services | 47,449 |
| | 45,204 |
| | 57,327 |
| | 2,245 |
| | 5 |
| | (12,123 | ) | | (21 | ) |
Marketing | 57,437 |
| | 52,185 |
| | 49,203 |
| | 5,252 |
| | 10 |
| | 2,982 |
| | 6 |
|
Deposit and other insurance expense | 54,107 |
| | 44,609 |
| | 49,044 |
| | 9,498 |
| | 21 |
| | (4,435 | ) | | (9 | ) |
Amortization of intangibles | 30,456 |
| | 27,867 |
| | 39,277 |
| | 2,589 |
| | 9 |
| | (11,410 | ) | | (29 | ) |
Other expense | 169,893 |
| | 161,822 |
| | 151,670 |
| | 8,071 |
| | 5 |
| | 10,152 |
| | 7 |
|
Total adjusted noninterest expense (Non-GAAP) | $ | 2,169,137 |
| | $ | 1,917,541 |
| | $ | 1,816,863 |
| | $ | 251,596 |
| | 13 | % | | $ | 100,678 |
| | 6 | % |
2016 vs. 2015
Noninterest expense increased $433 million, or 22%, from 2015:
$227 million, or 20%, increase in personnel costs, primarily reflecting a 31% increase in the number of average full-time equivalent employees largely related to the in-store branch expansion and the addition of colleagues from FirstMerit.
$73 Net occupancy expense increased $59 million, or 32%39%, increase in outside data processing and other services, primarily reflecting $46$52 million of acquisition-related expense. Other expense and ongoing technology investments.
$55 million, or 109%, increase in professional services, primarily reflecting $58 million of acquisition-related expense.
$40 million, or 32%, increase in equipment expense, primarily reflecting $25 million of acquisition-related expense.
$31increased $47 million, or 26%, increase in net occupancy expense, primarily reflecting $15 millionthe full impact of acquisition-related expense.
Partially offset by:
$17FirstMerit. Amortization of intangibles increased $26 million, or 8%87%, decrease inreflecting the full year impact of amortizing FirstMerit related intangibles. Deposit and other expense, primarily reflecting a $42 million reduction to litigation reserves which was mostly offset by a $40 million contribution in the 2016 fourth quarter to achieve the philanthropic plans related to FirstMerit.
2015 vs. 2014
Noninterestinsurance expense increased $94$24 million, or 5%, from 2014:
$73 million, or 7%, increase in personnel costs. Excluding the impact of significant items, personnel costs increased $88 million, or 9%44%, reflecting a $79 million increase in salaries related to the 2015 second quarter implementation of annual merit increases, the addition of Huntington Technology Finance, and a 3% increase in the number of average full-time equivalent employees, largely related to the build-out of the in-store strategy.
$26 million, or 15%, increase in other noninterest expense. Excluding the impact of significant items, other noninterest expense increased $10 million, or 7%, due to an increase in operating lease expense related to Huntington Technology Finance.
$19 million, or 9%, increase in outside data processing and other services. Excluding the impact of significant items, outside data processing and other services increased $20 million, or 10%, primarily reflecting higher debit and credit card processing costs and increased other technology investment expense, as we continue to invest in technology supporting our products, services, and our Continuous Improvement initiatives.
assessment base. Partially offset by:
$11 million, or 29%, decrease in amortization of intangibles reflecting the full amortization of the core deposit intangible at the end of the 2015 second quarter from the Sky Financial acquisition.
$9 million, or 16%, decrease in professional services. Excluding the impact of significant items,offsetting these increases, professional services decreased $12$36 million, or 21%,34% reflecting a decreasereduction in outside consultant expenses relatedlegal and consultation fees attributable to strategic planning.acquisition-related expense.
$6 million, or 5%, decrease in net occupancy. Excluding the impact of significant items, net occupancy remained relatively unchanged.
Provision for Income Taxes
(This section should be read in conjunction with Note 171 and Note 16 of the Notes to Consolidated Financial Statements.)
20162018 versus 20152017
The provision for income taxes was $208$235 million for 20162018 compared with a provision for income taxes of $221$208 million in 2015.2017. Both years included the benefits from tax-exempt income, tax-advantaged investments, general business credits, investments in qualified affordable housing projects, excess tax deductions for stock-based compensation, and capital losses. 2017 also included a $123 million tax benefit related to the federal tax reform enacted on December 22, 2017, which is primarily attributed to the revaluation of net deferred tax liabilities at the lower statutory federal income tax rate. We completed our provisional estimate related to tax reform during the 2018 fourth quarter. As of December 31, 20162018 and 20152017 there was no valuation allowance on federal deferred taxes. In 2015, a $69 million reduction in the provision for federal income taxes was recorded for the portion of federal capital loss carryforward deferred tax asset that are more likely than not to be realized. In 20162018 and 20152017 there was essentially no change recorded in the provision for state income taxes, net of federal, for the portion of state deferred tax assets and state net operating loss carryforwards that are more likely than not to be realized. At December 31, 2016,2018, we had a net federal deferred tax assetliability of $76$105 million and a net state deferred tax asset of $41 million.
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. TheCertain proposed adjustments resulting from the IRS is currently examiningexamination of our 2010 through 2011 tax returns have been settled, subject to final approval by the Joint Committee on Taxation of the U.S. Congress. While the statute of limitations remains open for tax years 2012 through 2017, the IRS has advised that tax years 2012 through 2014 will not be audited, and 2011 consolidatedbegan the examination of the 2015 federal income tax returns.return in second quarter 2018. Various state and other jurisdictions remain open to examination, including Ohio, Kentucky, Indiana, Michigan, Pennsylvania, West Virginia, Wisconsin, and Illinois.
20152017 versus 20142016
The provision for income taxes was $221$208 million for 2015 compared with a provision for income taxes of $221 million in 2014.2017 and 2016. Both years included the benefits from tax-exempt income, tax-advantaged investments, general business credits, investments in qualified affordable housing projects, excess tax deductions for stock-based compensation, and capital losses. In 2015,2017 also included a $69$123 million reduction intax benefit related to the provision forfederal tax reform enacted on December 22, 2017, which is primarily attributed to the revaluation of net deferred tax liabilities at the lower statutory federal income taxestax rate. As of December 31, 2017 and 2016 there was recorded for the portion ofno valuation allowance on federal deferred tax assets related to capital loss carryforwards that are more likely than not to be realized compared to a $27 million reduction in 2014.taxes. In 2015,2017 and 2016, there was essentially no change recorded in the provision for state income taxes, net of federal taxes, for the portion of state deferred tax assets and state net operating loss carryforwards that are more likely than not to be realized, compared to a $7 million reduction, net of federal taxes, in the 2014.realized.
RISK MANAGEMENT AND CAPITAL
Risk Governance
We use a multi-faceted approach to risk governance. It begins with the board of directors defining our risk appetite as aggregate moderate-to-low. This does not preclude engagement in select higher risk activities. Rather, the definition is intended to represent an aggregate view of where we want our overall risk to be managed.
Three board committees primarily oversee implementation of this desired risk appetite and monitoring of our risk profile:
The Audit Committee oversees the integrity of the consolidated financial statements, including policies, procedures, and practices regarding the preparation of financial statements, the financial reporting process, disclosures, and internal control over financial reporting. The Audit Committee also provides assistance to the board in overseeing the internal audit division and the independent registered public accounting firm’s qualifications and independence; compliance with our Financial Code of Ethics for the chief executive officer and senior financial officers; and compliance with corporate securities trading policies.
The Risk Oversight Committee (ROC) assists the board of directors in overseeing management of material risks, the approval and monitoring of the Company’s capital position and plan supporting our overall aggregate moderate-to-low risk profile, the risk governance structure, compliance with applicable laws and regulations, and determining adherence to the board’s stated risk appetite. The committee has oversight responsibility with respect to the full range of inherent risks: market, credit, liquidity, legal, compliance/regulatory, operational, strategic, and reputational. The ROC provides assistance to the Board in overseeing the credit review division. This committee also oversees our capital management and planning process, ensures that the amount and quality of capital are adequate in relation to expected and unexpected risks, and that our capital levels exceed “well-capitalized” requirements.
The Technology Committee assists the board of directors in fulfilling its oversight responsibilities with respect to all technology, cyber security, and third-party risk management strategies and plans. The committee is charged with evaluating Huntington’s capability to properly perform all technology functions necessary for its business plan, including projected growth, technology capacity, planning, operational execution, product development, and management capacity. The committee provides oversight of technology investments and plans to drive efficiency as well as to meet defined standards for risk, information security, and redundancy. The Committee oversees the allocation of technology costs and ensures that they are understood by the board of directors. The Technology Committee monitors and evaluates innovation and technology trends that may affect the Company’s strategic plans, including monitoring of overall industry trends. The Technology Committee reviews and provides oversight of the Company’s continuity and disaster recovery planning and preparedness.
The Audit and Risk Oversight Committees routinely hold executive sessions with our key officers engaged in accounting and risk management. On a periodic basis, the two committees meet in joint session to cover matters relevant to both, such as the construct and appropriateness of the ACL, which is reviewed quarterly. All directors have access to information provided to each committee and all scheduled meetings are open to all directors.
Further, through its Compensation Committee, the board of directors seeks to ensure its system of rewards is risk-sensitive and aligns the interests of management, creditors, and shareholders. We utilize a variety of compensation-related tools to induce appropriate behavior, including common stock ownership thresholds for the chief executive officer and certain members of senior management, a requirement to hold until retirement or exit from the Company, a portion of net shares received upon exercise of stock options or release of restricted stock awards (50% for executive officers and 25% for other award recipients), equity deferrals, recoupment provisions, and the right to terminate compensation plans at any time.
Management has implemented an Enterprise Risk Management and Risk Appetite Framework. Critically important is our self-assessment process, in which each business segment produces an analysis of its risks and the strength of its risk controls. The segment analyses are combined with assessments by our risk management organization of major risk sectors (e.g., market, credit, liquidity, legal, compliance/regulatory, operational, strategic, and reputational) to produce an overall enterprise risk assessment. Outcomes of the process include a determination of the quality of the overall control process, the direction of risk, and our position compared to the defined risk appetite.
Management also utilizes a wide series of metrics (key risk indicators) to monitor risk positions throughout the Company. In general, a range for each metric is established, which allows the Company, in aggregate, to operate within an aggregate moderate-to-low risk profile. Deviations from the range will indicate if the risk being measured exceeds desired tolerance, which may then necessitate corrective action.
We also have four executive level committees to manage risk: ALCO, Credit Policy and Strategy, Risk Management, and Capital Management. Each committee focuses on specific categories of risk and is supported by a series of subcommittees that are tactical in nature. We believe this structure helps ensure appropriate escalation of issues and overall communication of strategies.
Huntington utilizes three lines of defense with regard to risk management: (1) business segments, (2) corporate risk management, and (3) internal audit and credit review. To induce greater ownership of risk within its business segments, segment risk officers have been embedded in the business to identify and monitor risk, elevate and remediate issues, establish controls, perform self-testing, and oversee the self-assessment process. Corporate Risk Management establishes policies, sets operating limits, reviews new or modified products/processes, ensures consistency and quality assurance within the segments, and produces the enterprise risk assessment. The Chief Risk Officer has significant input into the design and outcome of incentive compensation plans as they apply to risk. Internal Audit and Credit Review provide additional assurance that risk-related functions are operating as intended.
A comprehensive discussion of risk management and capital matters affecting us can be found in the Risk Governance section included in Item 1A and the Regulatory Matters section of Item 1 of this Form 10-K.
Some of the more significant processes used to manage and control credit, market, liquidity, operational, and compliance risks are described in the following sections.
Credit Risk
Credit risk is the risk of financial loss if a counterparty is not able to meet the agreed upon terms of the financial obligation. The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. We also have credit risk associated with our AFS and HTMinvestment securities portfolios (see Note 5 and Note 64 of the Notes to 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, based on our underwriting practices we believe this exposure is minimal. (seeSee Note 1 of the Notes to Consolidated Financial Statements)Statements.)
We continue to focus on the identification, monitoring, and managingmanagement 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 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 solutions for delinquent or stressed borrowers.
The maximum level of credit exposure to individual credit borrowers is limited by policy guidelines based on the perceived risk of each borrower or related group of borrowers. All authority to grant commitments is delegated through the independent credit administration function and is closely monitored and regularly updated. Concentration risk is managed through limits on loan type, geography, industry, and loan quality factors. We focus predominantly on extending credit to retail and commercial customers with existing or expandable relationships within our primary banking markets, although we will consider lending opportunities outside our primary markets if we believe the associated risks are acceptable and aligned with strategic initiatives. Although we offer a broad set of products, we continue to develop new lending products and opportunities. Each of these new products and opportunities goes through a rigorous development and approval process prior to implementation to ensure our overall objective of maintaining an aggregate moderate-to-low risk portfolio profile.
The checks and balances in the credit process and the separation of the credit administration and risk management functions are designed to appropriately assess and sanction the level of credit risk being accepted, facilitate the early recognition of credit problems when they occur, and provide for effective problem asset management and resolution. For example, we do not extend additional credit to delinquent borrowers except in certain circumstances that substantially improve our overall repayment or collateral coverage position.
Loan and Lease Credit Exposure Mix
At December 31, 2016,2018, our loans and leases totaled $67.0$74.9 billion, representing a $16.6$4.8 billion, or 33%7%, increase compared to $50.3$70.1 billion at December 31, 2015.2017.
Total commercial loans and leases were $35.4$37.4 billion at December 31, 2016,2018, and represented 53%51% of our total loan and lease credit exposure. Our commercial loan portfolio is diversified by product type, customer size, and geography within our footprint, and is comprised of the following (see Commercial Credit discussion):
C&I – C&I loans and leases are made to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or other projects. The majority of these borrowers are customers doing business within our geographic regions. C&I loans and leases are generally underwritten individually and secured with the assets of the company and/or the personal guarantee of the business owners. The financing of owner occupied facilities is considered a C&I loan even though there is improved real estate as collateral. This treatment is a result of the credit decision process, which focuses on cash flow from operations of the business to repay the debt. The operation, sale, rental, or refinancing of the real estate is not considered the primary repayment source for these types of loans. As we have expanded our C&I portfolio, we have developed a series of “vertical specialties” to ensure that new products or lending types are embedded within a structured, centralized Commercial Lending area with designated, experienced credit officers. These specialties are comprised of either targeted industries (for example, Healthcare, Food & Agribusiness, Energy, etc.) and/or lending disciplines (Equipment Finance, ABL,Asset Based Lending, 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. For loans secured by real estate, appropriate appraisals are obtained at origination and updated on an as needed basis in compliance with regulatory requirements.
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,multi-family, office, and warehouse project types. Generally, these loans are for construction projects that have been presoldpre-sold or preleased,pre-leased, 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 $31.6$37.5 billion at December 31, 2016,2018, and represented 47%49% of our total loan and lease credit exposure. The consumer portfolio is comprised primarily of automobile loans, home equity loans and lines-of-credit, and residential mortgages (see Consumer Credit discussion).
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 marketscore footprint states represents 16%21% of the total exposure, with no individual state representing more than 5%. Applications are underwritten using 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 convertconverts 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. The underwriting for the floating rate lines of credit also incorporates a stress analysis for a rising interest rate.
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.
RV and marine finance – RV and marine finance loans are loans provided to consumers for the purpose of financing recreational vehicles and boats. Loans are originated on an indirect basis through a series of dealerships across 2634 states. The loans are underwritten centrally using an application and decisioning system similar to automobile loans. The current portfolio includes 60%35% of the balances within our core footprint states.
Other consumer – Other consumer loans primarily consists of consumer loans not secured by real estate, including credit cards, personal unsecured loans, and overdraft balances,balances. We originate these products within our established set of credit policies and credit cards.guidelines.
The table below provides the composition of our total loan and lease portfolio:
| | Table 9 - Loan and Lease Portfolio Composition | |
Table 8 - Loan and Lease Portfolio Composition | | Table 8 - Loan and Lease Portfolio Composition |
| | At December 31, |
(dollar amounts in millions) | | | | | | | | | | | | | | | | | | | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| At December 31, | |
| 2016 | | 2015 | | 2014 | | 2013 | | 2012 | |
Ending Balances by Type: | | | | | | | | | | | | | | | | | | | | |
Originated loans | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | $ | 21,631 |
| | 41 | % | | $ | 20,560 |
| | 41 | % | | $ | 19,033 |
| | 40 | % | | $ | 17,594 |
| | 41 | % | | $ | 16,971 |
| | 42 | % | $ | 30,605 |
| | 41 | % | | $ | 28,107 |
| | 40 | % | | $ | 28,059 |
| | 42 | % | | $ | 20,560 |
| | 41 | % | | $ | 19,033 |
| | 40 | % |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | 979 |
| | 2 |
| | 1,031 |
| | 2 |
| | 875 |
| | 2 |
| | 557 |
| | 1 |
| | 648 |
| | 2 |
| 1,185 |
| | 2 |
| | 1,217 |
| | 2 |
| | 1,446 |
| | 2 |
| | 1,031 |
| | 2 |
| | 875 |
| | 2 |
|
Commercial | 4,740 |
| | 9 |
| | 4,237 |
| | 8 |
| | 4,322 |
| | 9 |
| | 4,293 |
| | 10 |
| | 4,751 |
| | 12 |
| 5,657 |
| | 8 |
| | 6,008 |
| | 9 |
| | 5,855 |
| | 9 |
| | 4,237 |
| | 8 |
| | 4,322 |
| | 9 |
|
Commercial real estate | 5,719 |
| | 11 |
| | 5,268 |
| | 10 |
| | 5,197 |
| | 11 |
| | 4,850 |
| | 11 |
| | 5,399 |
| | 14 |
| 6,842 |
| | 10 |
| | 7,225 |
| | 11 |
| | 7,301 |
| | 11 |
| | 5,268 |
| | 10 |
| | 5,197 |
| | 11 |
|
Total commercial | 27,350 |
| | 52 |
| | 25,828 |
| | 51 |
| | 24,230 |
| | 51 |
| | 22,444 |
| | 52 |
| | 22,370 |
| | 56 |
| 37,447 |
| | 51 |
| | 35,332 |
| | 51 |
| | 35,360 |
| | 53 |
| | 25,828 |
| | 51 |
| | 24,230 |
| | 51 |
|
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Automobile | 9,619 |
| | 18 |
| | 9,481 |
| | 19 |
| | 8,690 |
| | 18 |
| | 6,639 |
| | 15 |
| | 4,634 |
| | 11 |
| 12,429 |
| | 16 |
| | 12,100 |
| | 17 |
| | 10,969 |
| | 16 |
| | 9,481 |
| | 19 |
| | 8,690 |
| | 18 |
|
Home equity | 8,665 |
| | 16 |
| | 8,471 |
| | 17 |
| | 8,491 |
| | 18 |
| | 8,336 |
| | 19 |
| | 8,335 |
| | 20 |
| 9,722 |
| | 13 |
| | 10,099 |
| | 14 |
| | 10,106 |
| | 15 |
| | 8,471 |
| | 17 |
| | 8,491 |
| | 18 |
|
Residential mortgage | 6,717 |
| | 13 |
| | 5,998 |
| | 12 |
| | 5,831 |
| | 12 |
| | 5,321 |
| | 12 |
| | 4,970 |
| | 12 |
| 10,728 |
| | 14 |
| | 9,026 |
| | 13 |
| | 7,725 |
| | 12 |
| | 5,998 |
| | 12 |
| | 5,831 |
| | 12 |
|
RV and marine finance | 166 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| 3,254 |
| | 4 |
| | 2,438 |
| | 3 |
| | 1,846 |
| | 3 |
| | — |
| | — |
| | — |
| | — |
|
Other consumer | 730 |
| | 1 |
| | 563 |
| | 1 |
| | 414 |
| | 1 |
| | 380 |
| | 2 |
| | 419 |
| | 1 |
| 1,320 |
| | 2 |
| | 1,122 |
| | 2 |
| | 956 |
| | 1 |
| | 563 |
| | 1 |
| | 414 |
| | 1 |
|
Total consumer | 25,897 |
| | 48 |
| | 24,513 |
| | 49 |
| | 23,426 |
| | 49 |
| | 20,676 |
| | 48 |
| | 18,358 |
| | 44 |
| 37,453 |
| | 49 |
| | 34,785 |
| | 49 |
| | 31,602 |
| | 47 |
| | 24,513 |
| | 49 |
| | 23,426 |
| | 49 |
|
Total originated loans and leases | $ | 53,247 |
| | 100 | % | | $ | 50,341 |
| | 100 | % | | $ | 47,656 |
| | 100 | % | | $ | 43,120 |
| | 100 | % | | $ | 40,728 |
| | 100 | % | |
| | | | | | | | | | | | | | | | | | | | |
Acquired loans (1) | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | $ | 6,428 |
| | 47 | % | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | |
Construction | 467 |
| | 3 |
| | | | | | | | | | | | | | | | | |
Commercial | 1,115 |
| | 8 |
| | | | | | | | | | | | | | | | | |
Commercial real estate | 1,582 |
| | 11 |
| | | | | | | | | | | | | | | | | |
Total commercial | 8,010 |
| | 58 |
| | | | | | | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | | | | | | | | | |
Automobile | 1,350 |
| | 10 |
| | | | | | | | | | | | | | | | | |
Home equity | 1,441 |
| | 11 |
| | | | | | | | | | | | | | | | | |
Total loans and leases | | $ | 74,900 |
| | 100 | % | | $ | 70,117 |
| | 100 | % | | $ | 66,962 |
| | 100 | % | | $ | 50,341 |
| | 100 | % | | $ | 47,656 |
| | 100 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | 1,008 |
| | 7 |
| | | | | | | | | | | | | | | | |
RV and marine finance | 1,680 |
| | 12 |
| | | | | | | | | | | | | | | | |
Other consumer | 226 |
| | 2 |
| | | | | | | | | | | | | | | | |
Total consumer | 5,705 |
| | 42 |
| | | | | | | | | | | | | | | | |
Total acquired loans and leases | $ | 13,715 |
| | 100 | % | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total loans | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | $ | 28,059 |
| | 42 | % | | $ | 20,560 |
| | 41 | % | | $ | 19,033 |
| | 40 | % | | $ | 17,594 |
| | 41 | % | | $ | 16,971 |
| | 42 | % |
Commercial real estate: | | | | | | | | | | | | | | | | | | | |
Construction | 1,446 |
| | 2 |
| | 1,031 |
| | 2 |
| | 875 |
| | 2 |
| | 557 |
| | 1 |
| | 648 |
| | 2 |
|
Commercial | 5,855 |
| | 9 |
| | 4,237 |
| | 8 |
| | 4,322 |
| | 9 |
| | 4,293 |
| | 10 |
| | 4,751 |
| | 12 |
|
Commercial real estate | 7,301 |
| | 11 |
| | 5,268 |
| | 10 |
| | 5,197 |
| | 11 |
| | 4,850 |
| | 11 |
| | 5,399 |
| | 14 |
|
Total commercial | 35,360 |
| | 53 |
| | 25,828 |
| | 51 |
| | 24,230 |
| | 51 |
| | 22,444 |
| | 52 |
| | 22,370 |
| | 56 |
|
Consumer: | | | | | | | | | | | | | | | | | | | |
Automobile | 10,969 |
| | 16 |
| | 9,481 |
| | 19 |
| | 8,690 |
| | 18 |
| | 6,639 |
| | 15 |
| | 4,634 |
| | 11 |
|
Home equity | 10,106 |
| | 15 |
| | 8,471 |
| | 17 |
| | 8,491 |
| | 18 |
| | 8,336 |
| | 19 |
| | 8,335 |
| | 20 |
|
Residential mortgage | 7,725 |
| | 12 |
| | 5,998 |
| | 12 |
| | 5,831 |
| | 12 |
| | 5,321 |
| | 12 |
| | 4,970 |
| | 12 |
|
RV and marine finance | 1,846 |
| | 3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other consumer | 956 |
| | 1 |
| | 563 |
| | 1 |
| | 414 |
| | 1 |
| | 380 |
| | 2 |
| | 419 |
| | 1 |
|
Total consumer | 31,602 |
| | 47 |
| | 24,513 |
| | 49 |
| | 23,426 |
| | 49 |
| | 20,676 |
| | 48 |
| | 18,358 |
| | 44 |
|
Total loans and leases | $ | 66,962 |
| | 100 | % | | $ | 50,341 |
| | 100 | % | | $ | 47,656 |
| | 100 | % | | $ | 43,120 |
| | 100 | % | | $ | 40,728 |
| | 100 | % |
| |
(1) | Represents loans from FirstMerit acquisition. |
Loans originated for investment are stated at their principal amount outstanding adjusted for partial charge-offs, and net deferred loan fees and costs. Acquired loans are those purchased in the FirstMerit acquisition and are recorded at estimated fair value at the acquisition date with no carryover of the related ALLL. The difference between acquired contractual balance and estimated fair value at acquisition date was recorded as a purchase premium or discount. The acquired loan portfolio will show a continuous decline as a result of payments, payoffs, charge-offs or other disposition, unless Huntington acquires additional loans in the future.
Our loan portfolio is composed of a managed mix of consumer and commercial credits. At the corporate level, we manage the overall credit exposure and portfolio composition in part via a credit concentration policy. The policy designates specific loan types, collateral types, and loan structures to be formally tracked and assigned maximum exposure limits as a percentage of capital. C&I lending by NAICS categories, specific limits for CRE primary project types, loans secured by residential real estate, shared national credit exposure, and designated high risk loan definitions represent examples of specifically tracked components of our concentration management process. Currently thereThere are no identified concentrations that exceed the established limit, including the impact of the FirstMerit acquisition.assigned exposure limit. Our concentration management policy is approved by the ROC of the Board and is one of the strategies used to ensure a high quality, well diversified portfolio that is consistent with our overall objective of maintaining an aggregate moderate-to-low risk profile. Changes to existing concentration limits require the approval of the ROC prior to implementation, incorporating specific information relating to the potential impact on the overall portfolio composition and performance metrics.
The table below provides our total loan and lease portfolio segregated by the type of collateral securing the loan or lease.industry type. The changes in the collateralindustry composition from December 31, 20152017 are consistent with the portfolio growth metrics.
The increase in the unsecured exposure is centered in high quality commercial credit customers.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 10 - Loan and Lease Portfolio by Collateral Type |
(dollar amounts in millions) | | | | | | | | | | | | | | | | | | | |
| At December 31, |
| 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
Secured loans: | | | | | | | | | | | | | | | | | | | |
Real estate—commercial | $ | 11,729 |
| | 18 | % | | $ | 8,296 |
| | 16 | % | | $ | 8,631 |
| | 18 | % | | $ | 8,622 |
| | 20 | % | | $ | 9,128 |
| | 22 | % |
Real estate—consumer | 17,831 |
| | 27 |
| | 14,469 |
| | 29 |
| | 14,322 |
| | 30 |
| | 13,657 |
| | 32 |
| | 13,305 |
| | 33 |
|
Vehicles, RV and marine | 15,934 |
| | 24 |
| | 11,880 |
| | 24 |
| | 10,932 |
| | 23 |
| | 8,989 |
| | 21 |
| | 6,659 |
| | 16 |
|
Receivables/Inventory | 6,277 |
| | 9 |
| | 5,961 |
| | 12 |
| | 5,968 |
| | 13 |
| | 5,534 |
| | 13 |
| | 5,178 |
| | 13 |
|
Machinery/Equipment | 9,465 |
| | 14 |
| | 5,171 |
| | 10 |
| | 3,863 |
| | 8 |
| | 2,738 |
| | 6 |
| | 2,749 |
| | 7 |
|
Securities/Deposits | 1,305 |
| | 2 |
| | 974 |
| | 2 |
| | 964 |
| | 2 |
| | 786 |
| | 2 |
| | 826 |
| | 2 |
|
Other | 1,154 |
| | 1 |
| | 987 |
| | 2 |
| | 919 |
| | 2 |
| | 1,016 |
| | 2 |
| | 1,090 |
| | 3 |
|
Total secured loans and leases | 63,695 |
| | 95 |
| | 47,738 |
| | 95 |
| | 45,599 |
| | 96 |
| | 41,342 |
| | 96 |
| | 38,935 |
| | 96 |
|
Unsecured loans and leases | 3,267 |
| | 5 |
| | 2,603 |
| | 5 |
| | 2,057 |
| | 4 |
| | 1,778 |
| | 4 |
| | 1,793 |
| | 4 |
|
Total loans and leases | $ | 66,962 |
| | 100 | % | | $ | 50,341 |
| | 100 | % | | $ | 47,656 |
| | 100 | % | | $ | 43,120 |
| | 100 | % | | $ | 40,728 |
| | 100 | % |
|
| | | | | | | | | | | | | |
Table 9 - Loan and Lease Portfolio by Industry Type | | | | | | | |
(dollar amounts in millions) | December 31, 2018 | | December 31, 2017 |
Commercial loans and leases: | | | | | | | |
Real estate and rental and leasing | $ | 6,964 |
| | 9 | % | | $ | 7,378 |
| | 11 | % |
Retail trade (1) | 5,337 |
| | 7 |
| | 4,886 |
| | 7 |
|
Manufacturing | 5,140 |
| | 7 |
| | 4,791 |
| | 7 |
|
Finance and insurance | 3,377 |
| | 5 |
| | 3,044 |
| | 4 |
|
Wholesale trade | 2,830 |
| | 4 |
| | 2,291 |
| | 3 |
|
Health care and social assistance | 2,533 |
| | 3 |
| | 2,664 |
| | 4 |
|
Accommodation and food services | 1,709 |
| | 2 |
| | 1,617 |
| | 2 |
|
Professional, scientific, and technical services | 1,344 |
| | 2 |
| | 1,257 |
| | 2 |
|
Transportation and warehousing | 1,320 |
| | 2 |
| | 1,243 |
| | 2 |
|
Other services | 1,290 |
| | 2 |
| | 1,296 |
| | 2 |
|
Mining, quarrying, and oil and gas extraction | 1,286 |
| | 2 |
| | 694 |
| | 1 |
|
Construction | 924 |
| | 1 |
| | 976 |
| | 1 |
|
Admin./Support/Waste Mgmt. and Remediation Services | 737 |
| | 1 |
| | 561 |
| | 1 |
|
Arts, entertainment, and recreation | 599 |
| | 1 |
| | 593 |
| | 1 |
|
Educational services | 473 |
| | 1 |
| | 504 |
| | 1 |
|
Utilities | 454 |
| | 1 |
| | 389 |
| | 1 |
|
Information | 441 |
| | 1 |
| | 467 |
| | 1 |
|
Public administration | 253 |
| | — |
| | 255 |
| | — |
|
Unclassified/Other | 174 |
| | — |
| | 163 |
| | — |
|
Agriculture, forestry, fishing and hunting | 174 |
| | — |
| | 172 |
| | — |
|
Management of companies and enterprises | 88 |
| | — |
| | 91 |
| | — |
|
Total commercial loans and leases by industry category | 37,447 |
| | 51 | % | | 35,332 |
| | 51 | % |
Automobile | 12,429 |
| | 16 |
| | 12,100 |
| | 17 |
|
Home Equity | 9,722 |
| | 13 |
| | 10,099 |
| | 14 |
|
Residential mortgage | 10,728 |
| | 14 |
| | 9,026 |
| | 13 |
|
RV and marine finance | 3,254 |
| | 4 |
| | 2,438 |
| | 3 |
|
Other consumer loans | 1,320 |
| | 2 |
| | 1,122 |
| | 2 |
|
Total loans and leases | $ | 74,900 |
| | 100 | % | | $ | 70,117 |
| | 100 | % |
| |
(1) | Amounts include $3.6 billion and $3.2 billion of auto dealer services loans at December 31, 2018 and December 31, 2017, respectively. |
Commercial Credit
The primary factors considered in commercial credit approvals are the financial strength of the borrower, assessment of the borrower’s management capabilities, cash flows from operations, industry sector trends, type and sufficiency of collateral, type of exposure, transaction structure, and the general economic outlook. While these are the primary factors considered, there are a number of other factors that may be considered in the decision process. We utilize a centralized preview and senior loan approval committee,committees, led by our chief credit officer.officers. The risk rating (see next paragraph), size, and complexity of the credit determines the threshold for approval of the senior loan committee with a minimum credit exposure of $10.0 million.approval. For loans not requiring senior loan committee approval, with the exception of small business loans, credit officers who understand each local region and are experienced in the industries and loan structures of the requested credit exposure are involved in all loan decisions and have the primary credit authority. For small business loans, we utilize a centralized loan approval process for standard products and structures. In this centralized decision environment, certain individuals who understand each local region may make credit-extension decisions to preserve our commitment to the communities in which we operate. In addition to disciplined and consistent judgmental factors, a sophisticated credit scoring process is used as a primary evaluation tool in the determination of approving a loan within the centralized loan approval process.
In commercial lending, on-going credit management is dependent on the type and nature of the loan. We monitor all significant exposures on an on-going basis. All commercial credit extensions are assigned internal risk ratings reflecting the borrower’s PD and LGD. This two-dimensional rating methodology provides granularity in the portfolio management process. The PD is rated and applied at the borrower level. The LGD is rated and applied based on the specific type of credit extension and the quality and lien
position associated with the underlying collateral. The internal risk ratings are assessed at origination and updated at each periodic monitoring event. There is also extensive macro portfolio management analysis on an on-going basis. We continually review and adjust our risk-rating criteria based on actual experience, which provides us with the current risk level in the portfolio and is the basis for determining an appropriate allowance for credit losses (ACL) amount for the commercial portfolio. A centralized portfolio management team monitors and reports on the performance of the entire commercial portfolio, including small business loans, to provide consistent oversight.
In addition to the initial credit analysis conducted during the approval process, our Credit Review group performs testing to provide an independent review and assessment of the quality and risk of new loan originations. This group is part of our Risk Management area and conducts portfolio reviews on a risk-based cycle to evaluate individual loans, validate risk ratings, and test the consistency of credit processes.
Our standardized loan grading system considers many components that directly correlate to loan quality and likelihood of repayment, one of which is guarantor support. On an annual basis, or more frequently if warranted, we consider, among other things, the guarantor’s reputation and creditworthiness, along with various key financial metrics such as liquidity and net worth, assuming such information is available. Our assessment of the guarantor’s credit strength, or lack thereof, is reflected in our risk ratings for such loans, which is directly tied to, and an integral component of, our ACL methodology. When a loan goes to impaired status, viable guarantor support is considered in the determination of a credit loss.
If our assessment of the guarantor’s credit strength yields an inherent capacity to perform, we will seek repayment from the guarantor as part of the collection process and have done so successfully.
Substantially all loans categorized as Classified (see Note 43 of Notes to Consolidated Financial Statements) are managed by SAD. SAD is a specialized group of credit professionals that handle the day-to-day management of workouts, commercial recoveries, and problem loan sales. Its responsibilities include developing and implementing action plans, assessing risk ratings, and determining the appropriateness of the allowance, the accrual status, and the ultimate collectability of the Classified loan portfolio.
C&I PORTFOLIO
We manage the risks inherent in the C&I portfolio through origination policies, a defined loan concentration policy with established limits, on-going loan level reviewsloan-level and portfolio levelportfolio-level reviews, recourse requirements, and continuous portfolio risk management activities. Our origination policies for the C&I portfolio include loan product-type specific policies such as LTV and debt service coverage ratios, as applicable. During 2016, the most volatile segment of the C&I portfolio was loans to borrowers supporting oil and gas exploration and production, and currently represents less than 1% of the total loan portfolio. While the energy industry remains a focus, the performance of the energy related portfolio has stabilized over the past three quarters.
The C&I portfolio continues to have solid origination activity as evidenced by its growth over the past 12 months andwhile we maintain a focus on high quality originations. The loans added as a result of the FirstMerit acquisition have a very similar risk profile and composition to the legacy Huntington portfolio. The only material new geographic location is the Chicago market. Problem loans hadhave trended downward over the last several years, reflecting a combination of proactive risk identification and effective workout strategies implemented by the SAD. However, in the first quarter of 2016 C&I problem loans began to increase, primarily as a result of oil and gas exploration and production customers and the increase in overall C&I loan portfolio size. We have seen some improvement in the Energy portfolio risk profile since the 2016 first quarter. We continue to maintain a proactive approach to identifying borrowers that may be facing financial difficulty in order to maximize the potential solutions. Subsequent to the origination of the loan, the Credit Review group provides an independent review and assessment of the quality of the underwriting and risk of new loan originations.
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 non-owner occupied, require that at least 50% of the space of the project be preleased.pre-leased. We actively monitor both geographic and project-type concentrations and performance metrics of all CRE loan types, with a focus on loans identified as higher risk based on the risk rating methodology. Both macro-level and loan-level stress-test scenarios based on existing and forecast market conditions are part of the on-going portfolio management process for the CRE portfolio.
Dedicated real estate professionals originate and manage the portfolio. The portfolio is diversified by project type and loan size, and this diversification represents a significant portion of the credit risk management strategies employed for this portfolio. Subsequent to the origination of the loan, the Credit Review group provides an independent review and assessment of the quality of the underwriting and risk of new loan originations.
Appraisal values are obtained in conjunction with all originations and renewals, and on an as neededas-needed basis, in compliance with regulatory requirements and to ensure appropriate decisions regarding the on-going management of the portfolio reflect the changing market conditions. Appraisals are obtained from approved vendors and are reviewed by an internal appraisal review group comprised of certified appraisers to ensure the quality of the valuation used in the underwriting process. We continue to perform on-going portfolio level reviews within the CRE portfolio. These reviews generate action plans based on occupancy levels or sales volume associated with the projects being reviewed. 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
Consumer credit approvals are based on, among other factors, the financial strength and payment history of the borrower, type of exposure, and transaction structure. Consumer credit decisions are generally made in a centralized environment utilizing decision models. Importantly, certain individuals who understand each local region have the authority to make credit extension decisions to preserve our focus on the local communities in which we operate. Each credit extension is assigned a specific PD and LGD. The PD is generally based on the borrower’s most recent credit bureau score (FICO), which we update quarterly, providing an ongoing view of the borrowers PD. The LGD is related to the type of collateral associated with the credit extension, which typically does not change over the course of the loan term. This allows Huntington to maintain a current view of the customer for credit risk management and ACL purposes.
In consumer lending, credit risk is managed from a segment (i.e., loan type, collateral position, geography, etc.) and vintage performance analysis. All portfolio segments are continuously monitored for changes in delinquency trends and other asset quality indicators. We make extensive use of portfolio assessment models to continuously monitor the quality of the portfolio, which may result in changes to future origination strategies. The ongoing analysis and review process results in a determination of an appropriate ALLLACL amount for our consumer loan portfolio. The independent risk management group has a consumer process review component to ensure the effectiveness and efficiency of the consumer credit processes.
Collection actions by our customer assistance team are initiated as needed through a centrally managed collection and recovery function. We employ a series of collection methodologies designed to maintain a high level of effectiveness, while maximizing efficiency. In addition to the consumer loan portfolio, the customer assistance team is responsible for collection activity on all sold and securitized consumer loans and leases. Collection practices include a single contact point for the majority of the residential real estate secured portfolios.
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.prior to the financial crisis. Our portfolio management strategies associated with our Home Savers group allow us to focus on effectively helping our customers with appropriate solutions for their specific circumstances.
|
| | | | | | | | | | | | | | | | |
Table 11 - Selected Home Equity and Residential Mortgage Portfolio Data |
(dollar amounts in millions) | | | | | | | | |
| Home Equity | | Residential Mortgage |
| December 31, |
| | 2016 | | 2015 | | 2016 | | 2015 |
Ending balance | | $ | 10,106 |
| | $ | 8,471 |
| | $ | 7,725 |
| | $ | 5,998 |
|
Portfolio weighted-average LTV ratio (1) | | 75 | % | | 75 | % | | 75 | % | | 75 | % |
Portfolio weighted-average FICO score (2) | | 760 |
| | 760 |
| | 748 |
| | 752 |
|
| | | | | | | | |
| Home Equity | | Residential Mortgage (3) |
| Twelve months ended December 31, |
| | 2016 | | 2015 | | 2016 | | 2015 |
Originations | | $ | 2,717 |
| | $ | 2,606 |
| | $ | 1,878 |
| | $ | 1,409 |
|
Origination weighted-average LTV ratio (1) | | 78 | % | | 77 | % | | 84 | % | | 83 | % |
Origination weighted-average FICO score (2) | | 775 |
| | 774 |
| | 751 |
| | 754 |
|
| |
(1) | The LTV ratios for home equity loans and home equity lines-of-credit are cumulative and reflect the balance of any senior loans. LTV ratios reflect collateral values at the time of loan origination. |
| |
(2) | Portfolio weighted average FICO scores reflect currently updated customer credit scores whereas origination weighted-average FICO scores reflect the customer credit scores at the time of loan origination. |
| |
(3) | Represents only owned-portfolio originations. |
Home Equity Portfolio
Within the home equity portfolio, the standard product is a 10-year interest-only draw period with a 20-year fully amortizing term at the end of the draw period. Prior to 2006, the standard product was a 10-year draw period with a balloon payment. In either case, after the 10-year draw period, the borrower must reapply, subject to full underwriting guidelines, to continue with the interest only revolving structure or begin repaying the debt in a term structure. The principal and interest payment associated with the term structure will be higher than the interest-only payment, resulting in end of draw period risk. Our HELOC risk can be segregated into two distinct segments: (1) home equity lines-of-credit underwritten with a balloon payment at maturity acquired from FirstMerit and (2) home equity lines-of-credit with an automatic conversion to a 20-year amortizing loan. We manage this risk based on both the actual maturity date of the line-of-credit structure and at the end of the 10-year draw period. This risk is embedded in the portfolio which we address with proactive contact strategies beginning one year prior to either maturity or the end of draw period. In certain circumstances, our Home Saver group is able to provide payment and structure relief to borrowers experiencing significant financial hardship associated with the payment adjustment.
The table below summarizes our home equity line-of-credit portfolio by end of draw period described above:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 12 - Draw Schedule of Home Equity Line-of-Credit Portfolio |
(dollar amounts in millions) | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| December 31, 2016 |
| Amortizing | | 1 year or less | | 1 to 2 years | | 2 to 3 years | | 3 to 4 years | | More than 4 years | | Total |
Current Balance | | | | | | | | | | | | | |
First Lien | $ | 94 |
| | $ | 98 |
| | $ | 255 |
| | $ | 134 |
| | $ | 168 |
| | $ | 3,486 |
| | $ | 4,235 |
|
Second Lien | 380 |
| | 220 |
| | 256 |
| | 115 |
| | 127 |
| | 2,403 |
| | 3,501 |
|
Total Current Balance | $ | 474 |
| | $ | 318 |
| | $ | 511 |
| | $ | 249 |
| | $ | 295 |
| | $ | 5,889 |
| | $ | 7,736 |
|
Residential Mortgages Portfolio
Huntington underwrites all residential mortgage applications centrally, with a focus on higher quality borrowers. We do not originate residential mortgages that allow negative amortization or allow the borrower multiple payment options and have incorporated regulatory requirements and guidance into our underwriting process.options. Residential mortgages are originated based on a completed full appraisal during the credit underwriting process. We update values in compliance with applicable regulations to facilitate our portfolio management, as well as our workout and loss mitigation functions.
We are subject to repurchase risk associated with residential mortgage loans sold in the secondary market. An appropriate level of reserve for representations and warranties related to residential mortgage loans sold has been established to address this repurchase risk inherent in the portfolio.
RV AND MARINE FINANCE PORTFOLIO
Our strategy in the RV and Marine portfolio focuses on high quality borrowers, combined with appropriate LTVs, terms, and profitability. Although entering new markets can be associated with increased risk levels, we believe our disciplined strategy and operational processes significantly mitigate these risks.
Credit Quality
(This section should be read in conjunction with Note 43 of the Notes to Consolidated Financial Statements.)
We believe the most meaningful way to assess overall credit quality performance is through an analysis of credit qualityspecific performance ratios. This approach forms the basis of most of the discussion in the sections immediately following: NPAs, and NALs, TDRs, ACL, and NCOs. In addition, we utilize delinquency rates, risk distribution and migration patterns, and product segmentation, and origination trends in the analysis of our credit quality performance.
Credit quality performance in 2016, including the FirstMerit acquisition,2018 reflected continued overall positive results.results with low net charge-offs. Total NCOs were $109$145 million or 0.19%0.20% of average total loans and leases.leases, a decrease from $159 million or 0.23% in the prior year. There was a 1% decline in NPAs from the prior year. The ACLALLL to total loans and leases ratio decreasedincreased by 234 basis points to 1.10%, due to the impact of the FirstMerit acquisition as acquired loans are recorded at fair value with no associated ALLL on the date of acquisition.1.03%.
NPAs and NALs
NPAs consist of (1) NALs, which represent loans and leases no longer accruing interest, (2) OREO properties, and (3) other NPAs. Any loan in our portfolio may be placed on nonaccrual status prior to the policies described below when collection of principal
or interest is in doubt. Also, when a borrower with discharged non-reaffirmed debt in a Chapter 7 bankruptcy is identified and the loan is determined to be collateral dependent, the loan is placed on nonaccrual status.
C&I and CRECommercial loans (except for purchased credit impaired loans) are placed on nonaccrual status at 90-days past due, or earlier if repayment of principal and interest is in doubt. Of the $255$203 million of CRE and C&I-relatedcommercial related NALs at December 31, 2016, $1732018, $139 million, or 68%, represented loans that were less than 30-days past due, demonstrating our continued commitment to proactive credit risk management. With the exception of residential mortgage loans guaranteed by government organizations which continue to accrue interest, first lien loans secured by residential mortgage collateral are placed on nonaccrual status at 150-days past due. Junior-lien home equity loans are placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien loan has been identified as nonaccrual. Automobile, RV and marine finance and other consumer loans are generally fully charged-off at 120-days past due.
When loans are placed on nonaccrual, accrued interest income is reversed with current year accruals charged to interest income and prior year amounts generally charged-off as a credit loss. When, in our judgment, the borrower’s ability to make required interest and principal payments has resumed and collectability is no longer in doubt, the loan or lease could be returned to accrual status.
The following table reflects period-end NALs and NPAs detail for each of the last five years:
|
| | | | | | | | | | | | | | | | | | | |
Table 13 - Nonaccrual Loans and Leases and Nonperforming Assets |
(dollar amounts in thousands) | | | | | | | | | |
| December 31, |
| 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
Nonaccrual loans and leases (NALs): (1) | | | | | | | | | |
Originated NALs | | | | | | | | | |
Commercial and industrial | $ | 225,162 |
| | $ | 175,195 |
| | $ | 71,974 |
| | $ | 56,615 |
| | $ | 90,705 |
|
Commercial real estate | 19,565 |
| | 28,984 |
| | 48,523 |
| | 73,417 |
| | 127,128 |
|
Automobile | 4,696 |
| | 6,564 |
| | 4,623 |
| | 6,303 |
| | 7,823 |
|
Residential mortgage | 83,159 |
| | 94,560 |
| | 96,564 |
| | 119,532 |
| | 122,452 |
|
RV and marine | — |
| | — |
| | — |
| | — |
| | — |
|
Home equity | 66,033 |
| | 66,278 |
| | 78,515 |
| | 66,169 |
| | 59,519 |
|
Other consumer | — |
| | — |
| | 45 |
| | 20 |
| | 6 |
|
Total nonaccrual loans and leases | 398,615 |
| | 371,581 |
| | 300,244 |
| | 322,056 |
| | 407,633 |
|
Other real estate, net: | | | | | | | | | |
Residential | 23,326 |
| | 24,194 |
| | 29,291 |
| | 23,447 |
| | 21,378 |
|
Commercial | 3,404 |
| | 3,148 |
| | 5,748 |
| | 4,217 |
| | 6,719 |
|
Total other real estate, net | 26,730 |
| | 27,342 |
| | 35,039 |
| | 27,664 |
| | 28,097 |
|
Other NPAs(2) | 6,968 |
| | — |
| | 2,440 |
| | 2,440 |
| | 10,045 |
|
Total nonperforming assets (4) | $ | 432,313 |
| | $ | 398,923 |
| | $ | 337,723 |
| | $ | 352,160 |
| | $ | 445,775 |
|
| | | | | | | | | |
Acquired NALs (5) | | | | | | | | | |
Commercial and industrial | $ | 9,022 |
| | | | | | | | |
Commercial real estate | 943 |
| | | | | | | | |
Automobile | 1,070 |
| | | | | | | | |
Residential mortgage | 7,343 |
| | | | | | | | |
RV and marine | 245 |
| | | | | | | | |
Home equity | 5,765 |
| | | | | | | | |
Other consumer | — |
| | | | | | | | |
Total nonaccrual loans and leases | 24,388 |
| | | | | | | | |
Other real estate, net: | | | | | | | | | |
Residential | 7,606 |
| | | | | | | | |
Commercial | 16,594 |
| | | | | | | | |
Total other real estate, net | 24,200 |
| | | | | | | | |
Other NPAs(2) | — |
| | | | | | | | |
| | Total nonperforming assets (4) | $ | 48,588 |
| | | | | | | | | |
Table 10 - Nonaccrual Loans and Leases and Nonperforming Assets | | Table 10 - Nonaccrual Loans and Leases and Nonperforming Assets |
| | | | | | | | | | December 31, |
Total NALs | | | | | | | | | | |
(dollar amounts in millions) | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
Nonaccrual loans and leases (NALs): | | | | | | | | | | |
Commercial and industrial | $ | 234,184 |
| | $ | 175,195 |
| | $ | 71,974 |
| | $ | 56,615 |
| | $ | 90,705 |
| $ | 188 |
| | $ | 161 |
| | $ | 234 |
| | $ | 175 |
| | $ | 72 |
|
Commercial real estate | 20,508 |
| | 28,984 |
| | 48,523 |
| | 73,417 |
| | 127,128 |
| 15 |
| | 29 |
| | 20 |
| | 29 |
| | 48 |
|
Automobile | 5,766 |
| | 6,564 |
| | 4,623 |
| | 6,303 |
| | 7,823 |
| 5 |
| | 6 |
| | 6 |
| | 7 |
| | 5 |
|
Home equity | | 62 |
| | 68 |
| | 72 |
| | 66 |
| | 79 |
|
Residential mortgage | 90,502 |
| | 94,560 |
| | 96,564 |
| | 119,532 |
| | 122,452 |
| 69 |
| | 84 |
| | 91 |
| | 95 |
| | 96 |
|
RV and marine | 245 |
| | — |
| | — |
| | — |
| | — |
| |
Home equity | 71,798 |
| | 66,278 |
| | 78,515 |
| | 66,169 |
| | 59,519 |
| |
RV and marine finance | | 1 |
| | 1 |
| | — |
| | — |
| | — |
|
Other consumer | — |
| | — |
| | 45 |
| | 20 |
| | 6 |
| — |
| | — |
| | — |
| | — |
| | — |
|
Total nonaccrual loans and leases | 423,003 |
| | 371,581 |
| | 300,244 |
| | 322,056 |
| | 407,633 |
| 340 |
| | 349 |
| | 423 |
| | 372 |
| | 300 |
|
Other real estate, net: | | | | | | | | | | | | | | | | | | |
Residential | 30,932 |
| | 24,194 |
| | 29,291 |
| | 23,447 |
| | 21,378 |
| 19 |
| | 24 |
| | 31 |
| | 24 |
| | 29 |
|
Commercial | 19,998 |
| | 3,148 |
| | 5,748 |
| | 4,217 |
| | 6,719 |
| 4 |
| | 9 |
| | 20 |
| | 3 |
| | 6 |
|
Total other real estate, net | 50,930 |
| | 27,342 |
| | 35,039 |
| | 27,664 |
| | 28,097 |
| 23 |
| | 33 |
| | 51 |
| | 27 |
| | 35 |
|
Other NPAs(2) | 6,968 |
| | — |
| | 2,440 |
| | 2,440 |
| | 10,045 |
| |
Total nonperforming assets (4) | $ | 480,901 |
| | $ | 398,923 |
| | $ | 337,723 |
| | $ | 352,160 |
| | $ | 445,775 |
| |
Other NPAs (1) | | 24 |
| | 7 |
| | 7 |
| | — |
| | 3 |
|
Total nonperforming assets | | $ | 387 |
| | $ | 389 |
| | $ | 481 |
| | $ | 399 |
| | $ | 338 |
|
| | | | | | | | | | | | | | | | | | |
Nonaccrual loans and leases as a % of total loans and leases | 0.63 | % | | 0.74 | % | | 0.63 | % | | 0.75 | % | | 1.00 | % | 0.45 | % | | 0.50 | % | | 0.63 | % | | 0.74 | % | | 0.63 | % |
NPA ratio(3) | 0.72 |
| | 0.79 |
| | 0.71 |
| | 0.82 |
| | 1.09 |
| |
NPA ratio (2) | | 0.52 |
| | 0.55 |
| | 0.72 |
| | 0.79 |
| | 0.71 |
|
| |
(1) | ExcludesOther nonperforming assets at December 31, 2018 includes certain nonaccrual loans transferredheld-for-sale. Amounts prior to held-for-sale.December 31, 2018 includes certain impaired investment securities. |
| |
(2) | Other nonperforming assets represent an investment security backed by a municipal bond. |
| |
(3) | Nonperforming assets divided by the sum of loans and leases, net other real estate owned, and other NPAs. |
| |
(4) | Nonaccruing troubled debt restructured loans are included in the total nonperforming assets balance. |
| |
(5) | Represents loans from FirstMerit acquisition. |
The $82
2018 versus 2017
Total NPAs decreased by $2 million, or 21%1%, increase in NPAs compared with December 31, 2015, primarily reflected:
$592017. A $14 million, or 34%48%, decline in CRE and a $15 million, or 18%, decline in residential mortgage portfolios, were largely offset by a $27 million, or 17%, increase in the C&I NALs, with the majorityportfolio. The C&I increase was centered in a small number of the increase in our energy related portfolios, noting that the performance of the energy portfolio has stabilized since the 2016 first quarter.
$24 million, or 86%, increase in OREO, predominantly associated with an increase in commercial propertiescredits from the FirstMerit acquisition.
Partially offset by declines in the Residential and CRE portfolios.
diverse industries.
The following table reflects period-end accruing loans and leases 90 days or more past due for each of the last five years:
| | Table 14 - Accruing Past Due Loans and Leases | |
(dollar amounts in thousands) | | |
Table 11 - Accruing Past Due Loans and Leases | | Table 11 - Accruing Past Due Loans and Leases |
| December 31, | December 31, |
| 2016 | | 2015 | | 2014 | | 2013 | | 2012 | |
(dollar amounts in millions) | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
Accruing loans and leases past due 90 days or more: | | | | | | | | | | | | | | | | | | |
Commercial and industrial (1) | $ | 18,148 |
| | $ | 8,724 |
| | $ | 4,937 |
| | $ | 14,562 |
| | $ | 26,648 |
| $ | 7 |
| | $ | 9 |
| | $ | 18 |
| | $ | 9 |
| | $ | 5 |
|
Commercial real estate (2) | 17,215 |
| | 9,549 |
| | 18,793 |
| | 39,142 |
| | 56,660 |
| |
Commercial real estate | | — |
| | 3 |
| | 17 |
| | 10 |
| | 19 |
|
Automobile | 10,182 |
| | 7,162 |
| | 5,703 |
| | 5,055 |
| | 4,418 |
| 8 |
| | 7 |
| | 10 |
| | 7 |
| | 5 |
|
Home equity | | 17 |
| | 18 |
| | 12 |
| | 9 |
| | 12 |
|
Residential mortgage (excluding loans guaranteed by the U.S. Government) | 15,074 |
| | 14,082 |
| | 33,040 |
| | 2,469 |
| | 2,718 |
| 32 |
| | 21 |
| | 15 |
| | 14 |
| | 33 |
|
RV and marine finance | 1,462 |
| | — |
| | — |
| | — |
| | — |
| 1 |
| | 1 |
| | 1 |
| | — |
| | — |
|
Home equity | 11,508 |
| | 9,044 |
| | 12,159 |
| | 13,983 |
| | 18,200 |
| |
Other consumer | 3,895 |
| | 1,394 |
| | 837 |
| | 998 |
| | 1,672 |
| 6 |
| | 5 |
| | 4 |
| | 1 |
| | 1 |
|
Total, excl. loans guaranteed by the U.S. Government | 77,484 |
| | 49,955 |
| | 75,469 |
| | 76,209 |
| | 110,316 |
| 71 |
| | 64 |
| | 77 |
| | 50 |
| | 75 |
|
Add: loans guaranteed by U.S. Government | 51,878 |
| | 55,835 |
| | 55,012 |
| | 87,985 |
| | 90,816 |
| 99 |
| | 51 |
| | 52 |
| | 56 |
| | 55 |
|
Total accruing loans and leases past due 90 days or more, including loans guaranteed by the U.S. Government | $ | 129,362 |
| | $ | 105,790 |
| | $ | 130,481 |
| | $ | 164,194 |
| | $ | 201,132 |
| $ | 170 |
| | $ | 115 |
| | $ | 129 |
| | $ | 106 |
| | $ | 130 |
|
Ratios: | | | | | | | | | | | | | | | | | | |
Excluding loans guaranteed by the U.S. Government, as a percent of total loans and leases | 0.12 | % | | 0.10 | % | | 0.16 | % | | 0.18 | % | | 0.27 | % | 0.09 | % | | 0.09 | % | | 0.12 | % | | 0.10 | % | | 0.16 | % |
Guaranteed by U.S. Government, as a percent of total loans and leases | 0.08 |
| | 0.11 |
| | 0.12 |
| | 0.20 |
| | 0.22 |
| 0.13 |
| | 0.07 |
| | 0.08 |
| | 0.11 |
| | 0.12 |
|
Including loans guaranteed by the U.S. Government, as a percent of total loans and leases | 0.19 |
| | 0.21 |
| | 0.27 |
| | 0.38 |
| | 0.49 |
| 0.23 |
| | 0.16 |
| | 0.19 |
| | 0.21 |
| | 0.27 |
|
| |
(1) | Amounts include Huntington Technology Finance administrative lease delinquencies and accruing purchase impaired loans related to acquisitions. |
| |
(2) | Amounts include accruing purchase impaired loans related to acquisitions. |
TDR Loans
TDRs are modified loans where a concession was provided to a borrower experiencing financial difficulties. TDRs can be classified as either accruing or nonaccruing loans. Nonaccruing TDRs are included in NALs whereas accruing TDRs are excluded from NALs, as it is probable that all contractual principal and interest due under the restructured terms will be collected. TDRs primarily reflect our loss mitigation efforts to proactively work with borrowers in financial difficulty or to comply with regulations regarding the treatment of certain bankruptcy filing and discharge situations. Acquired, non-purchased credit impaired loans are only considered for TDR reporting for modifications made subsequent to acquisition. Over the past five quarters,years, the accruing component of the total TDR balance has been betweenconsistently over 80% and 84%, indicating there is no identified credit loss and the borrowers continue to make their monthly payments. In fact,As of December 31, 2018, over 80%79% of the $513$470 million of accruing TDRs secured by residential real estate (Residential mortgage and Home Equityequity in Table 15)12) are current on their required payments. In addition,payments, with over 60%63% of the accruing pool havehaving had no delinquency at all in the past 12 months. There is very limited migration from the accruing to non-accruing components, and virtually all of the charge-offs as presented in Table 16within this group of loans come from the non-accruing TDR balances.
The following table below presents our accruing and nonaccruing TDRs at period-end for each of the past five years:
| | Table 15 - Accruing and Nonaccruing Troubled Debt Restructured Loans | |
(dollar amounts in thousands) | | | | | | | | | | |
| | | | | | | | | | |
| December 31, | |
Table 12 - Accruing and Nonaccruing Troubled Debt Restructured Loans | | Table 12 - Accruing and Nonaccruing Troubled Debt Restructured Loans |
(dollar amounts in millions) | | December 31, |
| 2016 | | 2015 | | 2014 | | 2013 | | 2012 | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
TDRs—accruing: | | | | | | | | | | | | | | | | | | |
Commercial and industrial | $ | 210,119 |
| | $ | 235,689 |
| | $ | 116,331 |
| | $ | 83,857 |
| | $ | 76,586 |
| $ | 269 |
| | $ | 300 |
| | $ | 210 |
| | $ | 236 |
| | $ | 117 |
|
Commercial real estate | 76,844 |
| | 115,074 |
| | 177,156 |
| | 204,668 |
| | 208,901 |
| 54 |
| | 78 |
| | 77 |
| | 115 |
| | 177 |
|
Automobile | 26,382 |
| | 24,893 |
| | 26,060 |
| | 30,781 |
| | 35,784 |
| 35 |
| | 30 |
| | 26 |
| | 25 |
| | 26 |
|
Home equity | 269,709 |
| | 199,393 |
| | 252,084 |
| | 188,266 |
| | 110,581 |
| 252 |
| | 265 |
| | 270 |
| | 199 |
| | 252 |
|
Residential mortgage | 242,901 |
| | 264,666 |
| | 265,084 |
| | 305,059 |
| | 290,011 |
| 218 |
| | 224 |
| | 243 |
| | 265 |
| | 265 |
|
RV and marine finance | — |
| | — |
| | — |
| | — |
| | — |
| 2 |
| | 1 |
| | — |
| | — |
| | — |
|
Other consumer | 3,780 |
| | 4,488 |
| | 4,018 |
| | 1,041 |
| | 2,544 |
| 9 |
| | 8 |
| | 4 |
| | 4 |
| | 4 |
|
Total TDRs—accruing | 829,735 |
| | 844,203 |
| | 840,733 |
| | 813,672 |
| | 724,407 |
| 839 |
| | 906 |
| | 830 |
| | 844 |
| | 841 |
|
TDRs—nonaccruing: | | | | | | | | | | | | | | | | | | |
Commercial and industrial | 107,087 |
| | 56,919 |
| | 20,580 |
| | 7,291 |
| | 19,268 |
| 97 |
| | 82 |
| | 107 |
| | 57 |
| | 21 |
|
Commercial real estate | 4,507 |
| | 16,617 |
| | 24,964 |
| | 23,981 |
| | 32,548 |
| 6 |
| | 15 |
| | 5 |
| | 17 |
| | 25 |
|
Automobile | 4,579 |
| | 6,412 |
| | 4,552 |
| | 6,303 |
| | 7,823 |
| 3 |
| | 4 |
| | 5 |
| | 6 |
| | 5 |
|
Home equity | 28,128 |
| | 20,996 |
| | 27,224 |
| | 20,715 |
| | 6,951 |
| 28 |
| | 28 |
| | 28 |
| | 21 |
| | 27 |
|
Residential mortgage | 59,157 |
| | 71,640 |
| | 69,305 |
| | 82,879 |
| | 84,515 |
| 44 |
| | 55 |
| | 59 |
| | 72 |
| | 69 |
|
RV and marine finance | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
|
Other consumer | 118 |
| | 151 |
| | 70 |
| | — |
| | 113 |
| — |
| | — |
| | — |
| | — |
| | — |
|
Total TDRs—nonaccruing | 203,576 |
| | 172,735 |
| | 146,695 |
| | 141,169 |
| | 151,218 |
| 178 |
| | 184 |
| | 204 |
| | 173 |
| | 147 |
|
Total TDRs | $ | 1,033,311 |
| | $ | 1,016,938 |
| | $ | 987,428 |
| | $ | 954,841 |
| | $ | 875,625 |
| $ | 1,017 |
| | $ | 1,090 |
| | $ | 1,034 |
| | $ | 1,017 |
| | $ | 988 |
|
Our strategy is to structure TDRs in a manner that avoids new concessions subsequent to the initial TDR terms. However, there are times when subsequent modifications are required, such as when the modifieda loan matures. Often the loans are performing in accordance with the TDR terms, and a new note is originated with similar modified terms. These loans are subjected to the normal underwriting standards and processes for other similar credit extensions, both new and existing. If the loan is not performing in accordance with the existing TDR terms, typically an individualized approach to repayment is established. In accordance with GAAP, the refinanced note is evaluated to determine if it is considered a new loan or a continuation of the prior loan. A new loan is considered for the removal of the TDR designation. A continuation of the prior note requires the continuation of the TDR designation, and because the refinanced note constitutes a new or amended debt instrument, it is included in our TDR activity table (below) as a new TDR and a restructured TDR removal during the period.designation.
The types of concessions granted for existing TDRs are consistent with those granted on new TDRs and include interest rate reductions, amortization or maturity date changes beyond what the collateral supports, and principal forgiveness based on the borrower’s specific needs at a point in time. Our policy does not limit the number of times a loan may be modified. A loan may be modified multiple times if it is considered to be in the best interest of both the borrower and us.
Commercial loans are not automatically considered to be accruing TDRs upon the granting of a new concession. If the loan is in accruing status and no loss is expected based on the modified terms, the modified TDR remains in accruing status. For loans that are on nonaccrual status before the modification, collectionreasonable assurance of both principalrepayment under modified terms and interest must not be in doubt, and the borrower must be able to exhibit sufficient cash flowsdemonstrated repayment performance for at least a six-month periodminimum of time to service the debt in ordersix months is needed to return to accruing status. This six-month period could extend before or after the restructure date.
Any granted change in terms or conditions that are not readily available in the market for that borrower, requires the designation as a TDR. There are no provisions for the removal of the TDR designation based on payment activity for consumer loans. A loan may be returned to accrual status when all contractually due interest and principal has been paid and the borrower demonstrates the financial capacity to continue to pay as agreed, with the risk of loss diminished. During the 2016 third quarter, Huntington transferred $81 million of home equity TDRs from loans held for sale back to loans.
The following table reflects TDR activity during the periods indicated:
|
| | | | | | | | | | | | | | | | | | | |
Table 16 - Troubled Debt Restructured Loan Activity |
(dollar amounts in thousands) | | | | | | | | | |
| Year Ended December 31, | | | | | | |
| 2016 | | 2015 | | | | | | |
TDRs—accruing: (3) | | | | | | | | | |
TDRs, beginning of period | $ | 844,203 |
| | $ | 840,733 |
| | | | | | |
New TDRs | 543,006 |
| | 731,783 |
| | | | | | |
Payments | (214,144 | ) | | (225,219 | ) | | | | | | |
Charge-offs | (3,547 | ) | | (5,816 | ) | | | | | | |
Sales | (18,801 | ) | | (14,204 | ) | | | | | | |
Transfer from (to) held-for-sale | 74,424 |
| | (88,415 | ) | | | | | | |
Transfer to OREO | (435 | ) | | (668 | ) | | | | | | |
Restructured TDRs—accruing (1) | (289,745 | ) | | (297,688 | ) | | | | | | |
Restructured TDRs—nonaccruing (1) | — |
| | — |
| | | | | | |
Other (2) | (105,226 | ) | | (96,303 | ) | | | | | | |
TDRs, end of period | $ | 829,735 |
| | $ | 844,203 |
| | | | | | |
| | | | | | | | | |
TDRs—nonaccruing: (3) | | | | | | | | | |
TDRs, beginning of period | $ | 172,735 |
| | $ | 146,695 |
| | | | | | |
New TDRs | 134,708 |
| | 162,917 |
| | | | | | |
Payments | (82,258 | ) | | (65,139 | ) | | | | | | |
Charge-offs | (34,605 | ) | | (37,675 | ) | | | | | | |
Sales | (1,445 | ) | | (2,858 | ) | | | | | | |
Transfer from (to) held-for-sale | 6,656 |
| | (8,371 | ) | | | | | | |
Transfer to OREO | (10,140 | ) | | (9,444 | ) | | | | | | |
Restructured TDRs—accruing (1) | — |
| | — |
| | | | | | |
Restructured TDRs—nonaccruing (1) | (42,937 | ) | | (98,474 | ) | | | | | | |
Other (2) | 60,862 |
| | 85,084 |
| | | | | | |
TDRs, end of period | $ | 203,576 |
| | $ | 172,735 |
| | | | | | |
| | | | | | | | | |
| Year Ended December 31, |
| 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
Total TDRs, beginning of period (3) | $ | 1,016,938 |
| | $ | 987,428 |
| | $ | 954,841 |
| | $ | 875,625 |
| | $ | 805,650 |
|
New TDRs | 677,714 |
| | 894,700 |
| | 667,315 |
| | 611,556 |
| | 597,425 |
|
Payments | (296,402 | ) | | (290,358 | ) | | (252,285 | ) | | (191,367 | ) | | (191,035 | ) |
Charge-offs | (38,152 | ) | | (43,491 | ) | | (35,150 | ) | | (29,897 | ) | | (81,115 | ) |
Sales | (20,246 | ) | | (17,062 | ) | | (23,424 | ) | | (11,164 | ) | | (13,787 | ) |
Transfer from (to) held-for-sale | 81,080 |
| | (96,786 | ) | | — |
| | — |
| | — |
|
Transfer to OREO | (10,575 | ) | | (10,112 | ) | | (12,668 | ) | | (8,242 | ) | | (21,709 | ) |
Restructured TDRs—accruing (1) | (289,745 | ) | | (297,688 | ) | | (243,225 | ) | | (211,131 | ) | | (153,583 | ) |
Restructured TDRs—nonaccruing (1) | (42,937 | ) | | (98,474 | ) | | (45,705 | ) | | (26,772 | ) | | (63,080 | ) |
Other | (44,364 | ) | | (11,219 | ) | | (22,271 | ) | | (53,767 | ) | | (3,141 | ) |
Total TDRs, end of period | $ | 1,033,311 |
| | $ | 1,016,938 |
| | $ | 987,428 |
| | $ | 954,841 |
| | $ | 875,625 |
|
| |
(1) | Represents existing TDRs that were underwritten with new terms providing a concession. A corresponding amount is included in the New TDRs amount above. |
| |
(2) | Primarily includes transfers between accruing and nonaccruing categories. |
| |
(3) | Effective 2015, we began tracking accruing and non-accruing TDR information. |
ACL
Our total credit reserve is comprised of two different components, both of which in our judgment are appropriate to absorb credit losses inherent in our loan and lease portfolio: the ALLL and the AULC. Combined, these reserves comprise the total ACL. Our ACL methodology committee is responsible for developing the methodology, assumptions and estimates used in the calculation, as well as determining the appropriateness of the ACL. The ALLL represents the estimate of incurred losses inherent in the loan portfolio at the reported date. Additions to the ALLL result from recording provision expense for loan losses or increased risk levels resulting from loan risk-rating downgrades or qualitative adjustments, while reductions reflect charge-offs (net of recoveries), decreased risk levels resulting from loan risk-rating upgrades, or the sale of loans. The AULC is determined by applying the same quantitative reserve determination process to the unfunded portion of the loan exposures adjusted by an applicable funding expectation. (seeSee Note 1 of the Notes to Consolidated Financial Statements).
The acquired loans were recorded at their fair value as of the acquisition date and the prior ALLL was eliminated. An ALLL for acquired loans is estimated using a methodology similar to that used for originated loans. The allowance determined for each acquired loan is compared to the remaining fair value adjustment for that loan. If the computed allowance is greater, the excess is added to the allowance through a provision for loan losses. If the computed allowance is less, no additional allowance is recognized.
Our ACL evaluation process includes the on-going assessment of credit quality metrics, and a comparison of certain ACL benchmarks to current performance. While the total ACL balance increased year over year, all of the relevant benchmarks remain strong.
The following table reflects activity in the ALLL and AULC for each of the last five years:
| | Table 17 - Summary of Allowance for Credit Losses | |
(dollar amounts in thousands) | | | | | | | | | | |
| Year Ended December 31, | |
Table 13 - Summary of Allowance for Credit Losses | | Table 13 - Summary of Allowance for Credit Losses |
(dollar amounts in millions) | | Year Ended December 31, |
| 2016 | | 2015 | | 2014 | | 2013 | | 2012 | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
ALLL, beginning of year | $ | 597,843 |
| | $ | 605,196 |
| | $ | 647,870 |
| | $ | 769,075 |
| | $ | 964,828 |
| $ | 691 |
| | $ | 638 |
| | $ | 598 |
| | $ | 605 |
| | $ | 648 |
|
Loan and lease charge-offs | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | |
Commercial and industrial | (76,802 | ) | | (79,724 | ) | | (76,654 | ) | | (45,904 | ) | | (101,475 | ) | (68 | ) | | (68 | ) | | (77 | ) | | (80 | ) | | (77 | ) |
Commercial real estate: | | | | | | | | | | | | | | | | | | |
Construction | (2,124 | ) | | (1,843 | ) | | (5,626 | ) | | (9,585 | ) | | (12,131 | ) | (1 | ) | | 2 |
| | (2 | ) | | (2 | ) | | (6 | ) |
Commercial | (12,988 | ) | | (16,233 | ) | | (19,078 | ) | | (59,927 | ) | | (105,920 | ) | (10 | ) | | (6 | ) | | (14 | ) | | (16 | ) | | (19 | ) |
Commercial real estate | (15,112 | ) | | (18,076 | ) | | (24,704 | ) | | (69,512 | ) | | (118,051 | ) | (11 | ) | | (4 | ) | | (16 | ) | | (18 | ) | | (25 | ) |
Total commercial | (91,914 | ) | | (97,800 | ) | | (101,358 | ) | | (115,416 | ) | | (219,526 | ) | (79 | ) | | (72 | ) | | (93 | ) | | (98 | ) | | (102 | ) |
Consumer: | | | | | | | | | | | | | | | | | | |
Automobile | (49,541 | ) | | (36,489 | ) | | (31,330 | ) | | (23,912 | ) | | (26,070 | ) | (58 | ) | | (64 | ) | | (50 | ) | | (36 | ) | | (30 | ) |
Home equity | (25,527 | ) | | (36,481 | ) | | (54,473 | ) | | (98,184 | ) | | (124,286 | ) | (21 | ) | | (20 | ) | | (26 | ) | | (36 | ) | | (54 | ) |
Residential mortgage | (10,851 | ) | | (15,696 | ) | | (25,946 | ) | | (34,236 | ) | | (52,228 | ) | (11 | ) | | (11 | ) | | (11 | ) | | (16 | ) | | (26 | ) |
RV and marine finance | (2,769 | ) | | — |
| | — |
| | — |
| | — |
| (14 | ) | | (13 | ) | | (3 | ) | | — |
| | — |
|
Other consumer | (46,712 | ) | | (31,415 | ) | | (33,494 | ) | | (34,568 | ) | | (33,090 | ) | (85 | ) | | (72 | ) | | (44 | ) | | (32 | ) | | (35 | ) |
Total consumer | (135,400 | ) | | (120,081 | ) | | (145,243 | ) | | (190,900 | ) | | (235,674 | ) | (189 | ) | | (180 | ) | | (134 | ) | | (120 | ) | | (145 | ) |
Total charge-offs | (227,314 | ) | | (217,881 | ) | | (246,601 | ) | | (306,316 | ) | | (455,200 | ) | (268 | ) | | (252 | ) | | (227 | ) | | (218 | ) | | (247 | ) |
Recoveries of loan and lease charge-offs | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | |
Commercial and industrial | 31,687 |
| | 51,800 |
| | 44,531 |
| | 29,514 |
| | 37,227 |
| 36 |
| | 26 |
| | 32 |
| | 52 |
| | 45 |
|
Commercial real estate: | | | | | | | | | | | | | | | | | | |
Construction | 4,208 |
| | 2,667 |
| | 4,455 |
| | 3,227 |
| | 4,090 |
| 2 |
| | 3 |
| | 4 |
| | 3 |
| | 4 |
|
Commercial | 37,243 |
| | 31,952 |
| | 29,616 |
| | 41,431 |
| | 35,532 |
| 27 |
| | 12 |
| | 38 |
| | 31 |
| | 30 |
|
Total commercial real estate | 41,451 |
| | 34,619 |
| | 34,071 |
| | 44,658 |
| | 39,622 |
| 29 |
| | 15 |
| | 42 |
| | 34 |
| | 34 |
|
Total commercial | 73,138 |
| | 86,419 |
| | 78,602 |
| | 74,172 |
| | 76,849 |
| 65 |
| | 41 |
| | 74 |
| | 86 |
| | 79 |
|
Consumer: | | | | | | | | | | | | | | | | | | |
Automobile | 17,550 |
| | 16,198 |
| | 13,762 |
| | 13,375 |
| | 16,628 |
| 24 |
| | 22 |
| | 18 |
| | 16 |
| | 13 |
|
Home equity | 16,523 |
| | 16,631 |
| | 17,526 |
| | 15,921 |
| | 7,907 |
| 15 |
| | 15 |
| | 17 |
| | 16 |
| | 18 |
|
Residential mortgage | 5,027 |
| | 5,570 |
| | 6,194 |
| | 7,074 |
| | 4,305 |
| 5 |
| | 5 |
| | 5 |
| | 6 |
| | 6 |
|
RV and marine finance | 481 |
| | — |
| | — |
| | — |
| | — |
| 5 |
| | 3 |
| | — |
| | — |
| | — |
|
Other consumer | 5,699 |
| | 5,270 |
| | 5,890 |
| | 7,108 |
| | 7,049 |
| 9 |
| | 7 |
| | 4 |
| | 6 |
| | 6 |
|
Total consumer | 45,280 |
| | 43,669 |
| | 43,372 |
| | 43,478 |
| | 35,889 |
| 58 |
| | 52 |
| | 44 |
| | 44 |
| | 43 |
|
Total recoveries | 118,418 |
| | 130,088 |
| | 121,974 |
| | 117,650 |
| | 112,738 |
| 123 |
| | 93 |
| | 118 |
| | 130 |
| | 122 |
|
Net loan and lease charge-offs | (108,896 | ) | | (87,793 | ) | | (124,627 | ) | | (188,666 | ) | | (342,462 | ) | (145 | ) | | (159 | ) | | (109 | ) | | (88 | ) | | (125 | ) |
Provision for loan and lease losses | 169,407 |
| | 88,679 |
| | 83,082 |
| | 67,797 |
| | 155,193 |
| 226 |
| | 212 |
| | 169 |
| | 89 |
| | 83 |
|
Allowance for assets sold and securitized or transferred to loans held for sale | (19,941 | ) | | (8,239 | ) | | (1,129 | ) | | (336 | ) | | (8,484 | ) | — |
| | — |
| | (20 | ) | | (8 | ) | | (1 | ) |
ALLL, end of year | 638,413 |
| | 597,843 |
| | 605,196 |
| | 647,870 |
| | 769,075 |
| 772 |
| | 691 |
| | 638 |
| | 598 |
| | 605 |
|
AULC, beginning of year | 72,081 |
| | 60,806 |
| | 62,899 |
| | 40,651 |
| | 48,456 |
| 87 |
| | 98 |
| | 72 |
| | 61 |
| | 63 |
|
(Reduction in) Provision for unfunded loan commitments and letters of credit losses | 21,395 |
| | 11,275 |
| | (2,093 | ) | | 22,248 |
| | (7,805 | ) | |
Provision for (Reduction in) unfunded loan commitments and letters of credit losses | | 9 |
| | (11 | ) | | 22 |
| | 11 |
| | (2 | ) |
AULC recorded at acquisition | 4,403 |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | 4 |
| | — |
| | — |
|
AULC, end of year | 97,879 |
| | 72,081 |
| | 60,806 |
| | 62,899 |
| | 40,651 |
| 96 |
| | 87 |
| | 98 |
| | 72 |
| | 61 |
|
ACL, end of year | $ | 736,292 |
| | $ | 669,924 |
| | $ | 666,002 |
| | $ | 710,769 |
| | $ | 809,726 |
| $ | 868 |
| | $ | 778 |
| | $ | 736 |
| | $ | 670 |
| | $ | 666 |
|
The table below reflects the allocation of our ACLALLL among our various loan categories and the reported ACL during each of the past five years:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 18 - Allocation of Allowance for Credit Losses (1) |
(dollar amounts in thousands) | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
ACL | | | | | | | | | | | | | | | | | | | |
Originated loans | | | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | $ | 324,737 |
| | 41 | % | | $ | 298,746 |
| | 41 | % | | $ | 286,995 |
| | 40 | % | | $ | 265,801 |
| | 41 | % | | $ | 241,051 |
| | 42 | % |
Commercial real estate | 95,483 |
| | 11 |
| | 100,007 |
| | 10 |
| | 102,839 |
| | 11 |
| | 162,557 |
| | 11 |
| | 285,369 |
| | 14 |
|
Total commercial | 420,220 |
| | 52 |
| | 398,753 |
| | 51 |
| | 389,834 |
| | 51 |
| | 428,358 |
| | 52 |
| | 526,420 |
| | 56 |
|
Consumer | | | | | | | | | | | | | | | | | | | |
Automobile | 47,970 |
| | 18 |
| | 49,504 |
| | 19 |
| | 33,466 |
| | 18 |
| | 31,053 |
| | 15 |
| | 34,979 |
| | 11 |
|
Home equity | 65,474 |
| | 16 |
| | 83,671 |
| | 17 |
| | 96,413 |
| | 18 |
| | 111,131 |
| | 19 |
| | 118,764 |
| | 20 |
|
Residential mortgage | 30,986 |
| | 13 |
| | 41,646 |
| | 12 |
| | 47,211 |
| | 12 |
| | 39,577 |
| | 12 |
| | 61,658 |
| | 12 |
|
RV and marine finance | 832 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other consumer | 34,233 |
| | 1 |
| | 24,269 |
| | 1 |
| | 38,272 |
| | 1 |
| | 37,751 |
| | 2 |
| | 27,254 |
| | 1 |
|
Total consumer | 179,495 |
| | 48 |
| | 199,090 |
| | 49 |
| | 215,362 |
| | 49 |
| | 219,512 |
| | 48 |
| | 242,655 |
| | 44 |
|
Total ALLL | 599,715 |
| | 100 | % | | 597,843 |
| | 100 | % | | 605,196 |
| | 100 | % | | 647,870 |
| | 100 | % | | 769,075 |
| | 100 | % |
AULC | 81,299 |
| | | | 72,081 |
| | | | 60,806 |
| | | | 62,899 |
| | | | 40,651 |
| | |
Total ACL | $ | 681,014 |
| | | | $ | 669,924 |
| | | | $ | 666,002 |
| | | | $ | 710,769 |
| | | | $ | 809,726 |
| | |
| | | | | | | | | | | | | | | | | | | |
Acquired loans (2) | | | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | $ | 30,687 |
| | 47 | % | | | | | | | | | | | | | | | | |
Commercial real estate | 184 |
| | 11 |
| | | | | | | | | | | | | | | | |
Total commercial | 30,871 |
| | 58 |
| | | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | | | |
Automobile | — |
| | 10 |
| | | | | | | | | | | | | | | | |
Home equity | — |
| | 11 |
| | | | | | | | | | | | | | | | |
Residential mortgage | 2,412 |
| | 7 |
| | | | | | | | | | | | | | | | |
RV and marine finance | 4,479 |
| | 12 |
| | | | | | | | | | | | | | | | |
Other consumer | 936 |
| | 2 |
| | | | | | | | | | | | | | | | |
Total consumer | 7,827 |
| | 42 |
| | | | | | | | | | | | | | | | |
Total ALLL | 38,698 |
| | 100 | % | | | | | | | | | | | | | | | | |
AULC | 16,580 |
| | | | | | | | | | | | | | | | | | |
Total ACL | $ | 55,278 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total loans | | | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | $ | 355,424 |
| | 42 | % | | $ | 298,746 |
| | 41 | % | | $ | 286,995 |
| | 40 | % | | $ | 265,801 |
| | 41 | % | | $ | 241,051 |
| | 42 | % |
Commercial real estate | 95,667 |
| | 11 |
| | 100,007 |
| | 10 |
| | 102,839 |
| | 11 |
| | 162,557 |
| | 11 |
| | 285,369 |
| | 14 |
|
Total commercial | 451,091 |
| | 53 |
| | 398,753 |
| | 51 |
| | 389,834 |
| | 51 |
| | 428,358 |
| | 52 |
| | 526,420 |
| | 56 |
|
Consumer | | | | | | | | | | | | | | | | | | | |
Automobile | 47,970 |
| | 16 |
| | 49,504 |
| | 19 |
| | 33,466 |
| | 18 |
| | 31,053 |
| | 15 |
| | 34,979 |
| | 11 |
|
Home equity | 65,474 |
| | 15 |
| | 83,671 |
| | 17 |
| | 96,413 |
| | 18 |
| | 111,131 |
| | 19 |
| | 118,764 |
| | 20 |
|
Residential mortgage | 33,398 |
| | 12 |
| | 41,646 |
| | 12 |
| | 47,211 |
| | 12 |
| | 39,577 |
| | 12 |
| | 61,658 |
| | 12 |
|
RV and marine finance | 5,311 |
| | 3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other consumer | 35,169 |
| | 1 |
| | 24,269 |
| | 1 |
| | 38,272 |
| | 1 |
| | 37,751 |
| | 2 |
| | 27,254 |
| | 1 |
|
Total consumer | 187,322 |
| | 47 |
| | 199,090 |
| | 49 |
| | 215,362 |
| | 49 |
| | 219,512 |
| | 48 |
| | 242,655 |
| | 44 |
|
Total ALLL | 638,413 |
| | 100 | % | | 597,843 |
| | 100 | % | | 605,196 |
| | 100 | % | | 647,870 |
| | 100 | % | | 769,075 |
| | 100 | % |
AULC | 97,879 |
| | | | 72,081 |
| | | | 60,806 |
| | | | 62,899 |
| | | | 40,651 |
| | |
Total ACL | $ | 736,292 |
| | | | $ | 669,924 |
| | | | $ | 666,002 |
| | | | $ | 710,769 |
| | | | $ | 809,726 |
| | |
Total ALLL as % of: |
| | Table 14 - Allocation of Allowance for Credit Losses (1) | | Table 14 - Allocation of Allowance for Credit Losses (1) |
(dollar amounts in millions) | | December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
ACL | | | | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 422 |
| | 41 | % | | $ | 377 |
| | 40 | % | | $ | 356 |
| | 42 | % | | $ | 299 |
| | 41 | % | | $ | 287 |
| | 40 | % |
Commercial real estate | | 120 |
| | 10 |
| | 105 |
| | 11 |
| | 95 |
| | 11 |
| | 100 |
| | 10 |
| | 103 |
| | 11 |
|
Total commercial | | 542 |
| | 51 |
| | 482 |
| | 51 |
| | 451 |
| | 53 |
| | 399 |
| | 51 |
| | 390 |
| | 51 |
|
Consumer | | | | | | | | | | | | | | | | | | | | |
Automobile | | 56 |
| | 16 |
| | 53 |
| | 17 |
| | 48 |
| | 16 |
| | 50 |
| | 19 |
| | 33 |
| | 18 |
|
Home equity | | 55 |
| | 13 |
| | 60 |
| | 14 |
| | 65 |
| | 15 |
| | 84 |
| | 17 |
| | 96 |
| | 18 |
|
Residential mortgage | | 25 |
| | 14 |
| | 21 |
| | 13 |
| | 33 |
| | 12 |
| | 42 |
| | 12 |
| | 47 |
| | 12 |
|
RV and marine finance | | 20 |
| | 4 |
| | 15 |
| | 3 |
| | 5 |
| | 3 |
| | — |
| | — |
| | — |
| | — |
|
Other consumer | | 74 |
| | 2 |
| | 60 |
| | 2 |
| | 36 |
| | 1 |
| | 23 |
| | 1 |
| | 39 |
| | 1 |
|
Total consumer | | 230 |
| | 49 |
| | 209 |
| | 49 |
| | 187 |
| | 47 |
| | 199 |
| | 49 |
| | 215 |
| | 49 |
|
Total ALLL | | 772 |
| | 100 | % | | 691 |
| | 100 | % | | 638 |
| | 100 | % | | 598 |
| | 100 | % | | 605 |
| | 100 | % |
AULC | | 96 |
| | | | 87 |
| | | | 98 |
| | | | 72 |
| | | | 61 |
| | |
Total ACL | | $ | 868 |
| | | | $ | 778 |
| | | | $ | 736 |
| | | | $ | 670 |
| | | | $ | 666 |
| | |
Total ALLL as % of: | | Total ALLL as % of: |
Total loans and leases | | | 0.95 | % | | | | 1.19 | % | | | | 1.27 | % | | | | 1.50 | % | | | | 1.89 | % | | | 1.03 | % | | | | 0.99 | % | | | | 0.95 | % | | | | 1.19 | % | | | | 1.27 | % |
Nonaccrual loans and leases | | | 151 |
| | | | 161 |
| | | | 202 |
| | | | 201 |
| | | | 189 |
| | | 228 |
| | | | 198 |
| | | | 151 |
| | | | 161 |
| | | | 202 |
|
NPAs | | | 133 |
| | | | 150 |
| | | | 179 |
| | | | 184 |
| | | | 173 |
| | | 200 |
| | | | 178 |
| | | | 133 |
| | | | 150 |
| | | | 179 |
|
Total ACL as % of: | | | | | | | | | | | | | | | | | | | | |
Total loans and leases | | | 1.10 | % | | | | 1.33 | % | | | | 1.40 | % | | | | 1.65 | % | | | | 1.99 | % | |
Nonaccrual loans and leases | | | 174 |
| | | | 180 |
| | | | 222 |
| | | | 221 |
| | | | 199 |
| |
NPAs | | | 153 |
| | | | 168 |
| | | | 197 |
| | | | 202 |
| | | | 182 |
| |
| |
(1) | Percentages represent the percentage of each loan and lease category to total loans and leases. |
| |
(2) | Represents loans from FirstMerit acquisition. |
2018 versus 2017
The $66At December 31, 2018, the ALLL was $772 million or 10%, increase in the ACL1.03% of total loans and leases, compared withto $691 million or 0.99% at December 31, 2015, was driven by:
$572017. The $81 million, or 19%12%, increase in the ALLL of the C&Iprimarily relates to increased reserve levels associated with portfolio was primary driven by the impact of the acquisition and loan growth withinacross the portfolio along with an increase in NALs within our energy related portfolios.
$26 million, or 36%, increase in the AULC driven primarily by acquired commercial exposures.
$11 million, or 45%, increase in the ALLL of the other consumer portfolio driven primarily by growth within the credit card portfolio.
Partially offset by:
$18 million, or 22%, decline in the ALLL of the home equity portfolio. The decline was driven by a reduction in delinquent and nonaccrual loans.
$8 million, or 20%, decline in the ALLL of the residential mortgage portfolio, also driven by a reduction in delinquency rates within the portfolio.
The ACL to total loans declined to 1.10% at December 31, 2016, compared to 1.33% at December 31, 2015. The reduction in the ratio can be attributed directly to the acquisition of the FirstMerit loan portfolio. We believe the ratio is appropriate given the overall moderate-to-low risk profile of our loan portfolio.portfolio and its coverage levels reflect the quality of our portfolio and the current operating environment. We continue to focus on early identification of loans with changes in credit metrics and have proactive action plans for these loans. Given the combination of these noted positive and negative factors, we believe that our ACL is appropriate and its coverage level is reflective of the quality of our portfolio and the current operating environment.
NCOs
AnyA loan in any portfolio may be charged-off prior to the policies described below if a loss confirming event has occurred. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency where that asset is the sole source of repayment. Additionally, discharged, collateral dependent non-reaffirmed debt in Chapter 7 bankruptcy filings will result in a charge-off to estimated collateral value, less anticipated selling costs at the time of discharge.
C&I and CRECommercial loans are either charged-off or written down to net realizable value atby 90-days past due with the exception of administrative small ticket lease delinquencies. Automobile loans, RV and marine finance, and other consumer loans are generally fully charged-off at 120-days past due. First-lien and junior-lien home equity loans are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due and 120-days past due, respectively. Residential mortgages are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due. The remaining balance is in delinquent status until a modification can be completed, or the loan goes through the foreclosure process.
The following table reflects NCO detail for each of the last five years:
| | Table 19 - Net Loan and Lease Charge-offs | | | | | | | | | | |
(dollar amounts in thousands) | | | | | | | | | | |
| Year Ended December 31, | |
Table 15 - Net Loan and Lease Charge-offs | | | | | | | | | | |
(dollar amounts in millions) | | Year Ended December 31, |
| 2016 (2) | | 2015 | | 2014 | | 2013 | | 2012 | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
Net charge-offs by loan and lease type: | | | | | | | | | | | | | | | | | | |
Originated Loans | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | |
Commercial and industrial | $ | 43,929 |
| | $ | 27,924 |
| | $ | 32,123 |
| | $ | 16,390 |
| | $ | 64,248 |
| $ | 32 |
| | $ | 42 |
| | $ | 45 |
| | $ | 28 |
| | $ | 32 |
|
Commercial real estate: | | | | | | | | | | | | | | | | | | |
Construction | (2,084 | ) | | (824 | ) | | 1,171 |
| | 6,358 |
| | 8,041 |
| (1 | ) | | (5 | ) | | (2 | ) | | (1 | ) | | 2 |
|
Commercial | (24,460 | ) | | (15,719 | ) | | (10,538 | ) | | 18,496 |
| | 70,388 |
| (17 | ) | | (6 | ) | | (24 | ) | | (15 | ) | | (11 | ) |
Commercial real estate | (26,544 | ) | | (16,543 | ) | | (9,367 | ) | | 24,854 |
| | 78,429 |
| (18 | ) | | (11 | ) | | (26 | ) | | (16 | ) | | (9 | ) |
Total commercial | 17,385 |
| | 11,381 |
| | 22,756 |
| | 41,244 |
| | 142,677 |
| 14 |
| | 31 |
| | 19 |
| | 12 |
| | 23 |
|
Consumer: | | | | | | | | | | | | | | | | | | |
Automobile | 27,057 |
| | 20,291 |
| | 17,568 |
| | 10,537 |
| | 9,442 |
| 34 |
| | 42 |
| | 32 |
| | 20 |
| | 17 |
|
Home equity | 8,073 |
| | 19,850 |
| | 36,947 |
| | 82,263 |
| | 116,379 |
| 6 |
| | 5 |
| | 9 |
| | 20 |
| | 37 |
|
Residential mortgage | 5,560 |
| | 10,126 |
| | 19,752 |
| | 27,162 |
| | 47,923 |
| 6 |
| | 6 |
| | 6 |
| | 10 |
| | 20 |
|
RV and marine finance | — |
| | — |
| | — |
| | — |
| | — |
| 9 |
| | 10 |
| | 2 |
| | — |
| | — |
|
Other consumer | 38,627 |
| | 26,145 |
| | 27,604 |
| | 27,460 |
| | 26,041 |
| 76 |
| | 65 |
| | 41 |
| | 26 |
| | 28 |
|
Total consumer | 79,317 |
| | 76,412 |
| | 101,871 |
| | 147,422 |
| | 199,785 |
| 131 |
| | 128 |
| | 90 |
| | 76 |
| | 102 |
|
Total originated net charge-offs | $ | 96,702 |
| | $ | 87,793 |
| | $ | 124,627 |
| | $ | 188,666 |
| | $ | 342,462 |
| |
Total net charge-offs | | $ | 145 |
| | $ | 159 |
| | $ | 109 |
| | $ | 88 |
| | $ | 125 |
|
| | | | | | | | | | | | | | | | | | |
Acquired loans (1) | | | | | | | | | | |
Net charge-offs - annualized percentages: | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | |
Commercial and industrial | $ | 1,186 |
| | | | | | | | | 0.11 | % | | 0.15 | % | | 0.19 | % | | 0.14 | % | | 0.18 | % |
Commercial real estate: | | | | | | | | | | | | | | | | | | |
Construction | — |
| | | | | | | | | (0.13 | ) | | (0.36 | ) | | (0.19 | ) | | (0.08 | ) | | 0.16 |
|
Commercial | 205 |
| | | | | | | | | (0.26 | ) | | (0.10 | ) | | (0.49 | ) | | (0.37 | ) | | (0.25 | ) |
Commercial real estate | 205 |
| | | | | | | | | (0.24 | ) | | (0.15 | ) | | (0.44 | ) | | (0.32 | ) | | (0.19 | ) |
Total commercial | 1,391 |
| | | | | | | | | 0.04 |
| | 0.09 |
| | 0.06 |
| | 0.05 |
| | 0.10 |
|
Consumer: | | | | | | | | | | | | | | | | | | |
Automobile | 4,934 |
| | | | | | | | | 0.27 |
| | 0.36 |
| | 0.30 |
| | 0.23 |
| | 0.23 |
|
Home equity | 931 |
| | | | | | | | | 0.06 |
| | 0.05 |
| | 0.10 |
| | 0.23 |
| | 0.44 |
|
Residential mortgage | 264 |
| | | | | | | | | 0.06 |
| | 0.08 |
| | 0.09 |
| | 0.17 |
| | 0.35 |
|
RV and marine finance | 2,288 |
| | | | | | | | | 0.32 |
| | 0.48 |
| | 0.33 |
| | — |
| | — |
|
Other consumer | 2,386 |
| | | | | | | | | 6.27 |
| | 6.36 |
| | 5.53 |
| | 5.44 |
| | 6.99 |
|
Total consumer | 10,803 |
| | | | | | | | | 0.36 |
| | 0.39 |
| | 0.32 |
| | 0.32 |
| | 0.46 |
|
Total acquired net charge-offs | $ | 12,194 |
| | | | | | | | | |
| | | | | | | | | | |
Total Loans | | | | | | | | | | |
Commercial: | | | | | | | | | | |
Commercial and industrial | $ | 45,115 |
| | $ | 27,924 |
| | $ | 32,123 |
| | $ | 16,390 |
| | $ | 64,248 |
| |
Commercial real estate: | | | | | | | | | | |
Construction | (2,084 | ) | | (824 | ) | | 1,171 |
| | 6,358 |
| | 8,041 |
| |
Commercial | (24,255 | ) | | (15,719 | ) | | (10,538 | ) | | 18,496 |
| | 70,388 |
| |
Commercial real estate | (26,339 | ) | | (16,543 | ) | | (9,367 | ) | | 24,854 |
| | 78,429 |
| |
Total commercial | 18,776 |
| | 11,381 |
| | 22,756 |
| | 41,244 |
| | 142,677 |
| |
Consumer: | | | | | | | | | | |
Automobile | 31,991 |
| | 20,291 |
| | 17,568 |
| | 10,537 |
| | 9,442 |
| |
Home equity | 9,004 |
| | 19,850 |
| | 36,947 |
| | 82,263 |
| | 116,379 |
| |
Net charge-offs as a % of average loans | | 0.20 | % | | 0.23 | % | | 0.19 | % | | 0.18 | % | | 0.27 | % |
|
| | | | | | | | | | | | | | | | | | | |
Residential mortgage | 5,824 |
| | 10,126 |
| | 19,752 |
| | 27,162 |
| | 47,923 |
|
RV and marine finance | 2,288 |
| | — |
| | — |
| | — |
| | — |
|
Other consumer | 41,013 |
| | 26,145 |
| | 27,604 |
| | 27,460 |
| | 26,041 |
|
Total consumer | 90,120 |
| | 76,412 |
| | 101,871 |
| | 147,422 |
| | 199,785 |
|
Total net charge-offs | $ | 108,896 |
| | $ | 87,793 |
| | $ | 124,627 |
| | $ | 188,666 |
| | $ | 342,462 |
|
| | | | | | | | | |
Net charge-offs - annualized percentages: | | | | | | | | | |
Commercial: | | | | | | | | | |
Commercial and industrial | 0.19 | % | | 0.14 | % | | 0.18 | % | | 0.10 | % | | 0.40 | % |
Commercial real estate: | | | | | | | | | |
Construction | (0.19 | ) | | (0.08 | ) | | 0.16 |
| | 1.10 |
| | 1.38 |
|
Commercial | (0.49 | ) | | (0.37 | ) | | (0.25 | ) | | 0.42 |
| | 1.35 |
|
Commercial real estate | (0.44 | ) | | (0.32 | ) | | (0.19 | ) | | 0.49 |
| | 1.36 |
|
Total commercial | 0.06 |
| | 0.05 |
| | 0.10 |
| | 0.19 |
| | 0.66 |
|
Consumer: | | | | | | | | | |
Automobile | 0.30 |
| | 0.23 |
| | 0.23 |
| | 0.19 |
| | 0.21 |
|
Home equity | 0.10 |
| | 0.23 |
| | 0.44 |
| | 0.99 |
| | 1.40 |
|
Residential mortgage | 0.09 |
| | 0.17 |
| | 0.35 |
| | 0.52 |
| | 0.92 |
|
RV and marine finance | 0.33 |
| | — |
| | — |
| | — |
| | — |
|
Other consumer | 5.53 |
| | 5.44 |
| | 6.99 |
| | 6.30 |
| | 5.72 |
|
Total consumer | 0.32 |
| | 0.32 |
| | 0.46 |
| | 0.75 |
| | 1.08 |
|
Net charge-offs as a % of average loans | 0.19 | % | | 0.18 | % | | 0.27 | % | | 0.45 | % | | 0.85 | % |
| |
(1) | Represents loans from FirstMerit acquisition.
|
| |
(2) | Amounts presented above exclude write-downs of loans transferred to loans held-for-sale. |
In assessing NCO trends, it is helpful to understand the process of how commercial loans are treated as they deteriorate over time. The ALLL is established is consistent with the level of risk associated with the commercial portfolio’s original underwriting. As a part of our normal portfolio management process for commercial loans, loans within the loan isportfolio are periodically reviewed and the ALLL is increased or decreased based on the updated risk rating. In certain cases, the standard ALLL is determined to not be appropriate,ratings. For TDRs and individually assessed impaired loans, a specific reserve is established based on the discounted projected cash flowflows or collateral value of the specific loan. Charge-offs, if necessary, are generally recognized in a period after the specific ALLL wasis established. If the previously established ALLL exceeds that necessary to satisfactorily resolve the problem loan, a reduction in the overall level of the ALLL could be recognized. Consumer loans are treated in much the same manner as commercial loans, with increasing reserve factors applied based on the risk characteristics of the loan, although specific reserves are not identified for consumer loans.loans, except for TDRs. In summary, if loan quality deteriorates, the typical credit sequence would be periods of reserve building, followed by periods of higher NCOs as the previously established ALLL is utilized. Additionally, an increase in the ALLL either precedes or is in conjunction with increases in NALs. When a loan is classified as NAL, it is evaluated for specific ALLL or charge-off. As a result, an increase in NALs does not necessarily result in an increase in the ALLL or an expectation of higher future NCOs.
All residential mortgage loans greater than 150-days past due are charged-down to the estimated value of the collateral, less anticipated selling costs. The remaining balance is in delinquent status until a modification can be completed, or the loan goes through the foreclosure process.
20162018 versus 20152017
NCOs increased $21decreased $14 million, or 24%9%, in 2016.2018. Given the low level of C&I and CRE NCO’s, there will continue to becommercial NCOs, we expect some continued volatility on a period-to-period comparison basis.
Market Risk
Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices and commodity prices, including the correlation among these factors and their volatility. When the value of an instrument is tied to such external factors, the holder faces market risk. We are primarily exposed to interest rate risk as a result of offering a wide array of financial products to our customers and secondarily to price risk from trading securities, securities owned by our broker-dealer subsidiary,subsidiaries, foreign exchange positions, equity investments, and investments in securities backed by mortgage loans.
Interest Rate Risk
OVERVIEW
We actively manage interest rate risk, as changes in market interest rates canmay have a significant impact on reported earnings. Changes in market interest rates may result in changes in the fair market value of our financial instruments, cash flows, and net interest income. We seek to achieve consistent growth in net interest income and capital while managing volatility arising from shifts in market interest rates. The ALCO oversees market risk management, establishingas well as the establishment of risk measures, limits, and policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital. According to these policies, responsibility for measuring and the management of interest rate risk resides in the corporate treasury group.
Interest rate risk on our balance sheet consists of reprice, option, and basis risks. Reprice risk results from differences in the maturity, or repricing, of asset and liability portfolios. Option risk arises from embedded options present in the investment portfolio and in many financial instruments such as loan prepayment options, deposit early withdrawal options, and interest rate options. These options allow customers opportunities to benefit when market interest rates change, which typically results in higher costs or lower revenue for us. Basis risk refers to the potential for changes in the underlying relationship between market rates or indices, which subsequently result in a narrowing of profit spread on an earning asset or liability. Basis risk is also present in administered rate liabilities, such as interest-bearing checking accounts, savings accounts, and money market accounts where historical pricing relationships to market rates may change due to the level or directional change in market interest rates. The interest rate risk position is measured and monitored using risk management tools, including earnings simulation modeling and EVE sensitivity analysis, which capture both short-term and long-term interest rate risk exposures. Combining the results from these separate risk measurement processes allows a reasonably comprehensive view of our short-term and long-term interest rate risk.risks.
Interest rate risk measurement is calculated and reported to the ALCO monthly and ROC at least quarterly. The reported information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.
We use two approaches to model interest rate risk: Net interest income at risk (NII at risk) and EVE.economic value of equity at risk modeling sensitivity analysis (EVE).
NII at risk uses net interest income simulation analysis which involves forecasting net interest earnings under a variety of scenarios including changes in the level of interest rates, the shape of the yield curve, and spreads between market interest rates. The sensitivity of net interest income to changes in interest rates is measured using numerous interest rate scenarios including shocks, gradual ramps, curve flattening, curve steepening as well as forecasts of likely interest rates scenarios. Modeling the sensitivity of net interest earnings to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. To the extent that actual performance is different than what was assumed, actual net interest earnings sensitivity may be different than projected. The assumptions used in the models are our best estimates based on studies conducted by the treasury department.group. The treasury departmentgroup uses a data warehouse to study interest rate risk at a transactional level and uses various ad-hoc reports to continuously refine assumptions continuously.assumptions. Assumptions and methodologies regarding administered rate liabilities (e.g., savings accounts, money market accounts and interest-bearing checking accounts), balance trends, and repricing relationships reflect our best estimate of expected behavior and these assumptions are reviewed regularly.
We also have longer-term interest rate risk exposure, which may not be appropriately measured by earnings sensitivity analysis. The ALCO uses economic value of equity at risk modeling, or EVE sensitivity analysis to study the impact of long-term cash flows on earnings and on capital. EVE involves discounting present values of all cash flows of on-balance sheeton and off-balance sheet items under different interest rate scenarios. The discounted present value of all cash flows represents our EVE. The analysis requires modifying the expected cash flows in each interest rate scenario, which will impact the discounted present value. The amount of base-case measurement and its sensitivity to shifts in the yield curve allow us to measure longer-term repricing and option risk in the balance sheet.
|
| | | | | | | | |
Table 20 - Net Interest Income at Risk |
| | | | | |
| Net Interest Income at Risk (%) |
Basis point change scenario | -25 |
| | +100 |
| | +200 |
|
Board policy limits | — | % | | -2.0 | % | | -4.0 | % |
December 31, 2016 | -1.0 | % | | 2.7 | % | | 5.6 | % |
December 31, 2015 | -0.3 | % | | 0.7 | % | | 0.3 | % |
|
| | | | | | | | |
Table 16 - Net Interest Income at Risk |
| Net Interest Income at Risk (%) |
Basis point change scenario | -100 |
| | +100 |
| | +200 |
|
Board policy limits | -4.0 | % | | -2.0 | % | | -4.0 | % |
December 31, 2018 | -2.9 | % | | 2.7 | % | | 5.8 | % |
December 31, 2017 | -2.6 | % | | 2.5 | % | | 4.8 | % |
The NII at Risk results included in the table above reflect the analysis used monthly by management. It models gradual -25,-100, +100 and +200 basis point parallel shifts in market interest rates, implied by the forward yield curve over the next twelve months. Due to the current low level of short-term interestThe
down 100 basis point scenario, included in Table 16, was added as rates the analysis reflects a declininghave risen sufficiently, such that yields will not reach zero percent, producing meaningful interest rate scenario ofrisk metrics. This replaces the down 25 basis points, the point at which many assets and liabilities reach zero percent.
scenario reported in prior years.
Our NII at Risk is within our boardBoard of director'sDirectors’ policy limits for the -100, +100 and +200 basis point scenarios. There is no policy limit for the -25 basis point scenario. The NII at Risk reported shows that our earnings are morebalance sheet is asset sensitive at both December 31, 2016 than at2018 and December 31, 2015, as a result of the $4.9 billion notional value reduction in asset receive-fixed cash flow swaps, the introduction of new non-maturity deposit models in the 2016 first quarter, and the FirstMerit acquisition in the third quarter.2017.
As of December 31, 2016,2018, we had $10.8$4.9 billion of notional value in receive-fixed cash flowfair value swaps, which we use for asset and liability management purposes. At December 31, 2016, the following table shows the expected maturity for asset and liability receive-fixed cash flow swaps: |
| | | | | | | |
Table 21 - Expected Maturity for Asset and Liability Receive-Fixed Cash Flow Swaps | | |
(dollar amounts in thousands) | Asset receive fixed-generic cash flow swaps | | Liability receive fixed-generic cash flow swaps |
2017 | $ | 3,250,000 |
| | $ | 500,000 |
|
2018 | 75,000 |
| | 2,610,000 |
|
2019 | — |
| | 575,000 |
|
2020 | — |
| | 1,300,000 |
|
2021 | — |
| | 990,000 |
|
2022 | — |
| | 1,000,000 |
|
Thereafter | — |
| | 500,000 |
|
|
| | | | | | | | |
Table 22 - Economic Value of Equity at Risk |
| | | | | |
| Economic Value of Equity at Risk (%) |
Basis point change scenario | -25 |
| | +100 |
| | +200 |
|
Board policy limits | — | % | | -5.0 | % | | -12.0 | % |
December 31, 2016 | -0.6 | % | | 0.9 | % | | 0.2 | % |
December 31, 2015 | -0.4 | % | | 0.5 | % | | -2.1 | % |
|
| | | | | | | | |
Table 17 - Economic Value of Equity at Risk |
| Economic Value of Equity at Risk (%) |
Basis point change scenario | -100 |
| | +100 |
| | +200 |
|
Board policy limits | -6.0 | % | | -6.0 | % | | -12.0 | % |
December 31, 2018 | -5.8 | % | | 2.3 | % | | 3.1 | % |
December 31, 2017 | -5.4 | % | | 1.9 | % | | 1.9 | % |
The EVE results included in the table above reflect the analysis used monthly by management. It models immediate -25,-100, +100 and +200 basis point parallel shifts in market interest rates. Due to the current low level of short-term interestThe down 100 basis point scenario, included in Table 17, was added as rates the analysis reflects a declininghave risen sufficiently, such that yields will not reach zero percent, producing meaningful interest rate scenario ofrisk metrics. This replaces the down 25 basis points, the point at which many deposit costs reach zero percent.scenario reported in prior years.
We are within our boardBoard of director'sDirectors’ policy limits for the -100, +100 and +200 basis point scenarios. There is no policy limit for the -25 basis point scenario. The EVE depicts a moderate level of long-term interest rate risk, which indicates theasset sensitive balance sheet is positioned favorably for rising interest rates.profile.
MSRs
(This section should be read in conjunction with Note 75 of Notes to the Consolidated Financial Statements.)
At December 31, 2016,2018, we had a total of $186$221 million of capitalized MSRs representing the right to service $18.9$21 billion in mortgage loans. Of this $186$221 million, $13.7$211 million was recorded using the amortization method and $10 million was recorded using the fair value method and $172.5 million was recorded using the amortization method.
MSR fair values are sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be reduced by prepayments. Prepayments usually increase when mortgage interest rates decline and decrease when mortgage interest rates rise. MSRs recorded using the amortization method generally relate to loans originated with historically low interest rates, which may result in a lower probability of prepayments or impairment. We have employedalso employ hedging strategies to reduce the risk of MSR fair value changes or impairment. However, volatile changes in interest rates can diminish the effectiveness of these economic hedges. We report changes in the MSR fair value adjustments net of hedge-related trading activity in the mortgage banking income category of noninterest income. ChangesDecreases in fair value between reporting dates are recordedof the MSR, below amortized costs, would be recognized as an increase or a decrease in mortgage banking income. Any increase in the fair value, to the extent of prior impairment, would be recognized as an increase in mortgage banking income.
MSRs recorded using the amortization method generally relate to loans originated with historically low interest rates, resulting in a lower probability of prepayments and, ultimately, impairment. MSR assets are included in servicing rights and other intangible assets in the Consolidated Financial Statements.
Price Risk
Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value and are subject to fair value accounting. We have price risk from trading securities, securities owned by our broker-dealer subsidiary,subsidiaries, foreign exchange positions and equity investments, and investments in securities backed by mortgage loans.investments. We have established loss limits on the trading portfolio, on the amount of foreign exchange exposure that can be maintained, and on the amount of marketable equity securities that can be held.
Liquidity Risk
Liquidity risk is the possibility of us being unable to meet current and future financial obligations in a timely manner. Liquidity is managed to ensure stable, reliable, and cost-effective sources of funds to satisfy demand for credit, deposit withdrawals and investment opportunities. We consider core earnings, strong capital ratios, and credit quality essential for maintaining high credit ratings, which allows us cost-effective access to market-based liquidity. We rely on a large, stable core deposit base and a diversified base of wholesale funding sources to manage liquidity risk. The ALCO is appointed by the ROC to oversee liquidity risk management and the establishment of liquidity risk policies and limits. The treasury department is responsible for identifying, measuring, and monitoring our liquidity profile. The position is evaluated daily, weekly, and monthly by analyzing the composition of all funding sources, reviewing projected liquidity commitments by future months, and identifying sources and uses of funds. The overall management of our liquidity position is also integrated into retail and commercial pricing policies to ensure a stable core deposit base. Liquidity risk is reviewed and managed continuously for the Bank and the parent company, as well as its subsidiaries. In addition, liquidity working groups meet regularly to identify and monitor liquidity positions, provide policy guidance, review funding strategies, and oversee the adherence to, and maintenance of, the contingency funding plans.
Our primary source of liquidity is our core deposit base. Core deposits comprised approximately 94%96% of total deposits at December 31, 2016.2018. We also have available unused wholesale sources of liquidity, including advances from the FHLB of Cincinnati, issuance through dealers in the capital markets, and access to certificates of deposit issued through brokers. Liquidity is further provided by unencumbered, or unpledged, investment securities that totaled $15.0$17.5 billion as of December 31, 2016.2018. The treasury department also prepares a contingency funding plan that details the potential erosion of funds in the event of a systemic financial market crisis or institutional-specific stress scenario. An example of an institution specific event would be a downgrade in our public credit rating by a rating agency due to factors such as deterioration in asset quality, a large charge to earnings, a decline in profitability or other financial measures, or a significant merger or acquisition. Examples of systemic events unrelated to us that could have an effect on our access to liquidity would be terrorism or war, natural disasters, political events, or the default or bankruptcy of a major corporation, mutual fund or hedge fund. Similarly, market speculation or rumors about us, or the banking industry in general, may adversely affect the cost and availability of normal funding sources. The liquidity contingency plan therefore outlines the process for addressing a liquidity crisis. The plan provides for an evaluation of funding sources under various market conditions. It also assigns specific roles and responsibilities and communication protocols for effectively managing liquidity through a problem period.
Available-for-sale and otherInvestment securities portfolio
(This section should be read in conjunction with Note 54 of the Notes to Consolidated Financial Statements.)
Our investment securities portfolio is evaluated under established asset/liability management objectives. Changing market conditions could affect the profitability of the portfolio, as well as the level of interest rate risk exposure.
The composition and maturity of the portfolio is presented on the following two tables:
|
| | | | | | | | | | | |
Table 23 - Available-for-sale and other securities Portfolio Summary at Fair Value | | | | | |
(dollar amounts in thousands) | At December 31, |
| 2016 | | 2015 | | 2014 |
U.S. Treasury, Federal agency, and other agency securities | $ | 10,752,381 |
| | $ | 4,643,073 |
| | $ | 5,679,696 |
|
Other | 4,810,456 |
| | 4,132,368 |
| | 3,704,974 |
|
Total available-for-sale and other securities | $ | 15,562,837 |
| | $ | 8,775,441 |
| | $ | 9,384,670 |
|
Duration in years (1) | 4.7 |
| | 5.2 |
| | 3.9 |
|
|
| | | | | | | | | | | |
Table 18 - Investment Securities and Other Securities Portfolio Summary | | | | | |
(dollar amounts in millions) | At December 31, |
Available-for-sale securities, at fair value: | 2018 | | 2017 | | 2016 |
U.S. Treasury, Federal agency, and other agency securities | $ | 9,968 |
| | $ | 10,413 |
| | $ | 10,752 |
|
Municipal securities | 3,440 |
| | 3,878 |
| | 3,250 |
|
Other | 372 |
| | 578 |
| | 997 |
|
Total available-for-sale securities | $ | 13,780 |
| | $ | 14,869 |
| | $ | 14,999 |
|
| | | | | |
Held-to-maturity securities, at cost: | | | | | |
Federal agency and other agency securities | $ | 8,560 |
| | $ | 9,086 |
| | $ | 7,801 |
|
Municipal securities | 5 |
| | 5 |
| | 6 |
|
Total held-to-maturity securities | $ | 8,565 |
| | $ | 9,091 |
| | $ | 7,807 |
|
| | | | | |
Other securities: | | | | | |
Other securities, at cost: | | | | | |
Non-marketable equity securities (1) | $ | 543 |
| | $ | 581 |
| | $ | 548 |
|
Other securities, at fair value: | | | | | |
Mutual Funds | 20 |
| | 18 |
| | 15 |
|
Marketable equity securities | 2 |
| | 1 |
| | 1 |
|
Total other securities | $ | 565 |
| | $ | 600 |
| | $ | 564 |
|
Duration in years (2) | 4.3 |
| | 4.3 |
| | 4.6 |
|
| |
(1) | Consists of FHLB and FRB restricted stock holding carried at par. |
| |
(2) | The average duration assumes a market driven prepayment rate on securities subject to prepayment. |
|
| | | | | | | | | | |
Table 24 - Available-for-sale and other securities Portfolio Composition and Maturity | | | | | |
(dollar amounts in thousands) | At December 31, 2016 |
| Amortized | | | | |
|
| | | | | | | | | | |
| Cost | | Fair Value | | Yield (1) |
U.S. Treasury, Federal agency, and other agency securities: | | | | | |
U.S. Treasury: | | | | | |
1 year or less | $ | 4,978 |
| | $ | 4,988 |
| | 1.12 | % |
After 1 year through 5 years | 502 |
| | 509 |
| | 1.94 |
|
After 5 years through 10 years | — |
| | — |
| | — |
|
After 10 years | — |
| | — |
| | — |
|
Total U.S. Treasury | 5,480 |
| | 5,497 |
| | 1.20 |
|
Federal agencies: mortgage-backed securities: | | | | | |
1 year or less | — |
| | — |
| | — |
|
After 1 year through 5 years | 46,591 |
| | 46,762 |
| | 2.72 |
|
After 5 years through 10 years | 173,941 |
| | 176,404 |
| | 2.90 |
|
After 10 years | 10,630,929 |
| | 10,450,176 |
| | 2.22 |
|
Total Federal agencies: mortgage-backed securities | 10,851,461 |
| | 10,673,342 |
| | 2.24 |
|
Other agencies: | | | | | |
1 year or less | 4,302 |
| | 4,367 |
| | 3.39 |
|
After 1 year through 5 years | 5,092 |
| | 5,247 |
| | 3.00 |
|
After 5 years through 10 years | 63,618 |
| | 63,928 |
| | 2.48 |
|
After 10 years | — |
| | — |
| | — |
|
Total other agencies | 73,012 |
| | 73,542 |
| | 2.57 |
|
Total U.S. Treasury, Federal agency, and other agency securities | 10,929,953 |
| | 10,752,381 |
| | — |
|
Municipal securities: | | | | | |
1 year or less | 169,636 |
| | 166,887 |
| | 3.70 |
|
After 1 year through 5 years | 933,893 |
| | 933,903 |
| | 3.36 |
|
After 5 years through 10 years | 1,463,459 |
| | 1,464,583 |
| | 3.58 |
|
After 10 years | 693,440 |
| | 684,684 |
| | 4.28 |
|
Total municipal securities | 3,260,428 |
| | 3,250,057 |
| | 3.68 |
|
Private-label CMO: | | | | | — |
|
1 year or less | — |
| | — |
| | — |
|
After 1 year through 5 years | — |
| | — |
| | 3.19 |
|
After 5 years through 10 years | — |
| | — |
| | — |
|
After 10 years | — |
| | — |
| | 3.21 |
|
Total private-label CMO | — |
| | — |
| | 3.21 |
|
Asset-backed securities: | | | | | |
1 year or less | — |
| | — |
| | — |
|
After 1 year through 5 years | 80,700 |
| | 80,560 |
| | 2.54 |
|
After 5 years through 10 years | 223,352 |
| | 224,565 |
| | 2.80 |
|
After 10 years | 520,072 |
| | 488,356 |
| | 2.93 |
|
Total asset-backed securities | 824,124 |
| | 793,481 |
| | 2.86 |
|
Corporate debt: | | | | | |
1 year or less | 43,223 |
| | 43,603 |
| | 4.29 |
|
After 1 year through 5 years | 78,430 |
| | 80,196 |
| | 3.74 |
|
After 5 years through 10 years | 32,523 |
| | 32,865 |
| | 3.66 |
|
After 10 years | 40,361 |
| | 42,019 |
| | 3.15 |
|
Total corporate debt | 194,537 |
| | 198,683 |
| | 3.73 |
|
Other: | | | | | |
1 year or less | 1,650 |
| | 1,650 |
| | 2.39 |
|
|
| | | | | | | | | | |
After 1 year through 5 years | 2,302 |
| | 2,283 |
| | 2.76 |
|
After 5 years through 10 years | — |
| | — |
| | N/A |
|
After 10 years | 10 |
| | 10 |
| | N/A |
|
Non-marketable equity securities (2) | 547,704 |
| | 547,704 |
| | 3.17 |
|
Mutual funds | 15,286 |
| | 15,286 |
| | N/A |
|
Marketable equity securities (3) | 861 |
| | 1,302 |
| | N/A |
|
Total other | 567,813 |
| | 568,235 |
| | 3.07 |
|
Total available-for-sale and other securities | $ | 15,776,855 |
| | $ | 15,562,837 |
| | 2.61 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 19 - Investment Securities Portfolio Composition and Maturity |
At December 31, 2018 | | | | | | | | | | | | | | | | | | | |
| 1 year or less | | After 1 year through 5 years | | After 5 years through 10 years | | After 10 years | | Total |
(dollar amounts in millions) | Amount | | Yield (1) | | Amount | | Yield (1) | | Amount | | Yield (1) | | Amount | | Yield (1) | | Amount | | Yield (1) |
Available-for-sale securities, at fair value: | | | | | | | | | | | | | | | | | | | |
U.S. Treasury | $ | 5 |
| | 2.59 | % | | $ | — |
| | — | % | | $ | — |
| | — | % | | $ | — |
| | — | % | | $ | 5 |
| | 2.59 | % |
Federal agencies: | | | | | | | | | | | | | | | | |
| | |
Residential CMO | — |
| | — |
| | — |
| | — |
| | 62 |
| | 3.05 |
| | 6,937 |
| | 2.49 |
| | 6,999 |
| | 2.50 |
|
Residential MBS | — |
| | — |
| | 1 |
| | 4.04 |
| | — |
| | — |
| | 1,254 |
| | 3.42 |
| | 1,255 |
| | 3.42 |
|
Commercial MBS | — |
| | — |
| | 26 |
| | 1.89 |
| | 8 |
| | 1.78 |
| | 1,549 |
| | 2.44 |
| | 1,583 |
| | 2.43 |
|
Other agencies | 1 |
| | 4.06 |
| | 2 |
| | 2.65 |
| | 123 |
| | 2.52 |
| | — |
| | — |
| | 126 |
| | 2.53 |
|
Total U.S. Treasury, Federal agencies and other agencies | 6 |
| | 2.85 |
| | 29 |
| | 2.04 |
| | 193 |
| | 2.66 |
| | 9,740 |
| | 2.60 |
| | 9,968 |
| | 2.60 |
|
Municipal securities | 178 |
| | 4.67 |
| | 955 |
| | 4.14 |
| | 1,577 |
| | 3.69 |
| | 730 |
| | 3.67 |
| | 3,440 |
| | 3.86 |
|
Asset-backed securities | — |
| | — |
| | 10 |
| | 3.70 |
| | 21 |
| | 4.63 |
| | 284 |
| | 3.32 |
| | 315 |
| | 3.42 |
|
Corporate debt | 1 |
| | 2.63 |
| | 41 |
| | 3.66 |
| | 11 |
| | 4.25 |
| | — |
| | — |
| | 53 |
| | 3.77 |
|
Other securities/Sovereign debt | — |
| | — |
| | 4 |
| | 2.68 |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | 2.68 |
|
Total available-for-sale securities | $ | 185 |
| | 4.60 | % | | $ | 1,039 |
| | 4.05 | % | | $ | 1,802 |
| | 3.59 | % | | $ | 10,754 |
| | 2.69 | % | | $ | 13,780 |
| | 2.94 | % |
| | | | | | | | | | | | | | | | | | | |
Held-to-maturity securities, at cost: | | | | | | | | | | | | | | | | | | | |
Federal agencies: | | | | | | | | | | | | | | | | | | | |
Residential CMO | $ | — |
| | — | % | | $ | — |
| | — | % | | $ | 35 |
| | 3.21 | % | | $ | 2,089 |
| | 2.55 | % | | $ | 2,124 |
| | 2.56 | % |
Residential MBS | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,851 |
| | 3.04 |
| | 1,851 |
| | 3.04 |
|
Commercial MBS | — |
| | — |
| | — |
| | — |
| | 128 |
| | 2.66 |
| | 4,107 |
| | 2.52 |
| | 4,235 |
| | 2.52 |
|
Other agencies | — |
| | — |
| | 11 |
| | 2.01 |
| | 199 |
| | 2.49 |
| | 140 |
| | 2.53 |
| | 350 |
| | 2.49 |
|
Total Federal agencies and other agencies | — |
| | — |
| | 11 |
| | 2.01 |
| | 362 |
| | 2.62 |
| | 8,187 |
| | 2.64 |
| | 8,560 |
| | 2.64 |
|
Municipal securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | 2.63 |
| | 5 |
| | 2.63 |
|
Total held-to-maturity securities | $ | — |
| | — | % | | $ | 11 |
| | 2.01 | % | | $ | 362 |
| | 2.62 | % | | $ | 8,192 |
| | 2.64 | % | | $ | 8,565 |
| | 2.64 | % |
| |
(1) | Weighted average yields were calculated using amortized cost on a fully-taxable equivalent basis, assuming a 35%21% tax rate.rate where applicable. |
| |
(2) | Consists of FHLB and FRB restricted stock holding carried at par. For 2016, the Federal Reserve reduced the dividend rate on FRB stock from 6% to 2.45%, the current 10-year Treasury rate for banks with more than $10 billion in assets. |
| |
(3) | Consists of certain mutual fund and equity security holdings. |
Investment securities portfolio
The expected weighted average maturities of our AFS and HTM portfolios are significantly shorter than their contractual maturities as reflected in Note 5 and Note 6 of the Notes to Consolidated Financial Statements. Particularly regarding the MBS and ABS, prepayments of principal and interest that historically occur in advance of scheduled maturities will shorten the expected life of these portfolios. The expected weighted average maturities, which take into account expected prepayments of principal and interest under existing interest rate conditions, are shown in the following table:
|
| | | | | | | | | | | | | | | |
Table 25 - Expected Life of Investment Securities | | | | | | |
(dollar amounts in thousands) | At December 31, 2016 |
| Available-for-Sale & Other Securities | | Held-to-Maturity Securities |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
1 year or less | $ | 394,532 |
| | $ | 389,422 |
| | $ | 11,479 |
| | $ | 11,469 |
|
After 1 year through 5 years | 4,135,992 |
| | 4,131,335 |
| | 2,544,725 |
| | 2,534,949 |
|
After 5 years through 10 years (1) | 9,895,629 |
| | 9,709,394 |
| | 5,244,564 |
| | 5,234,948 |
|
After 10 years | 786,442 |
| | 767,986 |
| | 6,171 |
| | 5,902 |
|
Other securities | 564,260 |
| | 564,700 |
| | — |
| | — |
|
Total | $ | 15,776,855 |
| | $ | 15,562,837 |
| | $ | 7,806,939 |
| | $ | 7,787,268 |
|
(1) The average duration of the securities with an average life of 5 years to 10 years is 5.28 years
Bank Liquidity and Sources of Funding
Our primary sources of funding for the Bank are retail and commercial core deposits. At December 31, 2016,2018, these core deposits funded 72%74% of total assets (107%(108% of total loans). Other sources of liquidity include non-core deposits, FHLB advances, wholesale debt instruments, and securitizations. Demand deposit overdrafts that have been reclassified as loan balances and were $23 million and $16$22 million at December 31, 20162018 and December 31, 2015,2017, respectively.
The following tables reflect contractual maturities of other domestic time deposits of $250,000 or more and brokered deposits and negotiable CDs, as well as, other domestic time deposits of $100,000 or more and brokered deposits and negotiable CDs at December 31, 2016.2018.
| | Table 26 - Maturity Schedule of time deposits, brokered deposits, and negotiable CDs | | |
Table 20 - Maturity Schedule of time deposits, brokered deposits, and negotiable CDs | | Table 20 - Maturity Schedule of time deposits, brokered deposits, and negotiable CDs | |
| | At December 31, 2018 |
(dollar amounts in millions) | At December 31, 2016 | 3 Months or Less | | 3 Months to 6 Months | | 6 Months to 12 Months | | 12 Months or More | | Total |
| 3 Months or Less | | 3 Months to 6 Months | | 6 Months to 12 Months | | 12 Months or More | | Total | |
Other domestic time deposits of $250,000 or more and brokered deposits and negotiable CDs | $ | 3,770 |
| | $ | 60 |
| | $ | 145 |
| | $ | 203 |
| | $ | 4,178 |
| $ | 3,633 |
| | $ | 130 |
| | $ | 90 |
| | $ | — |
| | $ | 3,853 |
|
Other domestic time deposits of $100,000 or more and brokered deposits and negotiable CDs | $ | 3,938 |
| | $ | 170 |
| | $ | 350 |
| | $ | 438 |
| | $ | 4,896 |
| $ | 3,819 |
| | $ | 221 |
| | $ | 1,193 |
| | $ | 619 |
| | $ | 5,852 |
|
The following table reflects deposit composition detail for each of the last three years:
| | Table 27 - Deposit Composition | | | | | | | | | | | | |
Table 21 - Deposit Composition | | | | | | | | | | | | |
| | At December 31, |
(dollar amounts in millions) | At December 31, | 2018 (1) | | 2017 | | 2016 |
| 2016 | | 2015 | | 2014 | |
By Type: | | | | | | | | | | | | | | | | | | | | | | |
Demand deposits—noninterest-bearing | $ | 22,836 |
| | 30 | % | | $ | 16,480 |
| | 30 | % | | $ | 15,393 |
| | 30 | % | $ | 21,783 |
| | 26 | % | | $ | 21,546 |
| | 28 | % | | $ | 22,836 |
| | 30 | % |
Demand deposits—interest-bearing | 15,676 |
| | 21 |
| | 7,682 |
| | 14 |
| | 6,248 |
| | 12 |
| 20,042 |
| | 24 |
| | 18,001 |
| | 23 |
| | 15,676 |
| | 21 |
|
Money market deposits | 18,407 |
| | 24 |
| | 19,792 |
| | 36 |
| | 18,986 |
| | 37 |
| 22,721 |
| | 27 |
| | 20,690 |
| | 27 |
| | 18,407 |
| | 24 |
|
Savings and other domestic deposits | 11,975 |
| | 16 |
| | 5,246 |
| | 9 |
| | 5,048 |
| | 10 |
| 10,451 |
| | 12 |
| | 11,270 |
| | 15 |
| | 11,975 |
| | 16 |
|
Core certificates of deposit | 2,535 |
| | 3 |
| | 2,382 |
| | 4 |
| | 2,936 |
| | 5 |
| 5,924 |
| | 7 |
| | 1,934 |
| | 3 |
| | 2,535 |
| | 3 |
|
Total core deposits: | 71,429 |
| | 94 |
| | 51,582 |
| | 93 |
| | 48,612 |
| | 94 |
| 80,921 |
| | 96 |
| | 73,441 |
| | 96 |
| | 71,429 |
| | 94 |
|
Other domestic deposits of $250,000 or more | 394 |
| | 1 |
| | 501 |
| | 1 |
| | 198 |
| | — |
| 337 |
| | — |
| | 239 |
| | — |
| | 395 |
| | 1 |
|
Brokered deposits and negotiable CDs | 3,784 |
| | 5 |
| | 2,944 |
| | 5 |
| | 2,522 |
| | 5 |
| 3,516 |
| | 4 |
| | 3,361 |
| | 4 |
| | 3,784 |
| | 5 |
|
Deposits in foreign offices | — |
| | — |
| | 268 |
| | 1 |
| | 401 |
| | 1 |
| |
Total deposits | $ | 75,608 |
| | 100 | % | | $ | 55,295 |
| | 100 | % | | $ | 51,733 |
| | 100 | % | $ | 84,774 |
| | 100 | % | | $ | 77,041 |
| | 100 | % | | $ | 75,608 |
| | 100 | % |
Total core deposits: | | | | | | | | | | | | | | | | | | | | | | |
Commercial | $ | 31,887 |
| | 45 | % | | $ | 24,474 |
| | 47 | % | | $ | 19,982 |
| | 44 | % | $ | 37,268 |
| | 46 | % | | $ | 34,273 |
| | 47 | % | | $ | 31,887 |
| | 45 | % |
Consumer | 39,542 |
| | 55 |
| | 27,108 |
| | 53 |
| | 25,355 |
| | 56 |
| 43,653 |
| | 54 |
| | 39,168 |
| | 53 |
| | 39,542 |
| | 55 |
|
Total core deposits | $ | 71,429 |
| | 100 | % | | $ | 51,582 |
| | 100 | % | | $ | 45,337 |
| | 100 | % | $ | 80,921 |
| | 100 | % | | $ | 73,441 |
| | 100 | % | | $ | 71,429 |
| | 100 | % |
The following table reflects short-term borrowings detail for each of the last three years:
|
| | | | | | | | | | | |
Table 28 - Federal Funds Purchased and Repurchase Agreements | | | | | |
(dollar amounts in millions) | At December 31, |
| 2016 | | 2015 | | 2014 |
Weighted average interest rate at year-end | | | | | |
Federal Funds purchased and securities sold under agreements to repurchase | 0.35 | % | | 0.13 | % | | 0.08 | % |
Federal Home Loan Bank advances | 0.65 |
| | — |
| | 0.14 |
|
Other short-term borrowings | 0.66 |
| | 0.27 |
| | 1.11 |
|
Maximum amount outstanding at month-end during the year | | | | | |
Federal Funds purchased and securities sold under agreements to repurchase | $ | 1,537 |
| | $ | 1,120 |
| | $ | 1,491 |
|
Federal Home Loan Bank advances | 2,425 |
| | 1,850 |
| | 2,375 |
|
Other short-term borrowings | 64 |
| | 43 |
| | 56 |
|
Average amount outstanding during the year | | | | | |
Federal Funds purchased and securities sold under agreements to repurchase | $ | 690 |
| | $ | 784 |
| | $ | 987 |
|
Federal Home Loan Bank advances | 822 |
| | 542 |
| | 1,753 |
|
Other short-term borrowings | 18 |
| | 20 |
| | 21 |
|
Weighted average interest rate during the year | | | | | |
Federal Funds purchased and securities sold under agreements to repurchase | 0.14 | % | | 0.06 | % | | 0.07 | % |
Federal Home Loan Bank advances | 0.44 |
| | 0.16 |
| | 0.06 |
|
Other short-term borrowings | 2.86 |
| | 1.17 |
| | 1.63 |
|
| |
(1) | December 31, 2018 includes $210 million of noninterest-bearing and $662 million of interesting bearing deposits classified as held-for-sale. |
The Bank maintains borrowing capacity at the FHLB and the Federal Reserve Bank Discount Window. The Bank does not consider borrowing capacity from the Federal Reserve Bank Discount Window as a primary source of liquidity. Information regarding amountsTotal loans pledged for the ability to borrow if necessary, and the unused borrowing capacity at both the Federal Reserve BankDiscount Window and the FHLB is outlined in the following table:
|
| | | | | | | |
Table 29 - Federal Reserve Bank and FHLB Borrowing Capacity | | | |
| | | |
(dollar amounts in billions) | At December 31, |
| 2016 | | 2015 |
Loans and securities pledged: | | | |
Federal Reserve Bank | $ | 10.0 |
| | $ | 8.3 |
|
FHLB | 9.7 |
| | 9.2 |
|
Total loans and securities pledged | $ | 19.7 |
| | $ | 17.5 |
|
Total unused borrowing capacity at Federal Reserve Bank and FHLB | $ | 14.1 |
| | $ | 13.6 |
|
(For further information related to debt issuances please see Note 11 of the Notes to Consolidated Financial Statements.)are $46.5 billion and $31.7 billion at December 31, 2018 and December 31, 2017, respectively.
To the extent we are unable to obtain sufficient liquidity through core deposits, we may meet our liquidity needs through sources of wholesale funding, asset securitization or sale. Sources of wholesale funding include other domestic deposits of $250,000 or more, brokered deposits and negotiable CDs, deposits in foreign offices, short-term borrowings, and long-term debt. At December 31, 2016,2018, total wholesale funding was $16.2$14.5 billion, an increasea decrease from $11.4$17.9 billion at December 31, 2015.2017. The increasedecrease from prior year-end primarily relates to an increase in short-term borrowings, brokered time deposits and negotiable CDs, and long-term debt, partially offset by a decrease in deposits in foreign offices and domestic time deposits of $250,000 or more.short-term borrowings.
Liquidity Coverage Ratio
At December 31, 2016,2018, we believe the Bank had sufficient liquidity to be in compliance with the LCR requirements and to meet its cash flow obligations for the foreseeable future.
| | Table 30 - Maturity Schedule of Commercial Loans | |
Table 22 - Maturity Schedule of Commercial Loans | | Table 22 - Maturity Schedule of Commercial Loans |
| | At December 31, 2018 |
(dollar amounts in millions) | At December 31, 2016 | One Year or Less | | One to Five Years | | After Five Years | | Total | | Percent of total |
| One Year or Less | | One to Five Years | | After Five Years | | Total | | Percent of total | |
Commercial and industrial | $ | 6,557 |
| | $ | 16,805 |
| | $ | 4,697 |
| | $ | 28,059 |
| | 79 | % | $ | 9,425 |
| | $ | 17,554 |
| | $ | 3,626 |
| | $ | 30,605 |
| | 82 | % |
Commercial real estate—construction | 536 |
| | 823 |
| | 87 |
| | 1,446 |
| | 4 |
| 387 |
| | 747 |
| | 51 |
| | 1,185 |
| | 3 |
|
Commercial real estate—commercial | 1,374 |
| | 3,465 |
| | 1,016 |
| | 5,855 |
| | 17 |
| 1,119 |
| | 3,347 |
| | 1,191 |
| | 5,657 |
| | 15 |
|
Total | $ | 8,467 |
| | $ | 21,093 |
| | $ | 5,800 |
| | $ | 35,360 |
| | 100 | % | $ | 10,931 |
| | $ | 21,648 |
| | $ | 4,868 |
| | $ | 37,447 |
| | 100 | % |
Variable-interest rates | $ | 7,170 |
| | $ | 16,487 |
| | $ | 3,419 |
| | $ | 27,076 |
| | 77 | % | $ | 8,994 |
| | $ | 18,080 |
| | $ | 3,066 |
| | $ | 30,140 |
| | 80 | % |
Fixed-interest rates | 1,297 |
| | 4,606 |
| | 2,381 |
| | 8,284 |
| | 23 |
| 1,937 |
| | 3,568 |
| | 1,802 |
| | 7,307 |
| | 20 |
|
Total | $ | 8,467 |
| | $ | 21,093 |
| | $ | 5,800 |
| | $ | 35,360 |
| | 100 | % | $ | 10,931 |
| | $ | 21,648 |
| | $ | 4,868 |
| | $ | 37,447 |
| | 100 | % |
Percent of total | 24 | % | | 60 | % | | 16 | % | | 100 | % | | | 29 | % | | 58 | % | | 13 | % | | 100 | % | | |
At December 31, 2016,2018, the carrying value of investment securities pledged to secure public and trust deposits, trading account liabilities, U.S. Treasury demand notes, and security repurchase agreements totaled $5.0$4.5 billion. There were no securities of a non-governmental single issuer, which are not governmental or government-sponsored, that exceeded 10% of shareholders’ equity at December 31, 2016.2018.
Parent Company Liquidity
The parent company’s funding requirements consist primarily of dividends to shareholders, debt service, income taxes, operating expenses, funding of nonbank subsidiaries, repurchases of our stock, and acquisitions. The parent company obtains funding to meet obligations from dividends and interest received from the Bank, interest and dividends received from direct subsidiaries, net taxes collected from subsidiaries included in the federal consolidated tax return, fees for services provided to subsidiaries, and the issuance of debt securities.
At December 31, 20162018 and December 31, 2015,2017, the parent company had $1.8$2.4 billion and $0.9$1.6 billion, respectively, in cash and cash equivalents. The increase primarily relates to 2016 issuances of long-term debt and preferred stock.
On January 18, 2017,16, 2019, the boardBoard of directorsDirectors declared a quarterly common stock cash dividend of $0.08$0.14 per common share. The dividend is payable on April 3 2017,1, 2019, to shareholders of record on March 20, 2017.18, 2019. Based on the current quarterly dividend of $0.08$0.14 per common share, cash demands required for common stock dividends are estimated to be approximately $87$147 million per quarter. On January 18, 2017,16, 2019, the boardBoard of directorsDirectors declared a quarterly Series A, Series, B, Series C, Series D, and Series DE Preferred Stock dividend payable on April 17, 201715, 2019 to shareholders of record on April 1, 2017. Based on the current dividend, cash demands required for Series A Preferred Stock are estimated to be approximately $8 million per quarter.2019. Cash demands required for Series B Preferred Stock are expected to be less than $1 million per quarter. Cash demands required for Series C, Preferred StockSeries D and Series E are expected to be approximately $2$2 million, $9 million and $7 million per quarter. Cash demands required for Series D Preferred Stock are expected to be approximately $9 million per quarter.quarter, respectively.
During the fourth quarter,2018, the Bank declared a returnpaid preferred dividends of capital$45 million and common stock dividends of $1.7 billion to the holding company of $225 million payable in the 2017 first quarter.company. To help meet any additional liquidity needs, the parent company may issue debt or equity securities from time to time. In April 2016, the Bank issued $490 million of preferred stock to the holding company. In the 2016 third and fourth quarter, the Bank declared and paid a preferred dividend of $7 million to the holding company.
Off-Balance Sheet Arrangements
In the normal course of business, we enter into various off-balance sheet arrangements. These arrangements include commitments to extend credit, interest rate swaps, financial guarantees contained in standby letters-of-credit issued by the Bank, and commitments by the Bank to sell mortgage loans.
COMMITMENTS TO EXTEND CREDIT
Commitments to extend credit generally have fixed expiration dates, are variable-rate, and contain clauses that permit Huntington to terminate or otherwise renegotiate the contracts in the event of a significant deterioration in the customer’s credit quality. These arrangements normally require the payment of a fee by the customer, the pricing of which is based on prevailing market conditions, credit quality, probability of funding, and other relevant factors. Since many of these commitments are expected to expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements. The interest rate risk arising from these financial instruments is insignificant as a result of their predominantly short-term, variable-rate nature. See Note 2120 for more information.
INTEREST RATE SWAPS
Balance sheet hedging activity is arranged to receive hedge accounting treatment and is classified as either fair value or cash flow hedges. Fair value hedges are purchased to convert deposits and long-term debt from fixed-rate obligations to floating rate. Cash flow hedges are also used to convert floating rate loans made to customers into fixed rate loans. See Note 1918 for more information.
STANDBY LETTERS-OF-CREDIT
Standby letters-of-credit are conditional commitments issued to guarantee the performance of a customer to a third-party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most of these arrangements mature within two years and are expected to expire without being drawn upon. Standby letters-of-credit are included in the determination of the amount of risk-based capital that the parent company and the Bank are required to hold. Through our credit process, we monitor the credit risks of outstanding standby letters-of-credit. When it is probable that a standby letter-of-credit will be drawn and not repaid in full, a loss is recognized in the provision for credit losses. See Note 2120 for more information.
COMMITMENTS TO SELL LOANS
Activity related to our mortgage origination activity supports the hedging of the mortgage pricing commitments to customers and the secondary sale to third parties. In addition, we have commitments to sell residential real estate loans. These contracts mature in less than one year. See Note 2120 for more information.
We believe that off-balance sheet arrangements are properly considered in our liquidity risk management process.
| | Table 31 - Contractual Obligations (1) | |
Table 23 - Contractual Obligations (1) | | Table 23 - Contractual Obligations (1) |
(dollar amounts in millions) | At December 31, 2016 | At December 31, 2018 |
| One Year or Less | | 1 to 3 Years | | 3 to 5 Years | | More than 5 Years | | Total | Less than 1 Year | | 1 to 3 Years | | 3 to 5 Years | | More than 5 Years | | Total |
Deposits without a stated maturity | $ | 67,786 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 67,786 |
| $ | 73,993 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 73,993 |
|
Certificates of deposit and other time deposits | 4,498 |
| | 1,839 |
| | 1,164 |
| | 321 |
| | 7,822 |
| 3,524 |
| | 4,249 |
| | 2,887 |
| | 121 |
| | 10,781 |
|
Short-term borrowings | 3,693 |
| | — |
| | — |
| | — |
| | 3,693 |
| 2,017 |
| | — |
| | — |
| | — |
| | 2,017 |
|
Long-term debt | 814 |
| | 3,385 |
| | 2,426 |
| | 1,758 |
| | 8,383 |
| 593 |
| | 4,211 |
| | 2,973 |
| | 1,004 |
| | 8,781 |
|
Operating lease obligations | 59 |
| | 102 |
| | 76 |
| | 152 |
| | 389 |
| 59 |
| | 95 |
| | 62 |
| | 95 |
| | 311 |
|
Purchase commitments | 96 |
| | 112 |
| | 34 |
| | 16 |
| | 258 |
| 92 |
| | 79 |
| | 21 |
| | 15 |
| | 207 |
|
| |
(1) | Amounts do not include associated interest payments. |
Operational Risk
Operational risk is the risk of loss due to human error; inadequate or failed internal systems and controls, including the use of financial or other quantitative methodologies that may not adequately predict future results; violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards; and external influences such as market conditions, fraudulent activities, disasters, and security risks. We continuously strive to strengthen our system of internal controls to ensure compliance with laws, rules, and regulations, and to improve the oversight of our operational risk. We actively and continuously monitor cyber-attackscyberattacks such as attempts related to online deception and loss of sensitive customer data. We evaluate internal systems, processes and controls to mitigate loss from cyber-attacks and, to date, have not experienced any material losses.
Our objective for managing cyber security risk is to avoid or minimize the impacts of external threat events or other efforts to penetrate our systems. We work to achieve this objective by hardening networks and systems against attack, and by diligently managing visibility and monitoring controls within our data and communications environment to recognize events and respond before the attacker has the opportunity to plan and execute on its own goals. To this end we employ a set of defense in-depth strategies, which include efforts to make us less attractive as a target and less vulnerable to threats, while investing in threat analytic capabilities for rapid detection and response. Potential concerns related to cyber security may be escalated to our board-level Technology Committee, as appropriate. As a complement to the overall cyber security risk management, we use a number of internal training methods, both formally through mandatory courses and informally through written communications and other updates. Internal policies and procedures have been implemented to encourage the reporting of potential phishing attacks or other security risks. We also use third-party services to test the effectiveness of our cyber security risk management framework, and any such third parties are required to comply with our policies regarding information security and confidentiality.
To mitigate operational risks, we have a senior managementan Operational Risk Committee, and a senior management Legal, Regulatory, and Compliance Committee, and a Third Party Risk Management Committee. The responsibilities of these committees, among other duties, include establishing and maintaining management information systems to monitor material risks and to identify potential concerns, risks, or trends that may have a significant impact and ensuring that recommendations are developed to address the identified issues. In addition, we have a senior management Model Risk Oversight Committee that is responsible for policies and procedures describing how model risk is evaluated and managed and the application of the governance process to implement these practices throughout the enterprise. These committees report any significant findings and recommendations to the Risk Management Committee. Potential concerns may be escalated to our ROC as appropriate.
The FirstMerit integration is inherently large and complex. Our objective for managing execution risk is to minimize impacts to daily operations. We have an established Integration Management Office led by senior management. Responsibilities include central management, reporting, and escalation of key integration deliverables. In addition, a board level Integration Governance Committee has been established to assist in the oversight of the integrationBoard, as appropriate. Significant findings or issues are escalated by the Third Party Risk Management Committee to the Technology Committee of people, systems, and processes of FirstMerit with Huntington.the Board, as appropriate.
The goal of this framework is to implement effective operational risk techniques and strategies; minimize operational, fraud, and legal losses; minimize the impact of inadequately designed models and enhance our overall performance.
Compliance Risk
Financial institutions are subject to many laws, rules, and regulations at both the federal and state levels. These broad-based laws, rules, and regulations include, but are not limited to, expectations relating to anti-money laundering, lending limits, client privacy, fair lending, prohibitions against unfair, deceptive or abusive acts or practices, protections for military members as they enter active duty, and community reinvestment. Additionally, theThe volume and complexity of recent regulatory changes have increased our overall compliance risk. As such, we utilize various resources to help ensure expectations are met, including a team of compliance experts dedicated to ensuring our conformance with all applicable laws, rules, and regulations. Our colleagues receive training for several broad-based laws and regulations including, but not limited to, anti-money laundering and customer privacy. Additionally, colleagues engaged in lending activities receive training for laws and regulations related to flood disaster protection, equal credit opportunity, fair lending, and/or other courses related to the extension of credit. We set a high standard of expectation for adherence to compliance management and seek to continuously enhance our performance.
Capital
(This section should be read in conjunction with the Regulatory Matters section included in Part 1, Item 1 and Note 2221 of the Notes to Consolidated Financial Statements.)
Both regulatory capital and shareholders’ equity are managed at the Bank and on a consolidated basis. We have an active program for managing capital and maintain a comprehensive process for assessing the Company’s overall capital adequacy. We believe our current levels of both regulatory capital and shareholders’ equity are adequate.
Regulatory Capital
We are subject to the Basel III capital requirements including the standardized approach for calculating risk-weighted assets in accordance with subpart D of the final capital rule. The following table presents risk-weighted assets and other financial data necessary to calculate certain financial ratios, including the common CET1, on a Basel III basis, which we use to measure capital adequacy.
| | Table 32 - Capital Under Current Regulatory Standards (transitional Basel III basis) (Non-GAAP) | |
(dollar amounts in millions, except per share amounts) | | | | | |
Table 24 - Capital Under Current Regulatory Standards (Basel III) | | Table 24 - Capital Under Current Regulatory Standards (Basel III) |
| | At December 31, | At December 31, |
| | 2016 | | 2015 | |
Common equity tier 1 risk-based capital ratio: | | | | | |
(dollar amounts in millions) | | 2018 | | 2017 |
CET 1 risk-based capital ratio: | | | | |
Total shareholders’ equity | | $ | 10,308 |
| | $ | 6,595 |
| $ | 11,102 |
| | $ | 10,814 |
|
Regulatory capital adjustments: | | | | | | | |
Shareholders’ preferred equity and related surplus | | (1,076 | ) | | (386 | ) | (1,207 | ) | | (1,076 | ) |
Accumulated other comprehensive loss (income) offset | | 401 |
| | 226 |
| 609 |
| | 528 |
|
Goodwill and other intangibles, net of taxes | | (2,126 | ) | | (695 | ) | (2,200 | ) | | (2,200 | ) |
Deferred tax assets that arise from tax loss and credit carryforwards | | (21 | ) | | (19 | ) | (33 | ) | | (25 | ) |
Common equity tier 1 capital | | 7,486 |
| | 5,721 |
| |
CET 1 capital | | 8,271 |
| | 8,041 |
|
Additional tier 1 capital | | | | | | | |
Shareholders’ preferred equity | | 1,076 |
| | 386 |
| 1,207 |
| | 1,076 |
|
Qualifying capital instruments subject to phase-out | | — |
| | 76 |
| |
Other | | (15 | ) | | (29 | ) | — |
| | (7 | ) |
Tier 1 capital | | 8,547 |
| | 6,154 |
| 9,478 |
| | 9,110 |
|
LTD and other tier 2 qualifying instruments | | 932 |
| | 563 |
| 776 |
| | 869 |
|
Qualifying allowance for loan and lease losses | | 736 |
| | 670 |
| 868 |
| | 778 |
|
Tier 2 capital | | 1,668 |
|
| 1,233 |
| 1,644 |
|
| 1,647 |
|
Total risk-based capital | | $ | 10,215 |
| | $ | 7,387 |
| $ | 11,122 |
| | $ | 10,757 |
|
Risk-weighted assets (RWA) | | $ | 78,263 |
| | $ | 58,420 |
| $ | 85,687 |
| | $ | 80,340 |
|
Common equity tier 1 risk-based capital ratio | | 9.56 | % | | 9.79 | % | |
CET 1 risk-based capital ratio | | 9.65 | % | | 10.01 | % |
Other regulatory capital data: | | | | | | | |
Tier 1 leverage ratio | | 8.70 |
| | 8.79 |
| |
Tier 1 risk-based capital ratio | | 10.92 |
| | 10.53 |
| 11.06 |
| | 11.34 |
|
Total risk-based capital ratio | | 13.05 |
| | 12.64 |
| 12.98 |
| | 13.39 |
|
Tangible common equity / RWA ratio | | 8.92 |
| | 9.41 |
| |
Tier 1 leverage ratio | | 9.10 |
| | 9.09 |
|
| | Table 33 - Capital Adequacy—Non-Regulatory (Non-GAAP) | |
Table 25 - Capital Adequacy—Non-Regulatory (Non-GAAP) | | Table 25 - Capital Adequacy—Non-Regulatory (Non-GAAP) |
(dollar amounts in millions) | | | | | At December 31, |
| At December 31, | | |
| 2016 | | 2015 | | 2018 | | 2017 |
Consolidated capital calculations: | | | | | | | |
Common shareholders’ equity | $ | 9,237 |
| | $ | 6,209 |
| | $ | 9,899 |
| | $ | 9,743 |
|
Preferred shareholders’ equity | 1,071 |
| | 386 |
| | 1,203 |
| | 1,071 |
|
Total shareholders’ equity | 10,308 |
| | 6,595 |
| | 11,102 |
| | 10,814 |
|
Goodwill | (1,993 | ) | | (677 | ) | | (1,989 | ) | | (1,993 | ) |
Other intangible assets | (402 | ) | | (55 | ) | | |
Other intangible asset deferred tax liability (1) | 141 |
| | 19 |
| | |
Other intangible assets (1) | | (222 | ) | | (273 | ) |
Total tangible equity | 8,054 |
| | 5,882 |
| | 8,891 |
| | 8,548 |
|
Preferred shareholders’ equity | (1,071 | ) | | (386 | ) | | (1,203 | ) | | (1,071 | ) |
Total tangible common equity | $ | 6,983 |
| | $ | 5,496 |
| | $ | 7,688 |
| | $ | 7,477 |
|
Total assets | $ | 99,714 |
| | $ | 71,018 |
| | $ | 108,781 |
| | $ | 104,185 |
|
Goodwill | (1,993 | ) | | (677 | ) | | (1,989 | ) | | (1,993 | ) |
Other intangible assets | (402 | ) | | (55 | ) | | |
Other intangible asset deferred tax liability (1) | 141 |
| | 19 |
| | |
Other intangible assets (1) | | (222 | ) | | (273 | ) |
Total tangible assets | $ | 97,460 |
| | $ | 70,305 |
| | $ | 106,570 |
| | $ | 101,919 |
|
Tangible equity / tangible asset ratio | 8.26 | % | | 8.37 | % | | 8.34 | % | | 8.39 | % |
Tangible common equity / tangible asset ratio | 7.16 |
| | 7.82 |
| | 7.21 |
| | 7.34 |
|
Tangible common equity / RWA ratio | | 8.97 |
| | 9.31 |
|
| |
(1) | Other intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate.liability. |
The following table presents certain regulatory capital data at both the consolidated and Bank levels for the past two years:
| | Table 34 - Regulatory Capital Data (1) | | | | | |
Table 26 - Regulatory Capital Data | | | | | |
| | | At December 31, |
(dollar amounts in millions) | | | | | | Basel III |
| | At December 31, | |
| | Basel III | |
| | 2016 | | 2015 | | 2018 | | 2017 |
Total risk-weighted assets | Consolidated | $ | 78,263 |
| | $ | 58,420 |
| Consolidated | $ | 85,687 |
| | $ | 80,340 |
|
| Bank | 78,242 |
| | 58,351 |
| Bank | 85,717 |
| | 80,383 |
|
Common equity tier 1 risk-based capital | Consolidated | 7,486 |
| | 5,721 |
| |
CET 1 risk-based capital | | Consolidated | 8,271 |
| | 8,041 |
|
| Bank | 8,153 |
| | 5,519 |
| Bank | 8,732 |
| | 8,856 |
|
Tier 1 risk-based capital | Consolidated | 8,547 |
| | 6,154 |
| Consolidated | 9,478 |
| | 9,110 |
|
| Bank | 9,086 |
| | 5,735 |
| Bank | 9,611 |
| | 9,727 |
|
Tier 2 risk-based capital | Consolidated | 1,668 |
| | 1,233 |
| Consolidated | 1,644 |
| | 1,647 |
|
| Bank | 1,732 |
| | 1,115 |
| Bank | 1,893 |
| �� | 1,790 |
|
Total risk-based capital | Consolidated | 10,215 |
| | 7,387 |
| Consolidated | 11,122 |
| | 10,757 |
|
| Bank | 10,818 |
| | 6,851 |
| Bank | 11,504 |
| | 11,517 |
|
Tier 1 leverage ratio | Consolidated | 8.70 | % | | 8.79 | % | |
| Bank | 9.29 |
| | 8.21 |
| |
Common equity tier 1 risk-based capital ratio | Consolidated | 9.56 |
| | 9.79 |
| |
CET 1 risk-based capital ratio | | Consolidated | 9.65 | % | | 10.01 | % |
| Bank | 10.42 |
| | 9.46 |
| Bank | 10.19 |
| | 11.02 |
|
Tier 1 risk-based capital ratio | Consolidated | 10.92 |
| | 10.53 |
| Consolidated | 11.06 |
| | 11.34 |
|
| Bank | 11.61 |
| | 9.83 |
| Bank | 11.21 |
| | 12.10 |
|
Total risk-based capital ratio | Consolidated | 13.05 |
| | 12.64 |
| Consolidated | 12.98 |
| | 13.39 |
|
| Bank | 13.83 |
| | 11.74 |
| Bank | 13.42 |
| | 14.33 |
|
Tier 1 leverage ratio | | Consolidated | 9.10 |
| | 9.09 |
|
| | Bank | 9.23 |
| | 9.70 |
|
AllAt December 31, 2018, we maintained Basel III capital ratios were impactedin excess of the well-capitalized standards established by the $1.3 billion of goodwill created and the issuance of $2.8 billionFederal Reserve.
The Company repurchased $939 million of common stock as partduring 2018 at an average cost of $15.23 per share. Included in the share repurchase activity, the Company completed the $400 million ASR which effectively offset the impact of the FirstMerit acquisition. The regulatory Tier 1 risk-based and total risk-based capital ratios benefited from the issuance of $400$363 million and $200 million of Class DSeries A preferred equity during the 2016 first and second quarters, respectively, and the issuance of $100 million of Class C preferred equity during the 2016 third quarter in exchange for FirstMerit preferred equity in conjunction with the acquisition. The total risk-based capital ratio was impacted by the repurchase of $40 million of trust preferred securities during the 2016 fourth quarter and $20 million of trust preferred securities during the 2016 third quarter, both of which were executed under the de minimis clause of the Federal Reserve's CCAR rules. In addition, $5 million of trust preferred securities were acquiredconversion in the FirstMerit acquisition and subsequently were redeemed.2018 first quarter.
Shareholders’ Equity
We generate shareholders’ equity primarily through the retention of earnings, net of dividends and share repurchases. Other potential sources of shareholders’ equity include issuances of common and preferred stock. Our objective is to maintain capital at an amount commensurate with our risk profile and risk tolerance objectives, to meet both regulatory and market expectations, and to provide the flexibility needed for future growth and business opportunities.
Shareholders’ equity totaled $10.3$11.1 billion at December 31, 2016,2018, an increase of $3.7$0.3 billion when compared with December 31, 2015. In connection with the FirstMerit merger, during the 2016 third quarter, we issued $2.8 billion of common stock and $0.1 billion of preferred stock. During the 2016 first and second quarter, we issued $400 million and $200 million of preferred stock, respectively. Costs of $15 million related to the issuances are reported as a direct deduction from the face amount of the stock.2017.
On June 29, 2016, we announced that28, 2018, Huntington was notified by the Federal Reserve did not objectthat it had no objection to ourHuntington’s proposed capital actions included in ourHuntington’s capital plan submitted toin the Federal Reserve in April 2016 as part of the 2016 Comprehensive Capital Analysis and Review (“CCAR”).2018 CCAR. These actions included a 14%27% increase in the quarterly dividend per common share to $0.08,$0.14, starting in the fourththird quarter of 2016. Our2018, the repurchase of up to $1.068 billion of common stock over the next four quarters (July 1, 2018 through June 30, 2019), and maintaining dividends on the outstanding classes of preferred stock and trust preferred securities. Any capital plan also includedactions, including those contemplated in the issuanceabove announced actions, are subject to consideration and evaluation by Huntington’s Board of capital in connection withDirectors.
On July 17, 2018, the acquisitionBoard authorized the repurchase of FirstMerit Corporationup to $1.068 billion of common shares over the four quarters through the 2019 second quarter. During 2018, Huntington repurchased a total of 61.6 million shares at a weighted average share price of $15.23. Purchases of common shares under the authorization may include open market purchases, privately negotiated transactions, and continues the previously announced suspension of ouraccelerated repurchase programs.
On July 27, 2018, Huntington entered into an accelerated share repurchase program.
agreement for the repurchase of approximately $400 million of its outstanding common shares. The accelerated share repurchase program enabled Huntington to purchase 20.9 million shares immediately. The accelerated share repurchase program ended in September 2018, resulting in an additional 4.4 million shares being delivered to Huntington.
Dividends
We consider disciplined capital management as a key objective, with dividends representing one component. Our currentstrong capital ratios and expectations for continued earnings growth positions us to continue to actively explore additional capital management opportunities.
Share Repurchases
From time to time the board of directors authorizes the Company to repurchase shares of our common stock. Although we announce when the board of directors authorizes share repurchases, we typically do not give any public notice before we repurchase our shares. Future stock repurchases may be private or open-market repurchases, including block transactions, accelerated or delayed block transactions, forward transactions, and similar transactions. Various factors determine the amount and timing of our share repurchases, including our capital requirements, the number of shares we expect to issue for employee benefit plans and acquisitions, market conditions (including the trading price of our stock), and regulatory and legal considerations, including the FRB’sFederal Reserve’s response to our annual capital plan. Our capital plan continues the previously announced suspension of our share repurchase program. There were no61.6 million common shares repurchased during 2016.2018.
BUSINESS SEGMENT DISCUSSION
Overview
Our business segments are based on our internally-aligned segment leadership structure, which is how we monitor results and assess performance. We have fivefour major business segments: Consumer and Business Banking, Commercial Banking, Commercial Real Estate and Vehicle Finance, (CREVF),and Regional Banking and The Huntington Private Client Group (RBHPCG), and Home Lending. A. The Treasury / Other function includes technology and operations, other unallocated assets, liabilities, revenue, and expense.
Business segment results are determined based upon our management reporting system,practices, which assigns balance sheet and income statement items to each of the business segments. The process is designed around our organizational and management structure and, accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions.
On August 16, 2016, we completed our acquisition of FirstMerit Corporation and segment results were impacted by the mid-quarter acquisition.
Revenue Sharing
Revenue is recorded in the business segment responsible for the related product or service. Fee sharing is recorded to allocate portions of such revenue to other business segments involved in selling to, or providing service to customers. Results of operations for the business segments reflect these fee sharing allocations.
Expense Allocation
The management accounting process that develops the business segment reporting utilizes various estimates and allocation methodologies to measure the performance of the business segments. Expenses are allocated to business segments using a two-phase approach. The first phase consists of measuring and assigning unit costs (activity-based costs) to activities related to product origination and servicing. These activity-based costs are then extended, based on volumes, with the resulting amount allocated to business segments that own the related products. The second phase consists of the allocation of overhead costs to all fivefour business segments from Treasury / Other. We utilize a full-allocation methodology, where all Treasury / Other expenses, except reported Significant Items, and a small amount ofcertain other residual unallocated expenses, are allocated to the fivefour business segments.
Funds Transfer Pricing (FTP)
We use an active and centralized FTP methodology to attribute appropriate income to the business segments. The intent of the FTP methodology is to transfer interest rate risk from the business segments by providing matched duration funding of assets and liabilities. The result is to centralize the financial impact, management, and reporting of interest rate risk in the Treasury / Other function where it can be centrally monitored and managed. The Treasury / Other function charges (credits) an internal cost of funds for assets held in (or pays for funding provided by) each business segment. The FTP rate is based on prevailing market interest rates for comparable duration assets (or liabilities).
Net Income by Business Segment
Net income by business segment for the past three years is presented in the following table:
| | Table 35 - Net Income (Loss) by Business Segment | |
Table 27 - Net Income (Loss) by Business Segment | | Table 27 - Net Income (Loss) by Business Segment |
| | | | | | Year Ended December 31, |
(dollar amounts in thousands) | Year ended December 31, | |
| 2016 | | 2015 | | 2014 | |
(dollar amounts in millions) | | 2018 | | 2017 | | 2016 |
Consumer and Business Banking | $ | 358,146 |
| | $ | 236,298 |
| | $ | 172,199 |
| $ | 463 |
| | $ | 344 |
| | $ | 303 |
|
Commercial Banking | 197,375 |
| | 198,008 |
| | 152,653 |
| 553 |
| | 439 |
| | 316 |
|
CREVF | 203,029 |
| | 164,830 |
| | 196,377 |
| |
Vehicle Finance | | 165 |
| | 147 |
| | 126 |
|
RBHPCG | 68,504 |
| | 37,861 |
| | 22,010 |
| 106 |
| | 76 |
| | 68 |
|
Home Lending | 17,837 |
| | (6,561 | ) | | (19,727 | ) | |
Treasury / Other | (133,070 | ) | | 62,521 |
| | 108,880 |
| 106 |
| | 180 |
| | (101 | ) |
Net income | $ | 711,821 |
| | $ | 692,957 |
| | $ | 632,392 |
| $ | 1,393 |
| | $ | 1,186 |
| | $ | 712 |
|
Treasury / Other
The Treasury / Other function includes revenue and expense related to assets, liabilities, and equity not directly assigned or allocated to one of the fivefour business segments. Other assetsAssets include investment securities and bank owned life insurance. The financialNet interest income includes the impact associated with our FTP methodology, as described above, is also included.
The net loss reported by the Treasury / Other function reflected a combination of factors:
The impact ofadministering our investment securities portfolios, and the net impact of derivatives used to hedge interest rate sensitivity.
$282 million of FirstMerit acquisition-relatedsensitivity as well as the financial impact associated with our FTP methodology, as described above. Noninterest income includes miscellaneous fee income not allocated to other business segments, such as bank owned life insurance income and securities and trading asset gains or losses. Noninterest expense $42 million reduction to litigation reserves,includes certain corporate administrative, and other miscellaneous expenses not allocated to other business segments.
The provision for income taxes for the business segments is calculated at a statutory 21% tax rate and a 35% tax rate thoughfor periods prior to January 1, 2018, although our overall effective tax rate is lower. As a result, Treasury / Other reflects a credit for income taxes representing the difference between the lower actual effective tax rate and the statutory tax rate used at the time to allocate income taxes to the business segments.
| | Consumer and Business Banking | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Table 36 - Key Performance Indicators for Consumer and Business Banking | |
(dollar amounts in thousands unless otherwise noted) | | | | | | | | | | |
Table 28 - Key Performance Indicators for Consumer and Business Banking | | Table 28 - Key Performance Indicators for Consumer and Business Banking |
| Year ended December 31, | | Change from 2015 | | | Year Ended December 31, | | Change from 2017 | | |
| 2016 | | 2015 | | Amount | | Percent | | 2014 | |
(dollar amounts in millions unless otherwise noted) | | 2018 | | 2017 | | Amount | | Percent | | 2016 |
Net interest income | $ | 1,272,713 |
| | $ | 1,027,950 |
| | $ | 244,763 |
| | 24 | % | | $ | 912,992 |
| $ | 1,685 |
| | $ | 1,549 |
| | $ | 136 |
| | 9 | % | | $ | 1,224 |
|
Provision for credit losses | 71,945 |
| | 42,777 |
| | 29,168 |
| | 68 |
| | 75,529 |
| 141 |
| | 108 |
| | 33 |
| | 31 |
| | 68 |
|
Noninterest income | 558,811 |
| | 478,142 |
| | 80,669 |
| | 17 |
| | 409,746 |
| 738 |
| | 735 |
| | 3 |
| | — |
| | 649 |
|
Noninterest expense | 1,208,585 |
| | 1,099,779 |
| | 108,806 |
| | 10 |
| | 982,288 |
| 1,696 |
| | 1,647 |
| | 49 |
| | 3 |
| | 1,339 |
|
Provision for income taxes | 192,848 |
| | 127,238 |
| | 65,610 |
| | 52 |
| | 92,722 |
| 123 |
| | 185 |
| | (62 | ) | | (34 | ) | | 163 |
|
Net income | $ | 358,146 |
| | $ | 236,298 |
| | $ | 121,848 |
| | 52 | % | | $ | 172,199 |
| $ | 463 |
| | $ | 344 |
| | $ | 119 |
| | 35 | % | | $ | 303 |
|
Number of employees (average full-time equivalent) | 6,488 |
| | 5,776 |
| | 712 |
| | 12 | % | | 5,239 |
| 8,355 |
| | 8,616 |
| | (261 | ) | | (3 | )% | | 7,466 |
|
Total average assets (in millions) | $ | 17,963 |
| | $ | 15,571 |
| | $ | 2,392 |
| | 15 |
| | $ | 14,861 |
| |
Total average loans/leases (in millions) | 15,187 |
| | 13,581 |
| | 1,606 |
| | 12 |
| | 13,034 |
| |
Total average deposits (in millions) | 36,442 |
| | 30,200 |
| | 6,242 |
| | 21 |
| | 29,023 |
| |
Total average assets | | $ | 26,861 |
| | $ | 25,656 |
| | $ | 1,205 |
| | 5 |
| | $ | 21,317 |
|
Total average loans/leases | | 21,866 |
| | 20,744 |
| | 1,122 |
| | 5 |
| | 17,861 |
|
Total average deposits | | 47,827 |
| | 45,287 |
| | 2,540 |
| | 6 |
| | 36,652 |
|
Net interest margin | 3.58 | % | | 3.47 | % | | 0.11 | % | | 3 |
| | 3.19 | % | 3.62 | % | | 3.52 | % | | 0.10 | % | | 3 |
| | 3.42 | % |
NCOs | $ | 70,139 |
| | $ | 62,729 |
| | $ | 7,410 |
| | 12 |
| | $ | 90,628 |
| $ | 108 |
| | $ | 104 |
| | $ | 4 |
| | 4 |
| | $ | 74 |
|
NCOs as a % of average loans and leases | 0.46 | % | | 0.46 | % | | — | % | | — | % | | 0.70 | % | 0.50 | % | | 0.50 | % | | — | % | | — |
| | 0.42 | % |
2018 versus 2017
Consumer and Business Banking, including Home Lending, reported net income of $463 million in 2018, an increase of $119 million, or 35%, compared with net income of $344 million in 2017. Segment net interest income increased $136 million, or 9%, primarily due to an increase in total average loans and deposits. The provision for credit losses increased $33 million, or 31%, driven by an increase in the allowance, primarily related to the other consumer portfolio. Noninterest expense increased $49 million, or 3%, due to increased personnel costs and allocated expenses.
Home Lending, an operating unit of Consumer and Business Banking, reflects the result of the origination of mortgage loans less referral fees and net interest income for mortgage banking products distributed by the retail branch network and other business segments. Home Lending reported a loss of $11 million in 2018, compared with net income of $12 million in the prior year. While total revenues increased largely due to higher residential loan balances, this increase was offset by an increase in noninterest expenses of $28 million, or 20%, as a result of higher origination volume and higher indirect expense allocations. Income from lower origination spreads was offset by higher origination volume.
2017 versus 2016 vs. 2015
Consumer and Business Banking reported net income of $358$344 million in 2017, compared with net income of $303 million in 2016. This was anThe $41 million increase of $122included a $325 million, or 52%27%, increase in net interest income and an $86 million, or 13%, increase noninterest income, partially offset by a $308 million, or 23%, increase in noninterest expense, a $40 million, or 59%, increase in provision for credit losses, and a $22 million, or 13%, increase in provision for income taxes.
Home Lending reported net income of $12 million in 2017, a decrease of $12 million, compared to the year-ago period. TheWhile total revenues increased $5 million, or 3%, this increase was offset by an increase in noninterest expenses of $18 million, or 15%.
|
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Commercial Banking | | | | | | | | | |
| | | | | | | | | |
Table 29 - Key Performance Indicators for Commercial Banking |
| Year Ended December 31, | | Change from 2017 | | |
(dollar amounts in millions unless otherwise noted) | 2018 | | 2017 | | Amount | | Percent | | 2016 |
Net interest income | $ | 938 |
| | $ | 901 |
| | $ | 37 |
| | 4 | % | | $ | 717 |
|
Provision for credit losses | 38 |
| | 30 |
| | 8 |
| | 27 |
| | 79 |
|
Noninterest income | 313 |
| | 278 |
| | 35 |
| | 13 |
| | 245 |
|
Noninterest expense | 513 |
| | 474 |
| | 39 |
| | 8 |
| | 397 |
|
Provision for income taxes | 147 |
| | 236 |
| | (89 | ) | | (38 | ) | | 170 |
|
Net income | $ | 553 |
| | $ | 439 |
| | $ | 114 |
| | 26 | % | | $ | 316 |
|
Number of employees (average full-time equivalent) | 1,266 |
| | 1,227 |
| | 39 |
| | 3 | % | | 1,075 |
|
Total average assets | $ | 33,178 |
| | $ | 31,322 |
| | $ | 1,856 |
| | 6 |
| | $ | 26,894 |
|
Total average loans/leases | 26,301 |
| | 25,259 |
| | 1,042 |
| | 4 |
| | 21,278 |
|
Total average deposits | 22,216 |
| | 21,175 |
| | 1,041 |
| | 5 |
| | 17,349 |
|
Net interest margin | 3.26 | % | | 3.34 | % | | (0.08 | )% | | (2 | ) | | 3.11 | % |
NCOs | $ | (7 | ) | | $ | 1 |
| | $ | (8 | ) | | (800 | ) | | $ | 2 |
|
NCOs as a % of average loans and leases | (0.03 | )% | | — | % | | (0.03 | )% | | (100 | ) | | 0.01 | % |
2018 versus 2017
Commercial Banking reported net income reflectedof $553 million in 2018, an increase of $114 million, or 26%, compared with net income of $439 million in 2017. Segment net interest income increased $37 million, or 4%, primarily due to a combination4% growth average loans and leases and a 5% growth in average deposits. Net interest margin decreased eight basis points, primarily driven by a decline in loan and lease spreads, partially offset by an improvement in deposit spreads. The provision for credit losses increased $8 million, or 27%, primarily due to growth in the portfolio, partially offset by a reduction in NCOs. Noninterest income increased $35 million, or 13%, largely driven by an increase in capital markets related revenues and loan commitment and other fees. Noninterest expense increased $39 million, or 8%, primarily due to an increase in personnel expense and allocated overhead, partially offset by a decrease in operating lease expense.
2017 versus 2016
Commercial Banking reported net income of factors described below.
$439 million in 2017, compared with net income of $316 million in 2016. The $123 million increase included a $184 million, or 26%, increase in net interest income, from the year-ago period reflected:
$6.2 billion,a $33 million, or 21%13% increase in noninterest income, partially offset by a $77 million, or 19%, increase in total average depositsnoninterest expense and a 10$66 million, or 39%, increase in provision for income taxes.
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Vehicle Finance | | | | | | | | | |
| | | | | | | | | |
Table 30 - Key Performance Indicators for Vehicle Finance |
| Year Ended December 31, | | Change from 2017 | | |
(dollar amounts in millions unless otherwise noted) | 2018 | | 2017 | | Amount | | Percent | | 2016 |
Net interest income | $ | 403 |
| | $ | 424 |
| | $ | (21 | ) | | (5 | )% | | $ | 344 |
|
Provision (reduction in allowance) for credit losses | 55 |
| | 63 |
| | (8 | ) | | (13 | ) | | 47 |
|
Noninterest income | 10 |
| | 14 |
| | (4 | ) | | (29 | ) | | 15 |
|
Noninterest expense | 149 |
| | 149 |
| | — |
| | — |
| | 118 |
|
Provision for income taxes | 44 |
| | 79 |
| | (35 | ) | | (44 | ) | | 68 |
|
Net income | $ | 165 |
| | $ | 147 |
| | $ | 18 |
| | 12 | % | | $ | 126 |
|
Number of employees (average full-time equivalent) | 264 |
| | 253 |
| | 11 |
| | 4 | % | | 211 |
|
Total average assets | $ | 18,502 |
| | $ | 16,966 |
| | $ | 1,536 |
| | 9 |
| | $ | 14,369 |
|
Total average loans/leases | 18,482 |
| | 16,936 |
| | 1,546 |
| | 9 |
| | 14,089 |
|
Total average deposits | 337 |
| | 334 |
| | 3 |
| | 1 |
| | 288 |
|
Net interest margin | 2.18 | % | | 2.51 | % | | (0.33 | )% | | (13 | ) | | 2.40 | % |
NCOs | $ | 43 |
| | $ | 52 |
| | $ | (9 | ) | | (17 | ) | | $ | 34 |
|
NCOs as a % of average loans and leases | 0.23 | % | | 0.31 | % | | (0.08 | )% | | (26 | ) | | 0.24 | % |
2018 versus 2017
Vehicle Finance reported net income of $165 million in 2018, an increase of $18 million, or 12%, compared with net income of $147 million in 2017. Results primarily reflect a lower provision for income taxes, as well as, a lower provision for credit losses primarily resulting from a decrease in NCOs compared to the prior year. Segment net interest income decreased $21 million or 5%, due to the 33 basis point increasereduction in depositthe net interest margin, which reflects the continued run off of the higher yielding acquired portfolio and, to a lesser degree, lower spreads on new loan production as a result of anthe rising rate environment during most of 2018. These decreases were partially offset by a 9% increase in the FTP rates assigned to deposits.
$1.6 billion or 12%, increase in total average loans combined with an 18 basis point increase in loan spreads, as a result of a reduction in the FTP rates assigned to loans and improved effective rates.
The increase in the provision for credit losses from the year-ago period reflected:
The migration of the acquired portfolio to the originated portfolio, which required a reserve build, portfolio growth, and a $7 million, or 12%, increase in NCOs.
The increase in total average loans and leases from the year-ago period reflected:
$1.2 billion, or 13%, increase in consumer loans,balances. Noninterest income was down slightly primarily reflecting lower servicing income due to the acquisition and core growth in home equity linesrun off of credit, credit card, and residential mortgages.
$0.4 billion, or 10%, increase in commercialsecuritized loans, primarily due to the impact of the acquisition and core portfolio growth.
The increase in total average deposits from the year-ago period reflected:
$6.2 billion, or 21%, increase due to the acquisition and core household growth.
The increase in noninterest income from the year-ago period reflected:
$36 million, or 16%, increase in service charges on deposits accounts cards, primarily due to new customer acquisition.
$35 million, or 29%, increase in cards and payment processing income, primarily due to higher debit card-related transaction volumes and an increase in the number of households.
$12 million, or 51%, increase in mortgage banking income.
The increase inwhile noninterest expense from the year-ago period reflected:
$56 million, or 16%, increase in personnel costs, primarily due to the FirstMerit acquisition.
$22 million, or 4%, increase in other noninterest expense, primarily reflecting an increase in allocated overhead expenses.
$14 million, or 18%, increase in occupancy expense, primarily due to the FirstMerit acquisition.was unchanged.
2015 vs. 20142017 versus 2016
Consumer and Business BankingVehicle Finance reported net income of $236$147 million in 2015,2017, compared with a net income of $172$126 million in 2014.2016. The $64$21 million increase included a $33an $80 million, or 43%, decrease in provision for credit losses, a $68 million, or 17%, increase noninterest income, and a $115 million, or 13%23%, increase in net interest income, partially offset by a $35 million, or 37%, increase in provision for income taxes and a $117 million, or 12%, increase in noninterest expense.
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Commercial Banking | | | | | | | | | |
| | | | | | | | | |
Table 37 - Key Performance Indicators for Commercial Banking |
(dollar amounts in thousands unless otherwise noted) | | | | | | | | | |
| Year ended December 31, | | Change from 2015 | | |
| 2016 | | 2015 | | Amount | | Percent | | 2014 |
Net interest income | $ | 512,995 |
| | $ | 379,409 |
| | $ | 133,586 |
| | 35 | % | | $ | 306,434 |
|
Provision for credit losses | 98,816 |
| | 49,534 |
| | 49,282 |
| | 99 |
| | 31,521 |
|
Noninterest income | 275,258 |
| | 258,778 |
| | 16,480 |
| | 6 |
| | 209,238 |
|
Noninterest expense | 385,783 |
| | 284,026 |
| | 101,757 |
| | 36 |
| | 249,300 |
|
Provision for income taxes | 106,279 |
| | 106,619 |
| | (340 | ) | | — |
| | 82,198 |
|
Net income | $ | 197,375 |
| | $ | 198,008 |
| | $ | (633 | ) | | — | % | | $ | 152,653 |
|
Number of employees (average full-time equivalent) | 1,307 |
| | 1,208 |
| | 99 |
| | 8 | % | | 1,026 |
|
Total average assets (in millions) | $ | 20,373 |
| | $ | 16,123 |
| | $ | 4,250 |
| | 26 |
| | $ | 14,145 |
|
Total average loans/leases (in millions) | 15,936 |
| | 12,844 |
| | 3,092 |
| | 24 |
| | 11,901 |
|
Total average deposits (in millions) | 12,964 |
| | 11,410 |
| | 1,554 |
| | 14 |
| | 10,207 |
|
Net interest margin | 2.95 | % | | 2.77 | % | | 0.18 | % | | 6 |
| | 2.53 | % |
NCOs | $ | 27,237 |
| | $ | 22,226 |
| | $ | 5,011 |
| | 23 |
| | $ | 7,852 |
|
NCOs as a % of average loans and leases | 0.17 | % | | 0.17 | % | | — | % | | — | % | | 0.07 | % |
2016 vs. 2015
Commercial Banking reported net income of $197 million in 2016. This was a decrease of $1 million, or less than one percent, compared to the year-ago period. The decrease in net income reflected a combination of factors described below.
The increase in net interest income from the year-ago period reflected:
$3.1 billion, or 24%, increase in average loans/leases.
$0.7 billion, or 41%, increase in average available-for-sale securities, primarily related to direct purchase municipal securities.
$1.6 billion, or 14%, increase in average total deposits.
18 basis point increase in the net interest margin due to a 13 basis point increase in the mix and yield on earning assets, of which 5 basis point increase in the net interest margin attributed to the mix in deposits stemming from a growth of $1.0 billion, or 18%, in average non-interest bearing demand deposits.
The increase in the provision for credit losses from the year-ago period reflected:
The migration of the acquired portfolio to the originated portfolio, which required a reserve build, portfolio growth, and a$5 million, or 23%, increase in NCOs.
The increase in total average assets from the year-ago period reflected:
The third quarter 2016 acquisition of FirstMerit.
$0.7 billion, or 19%, increase in the Equipment Finance loan and bond financing portfolio, which primarily reflected our focus on developing vertical strategies in Huntington Public Capital, business aircraft, rail industry, lender finance, and syndications, as well as the 2015 first quarter acquisition of Huntington Technology Finance.
$0.4 billion, or 15%, increase in the Corporate Banking loan portfolio due to establishing relationships with targeted prospects within our footprint.
The increase in total average deposits from the year-ago period reflected:
$1.6 billion, or 15%, increase in core deposits, which primarily reflected a $1.0 billion, or 18%, increase in noninterest-bearing demand deposits. Middle market accounts contributed $1.3 billion of the overall balance growth, while large corporate accounts declined $0.3 billion.
The increase in noninterest income from the year-ago period reflected:
$11 million, or 31%, increase in commitment and other loan related fees, such as syndication fees.
$10 million, or 17%, increase in service charges on deposit accounts and other treasury management related revenue, primarily due to growth in commercial card revenue, merchant services revenue, and cash management services.
$5 million, or 12%, increase in capital market fees, primarily due to growth in customer interest rate derivative contracts, foreign exchange, and commodities, partially offset by a decrease in underwriting fees.
Partially offset by:
$3 million, or 7%, decrease in equipment and technology finance related fee income, primarily reflecting reduced gains on the sale of loans/leases and income on terminated leases.
$3 million, or 5%, decrease in Insurance related fee income, primarily reflecting a decrease in property & casualty insurance, as well as an increase in fee sharing to other business segments.
$2 million, or 15%, decrease in International fee income, primarily reflecting a decrease in bankers' acceptances.
$1 million, or 6%, decrease in all other income, primarily reflecting a decrease in fee sharing from other business segments.
The increase in noninterest expense from the year-ago period reflected:
$58 million, or 189%, increase in allocated overhead expense.
$31 million, or 18%, increase in personnel expense, primarily reflecting the 2016 third quarter acquisition of FirstMerit. The increase also reflects additional cost from annual merit salary adjustments and incentives.
$5 million, or 63%, increase in FDIC insurance premiums, primarily reflecting the 2016 third quarter acquisition of FirstMerit.
$7 million, or 10%, increase in all other expense, primarily reflecting the 2016 third quarter acquisition of FirstMerit.
2015 vs. 2014
Commercial Banking reported net income of $198 million in 2015, compared with net income of $153 million in 2014. The $45 million increase included a $73 million, or 24%, increase in net interest income, a $50 million, or 24%, increase in noninterest income, and a $35 million, or 14%, increase in noninterest expense partially offset by $24 million, or 30%, increase in provision for income taxes and a $18 million, or 57%, increase in provision for credit losses.
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Commercial Real Estate and Vehicle Finance | | | | | | | | | |
| | | | | | | | | |
Table 38 - Commercial Real Estate and Vehicle Finance |
(dollar amounts in thousands unless otherwise noted) | | | | | | | | | |
| Year ended December 31, | | Change from 2015 | | |
| 2016 | | 2015 | | Amount | | Percent | | 2014 |
Net interest income | $ | 468,969 |
| | $ | 381,231 |
| | $ | 87,738 |
| | 23 | % | | $ | 379,363 |
|
Provision (reduction in allowance) for credit losses | 26,922 |
| | 4,890 |
| | 22,032 |
| | 451 |
| | (52,843 | ) |
Noninterest income | 40,582 |
| | 29,254 |
| | 11,328 |
| | 39 |
| | 26,628 |
|
Noninterest expense | 170,276 |
| | 152,010 |
| | 18,266 |
| | 12 |
| | 156,715 |
|
Provision for income taxes | 109,324 |
| | 88,755 |
| | 20,569 |
| | 23 |
| | 105,742 |
|
Net income | $ | 203,029 |
| | $ | 164,830 |
| | $ | 38,199 |
| | 23 | % | | $ | 196,377 |
|
Number of employees (average full-time equivalent) | 346 |
| | 302 |
| | 44 |
| | 15 | % | | 271 |
|
Total average assets (in millions) | $ | 20,753 |
| | $ | 16,894 |
| | $ | 3,859 |
| | 23 |
| | $ | 14,591 |
|
Total average loans/leases (in millions) | 19,386 |
| | 15,812 |
| | 3,574 |
| | 23 |
| | 14,224 |
|
Total average deposits (in millions) | 1,719 |
| | 1,496 |
| | 223 |
| | 15 |
| | 1,204 |
|
Net interest margin | 2.33 | % | | 2.34 | % | | (0.01 | )% | | — |
| | 2.61 | % |
NCOs | $ | 9,460 |
| | $ | (8,027 | ) | | $ | 17,487 |
| | N.R. |
| | $ | 2,100 |
|
NCOs as a % of average loans and leases | 0.05 | % | | (0.05 | )% | | 0.10 | % | | N.R. |
| | 0.01 | % |
N.R. - Not relevant.
2016 vs. 2015
CREVF reported net income of $203 million in 2016. This was an increase of $38 million, or 23%, compared to the year-ago period. The increase in net income reflected a combination of factors described below.
The increase in net interest income from the year-ago period reflected:
$1.8 billion, or 20%, increase in average automobile loans, primarily due to continued strong origination volume, which has exceeded $1.0 billion for each of the last 8 quarters. This increase also reflected $0.6 billion of indirect automobile loans acquired from FirstMerit and the $0.8 billion automobile securitization and sale completed in 2015 second quarter.
$0.7 billion indirect recreational loans acquired from FirstMerit.
$1.1 billion, or 16%, increase in commercial loans primarily due to an increase in automobile floor plan balances and commercial real estate loans acquired from FirstMerit.
Partially offset by:
A 1 basis point decrease in the net interest margin as the impact of competitive pricing pressures was mostly offset by higher spreads on the acquired FirstMerit portfolios.
The increase in the provision for credit losses from the year-ago period reflected:
$17 million increase in NCOs incurred with the Mezzanine portfolio.
The increase in noninterest income from the year-ago period reflected:
$5$31 million, or 26%, increase in other income primarily related to fee sharing income from derivative product sales.
$2 million, 46%, increase in gains on sales of loans related to 2016 fourth quarter balance sheet optimization strategies.
$3 million increase in securities gains.
The increase in noninterest expense, from the year-ago period reflected:
$7a $16 million, or 21%, increase in personnel costs due to a higher number of employees, resulting from higher production and business development activities as well as additional colleagues added from FirstMerit.
$6 million, or 6%, increase in other noninterest expense, primarily due to an increase in allocated expenses.
$5 million increase in allocated FDIC insurance expense.
2015 vs. 2014
CREVF reported net income of $165 million in 2015, compared with a net income of $196 million in 2014. The $31 million decrease included a $58 million, or 109%34%, increase in the provision for credit losses $3and an $11 million, or 10%16%, increase in the provision for income taxes.
|
| | | | | | | | | | | | | | | | | | |
Regional Banking and The Huntington Private Client Group | | | | | | |
| | | | | | | | | |
Table 31 - Key Performance Indicators for Regional Banking and The Huntington Private Client Group |
| Year Ended December 31, | | Change from 2017 | | |
(dollar amounts in millions unless otherwise noted) | 2018 | | 2017 | | Amount | | Percent | | 2016 |
Net interest income | $ | 192 |
| | $ | 172 |
| | $ | 20 |
| | 12 | % | | $ | 153 |
|
Provision (reduction in allowance) for credit losses | 1 |
| | — |
| | 1 |
| | 100 |
| | (3 | ) |
Noninterest income | 193 |
| | 188 |
| | 5 |
| | 3 |
| | 177 |
|
Noninterest expense | 250 |
| | 243 |
| | 7 |
| | 3 |
| | 229 |
|
Provision for income taxes | 28 |
| | 41 |
| | (13 | ) | | (32 | ) | | 36 |
|
Net income | $ | 106 |
| | $ | 76 |
| | $ | 30 |
| | 39 | % | | $ | 68 |
|
Number of employees (average full-time equivalent) | 1,030 |
| | 1,023 |
| | 7 |
| | 1 | % | | 977 |
|
Total average assets | $ | 6,149 |
| | $ | 5,543 |
| | $ | 606 |
| | 11 |
| | $ | 4,615 |
|
Total average loans/leases | 5,494 |
| | 4,857 |
| | 637 |
| | 13 |
| | 4,120 |
|
Total average deposits | 5,862 |
| | 6,028 |
| | (166 | ) | | (3 | ) | | 5,342 |
|
Net interest margin | 3.33 | % | | 2.92 | % | | 0.41 | % | | 14 |
| | 2.90 | % |
NCOs | $ | — |
| | $ | 2 |
| | $ | (2 | ) | | (100 | ) | | $ | (2 | ) |
NCOs as a % of average loans and leases | — | % | | 0.04 | % | | (0.04 | )% | | (100 | ) | | (0.05 | )% |
Total assets under management (in billions)—eop | $ | 15.3 |
| | $ | 18.3 |
| | $ | (3.0 | ) | | (16 | ) | | $ | 16.9 |
|
Total trust assets (in billions)—eop | 105.1 |
| | 110.1 |
| | (5.0 | ) | | (5 | ) | | 94.7 |
|
eop—End of Period.
2018 versus 2017
RBHPCG reported net income of $106 million in 2018, an increase of $30 million, or 39%, compared with a net income of $76 million in 2017. Net interest income increased $20 million, or 12%, due to an increase in average total loans combined with a 41 basis point increase in net interest margin. The increase in average total loans was due to growth in commercial and portfolio mortgage loans. Noninterest income increased $5 million, or 3%, primarily reflecting increased trust and investment management revenue as a result of increased sales production and year over year market growth. Noninterest expense increased $7 million, or 3%, mainly as a result of increased personnel expenses related to the hiring of new sales producers.
2017 versus 2016
RBHPCG reported net income of $76 million in 2017, compared with a net income of $68 million in 2016. The $8 million increase included a $19 million, or 12%, increase in net interest income and an $11 million, or 6%, increase in noninterest income, partially offset by a $2$14 million, or less than one percent, increase in net interest income and a $17 million, or 16%, decrease in provision for income taxes.
|
| | | | | | | | | | | | | | | | | | |
Regional Banking and The Huntington Private Client Group | | | | | | |
| | | | | | | | | |
Table 39 - Key Performance Indicators for Regional Banking and The Huntington Private Client Group |
(dollar amounts in thousands unless otherwise noted) | | | | | | | | | |
| Year ended December 31, | | Change from 2015 | | |
| 2016 | | 2015 | | Amount | | Percent | | 2014 |
Net interest income | $ | 177,431 |
| | $ | 139,188 |
| | $ | 38,243 |
| | 27 | % | | $ | 101,839 |
|
Provision (reduction in allowance) for credit losses | (3,467 | ) | | 87 |
| | (3,554 | ) | | N.R. |
| | 4,893 |
|
Noninterest income | 120,687 |
| | 114,814 |
| | 5,873 |
| | 5 |
| | 173,550 |
|
Noninterest expense | 196,194 |
| | 195,667 |
| | 527 |
| | — |
| | 236,634 |
|
Provision for income taxes | 36,887 |
| | 20,387 |
| | 16,500 |
| | 81 |
| | 11,852 |
|
Net income | $ | 68,504 |
| | $ | 37,861 |
| | $ | 30,643 |
| | 81 | % | | $ | 22,010 |
|
Number of employees (average full-time equivalent) | 630 |
| | 651 |
| | (21 | ) | | (3 | )% | | 1,022 |
|
Total average assets (in millions) | $ | 4,805 |
| | $ | 4,213 |
| | $ | 592 |
| | 14 |
| | $ | 3,812 |
|
Total average loans/leases (in millions) | 4,187 |
| | 3,785 |
| | 402 |
| | 11 |
| | 2,894 |
|
Total average deposits (in millions) | 8,076 |
| | 7,130 |
| | 946 |
| | 13 |
| | 6,029 |
|
Net interest margin | 2.26 | % | | 1.97 | % | | 0.29 | % | | 15 |
| | 1.75 | % |
NCOs | $ | (2,153 | ) | | $ | 4,808 |
| | $ | (6,961 | ) | | N.R. |
| | $ | 8,143 |
|
NCOs as a % of average loans and leases | (0.05 | )% | | 0.13 | % | | (0.18 | )% | | N.R. |
| | 0.28 | % |
Total assets under management (in billions)—eop | $ | 16.9 |
| | $ | 16.3 |
| | $ | 0.6 |
| | 4 |
| | $ | 14.8 |
|
Total trust assets (in billions)—eop | 94.7 |
| | 84.1 |
| | 10.6 |
| | 13 |
| | 81.5 |
|
N.R. - Not relevant.
eop—End of Period.
2016 vs. 2015
RBHPCG reported net income of $69 million in 2016. This was an increase of $31 million, or 81%, when compared to the year-ago period. The increase in net income reflected a combination of factors described below.
The increase in net interest income from the year-ago period reflected:
$0.9 billion, or 13%, increase in average total deposits combined with a $0.4 billion, or 11% increase in average total loans primarily due to the FirstMerit acquisition. In addition, the deposit balance increase reflected strong growth in the new Private Client Account interest checking product as well as commercial deposit balances, while the loan balance increase reflected strong growth in both commercial loans and portfolio mortgage loans.
The decrease in the provision for credit losses reflected from the year-ago period reflected:
$7 million decrease in NCOs incurred during the year.
The increase in noninterest income from the year-ago period reflected:
$4 million, or 4%, increase in trust services, due to increased revenue from the FirstMerit acquisition, partially offset by the reduction in revenue resulting from the sale of HASI and HAA in the 2015 fourth quarter.
The6% increase in noninterest expense from the year-ago period reflected:
$3 million, or 66%, increase in amortization of intangible assets, primarily due to the FirstMerit acquisition.
Partially offset by:
$2 million, or 47%, decrease in professional services related from the 2015 fourth quarter sale of HASI and HAA.
2015 vs. 2014
RBHPCG reported net income of $38 million in 2015, compared with a net income of $22 million in 2014. The $16 million increase included a $59 million, or 34%, decrease in noninterest income, a $5 million, decrease in the provision for credit losses, a $41 million, or 17% decrease in noninterest expense, partially offset by a $37 million, or 37%14%, increase in net interest income and a $9 million, or 72% increase in provision for income taxes.
|
| | | | | | | | | | | | | | | | | | |
Home Lending | | | | | | | | | |
| | | | | | | | | |
Table 40 - Key Performance Indicators for Home Lending |
(dollar amounts in thousands unless otherwise noted) | | | | | | | | | |
| Year ended December 31, | | Change from 2015 | | |
| 2016 | | 2015 | | Amount | | Percent | | 2014 |
Net interest income | $ | 58,354 |
| | $ | 50,404 |
| | $ | 7,950 |
| | 16 | % | | $ | 58,015 |
|
Provision (reduction in allowance) for credit losses | (3,412 | ) | | 2,671 |
| | (6,083 | ) | | (228 | ) | | 21,889 |
|
Noninterest income | 90,358 |
| | 87,021 |
| | 3,337 |
| | 4 |
| | 69,899 |
|
Noninterest expense | 124,683 |
| | 144,848 |
| | (20,165 | ) | | (14 | ) | | 136,374 |
|
Provision for income taxes | 9,604 |
| | (3,533 | ) | | 13,137 |
| | (372 | ) | | (10,622 | ) |
Net income (loss) | $ | 17,837 |
| | $ | (6,561 | ) | | $ | 24,398 |
| | (372 | )% | | $ | (19,727 | ) |
Number of employees (average full-time equivalent) | 1,071 |
| | 952 |
| | 119 |
| | 13 | % | | 971 |
|
Total average assets (in millions) | $ | 3,303 |
| | $ | 3,145 |
| | $ | 158 |
| | 5 |
| | $ | 3,810 |
|
Total average loans/leases (in millions) | 2,649 |
| | 2,551 |
| | 98 |
| | 4 |
| | 3,298 |
|
Total average deposits (in millions) | 438 |
| | 350 |
| | 88 |
| | 25 |
| | 292 |
|
Net interest margin | 1.87 | % | | 1.71 | % | | 0.16 | % | | 9 |
| | 1.61 | % |
NCOs | $ | 4,213 |
| | $ | 5,758 |
| | $ | (1,545 | ) | | (27 | ) | | $ | 15,900 |
|
NCOs as a % of average loans and leases | 0.16 | % | | 0.23 | % | | (0.07 | )% | | (30 | ) | | 0.48 | % |
Mortgage banking origination volume (in millions) | $ | 5,822 |
| | $ | 4,705 |
| | $ | 1,117 |
| | 24 |
| | $ | 3,558 |
|
2016 vs. 2015
Home Lending reported a net income of $18 million in 2016. This was an improvement of $24 million, when compared to the year-ago period. The increase in net income reflected a combination of factors described below.
The increase in net interest income from the year-ago period reflected:
16 basis point increase in the net interest margin, primarily due to an increase in loan spreads on consumer loans driven by lower funding costs and a $98 million increase in total loan balances.
The decrease in provision for credit losses from the year-ago period reflected:
$2 million, or 27%, decrease in NCOs and continued improvement in credit performance during the year.
The increase in noninterest income from the year-ago period reflected:
$2 million, or 2%, increase in mortgage banking income, primarily due to production revenue driven by higher origination volume and the impact of the net MSR hedge results, partially offset by higher fee sharing sent to other business segments.
The decrease in noninterest expense from the year-ago period reflected:
$38 million, or 177%, decrease in other noninterest expense, primarily related to lower allocated expenses.
Partially offset by:
$14 million, or 15%, increase in personnel costs due to incentive expense related to higher origination volume.
2015 vs. 2014
Home Lending reported a net loss of $7 million in 2015, compared to net loss of $20 million in 2014. The $13 million improvement included a $17 million, or 24%, increase in noninterest income and a $19 million, or 88%, decrease in reduction in allowance for credit losses partially offset by a $7 million increase in provision for income taxes, $8 million, or 13%, decrease in net interest income, and an $8 million, or 6%, increase in noninterest expense.
RESULTS FOR THE FOURTH QUARTER
Earnings Discussion
In the 20162018 fourth quarter, we reported net income of $239$334 million, an increasea decrease of $61$98 million, or 34%23%, from the 20152017 fourth quarter. EarningsDiluted earnings per common share for the 20162018 fourth quarter were $0.20,$0.29, a decrease of $0.01$0.08 from the year-ago quarter.
|
| | | | | | | |
Table 41 - Significant Items Influencing Earnings Performance Comparison |
(dollar amounts in millions, except per share amounts) | | | |
| | | |
Three Months Ended: | Amount | | EPS (1) |
December 31, 2016—Net income | $ | 239 |
| | |
Earnings per share, after-tax | | | $ | 0.20 |
|
| | | |
Mergers and acquisitions | $ | (96 | ) | | |
Tax impact | 33 |
| | |
Mergers and acquisitions, after-tax | $ | (63 | ) | | $ | (0.06 | ) |
| | | |
Litigation reserves | $ | 42 |
| | |
Tax impact | (15 | ) | | |
Litigation reserves, after-tax | $ | 27 |
| | $ | 0.02 |
|
| | | |
| Amount | | EPS (1) |
December 31, 2015—Net income | $ | 178 |
| | |
Earnings per share, after-tax | | | $ | 0.21 |
|
| | | |
Franchise repositioning related expense | $ | (8 | ) | | |
Tax impact | 3 |
| | |
Franchise repositioning related expense, after-tax | $ | (5 | ) | | $ | (0.01 | ) |
|
| | | | | | | |
Table 32 - Significant Items Influencing Earnings Performance Comparison |
(dollar amounts in millions, except per share data) | | | |
| | | |
Three Months Ended: | Amount | | EPS (1) |
December 31, 2018—Net income | $ | 334 |
| | |
Earnings per share, after-tax | | | $ | 0.29 |
|
| | | |
| Amount | | EPS (1) |
December 31, 2017—Net income | $ | 432 |
| | |
Earnings per share, after-tax | | | $ | 0.37 |
|
| | | |
Federal tax reform-related tax benefit | $ | — |
| | |
Tax impact | 123 |
| | |
Federal tax reform-related tax benefit, after-tax | $ | 123 |
| | $ | 0.11 |
|
| |
(1) | Based on average outstanding diluted common shares. |
Net Interest Income / Average Balance Sheet
FTE net interest income for the 20162018 fourth quarter increased $242$59 million, or 48%8%, from the 20152017 fourth quarter. This reflected the benefit from the $26.5$3.8 billion, or 41%4%, increase in average earning assets partially coupled with an 11 basis point increase in the FTE net interest margin to 3.41%. Average earning asset yields increased 51 basis points year-over-year, driven by a 1653 basis point improvement in loan yields. Average interest-bearing liability costs increased 50 basis points, although interest-bearing deposit costs only increased 47 basis points. The cost of short-term borrowings and long-term debt increased 134 basis points and 109 basis points, respectively. The benefit from noninterest-bearing funds increased 10 basis points versus the FTE NIM to 3.25%. Average earning asset growth included a $16.6 billion, or 33%, increase in average loansyear-ago quarter. Embedded within these yields and leases and a $7.9 billion, or 54%, increase in average securities. The NIM expansion reflected a 23 basis point increase related to the mix and yield of earning assets, partially offset by a 7 basis point increase in funding costs.costs, FTE net interest income during the 20162018 fourth quarter included $42$17 million, or approximately 18seven basis points, of purchase accounting impact.
impact compared to $24 million, or approximately 10 basis points, in the year-ago quarter. The 2018 fourth quarter included an approximately two basis point impact from higher commercial interest recoveries. On a year-over-year basis, NIM was negatively impacted by two basis points as a result of the impact of federal tax reform on the FTE adjustment.
| | Table 42 - Average Earning Assets - 2016 Fourth Quarter vs. 2015 Fourth Quarter | |
(dollar amounts in thousands) | | | | | | | | |
Table 33 - Average Earning Assets - 2018 Fourth Quarter vs. 2017 Fourth Quarter | | Table 33 - Average Earning Assets - 2018 Fourth Quarter vs. 2017 Fourth Quarter |
| Fourth Quarter | | Change | Fourth Quarter | | Change |
| 2016 | | 2015 | | Amount | | Percent | |
(dollar amounts in millions) | | 2018 | | 2017 | | Amount | | Percent |
Loans/Leases | | | | | | | | | | | | | | |
Commercial and industrial | $ | 27,727 |
| | $ | 20,186 |
| | $ | 7,541 |
| | 37 | % | $ | 29,557 |
| | $ | 27,445 |
| | $ | 2,112 |
| | 8 | % |
Commercial real estate | 7,218 |
| | 5,266 |
| | 1,952 |
| | 37 |
| 6,944 |
| | 7,196 |
| | (252 | ) | | (4 | ) |
Total commercial | 34,945 |
| | 25,452 |
| | 9,493 |
| | 37 |
| 36,501 |
| | 34,641 |
| | 1,860 |
| | 5 |
|
Automobile | 10,866 |
| | 9,286 |
| | 1,580 |
| | 17 |
| 12,423 |
| | 11,963 |
| | 460 |
| | 4 |
|
Home equity | 10,101 |
| | 8,463 |
| | 1,638 |
| | 19 |
| 9,817 |
| | 10,027 |
| | (210 | ) | | (2 | ) |
Residential mortgage | 7,690 |
| | 6,079 |
| | 1,611 |
| | 27 |
| 10,574 |
| | 8,809 |
| | 1,765 |
| | 20 |
|
RV and marine finance | 1,844 |
| | — |
| | 1,844 |
| | — |
| 3,216 |
| | 2,405 |
| | 811 |
| | 34 |
|
Other consumer | 959 |
| | 547 |
| | 412 |
| | 75 |
| 1,291 |
| | 1,095 |
| | 196 |
| | 18 |
|
Total consumer | 31,460 |
| | 24,375 |
| | 7,085 |
| | 29 |
| 37,321 |
| | 34,299 |
| | 3,022 |
| | 9 |
|
Total loans/leases | 66,405 |
| | 49,827 |
| | 16,578 |
| | 33 |
| 73,822 |
| | 68,940 |
| | 4,882 |
| | 7 |
|
Total securities | 22,441 |
| | 14,543 |
| | 7,898 |
| | 54 |
| 22,656 |
| | 24,309 |
| | (1,653 | ) | | (7 | ) |
Loans held-for-sale and other earning assets | 2,617 |
| | 591 |
| | 2,026 |
| | 343 |
| 1,274 |
| | 688 |
| | 586 |
| | 85 |
|
Total earning assets | $ | 91,463 |
| | $ | 64,961 |
| | $ | 26,502 |
| | 41 | % | $ | 97,752 |
| | $ | 93,937 |
| | $ | 3,815 |
| | 4 | % |
Average earning assets for the 20162018 fourth quarter increased $26.5$3.8 billion, or 41%, from the year-ago quarter. The increase was driven by:
$7.9 billion, or 54%, increase in average securities, primarily reflecting the FirstMerit acquisition, as well as the reinvestment in cash flows and additional investment in LCR Level 1 qualifying securities. The 2016 fourth quarter average balance included $2.9 billion of direct purchase municipal instruments in our Commercial Banking segment, up from $2.0 billion in the year-ago quarter.
$7.5 billion, or 37%, increase in average C&I loans and leases, primarily reflecting the impact of the FirstMerit acquisition, the $0.6 billion increase in automobile dealer floorplan loans, and the $0.4 billion increase in corporate banking.
$2.0 billion, or 37%, increase in commercial real estate (CRE) loans, primarily reflecting the FirstMerit acquisition.
$1.8 billion increase in average RV and marine finance loans, a new product offering for us as a result of the FirstMerit acquisition.
$1.6 billion, or 17%, increase in average automobile loans, primarily reflecting the addition of the FirstMerit portfolio. The increase also reflects continued strength in new and used automobile originations, while maintaining our underwriting consistency and discipline, partially offset by the impact of the $1.5 billion auto loan securitization.
$1.6 billion, or 19%, increase in average home equity loans and lines of credit, primarily reflecting the FirstMerit acquisition.
$1.6 billion, or 27%, increase in average residential mortgage loans, reflecting increased demand for residential mortgage loans across our footprint and the addition of the FirstMerit portfolio.
|
| | | | | | | | | | | | | | |
Table 43 - Average Interest-Bearing Liabilities - 2016 Fourth Quarter vs. 2015 Fourth Quarter |
(dollar amounts in millions) | | | | | | | |
| Fourth Quarter | | Change |
| 2016 | | 2015 | | Amount | | Percent |
Deposits | | | | | | | |
Demand deposits: noninterest-bearing | $ | 23,250 |
| | $ | 17,174 |
| | $ | 6,076 |
| | 35 | % |
Demand deposits: interest-bearing | 15,294 |
| | 6,923 |
| | 8,371 |
| | 121 |
|
Total demand deposits | 38,544 |
| | 24,097 |
| | 14,447 |
| | 60 |
|
Money market deposits | 18,618 |
| | 19,843 |
| | (1,225 | ) | | (6 | ) |
Savings and other domestic deposits | 12,272 |
| | 5,215 |
| | 7,057 |
| | 135 |
|
Core certificates of deposit | 2,636 |
| | 2,430 |
| | 206 |
| | 9 |
|
Total core deposits | 72,070 |
| | 51,585 |
| | 20,485 |
| | 40 |
|
Other domestic deposits of $250,000 or more | 391 |
| | 426 |
| | (35 | ) | | (8 | ) |
Brokered deposits and negotiable CDs | 4,273 |
| | 2,929 |
| | 1,344 |
| | 46 |
|
Deposits in foreign offices | 152 |
| | 398 |
| | (246 | ) | | (62 | ) |
Total deposits | 76,886 |
| | 55,338 |
| | 21,548 |
| | 39 |
|
Short-term borrowings | 2,628 |
| | 524 |
| | 2,104 |
| | 402 |
|
Long-term debt | 8,594 |
| | 6,788 |
| | 1,806 |
| | 27 |
|
Total interest-bearing liabilities | $ | 64,858 |
|
| $ | 45,476 |
| | $ | 19,382 |
| | 43 | % |
Average total deposits for the 2016 fourth quarter increased $21.5 billion, or 39%4%, from the year-ago quarter, includingprimarily reflecting a $20.5$4.9 billion, or 40%7%, increase in average total core deposits. The growth in average total core deposits more than fully funded the year-over-year increase in average total loans and leases. Average C&I loans increased $2.1 billion, or 8%, reflecting broad-based growth. Average residential mortgage loans increased $1.8 billion, or 20%, driven by an increase in
lending officers and expansion into the Chicago market. Average RV and marine finance loans increased $0.8 billion, or 34%, reflecting the success of the geographic expansion over the past two years, while maintaining our commitment to super prime originations. Average automobile loans increased $0.5 billion, or 4%, driven by origination volume consistent with current market dynamics and our continued commitment to high quality borrowers while optimizing yield and production in the rising rate environment over the past year. Average securities decreased $1.7 billion, or 7%, primarily due to runoff in the portfolio, partially offset by continued growth in direct purchase municipal instruments in our commercial banking segment.
|
| | | | | | | | | | | | | | |
Table 34 - Average Interest-Bearing Liabilities - 2018 Fourth Quarter vs. 2017 Fourth Quarter |
| Fourth Quarter | | Change |
(dollar amounts in millions) | 2018 | | 2017 | | Amount | | Percent |
Deposits | | | | | | | |
Demand deposits: noninterest-bearing | $ | 20,384 |
| | $ | 21,745 |
| | $ | (1,361 | ) | | (6 | )% |
Demand deposits: interest-bearing | 19,860 |
| | 18,175 |
| | 1,685 |
| | 9 |
|
Total demand deposits | 40,244 |
| | 39,920 |
| | 324 |
| | 1 |
|
Money market deposits | 22,595 |
| | 20,731 |
| | 1,864 |
| | 9 |
|
Savings and other domestic deposits | 10,534 |
| | 11,348 |
| | (814 | ) | | (7 | ) |
Core certificates of deposit | 5,705 |
| | 1,947 |
| | 3,758 |
| | 193 |
|
Total core deposits | 79,078 |
| | 73,946 |
| | 5,132 |
| | 7 |
|
Other domestic deposits of $250,000 or more | 346 |
| | 400 |
| | (54 | ) | | (14 | ) |
Brokered deposits and negotiable CDs | 3,507 |
| | 3,391 |
| | 116 |
| | 3 |
|
Total deposits | 82,931 |
| | 77,737 |
| | 5,194 |
| | 7 |
|
Short-term borrowings | 1,006 |
| | 2,837 |
| | (1,831 | ) | | (65 | ) |
Long-term debt | 8,871 |
| | 9,232 |
| | (361 | ) | | (4 | ) |
Total interest-bearing liabilities | $ | 72,424 |
|
| $ | 68,061 |
| | $ | 4,363 |
| | 6 | % |
Average total deposits increased $5.2 billion, or 7%, while average total core deposits increased $5.1 billion, or 7%. Average total interest-bearing liabilities for the 2018 fourth quarter increased $19.4 billion, or 43%, from the year-ago quarter. Including the impact of the FirstMerit acquisition, year-over-year changes in average total deposits and average total debt included:
$14.4 billion, or 60%, increase in average total demand deposits, including a $6.1 billion, or 35%, increase in average noninterest-bearing demand deposits and an $8.4 billion, or 121%, increase in average interest-bearing demand deposits. The increase in average total demand deposits was comprised of a $9.8 billion, or 62%, increase in average commercial demand deposits and a $4.6 billion, or 55%, increase in average consumer demand deposits.
$6.8 billion, or 158%, increase in average savings deposits, reflecting continued banker focus across all segments on obtaining our customers' full deposit relationship.
$3.9 billion, or 53%, increase in average total debt, reflecting a $2.1 billion, or 402%, increase in average short-term borrowings and a $1.8 billion, or 27%, increase in average long-term debt. The increase in average long-term debt reflected the issuance of $2.0 billion of holding company-level senior debt during 2016.
$1.3 billion, or 46%, increase in average brokered deposits and negotiable CDs, impacted by the FirstMerit acquisition.
Partially offset by:
$1.2$4.4 billion, or 6%, decreasefrom the year ago quarter. Average core CDs increased $3.8 billion, or 193%, reflecting consumer deposit growth initiatives primarily in averagethe first three quarters of 2018. Average money market deposits. During the 2016 third quarter, changes todeposits increased $1.9 billion, or 9%, primarily reflecting growth in commercial accounts resultedand consumer balances. Savings and other domestic deposits decreased $0.8 billion, or 7%, primarily reflecting FirstMerit-related balance attrition and continued consumer product mix shift. Average short-term borrowings decreased $1.8 billion, or 65%, as continued growth in the reclassification of $2.8 billion ofcore deposits from money market into interest bearing demand deposits. This decrease was partially offset by the impact of the FirstMerit acquisition.reduced reliance on wholesale funding.
Provision for Credit Losses
The provision for credit losses increaseddecreased to $75$60 million in the 20162018 fourth quarter compared to $36$65 million in the 20152017 fourth quarter.
Noninterest Income
|
| | | | | | | | | | | | | | |
Table 44 - Noninterest Income - 2016 Fourth Quarter vs. 2015 Fourth Quarter |
(dollar amounts in thousands) | | | | | | | |
| Fourth Quarter | | Change |
| 2016 | | 2015 | | Amount | | Percent |
Service charges on deposit accounts | $ | 91,577 |
| | $ | 72,854 |
| | $ | 18,723 |
| | 26 | % |
Cards and payment processing income | 49,113 |
| | 37,594 |
| | 11,519 |
| | 31 |
|
Mortgage banking income | 37,520 |
| | 31,418 |
| | 6,102 |
| | 19 |
|
Trust services | 34,016 |
| | 25,272 |
| | 8,744 |
| | 35 |
|
Insurance income | 16,486 |
| | 15,528 |
| | 958 |
| | 6 |
|
Brokerage income | 17,014 |
| | 14,462 |
| | 2,552 |
| | 18 |
|
Capital markets fees | 18,730 |
| | 13,778 |
| | 4,952 |
| | 36 |
|
Bank owned life insurance income | 17,067 |
| | 13,441 |
| | 3,626 |
| | 27 |
|
Gain on sale of loans | 24,987 |
| | 10,122 |
| | 14,865 |
| | 147 |
|
Securities gains (losses) | (1,771 | ) | | 474 |
| | (2,245 | ) | | N.R. |
|
Other income | 29,598 |
| | 37,272 |
| | (7,674 | ) | | (21 | ) |
Total noninterest income | $ | 334,337 |
| | $ | 272,215 |
| | $ | 62,122 |
| | 23 | % |
N.R. - Not relevant.
|
| | | | | | | | | | | | | | |
Noninterest Income | | | | | | | |
| | | | | | | |
Table 35 - Noninterest Income - 2018 Fourth Quarter vs. 2017 Fourth Quarter |
| Fourth Quarter | | Change |
(dollar amounts in millions) | 2018 | | 2017 | | Amount | | Percent |
Service charges on deposit accounts | $ | 94 |
| | $ | 91 |
| | $ | 3 |
| | 3 | % |
Card and payment processing income | 58 |
| | 53 |
| | 5 |
| | 9 |
|
Trust and management investment services | 42 |
| | 41 |
| | 1 |
| | 2 |
|
Mortgage banking income | 23 |
| | 33 |
| | (10 | ) | | (30 | ) |
Capital markets fees | 29 |
| | 23 |
| | 6 |
| | 26 |
|
Insurance income | 21 |
| | 21 |
| | — |
| | — |
|
Bank owned life insurance income | 16 |
| | 18 |
| | (2 | ) | | (11 | ) |
Gain on sale of loans | 16 |
| | 17 |
| | (1 | ) | | (6 | ) |
Securities (losses) gains | (19 | ) | | (4 | ) | | (15 | ) | | (375 | ) |
Other income | 49 |
| | 47 |
| | 2 |
| | 4 |
|
Total noninterest income | $ | 329 |
| | $ | 340 |
| | $ | (11 | ) | | (3 | )% |
Noninterest income for the 20162018 fourth quarter increased $62decreased $11 million, or 23%3%, from the year-ago quarter. The year-over-year increaseSecurities losses were $19 million compared to $4 million in the year-ago quarter, reflecting the losses related to the $1.1 billion portfolio
repositioning completed in the 2018 fourth quarter. Mortgage banking income decreased $10 million, or 30%, primarily reflected:
$19reflecting lower spreads on origination volume. Capital markets fees increased $6 million, or 26%, increase in service charges on deposit accounts, reflecting the benefit of continued new customer acquisition. Of the increase, $12 million was attributable to consumer deposit accounts, while $7 million was attributable to commercial deposit accounts.
$15 million, or 147%, increase in gain on sale of loans, reflecting a $6 million auto loan securitization gain and $5primarily driven by $4 million of gains on non-relationship C&I and CRE loan sales, both offees from HSE, which were related to the balance sheet optimization strategy completed in the 2016 fourth quarter.
$12 million, or 31%, increase in cardswas acquired October 1, 2018. Card and payment processing income increased $5 million, or 9%, due to higher card-related income and underlying customer growth.
$9 million, or 35%, increase in trust services, primarily related to the FirstMerit acquisition.
$6 million, or 19%, increase in mortgage banking income, reflecting a $7 million increase from net mortgage servicing rights (MSR) hedging-related activities.
Partially offset by:
$8 million, or 21%, decrease in other income, reflecting $8 million unfavorable impact related to ineffectiveness of derivatives used to hedge fixed-rate, long-term debt.
growth and higher card usage.
|
| | | | | | | | | | | | | | |
Noninterest Expense | | | | | | | |
| | | | | | | |
Table 45 - Noninterest Expense - 2016 Fourth Quarter vs. 2015 Fourth Quarter |
(dollar amounts in thousands) | | | | | | | |
| Fourth Quarter | | Change |
| 2016 | | 2015 | | Amount | | Percent |
Personnel costs | $ | 359,755 |
| | $ | 288,861 |
| | $ | 70,894 |
| | 25 | % |
Outside data processing and other services | 88,695 |
| | 63,775 |
| | 24,920 |
| | 39 |
|
Equipment | 59,666 |
| | 31,711 |
| | 27,955 |
| | 88 |
|
Net occupancy | 49,450 |
| | 32,939 |
| | 16,511 |
| | 50 |
|
Professional services | 23,165 |
| | 13,010 |
| | 10,154 |
| | 78 |
|
Marketing | 21,478 |
| | 12,035 |
| | 9,443 |
| | 78 |
|
Deposit and other insurance expense | 15,772 |
| | 11,105 |
| | 4,667 |
| | 42 |
|
Amortization of intangibles | 14,099 |
| | 3,788 |
| | 10,311 |
| | 272 |
|
Other expense | 49,417 |
| | 41,542 |
| | 7,875 |
| | 19 |
|
Total noninterest expense | $ | 681,497 |
| | $ | 498,766 |
| | $ | 182,731 |
| | 37 | % |
Number of employees (average full-time equivalent) | 15,993 |
| | 12,418 |
| | 3,575 |
| | 29 | % |
|
| | | | | | | |
Impacts of Significant Items: | Fourth Quarter |
(dollar amounts in thousands) | 2016 | | 2015 |
Personnel costs | $ | (5,385 | ) | | $ | 2,332 |
|
Outside data processing and other services | 15,420 |
| | 1,990 |
|
Equipment | 20,000 |
| | 4,587 |
|
Net occupancy | 7,146 |
| | 110 |
|
Professional services | 9,141 |
| | 1,153 |
|
Marketing | 4,340 |
| | — |
|
Other expense | 2,742 |
| | 318 |
|
Total noninterest expense adjustments | $ | 53,404 |
| | $ | 10,490 |
|
| | Adjusted Noninterest Expense (Non-GAAP): | | | | | | | | |
(dollar amounts in thousands) | Fourth Quarter | | Change | |
Noninterest Expense | | | | | | | | |
| 2016 | | 2015 | | Amount | | Percent | | | | | | | |
Table 36 - Noninterest Expense - 2018 Fourth Quarter vs. 2017 Fourth Quarter | | Table 36 - Noninterest Expense - 2018 Fourth Quarter vs. 2017 Fourth Quarter |
| | Fourth Quarter | | Change |
(dollar amounts in millions) | | 2018 | | 2017 | | Amount | | Percent |
Personnel costs | $ | 365,140 |
| | $ | 286,529 |
| | $ | 78,611 |
| | 27 | % | $ | 399 |
| | $ | 373 |
| | $ | 26 |
| | 7 | % |
Outside data processing and other services | 73,275 |
| | 61,785 |
| | 11,490 |
| | 19 |
| 83 |
| | 71 |
| | 12 |
| | 17 |
|
Net occupancy | | 70 |
| | 36 |
| | 34 |
| | 94 |
|
Equipment | 39,666 |
| | 27,124 |
| | 12,542 |
| | 46 |
| 48 |
| | 36 |
| | 12 |
| | 33 |
|
Net occupancy | 42,304 |
| | 32,829 |
| | 9,475 |
| | 29 |
| |
Deposit and other insurance expense | | 9 |
| | 19 |
| | (10 | ) | | (53 | ) |
Professional services | 14,024 |
| | 11,857 |
| | 2,167 |
| | 18 |
| 17 |
| | 18 |
| | (1 | ) | | (6 | ) |
Marketing | 17,138 |
| | 12,035 |
| | 5,103 |
| | 42 |
| 15 |
| | 10 |
| | 5 |
| | 50 |
|
Deposit and other insurance expense | 15,772 |
| | 11,105 |
| | 4,667 |
| | 42 |
| |
Amortization of intangibles | 14,099 |
| | 3,788 |
| | 10,311 |
| | 272 |
| 13 |
| | 14 |
| | (1 | ) | | (7 | ) |
Other expense | 46,675 |
| | 41,224 |
| | 5,451 |
| | 13 |
| 57 |
| | 56 |
| | 1 |
| | 2 |
|
Total adjusted noninterest expense (Non-GAAP) | $ | 628,093 |
| | $ | 488,276 |
| | $ | 139,817 |
| | 29 | % | |
Total noninterest expense | | $ | 711 |
| | $ | 633 |
| | $ | 78 |
| | 12 | % |
Number of employees (average full-time equivalent) | | 15,657 |
| | 15,375 |
| | 282 |
| | 2 | % |
Reported noninterest expense for the 20162018 fourth quarter increased $183$78 million, or 37%12%, from the year-ago quarter. Including the impact of the FirstMerit acquisition, changes in reported noninterest expense primarily reflect:
$71Net occupancy costs increased $34 million, or 25%94%, increaseprimarily reflecting $28 million of branch and facility consolidation-related expense in personnelthe 2018 fourth quarter. Personnel costs reflecting an $84increased $26 million, increase in salaries related to the May implementation ofor 7%, reflecting annual merit increases, higher benefit costs, and a 29% increase$3 million of run-rate expense from HSE. Equipment increased $12 million, or 33%, primarily reflecting $7 million of branch and facility consolidation-related expense in the number of average full-time equivalent employees, partially offset by a $13 million decrease in benefits expense related to an $18 million gain on the settlement of a portion of the FirstMerit pension plan liability during the 20162018 fourth quarter.
$8 million, or 19%, increase in other expense, primarily reflecting a $42 million reduction to litigation reserves, which was mostly offset by a $40 million contribution in the 2016 fourth quarter to achieve the philanthropic plans related to FirstMerit.
$28 million, or 88%, increase in equipment expense, reflecting the impact of the FirstMerit acquisition.
$25 million, or 39%, increase in outside Outside data processing and other services expense increased $12 million, or 17%, primarily related to ongoingdriven by higher technology investments and the impact of the FirstMerit acquisition.
$17investment costs. Marketing increased $5 million, or 50%, increase in net occupancy costs,primarily reflecting the FirstMerit acquisition.
$10timing of marketing campaigns. Deposit and other insurance expense decreased $10 million, or 272%53%, increase in amortizationdue to the discontinuation of intangibles reflecting the FirstMerit acquisition.
$10 million, or 78%, increase in professional services, primarily related to $9 million of acquisition-related Significant ItemsFDIC surcharge in the 20162018 fourth quarter.
$9 million, or 78%, increase in marketing, related to the FirstMerit acquisition.
Provision for Income Taxes
(This section should be read in conjunction with Note 1 and Note 16 of the Notes to Consolidated Financial Statements.)
The provision for income taxes in the 20162018 fourth quarter was $74$57 million and $56compared to a $20 million benefit in the 20152017 fourth quarter. The effective tax rates for the 20162018 fourth quarter and 20152017 fourth quarter were 23.6%14.6% and 23.8%(4.8%), respectively. Included in the 2017 fourth quarter results is a $123 million tax benefit related to the TCJA enacted on December 22, 2017, primarily attributed to the revaluation of net deferred tax liabilities at the lower statutory federal income tax rate. We completed our provisional estimate related to tax reform during the 2018 fourth quarter. At December 31, 2016,2018, we had a net federal deferred tax assetliability of $76$105 million and a net state deferred tax asset of $41 million.
Credit Quality
NCOs
Net charge-offs (NCOs) increased $22$9 million to $50 million. The increase was primarily centered in the C&I portfolio, with no segment or 99%, to $44 million.geographic concentration. Consumer charge-offs have remained consistent over the past year. NCOs represented an annualized 0.26%0.27% of average loans and leases in the current quarter, unchangedup from 0.16% in the prior quarter butand up from 0.18%0.24% in the year-ago quarter. Commercial charge-offs continued to be positively impacted by recoveries in the CRE portfolio and broader continued successful workout strategies, while consumer charge-offs remained within our expected range.
NALs
Overall asset quality remains strong,performance remained consistent with modest volatility. Overallprior periods and our expectations. The consumer creditportfolio metrics led by the Home Equity and Residential portfolios, continue to showreflect the results associated with our focus on high quality borrowers, with an improving trend, whileexpected modest seasonal impact evident across the Commercialportfolios. The commercial portfolios continue to experiencehave performed consistently, with some quarter-to-quarter volatility based onas a result of the absolute low level of problem loans. The FirstMerit portfolio quality, composition, and geographic distribution was similar to the legacy Huntington portfolio. The only new loan classification is the RV/marine portfolio.
Nonaccrual loans and leases (NALs) of $423decreased $9 million, represented 0.63%or 3%, from the year-ago quarter to $340 million, or 0.45% of total loans and leases, down from 0.74% a year ago.leases. The decreaseyear-over-year decline was centered in the NAL ratio reflected a 14% year-over-yearcommercial real estate and residential mortgage portfolios, partially offset by an increase in NALs, more than offset by the impact ofcommercial portfolio. OREO balances decreased $10 million, or 30%, from the 33% year-over-year increaseyear-ago quarter. The decline in total loans. NonperformingOREO assets (NPAs) of $481reflected reductions in both commercial and residential properties. NPAs decreased to $387 million, represented 0.72%or
0.52% of total loans and leases and OREO, down from 0.79%OREO. On a year ago. The NAL ratio increased 2linked quarter basis, points from the prior quarter,NALs decreased $30 million, or 8%, while the NPA ratio remained unchanged.NPAs decreased $16 million, or 4%.
ACL
(This section should be read in conjunction with Note 43 of the Notes to Consolidated Financial Statements.)
The period-end allowance for credit losses (ACL)ALLL as a percentage of total loans and leases decreasedincreased to 1.10% from 1.33%1.03% compared to 0.99% a year ago, while the ACLALLL as a percentage of period-end total NALs decreasedincreased to 174%228% from 180%.198% over the same period. The declineincrease in the coverage ratiosALLL is primarily a functionthe result of loan growth. We believe the level of the purchase accounting impact associated with FirstMerit.ALLL and ACL are appropriate given the low level of problem loans and the current composition of the overall loan and lease portfolio.
|
| | | | | | | | | | | | | | | |
Table 37 - Selected Quarterly Financial Information (1) |
| Three Months Ended |
(dollar amounts in millions, share amounts in thousands) | December 31, | | September 30, | | June 30, | | March 31, |
| 2018 | | 2018 | | 2018 | | 2018 |
Interest income | $ | 1,056 |
| | $ | 1,007 |
| | $ | 972 |
| | $ | 914 |
|
Interest expense | 223 |
| | 205 |
| | 188 |
| | 144 |
|
Net interest income | 833 |
| | 802 |
| | 784 |
| | 770 |
|
Provision for credit losses | 60 |
| | 53 |
| | 56 |
| | 66 |
|
Net interest income after provision for credit losses | 773 |
| | 749 |
| | 728 |
| | 704 |
|
Total noninterest income | 329 |
| | 342 |
| | 336 |
| | 314 |
|
Total noninterest expense | 711 |
| | 651 |
| | 652 |
| | 633 |
|
Income before income taxes | 391 |
| | 440 |
| | 412 |
| | 385 |
|
Provision (benefit) for income taxes | 57 |
| | 62 |
| | 57 |
| | 59 |
|
Net income | 334 |
| | 378 |
| | 355 |
| | 326 |
|
Dividends on preferred shares | 19 |
| | 18 |
| | 21 |
| | 12 |
|
Net income applicable to common shares | $ | 315 |
| | $ | 360 |
| | $ | 334 |
| | $ | 314 |
|
Common shares outstanding | | | | | | | |
Average—basic | 1,054,460 |
| | 1,084,536 |
| | 1,103,337 |
| | 1,083,836 |
|
Average—diluted (2) | 1,073,055 |
| | 1,103,740 |
| | 1,122,612 |
| | 1,124,778 |
|
Ending | 1,046,767 |
| | 1,061,529 |
| | 1,104,227 |
| | 1,101,796 |
|
Book value per common share | $ | 9.46 |
| | $ | 9.17 |
| | $ | 9.30 |
| | $ | 9.17 |
|
Tangible book value per common share (3) | 7.34 |
| | 7.06 |
| | 7.27 |
| | 7.12 |
|
Per common share | | | | | | | |
Net income—basic | $ | 0.30 |
| | $ | 0.33 |
| | $ | 0.30 |
| | $ | 0.29 |
|
Net income—diluted | 0.29 |
| | 0.33 |
| | 0.30 |
| | 0.28 |
|
Return on average total assets | 1.25 | % | | 1.42 | % | | 1.36 | % | | 1.27 | % |
Return on average common shareholders’ equity | 12.9 |
| | 14.3 |
| | 13.2 |
| | 13.0 |
|
Return on average tangible common shareholders’ equity (4) | 17.3 |
| | 19.0 |
| | 17.6 |
| | 17.5 |
|
Efficiency ratio (5) | 58.7 |
| | 55.3 |
| | 56.6 |
| | 56.8 |
|
Effective tax rate | 14.6 |
| | 14.1 |
| | 13.8 |
| | 15.3 |
|
Margin analysis-as a % of average earning assets (6) | | | | | | | |
Interest income (6) | 4.34 | % | | 4.16 | % | | 4.07 | % | | 3.91 | % |
Interest expense | 0.93 |
| | 0.84 |
| | 0.78 |
| | 0.61 |
|
Net interest margin (6) | 3.41 | % | | 3.32 | % | | 3.29 | % | | 3.30 | % |
Revenue—FTE | | | | | | | |
Net interest income | $ | 833 |
| | $ | 802 |
| | $ | 784 |
| | $ | 770 |
|
FTE adjustment | 8 |
| | 8 |
| | 7 |
| | 7 |
|
Net interest income (6) | 841 |
| | 810 |
| | 791 |
| | 777 |
|
Noninterest income | 329 |
| | 342 |
| | 336 |
| | 314 |
|
Total revenue (6) | $ | 1,170 |
| | $ | 1,152 |
| | $ | 1,127 |
| | $ | 1,091 |
|
|
| | | | | | | | | | | | | | | |
Table 46 - Selected Quarterly Financial Information (1) |
(dollar amounts in thousands, except per share amounts) | | | | | | | |
| Three months ended |
| December 31, | | September 30, | | June 30, | | March 31, |
| 2016 | | 2016 | | 2016 | | 2016 |
Interest income | $ | 814,858 |
| | $ | 694,346 |
| | $ | 565,658 |
| | $ | 557,251 |
|
Interest expense | 79,877 |
| | 68,956 |
| | 59,777 |
| | 54,185 |
|
Net interest income | 734,981 |
| | 625,390 |
| | 505,881 |
| | 503,066 |
|
Provision for credit losses | 74,906 |
| | 63,805 |
| | 24,509 |
| | 27,582 |
|
Net interest income after provision for credit losses | 660,075 |
| | 561,585 |
| | 481,372 |
| | 475,484 |
|
Total noninterest income | 334,337 |
| | 302,415 |
| | 271,112 |
| | 241,867 |
|
Total noninterest expense | 681,497 |
| | 712,247 |
| | 523,661 |
| | 491,080 |
|
Income before income taxes | 312,915 |
| | 151,753 |
| | 228,823 |
| | 226,271 |
|
Provision for income taxes | 73,952 |
| | 24,749 |
| | 54,283 |
| | 54,957 |
|
Net income | 238,963 |
| | 127,004 |
| | 174,540 |
| | 171,314 |
|
Dividends on preferred shares | 18,865 |
| | 18,537 |
| | 19,874 |
| | 7,998 |
|
Net income applicable to common shares | $ | 220,098 |
| | $ | 108,467 |
| | $ | 154,666 |
| | $ | 163,316 |
|
Common shares outstanding | | | | | | | |
Average—basic | 1,085,253 |
| | 938,578 |
| | 798,167 |
| | 795,755 |
|
Average—diluted(2) | 1,104,358 |
| | 952,081 |
| | 810,371 |
| | 808,349 |
|
Ending | 1,085,688 |
| | 1,084,783 |
| | 799,154 |
| | 796,689 |
|
Book value per common share | $ | 8.51 |
| | $ | 8.59 |
| | $ | 8.18 |
| | $ | 8.01 |
|
Tangible book value per common share(3) | 6.43 |
| | 6.48 |
| | 7.29 |
| | 7.12 |
|
Per common share | | | | | | | |
Net income—basic | $ | 0.20 |
| | $ | 0.12 |
| | $ | 0.19 |
| | $ | 0.21 |
|
Net income—diluted | 0.20 |
| | 0.11 |
| | 0.19 |
| | 0.20 |
|
Cash dividends declared | 0.08 |
| | 0.07 |
| | 0.07 |
| | 0.07 |
|
Common stock price, per share | | | | | | | |
High(4) | $ | 13.64 |
| | $ | 10.11 |
| | $ | 10.65 |
| | $ | 10.81 |
|
Low(4) | 9.57 |
| | 8.23 |
| | 8.05 |
| | 7.83 |
|
Close | 13.22 |
| | 9.86 |
| | 8.94 |
| | 9.54 |
|
Average closing price | 11.63 |
| | 9.52 |
| | 9.83 |
| | 9.22 |
|
Return on average total assets | 0.95 | % | | 0.58 | % | | 0.96 | % | | 0.96 | % |
Return on average common shareholders’ equity | 9.4 |
| | 5.4 |
| | 9.6 |
| | 10.4 |
|
Return on average tangible common shareholders’ equity(5) | 12.9 |
| | 7.0 |
| | 11.0 |
| | 11.9 |
|
Efficiency ratio(6) | 61.6 |
| | 75.0 |
| | 66.1 |
| | 64.6 |
|
Effective tax rate | 23.6 |
| | 16.3 |
| | 23.7 |
| | 24.3 |
|
Margin analysis-as a % of average earning assets(7) | | | | | | | |
Interest income(7) | 3.60 | % | | 3.52 | % | | 3.41 | % | | 3.44 | % |
Interest expense | 0.35 |
| | 0.34 |
| | 0.35 |
| | 0.33 |
|
Net interest margin(7) | 3.25 | % | | 3.18 | % | | 3.06 | % | | 3.11 | % |
Revenue—FTE | | | | | | | |
Net interest income | $ | 734,981 |
| | $ | 625,390 |
| | $ | 505,881 |
| | $ | 503,066 |
|
FTE adjustment | 12,560 |
| | 10,598 |
| | 10,091 |
| | 9,159 |
|
Net interest income(7) | 747,541 |
| | 635,988 |
| | 515,972 |
| | 512,225 |
|
Noninterest income | 334,337 |
| | 302,415 |
| | 271,112 |
| | 241,867 |
|
Total revenue(7) | $ | 1,081,878 |
| | $ | 938,403 |
| | $ | 787,084 |
| | $ | 754,092 |
|
|
| | | | | | | | | | | | | | | |
Table 38 - Selected Quarterly Capital Data (1) |
| 2018 |
Capital adequacy (Basel III) | December 31, | | September 30, | | June 30, | | March 31, |
Total risk-weighted assets | $ | 85,687 |
| | $ | 83,580 |
| | $ | 82,951 |
| | $ | 81,365 |
|
Tier 1 leverage ratio (period end) | 9.10 | % | | 9.14 | % | | 9.65 | % | | 9.53 | % |
CET 1 risk-based capital ratio | 9.65 |
| | 9.89 |
| | 10.53 |
| | 10.45 |
|
Tier 1 risk-based capital ratio (period end) | 11.06 |
| | 11.33 |
| | 11.99 |
| | 11.94 |
|
Total risk-based capital ratio (period end) | 12.98 |
| | 13.36 |
| | 13.97 |
| | 13.92 |
|
Tangible common equity / tangible asset ratio (7) (9) | 7.21 |
| | 7.25 |
| | 7.78 |
| | 7.70 |
|
Tangible equity / tangible asset ratio (8) (9) | 8.34 |
| | 8.41 |
| | 8.95 |
| | 8.88 |
|
Tangible common equity / risk-weighted assets ratio (9) | 8.97 |
| | 8.97 |
| | 9.67 |
| | 9.65 |
|
| |
(1) | Comparisons for presented periods are impacted by a number of factors. Refer to the Significant Items section for additional discussion regarding these items. |
| |
(2) | Weighted average diluted shares outstanding for the quarterly period ending March 31, 2018, includes the impact of the convertible preferred stock issued in April of 2008. |
| |
(3) | Other intangible assets are net of deferred tax liability. |
| |
(4) | Net income applicable to common shares excluding expense for amortization of intangibles for the period divided by average tangible shareholders’ equity. Average tangible shareholders’ equity equals average total shareholders’ equity less average intangible assets and goodwill. Expense for amortization of intangibles and average intangible assets are net of deferred tax liability. |
| |
(5) | Noninterest expense less amortization of intangibles and goodwill impairment divided by the sum of FTE net interest income and noninterest income excluding securities gains (losses). |
| |
(6) | Presented on a FTE basis assuming a 21% tax rate. |
| |
(7) | Tangible common equity (total common equity less goodwill and other intangible assets) divided by tangible assets (total assets less goodwill and other intangible assets). Other intangible assets are net of deferred tax. |
| |
(8) | Tangible equity (total equity less goodwill and other intangible assets) divided by tangible assets (total assets less goodwill and other intangible assets). Other intangible assets are net of deferred tax. |
| |
(9) | Tangible equity, tangible common equity, and tangible assets are non-GAAP financial measures. Additionally, any ratios utilizing these financial measures are also non-GAAP. These financial measures have been included as they are considered to be critical metrics with which to analyze and evaluate financial condition and capital strength. Other companies may calculate these financial measures differently. |
|
| | | | | | | | | | | | | | | |
Table 39 - Selected Quarterly Financial Information (1) |
| Three Months Ended |
(dollar amounts in millions, share amounts in thousands) | December 31, | | September 30, | | June 30, | | March 31, |
| 2017 | | 2017 | | 2017 | | 2017 |
Interest income | $ | 894 |
| | $ | 873 |
| | $ | 846 |
| | $ | 820 |
|
Interest expense | 124 |
| | 115 |
| | 101 |
| | 91 |
|
Net interest income | 770 |
| | 758 |
| | 745 |
| | 729 |
|
Provision for credit losses | 65 |
| | 43 |
| | 25 |
| | 68 |
|
Net interest income after provision for credit losses | 705 |
| | 715 |
| | 720 |
| | 661 |
|
Total noninterest income | 340 |
| | 330 |
| | 325 |
| | 312 |
|
Total noninterest expense | 633 |
| | 680 |
| | 694 |
| | 707 |
|
Income before income taxes | 412 |
| | 365 |
| | 351 |
| | 266 |
|
Provision (benefit) for income taxes | (20 | ) | | 90 |
| | 79 |
| | 59 |
|
Net income | 432 |
| | 275 |
| | 272 |
| | 207 |
|
Dividends on preferred shares | 19 |
| | 19 |
| | 19 |
| | 19 |
|
Net income applicable to common shares | $ | 413 |
| | $ | 256 |
| | $ | 253 |
| | $ | 188 |
|
Common shares outstanding | | | | | | | |
Average—basic | 1,077,397 |
| | 1,086,038 |
| | 1,088,934 |
| | 1,086,374 |
|
Average—diluted (2) | 1,130,117 |
| | 1,106,491 |
| | 1,108,527 |
| | 1,108,617 |
|
Ending | 1,072,027 |
| | 1,080,946 |
| | 1,090,016 |
| | 1,087,120 |
|
Book value per share | $ | 9.09 |
| | $ | 8.91 |
| | $ | 8.79 |
| | $ | 8.62 |
|
Tangible book value per share (3) | 6.97 |
| | 6.85 |
| | 6.74 |
| | 6.55 |
|
Per common share | | | | | | | |
Net income—basic | $ | 0.38 |
| | $ | 0.24 |
| | $ | 0.23 |
| | $ | 0.17 |
|
Net income —diluted | 0.37 |
| | 0.23 |
| | 0.23 |
| | 0.17 |
|
Return on average total assets | 1.67 | % | | 1.08 | % | | 1.09 | % | | 0.84 | % |
Return on average common shareholders’ equity | 17.0 |
| | 10.5 |
| | 10.6 |
| | 8.2 |
|
Return on average tangible common shareholders’ equity (4) | 22.7 |
| | 14.1 |
| | 14.4 |
| | 11.3 |
|
Efficiency ratio (5) | 54.9 |
| | 60.5 |
| | 62.9 |
| | 65.7 |
|
Effective tax rate | (4.8 | ) | | 24.7 |
| | 22.4 |
| | 22.2 |
|
Margin analysis-as a % of average earning assets (6) | | | | | | | |
Interest income (6) | 3.83 | % | | 3.78 | % | | 3.75 | % | | 3.70 | % |
Interest expense | 0.53 |
| | 0.49 |
| | 0.44 |
| | 0.40 |
|
Net interest margin (6) | 3.30 | % | | 3.29 | % | | 3.31 | % | | 3.30 | % |
Revenue—FTE | | | | | | | |
Net interest income | $ | 770 |
| | $ | 758 |
| | $ | 745 |
| | $ | 729 |
|
FTE adjustment | 12 |
| | 13 |
| | 12 |
| | 13 |
|
Net interest income (6) | 782 |
| | 771 |
| | 757 |
| | 742 |
|
Noninterest income | 340 |
| | 330 |
| | 325 |
| | 312 |
|
Total revenue (6) | $ | 1,122 |
| | $ | 1,101 |
| | $ | 1,082 |
| | $ | 1,054 |
|
|
| | | | | | | | | | | | | | | |
Table 47 - Selected Quarterly Capital Data (1) |
| | | | | | | |
| 2016 |
Capital adequacy | December 31, | | September 30, | | June 30, | | March 31, |
Total risk-weighted assets(10) | $ | 78,263 |
| | $ | 80,513 |
| | $ | 60,721 |
| | $ | 59,798 |
|
Tier 1 leverage ratio (period end)(10) | 8.70 | % | | 9.89 | % | | 9.55 | % | | 9.29 | % |
Common equity tier 1 risk-based capital ratio(10) | 9.56 |
| | 9.09 |
| | 9.80 |
| | 9.73 |
|
Tier 1 risk-based capital ratio (period end)(10) | 10.92 |
| | 10.40 |
| | 11.37 |
| | 10.99 |
|
Total risk-based capital ratio (period end)(10) | 13.05 |
| | 12.56 |
| | 13.49 |
| | 13.17 |
|
Tangible common equity / tangible asset ratio(8) | 7.16 |
| | 7.14 |
| | 7.96 |
| | 7.89 |
|
Tangible equity / tangible asset ratio(9) | 8.26 |
| | 8.23 |
| | 9.28 |
| | 8.96 |
|
Tangible common equity / risk-weighted assets ratio(10) | 8.92 |
| | 8.74 |
| | 9.60 |
| | 9.49 |
|
|
| | | | | | | | | | | | | | | |
Table 48 - Selected Quarterly Financial Information (1) |
(dollar amounts in thousands, except per share amounts) | | | | | | | |
| Three months ended |
| December 31, | | September 30, | | June 30, | | March 31, |
| 2015 | | 2015 | | 2015 | | 2015 |
Interest income | $ | 544,153 |
| | $ | 538,477 |
| | $ | 529,795 |
| | $ | 502,096 |
|
Interest expense | 47,242 |
| | 43,022 |
| | 39,109 |
| | 34,411 |
|
Net interest income | 496,911 |
| | 495,455 |
| | 490,686 |
| | 467,685 |
|
Provision for credit losses | 36,468 |
| | 22,476 |
| | 20,419 |
| | 20,591 |
|
Net interest income after provision for credit losses | 460,443 |
| | 472,979 |
| | 470,267 |
| | 447,094 |
|
Total noninterest income | 272,215 |
| | 253,119 |
| | 281,773 |
| | 231,623 |
|
Total noninterest expense | 498,766 |
| | 526,508 |
| | 491,777 |
| | 458,857 |
|
Income before income taxes | 233,892 |
| | 199,590 |
| | 260,263 |
| | 219,860 |
|
Provision for income taxes | 55,583 |
| | 47,002 |
| | 64,057 |
| | 54,006 |
|
Net income | 178,309 |
| | 152,588 |
| | 196,206 |
| | 165,854 |
|
Dividends on preferred shares | 7,972 |
| | 7,968 |
| | 7,968 |
| | 7,965 |
|
Net income applicable to common shares | $ | 170,337 |
| | $ | 144,620 |
| | $ | 188,238 |
| | $ | 157,889 |
|
Common shares outstanding | | | | | | | |
Average—basic | 796,095 |
| | 800,883 |
| | 806,891 |
| | 809,778 |
|
Average—diluted(2) | 810,143 |
| | 814,326 |
| | 820,238 |
| | 823,809 |
|
Ending | 794,929 |
| | 796,659 |
| | 803,066 |
| | 808,528 |
|
Book value per share | $ | 7.81 |
| | $ | 7.78 |
| | $ | 7.61 |
| | $ | 7.51 |
|
Tangible book value per share(3) | 6.91 |
| | 6.88 |
| | 6.71 |
| | 6.62 |
|
Per common share | | | | | | | |
Net income—basic | $ | 0.21 |
| | $ | 0.18 |
| | $ | 0.23 |
| | $ | 0.19 |
|
Net income —diluted | 0.21 |
| | 0.18 |
| | 0.23 |
| | 0.19 |
|
Cash dividends declared | 0.07 |
| | 0.06 |
| | 0.06 |
| | 0.06 |
|
Common stock price, per share | | | | | | | |
High(4) | $ | 11.87 |
| | $ | 11.90 |
| | $ | 11.72 |
| | $ | 11.30 |
|
Low(4) | 10.21 |
| | 10.00 |
| | 10.67 |
| | 9.63 |
|
Close | 11.06 |
| | 10.60 |
| | 11.31 |
| | 11.05 |
|
Average closing price | 11.18 |
| | 11.16 |
| | 11.19 |
| | 10.56 |
|
Return on average total assets | 1.00 | % | | 0.87 | % | | 1.16 | % | | 1.02 | % |
Return on average common shareholders’ equity | 10.8 |
| | 9.3 |
| | 12.3 |
| | 10.6 |
|
Return on average tangible common shareholders’ equity(5) | 12.4 |
| | 10.7 |
| | 14.4 |
| | 12.2 |
|
Efficiency ratio(6) | 63.7 |
| | 69.1 |
| | 61.7 |
| | 63.5 |
|
Effective tax rate | 23.8 |
| | 23.5 |
| | 24.6 |
| | 24.6 |
|
Margin analysis-as a % of average earning assets(7) | | | | | | | |
Interest income(7) | 3.37 | % | | 3.42 | % | | 3.45 | % | | 3.38 | % |
Interest expense | 0.28 |
| | 0.26 |
| | 0.25 |
| | 0.23 |
|
Net interest margin(7) | 3.09 | % | | 3.16 | % | | 3.20 | % | | 3.15 | % |
Revenue—FTE | | | | | | | |
Net interest income | $ | 496,911 |
| | $ | 495,455 |
| | $ | 490,686 |
| | $ | 467,685 |
|
FTE adjustment | 8,425 |
| | 8,168 |
| | 7,962 |
| | 7,560 |
|
Net interest income(7) | 505,336 |
| | 503,623 |
| | 498,648 |
| | 475,245 |
|
Noninterest income | 272,215 |
| | 253,119 |
| | 281,773 |
| | 231,623 |
|
Total revenue(7) | $ | 777,551 |
| | $ | 756,742 |
| | $ | 780,421 |
| | $ | 706,868 |
|
|
| | | | | | | | | | | | | | | |
Table 49 - Selected Quarterly Capital Data (1) |
| | | | | | | |
| 2015 |
Capital adequacy | December 31, | | September 30, | | June 30, | | March 31, |
Total risk-weighted assets(11) | $ | 58,420 |
| | $ | 57,839 |
| | $ | 57,850 |
| | $ | 57,840 |
|
Tier 1 leverage ratio(11) | 8.79 | % | | 8.85 | % | | 8.98 | % | | 9.04 | % |
Tier 1 risk-based capital ratio(11) | 9.79 |
| | 9.72 |
| | 9.65 |
| | 9.51 |
|
Total risk-based capital ratio(11) | 10.53 |
| | 10.49 |
| | 10.41 |
| | 10.22 |
|
Tier 1 common risk-based capital ratio(11) | 12.64 |
| | 12.70 |
| | 12.62 |
| | 12.48 |
|
Tangible common equity / tangible asset ratio(8) | 7.81 |
| | 7.89 |
| | 7.91 |
| | 7.95 |
|
Tangible equity / tangible asset ratio(9) | 8.36 |
| | 8.44 |
| | 8.48 |
| | 8.53 |
|
Tangible common equity / risk-weighted assets ratio(11) | 9.41 |
| | 9.48 |
| | 9.32 |
| | 9.25 |
|
|
| | | | | | | | | | | | | | | |
Table 40 - Selected Quarterly Capital Data (1) |
| 2017 |
Capital adequacy (Basel III) | December 31, | | September 30, | | June 30, | | March 31, |
Total risk-weighted assets | $ | 80,340 |
| | $ | 78,631 |
| | $ | 78,366 |
| | $ | 77,559 |
|
Tier 1 leverage ratio | 9.09 | % | | 8.96 | % | | 8.98 | % | | 8.76 | % |
Tier 1 risk-based capital ratio | 10.01 |
| | 9.94 |
| | 9.88 |
| | 9.74 |
|
Total risk-based capital ratio | 11.34 |
| | 11.30 |
| | 11.24 |
| | 11.11 |
|
Tier 1 common risk-based capital ratio | 13.39 |
| | 13.39 |
| | 13.33 |
| | 13.26 |
|
Tangible common equity / tangible asset ratio (7)(9) | 7.34 |
| | 7.42 |
| | 7.41 |
| | 7.28 |
|
Tangible equity / tangible asset ratio (8)(9) | 8.39 |
| | 8.49 |
| | 8.49 |
| | 8.38 |
|
Tangible common equity / risk-weighted assets ratio (9) | 9.31 |
| | 9.41 |
| | 9.37 |
| | 9.18 |
|
| |
(1) | Comparisons for presented periods are impacted by a number of factors. Refer to the Significant Items section for additional discussion regarding these items. |
| |
(2) | For all quarterly periods presented above,prior to December 31, 2017, the impact of the convertible preferred stock issued in April of 2008 was excluded from the diluted share calculation because the result would have been higher than basic earnings per common share (anti-dilutive) for the periods. |
| |
(3) | Deferred tax liability related to otherOther intangible assets is calculated assuming a 35% tax rate.are net of deferred tax. |
| |
(4) | High and low stock prices are intra-day quotes obtained from Bloomberg. |
| |
(5) | Net income applicable to common shares 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.tax. |
| |
(6)(5) | Noninterest expense less amortization of intangibles and goodwill impairment divided by the sum of FTE net interest income and noninterest income excluding securities gains (losses). |
| |
(7)(6) | Presented on a FTE basis assuming a 35% tax rate. |
| |
(8)(7) | Tangible common equity (total common equity less goodwill and other intangible assets) divided by tangible assets (total assets less goodwill and other intangible assets). Other intangible assets are net of deferred tax, and calculated assuming a 35% tax rate.tax. |
| |
(9)(8) | Tangible equity (total equity less goodwill and other intangible assets) divided by tangible assets (total assets less goodwill and other intangible assets). Other intangible assets are net of deferred tax, and calculated assuming a 35% tax rate.tax. |
| |
(10)(9) | On January 1, 2015, we became subjectTangible equity, tangible common equity, and tangible assets are non-GAAP financial measures. Additionally, any ratios utilizing these financial measures are also non-GAAP. These financial measures have been included as they are considered to the Basel IIIbe critical metrics with which to analyze and evaluate financial condition and capital requirements and the standardized approach for calculating risk-weighted assets in accordance with subpart D of the final capital rule. |
| |
(11) | Ratios are calculated on the Basel I basis.strength. Other companies may calculate these financial measures differently. |
ADDITIONAL DISCLOSURES
Forward-Looking Statements
This report, including MD&A, contains certain forward-looking statements, including, but not limited to, certain plans, expectations, goals, projections, and statements, which are not historical facts and are subject to numerous assumptions, risks, and uncertainties. Statements that do not describe historical or current facts, including statements about beliefs and expectations, are forward-looking statements. Forward-looking statements may be identified by words such as expect, anticipate, believe, intend, estimate, plan, target, goal, or similar expressions, or future or conditional verbs such as will, may, might, should, would, could, or similar variations. The forward-looking statements are intended to be subject to the safe harbor provided by Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995.
While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those contained or implied in the forward-looking statements: changes in general economic, political, or industry conditions; uncertainty in U.S. fiscal and monetary policy, including the interest rate policies of the Federal Reserve Board; volatility and disruptions in global capital and credit markets; movements in interest rates; competitive pressures on product pricing and services; success, impact, and timing of our business strategies, including market acceptance of any new products or services implementing our “Fair Play” banking philosophy; the nature, extent, timing, and results of governmental actions, examinations, reviews, reforms, regulations, and interpretations, including those related to the Dodd-Frank Wall Street
Reform and Consumer Protection Act and the Basel III regulatory capital reforms, as well as those involving the OCC, Federal Reserve, FDIC, and CFPB; the possibility that the anticipated benefits of the merger with FirstMerit Corporation are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas where we do business; diversion of management’s attention from ongoing business operations and opportunities; potential adverse reactions or changes to business or employee relationships, including those resulting from the completion of the merger with FirstMerit Corporation; our ability to complete the integration of FirstMerit Corporation successfully; and other factors that may affect our future results.
All forward-looking statements speak only as of the date they are made and are based on information available at that time. We do not assume any obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance on such statements.
Non-GAAP Financial Measures
This document contains GAAP financial measures and non-GAAP financial measures where management believes it to be helpful in understanding Huntington’s results of operations or financial position. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found herein.
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.
Fully-Taxable Equivalent Basis
Interest income, yields, and ratios on a FTE basis are considered non-GAAP financial measures. Management believes net interest income on a FTE basis provides an insightful picture of the interest margin for comparison purposes. The FTE basis also allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The FTE basis assumes a federal statutory tax rate of 21 percent for the year ended 2018 and 35 percent.percent for all prior periods. We encourage readers to consider the consolidated financial statements and other financial information contained in this Form 10-K in their entirety, and not to rely on any single financial measure.
Non-Regulatory Capital Ratios
In addition to capital ratios defined by banking regulators, the Company considers various other measures when evaluating capital utilization and adequacy, including:
Tangible common equity to tangible assets,
Tangible equity to tangible assets, and
Tangible common equity to risk-weighted assets using Basel III definitions.
These non-regulatory capital ratios are viewed by management as useful additional methods of reflecting the level of capital available to withstand unexpected market conditions. Additionally, presentation of these ratios allows readers to compare the Company’s capitalization to other financial services companies. These ratios differ from capital ratios defined by banking regulators principally in that the numerator excludes preferred securities,goodwill and other intangible assets, the nature and extent of which varies among different financial services companies. These ratios are not defined in Generally Accepted Accounting Principles (“GAAP”)GAAP or federal banking regulations. As a result, these non-regulatory capital ratios disclosed by the Company are considered non-GAAP financial measures.
Because there are no standardized definitions for these non-regulatory capital ratios, the Company’s calculation methods may differ from those used by other financial services companies. Also, there may be limits in the usefulness of these measures to investors. As a result, the Company encourages readers to consider the consolidated financial statements and other financial information contained in this Form 10-K in their entirety, and not to rely on any single financial measure.
Risk Factors
More information on risk is set forth underdiscussed in the heading Risk Factors section included in Item 1A and incorporated by reference intoof this MD&A.report. Additional information regarding risk factors can also be found in the Risk Management and Capital discussion of this report, as well as the Regulatory Matters section included in Item 1 and incorporated by reference into the MD&A.of this report.
Critical Accounting Policies and Use of Significant Estimates
Our Consolidated Financial Statements are prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to establish accounting policies and make estimates that affect amounts reported in our Consolidated Financial Statements. Note 1 of the Notes to Consolidated Financial Statements, which is incorporated by reference into this MD&A, describes the significant accounting policies we useused in our Consolidated Financial Statements.
An accounting estimate requires assumptions and judgments about uncertain matters that could have a material effect on the Consolidated Financial Statements. Estimates are made under facts and circumstances at a point in time, and changes in those facts and circumstances could produce results substantially different from those estimates. TheOur most significant accounting policies and estimates and their related application are discussed below.
Allowance for Credit Losses
Our ACL of $0.7 billion$868 million at December 31, 2016,2018, represents our estimate of probable credit losses inherent in our loan and lease portfolio and our unfunded loan commitments and letters of credit. We regularly review our ACL for appropriateness by performing on-going evaluations of the loan and lease portfolio. In doing so, we consider factors such as the differing economic risk associated with each loan category, the financial condition of specific borrowers, the level of delinquent loans, the value of any collateral and, where applicable, the existence of any guarantees or other documented support. We also evaluate the impact of changes in interest rates and overall economic conditions on the ability of borrowers to meet their financial obligations when quantifying our exposure to credit losses and assessing the appropriateness of our ACL at each reporting date. There is no certainty that our ACL will be appropriate over time to cover losses in the portfolio because of unanticipated adverse changes in the economy, market conditions, or events adversely affecting specific customers, industries, or markets. If the credit quality of our customer base materially deteriorates, the risk profile of a market, industry, or group of customers changes materially, or if the ACL is not appropriate, our net income and capital could be materially adversely affected which, in turn, could have a material adverse effect on our financial condition and results of operations.For more information, see Note 3 - Loans / Leases and Allowance for Credit Losses.
Valuation of Financial InstrumentsFair Value Measurement
AssetsCertain assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. Assetsare measured at fair value on a recurring basis and include certaintrading securities, available-for-sale securities, other securities, loans held for sale, loans held for investment, available-for-saleMSRs and trading securities, certain securitized automobile loans, MSRs, derivatives, and certain short-term borrowings.derivative instruments. At December 31, 2016,2018, approximately $15.8$14.8 billion of our assets and $0.1$0.2 billion of our liabilities were recorded at fair value on a recurring basis. In addition to the above mentioned on-goingassets and liabilities subject to recurring fair value measurements,measurement, we measure certain other assets such as impaired loans, loans held for sale and other real estate owned at fair value is alsoon a non-recurring basis. Assets and liabilities carried at fair value inherently include subjectivity and may require use of significant assumptions, adjustments and judgment. A significant change in assumptions may result in a significant change in fair value, which in turn, may result in a higher degree of financial statement volatility.
Significant adjustments and assumptions used in determining fair value include, but are not limited to, market liquidity and credit quality, where appropriate. Valuations of products using models or other techniques are sensitive to assumptions used for recording business combinationsthe significant inputs. The type and measuring other non-recurring financial assets and liabilities.
Atlevel of judgment required is largely dependent on the end of each quarter, we assess the valuation hierarchy for each asset or liability measured at fair value. As necessary, assets or liabilities may be transferred within fair value hierarchy levels due to changes in availabilityamount of observable market inputs to measure fair value at the measurement date.
information available. Where available, we use quoted market prices to determine fair value. If quoted market prices are not available, fair value is determined using either internally developed or independent third-party valuation models, based on inputs that are either directly observable or derived from market data.data using either internally developed or independent third-party valuation models. These inputs include, but are not limited to, interest rate yield curves, credit spreads, option volatilities, or option adjustedand option-adjusted spreads. Where neither quoted market prices nor observable market data are available, fair value is determined using valuation models that feature one or more significant unobservable inputs based on management’s expectation thatof what market participants
would use in determining the fair value of the asset or liability. The determinationInputs to valuation models are considered unobservable if they are supported by little or no market activity. In periods of appropriate unobservable inputs requires exerciseextreme volatility, lessened liquidity or in illiquid markets, there may be more variability in market pricing or a lack of significant judgment. market data to use in the valuation process.
A significant portion of our assets and liabilities that are reported at fair value are measured based on quoted market prices or observable market/market / independent inputs.
The following is a description of the significant estimates used in theinputs and are classified within levels 1 and 2. Instruments valued using internally developed valuation of financial assetsmodels and liabilities for which quoted market prices and observable market parameters are not available.
Municipal and asset-backed securities
The municipal securities portionother valuation techniques that is classified as Level 3 uses significant estimates to determine the fair value of these securities which results in greater subjectivity. The fair value is determined by utilizing third-party valuation services. The third-party service provider reviews credit worthiness, prevailing market rates, analysis of similar securities, and projected cash flows. The third-party service provider also incorporates industry and general economic conditions into their analysis. Huntington evaluates the analysis provided for reasonableness.
Our CDO preferred securities portfolios are measured at fair value using a valuation methodology involving use of significant unobservable inputs and are thus, classified as Levelwithin level 3 in the fair value hierarchy. The private label CMO securities portfolio is subjected to a monthly review of the projected cash flows, while the cash flowsvaluation hierarchy. For more information, see Note 17 - Fair Value of our CDO preferred securities portfolio is reviewed quarterly. These reviews are supported with analysis from independent third parties,Assets and are used as a basis for impairment analysis.Liabilities.
CDO preferred securities are CDOs backed by a pool of debt securities issued by financial institutions. The collateral generally consists of trust-preferred securities and subordinated debt securities issued by banks, bank holding companies, and insurance companies. A full cash flow analysis is used to estimate fair values and assess impairment for each security within this portfolio. We engage a third-party pricing specialist with direct industry experience in pooled-trust-preferred securities valuations to provide assistance in estimating the fair value and expected cash flows for each security in this portfolio. The PD of each issuer and the market discount rate are the most significant inputs in determining fair value. Management evaluates the PD assumptions provided by the third-party pricing specialist by comparing the current PD to the assumptions used the previous quarter, actual defaults and deferrals in the current period, and trend data on certain financial ratios of the issuers. Huntington also evaluates the assumptions related to discount rates. Relying on cash flows is necessary because there was a lack of observable transactions in the market and many of the original sponsors or dealers for these securities are no longer able to provide a fair value that is compliant with ASC 820.
Derivatives used for hedging purposes
Derivatives designated as qualified hedges are tested for hedge effectiveness on a quarterly basis. Assessments are made at the inception of the hedge and on a recurring basis to determine whether the derivative used in the hedging transaction has been and is expected to continue to be highly effective in offsetting changes in fair values or cash flows of the hedged item. A statistical regression analysis is performed to measure the effectiveness.
If, based on the assessment, a derivative is not expected to be a highly effective hedge or it has ceased to be a highly effective hedge, hedge accounting is discontinued as of the quarter the hedge is not highly effective. As the statistical regression analysis requires the use of estimates regarding the amount and timing of future cash flows which are sensitive to significant changes in future periods based on changes in market rates; we consider this a critical accounting estimate.
Loans held for sale
Huntington has elected to apply the fair value option to certain residential mortgage loans that are classified as held for sale at origination. The fair value of such loans is estimated based on the inputs that include prices of mortgage backed securities adjusted for other variables such as, interest rates, expected credit defaults and market discount rates. The adjusted value reflects the price we expect to receive from the sale of such loans.
Certain consumer and commercial loans are classified as held for sale and are accounted for at the lower of amortized cost or fair value. The determination of fair value for these consumer loans is based on observable prices for similar products or discounted expected cash flows, which takes into consideration factors such as future interest rates, prepayment speeds, default and loss curves, and market discount rates.
Mortgage Servicing Rights
Retained rights to service mortgage loans are recognized as a separate and distinct asset at the time the loans are sold. Mortgage servicing rights (“MSRs”) are initially recorded at fair value at the time the related loans are sold and subsequently re-measured at each reporting date under either the fair value or amortization method. The election of the fair value or amortization method is made at the time each servicing asset is established. All newly created MSRs since 2009 are recorded using the amortization method. Any increase or decrease in fair value of MSRs accounted for under the fair value method, as well as any amortization and/or impairment of MSRs recorded under the amortization method, is reflected in earnings in the period that the changes occur. MSRs are subject to
interest rate risk in that their fair value will fluctuate as a result of changes in the interest rate environment. Fair value is determined based upon the application of an income approach valuation model. We use an independent third-party valuation model, which incorporates assumptions in estimating future cash flows. These assumptions include prepayment speeds, payoffs, and changes in valuation inputs and assumptions. The reasonableness of these pricing models is validated on a minimum of a quarterly basis by at least one independent external service broker valuation. Because the fair values of MSRs are significantly impacted by the use of estimates, the use of different assumptions can result in different estimated fair values of those MSRs.
Contingent Liabilities
We are a party to various claims, litigation, and legal proceedings resulting from ordinary business activities relating to our current and/or former operations. We estimate and provide for potential losses that may arise out of litigation and regulatory proceedings to the extent that such losses are probable and can be reasonably estimated. Significant judgment is required in making these estimates and our final liabilities may ultimately be more or less than the current estimate. Our total estimated liability in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, our experience and the experience of others in similar cases or proceedings, and the opinions and views of legal counsel. Litigation exposure represents a key area of judgment and is subject to uncertainty and certain factors outside of our control.
Income Taxes
The calculation of our provision for income taxes is complex and requires the use of estimates and judgments. We have two accruals for income taxes: (1) our income tax payable represents the estimated net amount currently due to the federal, state, and local taxing jurisdictions, net of any reserve for potential audit issues and any tax refunds and the net receivable balance is reported as a component of accrued income and other assets in our consolidated balance sheet;refunds; (2) our deferred federal and state income tax and related valuation accounts, reported as a component of accrued income and other assets, represents the estimated impact of temporary differences between how we recognize our assets and liabilities under GAAP, and how such assets and liabilities are recognized under federal and state tax law. The net receivable
balance and deferred tax accounts are presented as components of other assets or other liabilities in accordance with the asset or liability balance of the account.
In the ordinary course of business, we operate in various taxing jurisdictions and are subject to income and non-income taxes. The effective tax rate is based in part on our interpretation of the relevant current tax laws. We believe the aggregate liabilities related to taxes are appropriately reflected in the consolidated financial statements. We review the appropriate tax treatment of all transactions taking into consideration statutory, judicial, and regulatory guidance in the context of our tax positions. In addition, we rely on various tax opinions, recent tax audits, and historical experience.
From time-to-time, we engage in business transactions that may affect our tax liabilities. Where appropriate, we obtain opinions of outside experts and assess the relative merits and risks of the appropriate tax treatment of business transactions taking into account statutory, judicial, and regulatory guidance in the context of the tax position. However, changes to our estimates of accrued taxes can occur due to changes in tax rates, implementation of new business strategies, resolution of issues with taxing authorities regarding previously taken tax positions, and newly enacted statutory, judicial, and regulatory guidance. Such changes could affect the amount of our accrued taxes and could be material to our financial position and/and / or results of operations. (SeeFor more information, see Note 17 of the Notes to Consolidated Financial Statements.)16 - Income Taxes.
Deferred Tax Assets
At December 31, 2016, we had a net federal deferred tax asset of $76 million and a net state deferred tax asset of $41 million. A valuation allowance is provided when it is more-likely-than-not some portion of the deferred tax asset will not be realized. All available evidence, both positive and negative, was considered to determine whether, based on the weight of that evidence, impairment should be recognized. Our forecast process includes judgmental and quantitative elements that may be subject to significant change. If our forecast of taxable income within the carryforward periods available under applicable law is not sufficient to cover the amount of net deferred tax assets, such assets may be impaired. Based on our analysis of both positive and negative evidence and our ability to offset the net deferred tax assets against our forecasted future taxable income, there was no impairment of the net deferred tax assets at December 31, 2016, other than a valuation allowance relating to state net operating loss carryovers.
Goodwill and Intangible Assets
The acquisition method of accounting requires that acquired assets and liabilities are recorded at their fair values as of the date of acquisition. This often involves estimates based on third party valuations or internal valuations based on discounted cash flow analyses or other valuation techniques, all of which are inherently subjective. Acquisitions typically result in goodwill, the amount by which the cost of net assets acquired in a business combination exceeds their fair value, which is subject to impairment testing at least annually. The amortization of identified intangible assets recognized in a business combination is based upon the estimated economic benefits to be received over their economic life, which is also subjective. Customer attrition rates that are based on historical
experience are used to determine the estimated economic life of certain intangibles assets, including but not limited to, customer deposit intangibles. Refer to Note 86 of the Notes to Consolidated Financial Statements for further information regarding these items.
Recent Accounting Pronouncements and Developments
Note 2 of the Notes to Consolidated Financial Statements discusses new accounting pronouncements adopted during 20162018 and the expected impact of accounting pronouncements recently issued but not yet required to be adopted. To the extent the adoption of new accounting standards materially affect financial condition, results of operations, or liquidity, the impacts are discussed in the applicable section of this MD&A and the Notes to Consolidated Financial Statements.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Information required by this item is set forth under the heading of “Market Risk” in Item 7 (MD&A), which is incorporated by reference into this item.
Item 8: Financial Statements and Supplementary Data
Information required by this item is set forth in the Reports of Independent Registered Public Accounting Firm, Consolidated Financial Statements and Notes, and Selected AnnualQuarterly Income Statements.Statements, which is incorporated by reference into this item.
REPORT OF MANAGEMENT'SMANAGEMENT’S EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Management of Huntington Bancshares Incorporated (Huntington or the Company) is responsible for the financial information and representations contained in the Consolidated Financial Statements and other sections of this report. The Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States. In all material respects, they reflect the substance of transactions that should be included based on informed judgments, estimates, and currently available information. Management maintains a system of internal accounting controls, which includes the careful selection and training of qualified personnel, appropriate segregation of responsibilities, communication of written policies and procedures, and a broad program of internal audits. The costs of the controls are balanced against the expected benefits. During 2016,2018, the audit committee of the board of directors met regularly with Management, Huntington’s internal auditors, and the independent registered public accounting firm, PricewaterhouseCoopers LLP, to review the scope of thetheir audits and to discuss the evaluation of internal accounting controls and financial reporting matters. The independent registered public accounting firm and the internal auditors have free access to, and meet confidentially with, the audit committee to discuss appropriate matters. Also, Huntington maintains a disclosure review committee. This committee’s purpose is to design and maintain disclosure controls and procedures to ensure that material information relating to the financial and operating condition of Huntington is properly reported to its chief executive officer, chief financial officer, internal auditors,chief auditor, and the audit committee of the board of directors in connection with the preparation and filing of periodic reports and the certification of those reports by the chief executive officer and the chief financial officer.
REPORT OF MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. Huntington’s Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016.2018. In making this assessment, Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013).Based on that assessment, Management concluded that, as of December 31, 2016,2018, the Company’s internal control over financial reporting is effective based on those criteria. The Company’s internal control over financial reporting as of December 31, 20162018 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing on the next page.
![g859562g42e64.jpg](https://files.docoh.com/10-K/0000049196-19-000018/g859562g42e64.jpg)
Stephen D. Steinour – Chairman, President, and Chief Executive Officer
Howell D. McCullough III – Senior Executive Vice President and Chief Financial Officer
February 22, 201715, 2019
Report of Independent Registered Public Accounting Firm
To theBoard of Directors and Shareholders of
Huntington Bancshares Incorporated
Opinions on the Financial Statements and Internal Control over Financial Reporting
In our opinion,We have audited the accompanying consolidated balance sheets of Huntington Bancshares Incorporated and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Huntington Bancshares Incorporated and its subsidiaries atthe Company as of December 31, 20162018 and 2015,2017, and the results of theirits operations and theirits cash flows for each of the twothree years in the period ended December 31, 20162018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016,2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). COSO.
Basis for Opinions
The Company'sCompany’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express opinions on thesethe Company’s consolidated financial statements and on the Company'sCompany’s internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Columbus, Ohio
February 22, 201715, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Huntington Bancshares Incorporated
Columbus, Ohio
We have audited the accompanying consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year ended December 31, 2014 of Huntington Bancshares Incorporated and subsidiaries (the “Company”). These financial statements are the responsibility ofserved as the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements of Huntington Bancshares Incorporated and subsidiaries present fairly, in all material respects, the results of their operations and their cash flows for the year ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
Columbus, Ohio
February 13, 2015auditor since 2015.
Huntington Bancshares Incorporated
Consolidated Balance Sheets
| | | December 31, | December 31, |
(dollar amounts in thousands, except per share amounts) | 2016 | | 2015 | |
(dollar amounts in millions) | | 2018 | | 2017 |
Assets | | | | | | |
Cash and due from banks | $ | 1,384,770 |
| | $ | 847,156 |
| $ | 1,108 |
| | $ | 1,212 |
|
Interest-bearing deposits at Federal Reserve Bank | | 1,564 |
| | 308 |
|
Interest-bearing deposits in banks | 58,267 |
| | 51,838 |
| 53 |
| | 47 |
|
Trading account securities | 133,295 |
| | 36,997 |
| 105 |
| | 86 |
|
Loans held for sale | 512,951 |
| | 474,621 |
| |
(includes $438,224 and $337,577 respectively, measured at fair value)(1) | | | | |
Available-for-sale and other securities | 15,562,837 |
| | 8,775,441 |
| |
Available-for-sale securities | | 13,780 |
| | 14,869 |
|
Held-to-maturity securities | 7,806,939 |
| | 6,159,590 |
| 8,565 |
| | 9,091 |
|
Loans and leases (includes $82,319 and $34,637 respectively, measured at fair value)(1) | | | | |
Commercial and industrial loans and leases | 28,058,712 |
| | 20,559,834 |
| |
Commercial real estate loans | 7,300,901 |
| | 5,268,651 |
| |
Automobile loans | 10,968,782 |
| | 9,480,678 |
| |
Home equity loans | 10,105,774 |
| | 8,470,482 |
| |
Residential mortgage loans | 7,724,961 |
| | 5,998,400 |
| |
RV and marine finance loans | 1,846,447 |
| | — |
| |
Other consumer loans | 956,419 |
| | 563,054 |
| |
Loans and leases | 66,961,996 |
| | 50,341,099 |
| |
Other securities | | 565 |
| | 600 |
|
Loans held for sale (includes $613 and $413 respectively, measured at fair value)(1) | | 804 |
| | 488 |
|
Loans and leases (includes $79 and $93 respectively, measured at fair value)(1) | | 74,900 |
| | 70,117 |
|
Allowance for loan and lease losses | (638,413 | ) | | (597,843 | ) | (772 | ) | | (691 | ) |
Net loans and leases | 66,323,583 |
| | 49,743,256 |
| 74,128 |
| | 69,426 |
|
Bank owned life insurance | 2,432,086 |
| | 1,757,668 |
| 2,507 |
| | 2,466 |
|
Premises and equipment | 815,508 |
| | 620,540 |
| 790 |
| | 864 |
|
Goodwill | 1,992,849 |
| | 676,869 |
| 1,989 |
| | 1,993 |
|
Other intangible assets | 402,458 |
| | 54,978 |
| |
Servicing rights | 225,578 |
| | 189,237 |
| |
Accrued income and other assets | 2,062,976 |
| | 1,630,110 |
| |
Servicing rights and other intangible assets | | 535 |
| | 584 |
|
Other assets | | 2,288 |
| | 2,151 |
|
Total assets | $ | 99,714,097 |
| | $ | 71,018,301 |
| $ | 108,781 |
| | $ | 104,185 |
|
Liabilities and shareholders’ equity | | | | | | |
Liabilities | | | | | | |
Deposits in domestic offices | | | | | | |
Demand deposits—noninterest-bearing | $ | 22,835,798 |
| | $ | 16,479,984 |
| |
Interest-bearing | 52,771,919 |
| | 38,547,587 |
| |
Deposits in foreign offices | — |
| | 267,408 |
| |
Demand deposits—noninterest-bearing (includes $210 classified as held-for-sale at December 31, 2018) | | $ | 21,783 |
| | $ | 21,546 |
|
Interest-bearing (includes $662 classified as held-for-sale at December 31, 2018) | | 62,991 |
| | 55,495 |
|
Deposits | 75,607,717 |
| | 55,294,979 |
| 84,774 |
| | 77,041 |
|
Short-term borrowings | 3,692,654 |
| | 615,279 |
| 2,017 |
| | 5,056 |
|
Long-term debt | 8,309,159 |
| | 7,041,364 |
| 8,625 |
| | 9,206 |
|
Accrued expenses and other liabilities | 1,796,421 |
| | 1,472,073 |
| |
Other liabilities | | 2,263 |
| | 2,068 |
|
Total liabilities | 89,405,951 |
| | 64,423,695 |
| 97,679 |
| | 93,371 |
|
Commitments and contingencies (Note 21) |
| |
| |
Commitments and contingencies (Note 20) | |
| |
|
Shareholders’ equity | | | | | | |
Preferred stock | 1,071,227 |
| | 386,291 |
| 1,203 |
| | 1,071 |
|
Common stock | 10,886 |
| | 7,970 |
| 11 |
| | 11 |
|
Capital surplus | 9,881,277 |
| | 7,038,502 |
| 9,181 |
| | 9,707 |
|
Less treasury shares, at cost | (27,384 | ) | | (17,932 | ) | (45 | ) | | (35 | ) |
Accumulated other comprehensive loss | (401,016 | ) | | (226,158 | ) | (609 | ) | | (528 | ) |
Retained (deficit) earnings | (226,844 | ) | | (594,067 | ) | |
Retained earnings | | 1,361 |
| | 588 |
|
Total shareholders’ equity | 10,308,146 |
| | 6,594,606 |
| 11,102 |
| | 10,814 |
|
Total liabilities and shareholders’ equity | $ | 99,714,097 |
| | $ | 71,018,301 |
| $ | 108,781 |
| | $ | 104,185 |
|
Common shares authorized (par value of $0.01) | 1,500,000,000 |
| | 1,500,000,000 |
| 1,500,000,000 |
| | 1,500,000,000 |
|
Common shares issued | 1,088,641,251 |
| | 796,969,694 |
| |
Common shares outstanding | 1,085,688,538 |
| | 794,928,886 |
| 1,046,767,252 |
| | 1,072,026,681 |
|
Treasury shares outstanding | 2,952,713 |
| | 2,040,808 |
| 3,817,385 |
| | 3,268,265 |
|
Preferred stock, authorized shares | 6,617,808 |
| | 6,617,808 |
| 6,617,808 |
| | 6,617,808 |
|
Preferred shares issued | 2,702,571 |
| | 1,967,071 |
| |
Preferred shares outstanding | 1,098,006 |
| | 398,006 |
| 740,500 |
| | 1,098,006 |
|
| |
(1) | Amounts represent loans for which Huntington has elected the fair value option. See Note 18.17. |
See Notes to Consolidated Financial Statements
Huntington Bancshares Incorporated
Consolidated Statements of Income
|
| | | | | | | | | | | |
| Year Ended December 31, |
(dollar amounts in thousands, except per share amounts) | 2016 | | 2015 | | 2014 |
Interest and fee income: | | | | | |
Loans and leases | $ | 2,178,044 |
| | $ | 1,759,525 |
| | $ | 1,674,563 |
|
Available-for-sale and other securities | | | | | |
Taxable | 221,782 |
| | 202,104 |
| | 171,080 |
|
Tax-exempt | 58,853 |
| | 42,014 |
| | 28,965 |
|
Held-to-maturity securities | 138,312 |
| | 86,614 |
| | 88,724 |
|
Other | 35,122 |
| | 24,264 |
| | 13,130 |
|
Total interest income | 2,632,113 |
| | 2,114,521 |
| | 1,976,462 |
|
Interest expense | | | | | |
Deposits | 102,005 |
| | 82,175 |
| | 86,453 |
|
Short-term borrowings | 5,140 |
| | 1,584 |
| | 2,940 |
|
Federal Home Loan Bank advances | 274 |
| | 586 |
| | 1,011 |
|
Subordinated notes and other long-term debt | 155,376 |
| | 79,439 |
| | 48,917 |
|
Total interest expense | 262,795 |
| | 163,784 |
| | 139,321 |
|
Net interest income | 2,369,318 |
| | 1,950,737 |
| | 1,837,141 |
|
Provision for credit losses | 190,802 |
| | 99,954 |
| | 80,989 |
|
Net interest income after provision for credit losses | 2,178,516 |
| | 1,850,783 |
| | 1,756,152 |
|
Service charges on deposit accounts | 324,299 |
| | 280,349 |
| | 273,741 |
|
Cards and payment processing income | 169,064 |
| | 142,715 |
| | 105,401 |
|
Mortgage banking income | 128,257 |
| | 111,853 |
| | 84,887 |
|
Trust services | 108,274 |
| | 105,833 |
| | 115,972 |
|
Insurance income | 64,523 |
| | 65,264 |
| | 65,473 |
|
Brokerage income | 61,834 |
| | 60,205 |
| | 68,277 |
|
Capital markets fees | 59,527 |
| | 53,616 |
| | 43,731 |
|
Bank owned life insurance income | 57,567 |
| | 52,400 |
| | 57,048 |
|
Gain on sale of loans | 47,153 |
| | 33,037 |
| | 21,091 |
|
Net gains on sales of securities | 2,035 |
| | 3,184 |
| | 17,554 |
|
Impairment losses recognized in earnings on available-for-sale securities (a) | (2,119 | ) | | (2,440 | ) | | — |
|
Other income | 129,317 |
| | 132,714 |
| | 126,004 |
|
Total noninterest income | 1,149,731 |
| | 1,038,730 |
| | 979,179 |
|
Personnel costs | 1,349,124 |
| | 1,122,182 |
| | 1,048,775 |
|
Outside data processing and other services | 304,743 |
| | 231,353 |
| | 212,586 |
|
Equipment | 164,839 |
| | 124,957 |
| | 119,663 |
|
Net occupancy | 153,090 |
| | 121,881 |
| | 128,076 |
|
Professional services | 105,266 |
| | 50,291 |
| | 59,555 |
|
Marketing | 62,957 |
| | 52,213 |
| | 50,560 |
|
Deposit and other insurance expense | 54,107 |
| | 44,609 |
| | 49,044 |
|
Amortization of intangibles | 30,456 |
| | 27,867 |
| | 39,277 |
|
Other expense | 183,903 |
| | 200,555 |
| | 174,810 |
|
Total noninterest expense | 2,408,485 |
| | 1,975,908 |
| | 1,882,346 |
|
Income before income taxes | 919,762 |
| | 913,605 |
| | 852,985 |
|
Provision for income taxes | 207,941 |
| | 220,648 |
| | 220,593 |
|
Net income | 711,821 |
| | 692,957 |
| | 632,392 |
|
Dividends on preferred shares | 65,274 |
| | 31,873 |
| | 31,854 |
|
Net income applicable to common shares | $ | 646,547 |
| | $ | 661,084 |
| | $ | 600,538 |
|
Average common shares—basic | 904,438 |
| | 803,412 |
| | 819,917 |
|
| | | | Year Ended December 31, |
(dollar amounts in millions, share amounts in thousands) | | 2018 | | 2017 | | 2016 |
Interest and fee income: | | | | | | |
Loans and leases | | $ | 3,305 |
| | $ | 2,838 |
| | $ | 2,178 |
|
Available-for-sale securities | | | | | | |
Taxable | | 279 |
| | 283 |
| | 211 |
|
Tax-exempt | | 97 |
| | 77 |
| | 59 |
|
Held-to-maturity securities-taxable | | 211 |
| | 193 |
| | 138 |
|
Other securities-taxable | | 25 |
| | 20 |
| | 12 |
|
Other interest income | | 32 |
| | 22 |
| | 34 |
|
Total interest income | | 3,949 |
| | 3,433 |
| | 2,632 |
|
Interest expense | | | | | | |
Deposits | | 391 |
| | 180 |
| | 102 |
|
Short-term borrowings | | 48 |
| | 25 |
| | 5 |
|
Long-term debt | | 321 |
| | 226 |
| | 156 |
|
Total interest expense | | 760 |
| | 431 |
| | 263 |
|
Net interest income | | 3,189 |
| | 3,002 |
| | 2,369 |
|
Provision for credit losses | | 235 |
| | 201 |
| | 191 |
|
Net interest income after provision for credit losses | | 2,954 |
| | 2,801 |
| | 2,178 |
|
Service charges on deposit accounts | | 364 |
| | 353 |
| | 324 |
|
Card and payment processing income | | 224 |
| | 206 |
| | 169 |
|
Trust and investment management services | | 171 |
| | 156 |
| | 123 |
|
Mortgage banking income | | 108 |
| | 131 |
| | 128 |
|
Capital markets fees | | 91 |
| | 76 |
| | 60 |
|
Insurance income | | 82 |
| | 81 |
| | 84 |
|
Bank owned life insurance income | | 67 |
| | 67 |
| | 58 |
|
Gain on sale of loans and leases | | 55 |
| | 56 |
| | 47 |
|
Net (losses) gains on sales of securities | | (21 | ) | | — |
| | 2 |
|
Impairment losses recognized in earnings on available-for-sale securities (a) | | — |
| | (4 | ) | | (2 | ) |
Other income | | 180 |
| | 185 |
| | 157 |
|
Total noninterest income | | 1,321 |
| | 1,307 |
| | 1,150 |
|
Personnel costs | | 1,559 |
| | 1,524 |
| | 1,349 |
|
Outside data processing and other services | | 294 |
| | 313 |
| | 305 |
|
Net occupancy | | 184 |
| | 212 |
| | 153 |
|
Equipment | | 164 |
| | 171 |
| | 165 |
|
Deposit and other insurance expense | | 63 |
| | 78 |
| | 54 |
|
Professional services | | 60 |
| | 69 |
| | 105 |
|
Marketing | | 53 |
| | 60 |
| | 63 |
|
Amortization of intangibles | | 53 |
| | 56 |
| | 30 |
|
Other expense | | 217 |
| | 231 |
| | 184 |
|
Total noninterest expense | | 2,647 |
| | 2,714 |
| | 2,408 |
|
Income before income taxes | | 1,628 |
| | 1,394 |
| | 920 |
|
Provision for income taxes | | 235 |
| | 208 |
| | 208 |
|
Net income | | 1,393 |
| | 1,186 |
| | 712 |
|
Dividends on preferred shares | | 70 |
| | 76 |
| | 65 |
|
Net income applicable to common shares | | $ | 1,323 |
| | $ | 1,110 |
| | $ | 647 |
|
Average common shares—basic | | 1,081,542 |
| | 1,084,686 |
| | 904,438 |
|
Average common shares—diluted | 918,790 |
| | 817,129 |
| | 833,081 |
| 1,105,985 |
| | 1,136,186 |
| | 918,790 |
|
Per common share: | | | | | | | | | | |
Net income—basic | $ | 0.72 |
| | $ | 0.82 |
| | $ | 0.73 |
| $ | 1.22 |
| | $ | 1.02 |
| | $ | 0.72 |
|
Net income—diluted | 0.70 |
| | 0.81 |
| | 0.72 |
| 1.20 |
| | 1.00 |
| | 0.70 |
|
Cash dividends declared | 0.29 |
| | 0.25 |
| | 0.21 |
| |
| |
(a) | The following OTTI losses are included in securities losses for the periods presented: |
| | Total OTTI losses | $ | (5,851 | ) | | $ | (3,144 | ) | | $ | — |
| $ | — |
| | $ | (4 | ) | | $ | (6 | ) |
Noncredit-related portion of loss recognized in OCI | 3,732 |
| | 704 |
| | — |
| — |
| | — |
| | 4 |
|
Net impairment credit losses recognized in earnings | $ | (2,119 | ) | | $ | (2,440 | ) | | $ | — |
| $ | — |
| | $ | (4 | ) | | $ | (2 | ) |
See Notes to Consolidated Financial Statements
Huntington Bancshares Incorporated
Consolidated Statements of Comprehensive Income
| | | Year Ended December 31, | Year Ended December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | | 2014 | |
(dollar amounts in millions) | | 2018 | | 2017 | | 2016 |
Net income | $ | 711,821 |
| | $ | 692,957 |
| | $ | 632,392 |
| $ | 1,393 |
| | $ | 1,186 |
| | $ | 712 |
|
Other comprehensive income, net of tax: | | | | | | | | | | |
Unrealized gains (losses) on available-for-sale and other securities: | | | | | | | | | | |
Non-credit-related impairment recoveries on debt securities not expected to be sold | 585 |
| | 12,673 |
| | 8,780 |
| — |
| | 2 |
| | 1 |
|
Unrealized net gains (losses) on available-for-sale and other securities arising during the period, net of reclassification for net realized gains and losses | (201,599 | ) | | (19,757 | ) | | 45,783 |
| (84 | ) | | (39 | ) | | (202 | ) |
Total unrealized gains (losses) on available-for-sale securities | (201,014 | ) | | (7,084 | ) | | 54,563 |
| (84 | ) | | (37 | ) | | (201 | ) |
Unrealized gains on cash flow hedging derivatives, net of reclassifications to income | 1,314 |
| | 8,285 |
| | 6,611 |
| — |
| | 3 |
| | 1 |
|
Change in accumulated unrealized gains (losses) for pension and other post-retirement obligations | 24,842 |
| | (5,067 | ) | | (69,457 | ) | 4 |
| | — |
| | 25 |
|
Other comprehensive loss, net of tax | (174,858 | ) | | (3,866 | ) | | (8,283 | ) | (80 | ) | | (34 | ) | | (175 | ) |
Comprehensive income | $ | 536,963 |
| | $ | 689,091 |
| | $ | 624,109 |
| $ | 1,313 |
| | $ | 1,152 |
| | $ | 537 |
|
See Notes to Consolidated Financial Statements
Huntington Bancshares Incorporated
Consolidated Statements of Changes in Shareholders’ Equity
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | | | | | | Other | | Retained | | |
(dollar amounts in thousands, except per share amounts) | | Preferred Stock | | Common Stock | | Capital | | Treasury Stock | | Comprehensive | | Earnings | | |
| Amount | | Shares | | Amount | | Surplus | | Shares | | Amount | | Loss | | (Deficit) | | Total |
Year Ended December 31, 2016 | | | | | | | | | | | | | | | | | | |
Balance, beginning of year | | $ | 386,291 |
| | 796,970 |
| | $ | 7,970 |
| | $ | 7,038,502 |
| | (2,041 | ) | | $ | (17,932 | ) | | $ | (226,158 | ) | | $ | (594,067 | ) | | $ | 6,594,606 |
|
Net income | | | | | | | | | | | | | | | | 711,821 |
| | 711,821 |
|
Other comprehensive income (loss) | | | | | | | | | | | | | | (174,858 | ) | | | | (174,858 | ) |
FirstMerit Acquisition: | | | | | | | | | | | | | | | | | | |
Issuance of common stock | | | | 285,425 |
| | 2,854 |
| | 2,763,919 |
| | | | | | | | | | 2,766,773 |
|
Issuance of Series C preferred stock | | 100,000 |
| | | | | | 4,320 |
| | | | | | | | | | 104,320 |
|
Net proceeds from issuance of Series D preferred stock | | 584,936 |
| | | | | | | | | | | | | | | | 584,936 |
|
Cash dividends declared: | | | | | | | | | | | | | | | | | | |
Common ($0.29 per share) | | | | | | | | | | | | | | | | (274,780 | ) | | (274,780 | ) |
Preferred Series A ($85.00 per share) | | | | | | | | | | | | | | | | (30,813 | ) | | (30,813 | ) |
Preferred Series B ($34.03 per share) | | | | | | | | | | | | | | | | (1,208 | ) | | (1,208 | ) |
Preferred Series C ($26.28 per share) | | | | | | | | | | | | | | | | (2,628 | ) | | (2,628 | ) |
Preferred Series D ($51.04 per share) | | | | | | | | | | | | | | | | (30,625 | ) | | (30,625 | ) |
Recognition of the fair value of share-based compensation | | | | | | | | 65,608 |
| | | | | | | | | | 65,608 |
|
Other share-based compensation activity | | | | 5,924 |
| | 59 |
| | 5,483 |
| | | | | | | | (4,554 | ) | | 988 |
|
Other | | | | 322 |
| | 3 |
| | 3,445 |
| | (912 | ) | | (9,452 | ) | | | | 10 |
| | (5,994 | ) |
Balance, end of year | | $ | 1,071,227 |
| | 1,088,641 |
| | $ | 10,886 |
| | $ | 9,881,277 |
| | (2,953 | ) | | $ | (27,384 | ) | | $ | (401,016 | ) | | $ | (226,844 | ) | | $ | 10,308,146 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | | | | | | Other | | Retained | | |
(dollar amounts in millions, share amounts in thousands) | | Preferred Stock | | Common Stock | | Capital | | Treasury Stock | | Comprehensive | | Earnings | | |
| Amount | | Shares | | Amount | | Surplus | | Shares | | Amount | | Loss | | (Deficit) | | Total |
Year Ended December 31, 2018 | | | | | | | | | | | | | | | | | | |
Balance, beginning of year | | $ | 1,071 |
| | 1,075,295 |
| | $ | 11 |
| | $ | 9,707 |
| | (3,268 | ) | | $ | (35 | ) | | $ | (528 | ) | | $ | 588 |
| | $ | 10,814 |
|
Cumulative-effect adjustment (ASU 2016-01) | | | | | | | | | | | | | | (1 | ) | | 1 |
| | — |
|
Net income | | | | | | | | | | | | | | | | 1,393 |
| | 1,393 |
|
Other comprehensive income (loss) | | | | | | | | | | | | | | (80 | ) | | | | (80 | ) |
Net proceeds from issuance of Preferred Series E Stock | | 495 |
| | | | | | | | | | | | | | | | 495 |
|
Repurchases of common stock | | | | (61,644 | ) | | — |
| | (939 | ) | | | | | | | | | | (939 | ) |
Cash dividends declared: | | | | | | | | | | | | | | | | | | |
Common ($0.50 per share) | | | | | | | | | | | | | | | | (541 | ) | | (541 | ) |
Preferred Series B ($49.11 per share) | | | | | | | | | | | | | | | | (3 | ) | | (3 | ) |
Preferred Series C ($58.76 per share) | | | | | | | | | | | | | | | | (6 | ) | | (6 | ) |
Preferred Series D ($62.50 per share) | | | | | | | | | | | | | | | | (37 | ) | | (37 | ) |
Preferred Series E ($4,892.50 per share) | | | | | | | | | | | | | | | | (24 | ) | | (24 | ) |
Conversion of Preferred Series A Stock to Common Stock | | (363 | ) | | 30,330 |
| | | | 363 |
| | | | | | | | | | — |
|
Recognition of the fair value of share-based compensation | | | | | | | | 78 |
| | | | | | | | | | 78 |
|
Other share-based compensation activity | | | | 6,603 |
| | — |
| | (31 | ) | | | | | | | | (10 | ) | | (41 | ) |
Other | | | | — |
| | — |
| | 3 |
| | (549 | ) | | (10 | ) | | | | — |
| | (7 | ) |
Balance, end of year | | $ | 1,203 |
| | 1,050,584 |
| | $ | 11 |
| | $ | 9,181 |
| | (3,817 | ) | | $ | (45 | ) | | $ | (609 | ) | | $ | 1,361 |
| | $ | 11,102 |
|
See Notes to Consolidated Financial Statements
Huntington Bancshares Incorporated
Consolidated Statements of Changes in Shareholders’ Equity
| | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | | | | | Other | | Retained | | | | | | | | | | | | | | | Other | | Retained | | |
(dollar amounts in thousands, except per share amounts) | Preferred Stock | | Common Stock | | Capital | | Treasury Stock | | Comprehensive | | Earnings | | | |
Amount | | Shares | | Amount | | Surplus | | Shares | | Amount | | Loss | | (Deficit) | | Total | |
Year Ended December 31, 2015 | | | | | | | | | | | | | | | | | | |
(dollar amounts in millions, share amounts in thousands) | | Preferred Stock | | Common Stock | | Capital | | Treasury Stock | | Comprehensive | | Earnings | | |
| Amount | | Shares | | Amount | | Surplus | | Shares | | Amount | | Loss | | (Deficit) | | Total |
Year Ended December 31, 2017 | | | | | | | | | | | | | | | | | | |
Balance, beginning of year | $ | 386,292 |
| | 813,136 |
| | $ | 8,131 |
| | $ | 7,221,745 |
| | (1,682 | ) | | $ | (13,382 | ) | | $ | (222,292 | ) | | $ | (1,052,324 | ) | | $ | 6,328,170 |
| $ | 1,071 |
| | 1,088,641 |
| | $ | 11 |
| | $ | 9,881 |
| | (2,953 | ) | | $ | (27 | ) | | $ | (401 | ) | | $ | (227 | ) | | $ | 10,308 |
|
Net income | | | | | | | | | | | | | | | 692,957 |
| | 692,957 |
| | | | | | | | | | | | | | | 1,186 |
| | 1,186 |
|
Other comprehensive income (loss) | | | | | | | | | | | | | (3,866 | ) | | | | (3,866 | ) | | | | | | | | | | | | | (34 | ) | | | | (34 | ) |
Repurchase of common stock | | | (23,036 | ) | | (230 | ) | | (251,614 | ) | | | | | | | | | | (251,844 | ) | | | (19,430 | ) | | — |
| | (260 | ) | | | | | | | | | | (260 | ) |
Cash dividends declared: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common ($0.25 per share) | | | | | | | | | | | | | | | (200,197 | ) | | (200,197 | ) | |
Common ($0.35 per share) | | | | | | | | | | | | | | | | (379 | ) | | (379 | ) |
Preferred Series A ($85.00 per share) | | | | | | | | | | | | | | | (30,813 | ) | | (30,813 | ) | | | | | | | | | | | | | | | (31 | ) | | (31 | ) |
Preferred Series B ($29.84 per share) | | | | | | | | | | | | | | | (1,059 | ) | | (1,059 | ) | |
Preferred share conversion | (1 | ) | | | | | | 1 |
| | | | | | | | | | — |
| |
Preferred Series B ($39.11 per share) | | | | | | | | | | | | | | | | (1 | ) | | (1 | ) |
Preferred Series C ($58.76 per share) | | | | | | | | | | | | | | | | (6 | ) | | (6 | ) |
Preferred Series D ($62.50 per share) | | | | | | | | | | | | | | | | (38 | ) | | (38 | ) |
Recognition of the fair value of share-based compensation | | | | | | | 51,415 |
| | | | | | | | | | 51,415 |
| | | | | | | 92 |
| | | | | | | | | | 92 |
|
Other share-based compensation activity | | | 6,784 |
| | 68 |
| | 16,068 |
| | | | | | | | (2,644 | ) | | 13,492 |
| | | 5,923 |
| | — |
| | (10 | ) | | | | | | | | (9 | ) | | (19 | ) |
TCJA, Reclassification from accumulated OCI to retained earnings | | | | | | | | | | | | | | (93 | ) | | 93 |
| | — |
|
Other | | | 86 |
| | 1 |
| | 887 |
| | (359 | ) | | (4,550 | ) | | | | 13 |
| | (3,649 | ) | | | 161 |
| |
| | 4 |
| | (315 | ) | | (8 | ) | | | | | | (4 | ) |
Balance, end of year | $ | 386,291 |
| | 796,970 |
| | $ | 7,970 |
| | $ | 7,038,502 |
| | (2,041 | ) | | $ | (17,932 | ) | | $ | (226,158 | ) | | $ | (594,067 | ) | | $ | 6,594,606 |
| $ | 1,071 |
| | 1,075,295 |
| | $ | 11 |
| | $ | 9,707 |
| | (3,268 | ) | | $ | (35 | ) | | $ | (528 | ) | | $ | 588 |
| | $ | 10,814 |
|
See Notes to Consolidated Financial Statements
Huntington Bancshares Incorporated
Consolidated Statements of Changes in Shareholders’ Equity
| | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | | | | | Other | | Retained | | | | | | | | | | | | | | | Other | | Retained | | |
(dollar amounts in thousands, except per share amounts) | Preferred Stock | | Common Stock | | Capital | | Treasury Stock | | Comprehensive | | Earnings | | | |
Amount | | Shares | | Amount | | Surplus | | Shares | | Amount | | Loss | | (Deficit) | | Total | |
Year Ended December 31, 2014 | | | | | | | | | | | | | | | | | | |
(dollar amounts in millions, share amounts in thousands) | | Preferred Stock | | Common Stock | | Capital | | Treasury Stock | | Comprehensive | | Earnings | | |
| Amount | | Shares | | Amount | | Surplus | | Shares | | Amount | | Loss | | (Deficit) | | Total |
Year Ended December 31, 2016 | | | | | | | | | | | | | | | | | | |
Balance, beginning of year | $ | 386,292 |
| | 832,217 |
| | $ | 8,322 |
| | $ | 7,398,515 |
| | (1,331 | ) | | $ | (9,643 | ) | | $ | (214,009 | ) | | $ | (1,479,324 | ) | | $ | 6,090,153 |
| $ | 386 |
| | 796,970 |
| | $ | 8 |
| | $ | 7,039 |
| | (2,041 | ) | | $ | (18 | ) | | $ | (226 | ) | | $ | (594 | ) | | $ | 6,595 |
|
Net income | | | | | | | | | | | | | | | 632,392 |
| | 632,392 |
| | | | | | | | | | | | | | | 712 |
| | 712 |
|
Other comprehensive income (loss) | | | | | | | | | | | | | (8,283 | ) | | | | (8,283 | ) | | | | | | | | | | | | | (175 | ) | | | | (175 | ) |
Repurchase of common stock | | | (35,709 | ) | | (357 | ) | | (334,072 | ) | | | | | | | | | | (334,429 | ) | |
FirstMerit Acquisition: | | | | | | | | | | | | | | | | | | |
Issuance of common stock | | | | 285,425 |
| | 3 |
| | 2,764 |
| | | | | | | | | | 2,767 |
|
Issuance of Preferred Series C Stock | | 100 |
| | | | | | 4 |
| | | | | | | | | | 104 |
|
Net proceeds from issuance of Preferred Series D Stock | | 585 |
| | | | | | | | | | | | | | | | 585 |
|
Cash dividends declared: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common ($0.21 per share) | | | | | | | | | | | | | | | (171,692 | ) | | (171,692 | ) | |
Common ($0.29 per share) | | | | | | | | | | | | | | | | (275 | ) | | (275 | ) |
Preferred Series A ($85.00 per share) | | | | | | | | | | | | | | | (30,813 | ) | | (30,813 | ) | | | | | | | | | | | | | | | (31 | ) | | (31 | ) |
Preferred Series B ($29.33 per share) | | | | | | | | | | | | | | | (1,041 | ) | | (1,041 | ) | |
Shares issued pursuant to acquisition | | | 8,694 |
| | 87 |
| | 91,577 |
| | | | | | | | | | 91,664 |
| |
Preferred Series B ($34.03 per share) | | | | | | | | | | | | | | | | (1 | ) | | (1 | ) |
Preferred Series C ($26.28 per share) | | | | | | | | | | | | | | | | (3 | ) | | (3 | ) |
Preferred Series D ($51.04 per share) | | | | | | | | | | | | | | | | (31 | ) | | (31 | ) |
Recognition of the fair value of share-based compensation | | | | | | | 43,666 |
| | | | | | | | | | 43,666 |
| | | | | | | 66 |
| | | | | | | | | | 66 |
|
Other share-based compensation activity | | | 6,752 |
| | 68 |
| | 17,219 |
| | | | | | | | (1,774 | ) | | 15,513 |
| | | 5,924 |
| | — |
| | 5 |
| | | | | | | | (4 | ) | | 1 |
|
Other | | | 1,182 |
| | 11 |
| | 4,840 |
| | (351 | ) | | (3,739 | ) | | | | (72 | ) | | 1,040 |
| | | 322 |
| | — |
| | 3 |
| | (912 | ) | | (9 | ) | | | |
|
| | (6 | ) |
Balance, end of year | $ | 386,292 |
| | 813,136 |
| | $ | 8,131 |
| | $ | 7,221,745 |
| | (1,682 | ) | | $ | (13,382 | ) | | $ | (222,292 | ) | | $ | (1,052,324 | ) | | $ | 6,328,170 |
| $ | 1,071 |
| | 1,088,641 |
| | $ | 11 |
| | $ | 9,881 |
| | (2,953 | ) | | $ | (27 | ) | | $ | (401 | ) | | $ | (227 | ) | | $ | 10,308 |
|
See Notes to Consolidated Financial Statements
Huntington Bancshares Incorporated
Consolidated Statements of Cash Flows
| | | Year Ended December 31, | Year Ended December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | | 2014 | |
(dollar amounts in millions) | | 2018 | | 2017 | | 2016 |
Operating activities | | | | | | | | | | |
Net income | $ | 711,821 |
| | $ | 692,957 |
| | $ | 632,392 |
| $ | 1,393 |
| | $ | 1,186 |
| | $ | 712 |
|
Adjustments to reconcile net income to net cash provided by (used for) operating activities: | | | | | | |
Impairment of goodwill | — |
| | — |
| | 3,000 |
| |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | |
Provision for credit losses | 190,802 |
| | 99,954 |
| | 80,989 |
| 235 |
| | 201 |
| | 191 |
|
Depreciation and amortization | 379,772 |
| | 341,281 |
| | 332,832 |
| 493 |
| | 413 |
| | 380 |
|
Share-based compensation expense | 65,608 |
| | 51,415 |
| | 43,666 |
| 78 |
| | 92 |
| | 66 |
|
Net gains on sales of securities | (2,035 | ) | | (3,184 | ) | | (17,554 | ) | |
Deferred income tax expense | | 63 |
| | 168 |
| | 165 |
|
Net losses (gains) on sales of securities | | 21 |
| | — |
| | (2 | ) |
Impairment losses recognized in earnings on available-for-sale securities | 2,119 |
| | 2,440 |
| | — |
| — |
| | 4 |
| | 2 |
|
Net Change in: | | | | | | |
Net change in: | | | | | | |
Trading account securities | (96,298 | ) | | 5,194 |
| | (6,618 | ) | (11 | ) | | 47 |
| | (96 | ) |
Loans held for sale | (123,047 | ) | | 53,765 |
| | (58,803 | ) | (301 | ) | | 12 |
| | (123 | ) |
Accrued income and other assets | (95,758 | ) | | (233,624 | ) | | (438,366 | ) | |
Deferred income taxes | 164,747 |
| | 68,776 |
| | 35,174 |
| |
Accrued expense and other liabilities | 4,001 |
| | (34,846 | ) | | 282,074 |
| |
Other assets | | (235 | ) | | (420 | ) | | (96 | ) |
Other liabilities | | 22 |
| | 233 |
| | 4 |
|
Other, net | 13,570 |
| | (10,766 | ) | | — |
| (32 | ) | | 18 |
| | 12 |
|
Net cash provided by (used for) operating activities | 1,215,302 |
| | 1,033,362 |
| | 888,786 |
| |
Net cash provided by (used in) operating activities | | 1,726 |
| | 1,954 |
| | 1,215 |
|
Investing activities | | | | | | | | | | |
Decrease (increase) in interest-bearing deposits in banks | 26,067 |
| | 12,721 |
| | (7,516 | ) | |
Net cash (paid) received in acquisitions | (133,218 | ) | | (457,836 | ) | | 691,637 |
| |
Change in interest bearing deposits in banks | | 90 |
| | 39 |
| | 26 |
|
Cash paid for acquisition of a business, net of cash received | | (15 | ) | | — |
| | (133 | ) |
Proceeds from: | | | | | | | | | | |
Maturities and calls of available-for-sale securities | 2,113,383 |
| | 1,907,669 |
| | 1,480,505 |
| 2,109 |
| | 1,994 |
| | 2,346 |
|
Maturities of held-to-maturity securities | 1,212,179 |
| | 594,905 |
| | 452,785 |
| |
Maturities and calls of held-to-maturity securities | | 743 |
| | 1,054 |
| | 1,212 |
|
Sales of available-for-sale securities | 6,154,326 |
| | 163,224 |
| | 1,152,907 |
| 1,419 |
| | 2,490 |
| | 6,154 |
|
Maturities, calls, and sales of other securities | | 42 |
| | (48 | ) | | (233 | ) |
Purchases of available-for-sale securities | (10,887,582 | ) | | (4,506,764 | ) | | (4,553,857 | ) | (2,485 | ) | | (5,429 | ) | | (10,905 | ) |
Purchases of held-to-maturity securities | — |
| | (379,351 | ) | | — |
| (338 | ) | | (1,356 | ) | | — |
|
Net proceeds from sales of loans | 2,981,184 |
| | 1,304,309 |
| | 353,811 |
| |
Purchases of other securities | | (7 | ) | | 11 |
| | 17 |
|
Net proceeds from sales of portfolio loans | | 697 |
| | 603 |
| | 2,981 |
|
Net loan and lease activity, excluding sales and purchases | (3,950,901 | ) | | (3,186,775 | ) | | (4,232,350 | ) | (5,333 | ) | | (3,680 | ) | | (3,951 | ) |
Proceeds from sale of operating lease assets | — |
| | 2,227 |
| | 17,591 |
| |
Purchases of premises and equipment | (120,438 | ) | | (93,097 | ) | | (58,862 | ) | (110 | ) | | (194 | ) | | (120 | ) |
Proceeds from sales of other real estate | 50,299 |
| | 36,038 |
| | 38,479 |
| |
Purchases of loans and leases | (410,625 | ) | | (333,726 | ) | | (345,039 | ) | (542 | ) | | (405 | ) | | (411 | ) |
Net cash paid for branch divestiture | (479,571 | ) | | — |
| | — |
| — |
| | — |
| | (480 | ) |
Purchases of customer lists | — |
| | — |
| | (946 | ) | |
Other, net | (456 | ) | | 7,802 |
| | 6,074 |
| 67 |
| | 55 |
| | 52 |
|
Net cash provided by (used for) investing activities | (3,445,353 | ) | | (4,928,654 | ) | | (5,004,781 | ) | |
Net cash provided by (used in) investing activities | | (3,663 | ) | | (4,866 | ) | | (3,445 | ) |
Financing activities | | | | | | | | | | |
Increase (decrease) in deposits | (292,259 | ) | | 3,644,492 |
| | 2,923,928 |
| 7,733 |
| | 1,433 |
| | (292 | ) |
Increase (decrease) in short-term borrowings | 1,899,561 |
| | (1,818,947 | ) | | 118,698 |
| (3,025 | ) | | 1,371 |
| | 1,900 |
|
Sale of deposits | — |
| | (47,521 | ) | | — |
| |
Proceeds from issuance of long-term debt | 2,127,750 |
| | 3,232,227 |
| | 2,000,000 |
| |
Net proceeds from issuance of long-term debt | | 2,229 |
| | 1,891 |
| | 2,128 |
|
Maturity/redemption of long-term debt | (1,274,838 | ) | | (1,036,717 | ) | | (198,922 | ) | (2,798 | ) | | (948 | ) | | (1,275 | ) |
Dividends paid on preferred stock | (54,380 | ) | | (31,872 | ) | | (31,854 | ) | (70 | ) | | (76 | ) | | (54 | ) |
Dividends paid on common stock | (245,208 | ) | | (192,518 | ) | | (166,935 | ) | (514 | ) | | (349 | ) | | (245 | ) |
Repurchase of common stock | — |
| | (251,844 | ) | | (334,429 | ) | |
Proceeds from stock options exercised | 16,981 |
| | 19,000 |
| | 17,710 |
| |
Net proceeds from issuance of common stock | — |
| | — |
| | 2,597 |
| |
Repurchases of common stock | | (939 | ) | | (260 | ) | | — |
|
Net proceeds from issuance of preferred stock | 584,936 |
| | — |
| | — |
| 495 |
| | — |
| | 585 |
|
Payments related to tax-withholding for share based compensation awards | | (27 | ) | | (26 | ) | | — |
|
Other, net | 5,122 |
| | 5,583 |
| | 4,635 |
| 5 |
| | 11 |
| | 21 |
|
Net cash provided by (used for) financing activities | 2,767,665 |
| | 3,521,883 |
| | 4,335,428 |
| 3,089 |
| | 3,047 |
| | 2,768 |
|
Increase (decrease) in cash and cash equivalents | 537,614 |
| | (373,409 | ) | | 219,433 |
| 1,152 |
| | 135 |
| | 538 |
|
Cash and cash equivalents at beginning of period | 847,156 |
| | 1,220,565 |
| | 1,001,132 |
| 1,520 |
| | 1,385 |
| | 847 |
|
Cash and cash equivalents at end of period | $ | 1,384,770 |
| | $ | 847,156 |
| | $ | 1,220,565 |
| $ | 2,672 |
| | $ | 1,520 |
| | $ | 1,385 |
|
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | Year Ended December 31, |
(dollar amounts in millions) | | 2018 | | 2017 | | 2016 |
Supplemental disclosures: | | | | | | | | | | |
Interest paid | $ | 241,073 |
| | $ | 150,403 |
| | $ | 131,488 |
| $ | 742 |
| | $ | 409 |
| | $ | 241 |
|
Income taxes paid | 4,979 |
| | 153,590 |
| | 139,918 |
| |
Income taxes (refunded) paid | | (52 | ) | | 84 |
| | 5 |
|
Non-cash activities: | | | | | | | | | | |
Common stock issued to acquire FirstMerit | 2,766,773 |
| | — |
| | — |
| — |
| | — |
| | 2,767 |
|
Preferred stock issued to acquire FirstMerit | 104,320 |
| | — |
| | — |
| — |
| | — |
| | 104 |
|
Loans transferred to held-for-sale from portfolio | 3,436,692 |
| | 1,727,440 |
| | 96,643 |
| 818 |
| | 660 |
| | 3,437 |
|
Loans transferred to portfolio from held-for-sale | 481,516 |
| | 278,080 |
| | 45,240 |
| 51 |
| | 12 |
| | 482 |
|
Transfer of loans to OREO | 78,693 |
| | 24,625 |
| | 39,066 |
| 20 |
| | 29 |
| | 79 |
|
Transfer of securities to held-to-maturity from available-for-sale | 2,870,257 |
| | 3,000,180 |
| | — |
| |
Transfer of securities from held-to-maturity to available-for-sale | | 2,833 |
| | — |
| | — |
|
Transfer of securities from available-for-sale to held-to-maturity | | 2,707 |
| | 993 |
| | 2,870 |
|
Huntington Bancshares Incorporated
Notes to Consolidated Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations — Huntington Bancshares Incorporated (Huntington or the Company) is a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through its subsidiaries, including its bank subsidiary, The Huntington National Bank (the Bank), Huntington is engaged in providing full-service commercial, small business, consumer banking services, mortgage banking services, automobile financing, recreational vehicle and marine financing, equipment leasing, investment management, trust services, brokerage services, customized insurance programs, and other financial products and services. Huntington’s banking offices are located in Ohio, Illinois, Michigan, Pennsylvania, Indiana, West Virginia, Wisconsin and Kentucky. Select financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office in Columbus, Ohio.
Basis of Presentation — The Consolidated Financial Statements include the accounts of Huntington and its majority-owned subsidiaries and are presented in accordance with GAAP. All intercompany transactions and balances have been eliminated in consolidation. CompaniesEntities in which Huntington holds more than a 50% voting equity interest, or a controlling financial interest are consolidated. For a voting interest entity, a controlling financial interest is generally where Huntington holds, directly or areindirectly, more than 50 percent of the outstanding voting shares. For a VIE in whichvariable interest entity (VIE), a controlling financial interest is where Huntington has the power to direct the activities of an entity that most significantly impact the entity’s economic performance and has an obligation to absorb losses or the right to receive benefits from the VIEVIE. These losses or benefits, which could potentially be significant to the VIE, are consolidated. VIEs are legal entities with insubstantial equity, whose equity investors lack the ability to make decisions about the entity’s activities, or whose equity investors do not have the obligation to absorb losses or the right to receive the residual returns of the entity if they occur. VIEs in which Huntington does not hold the power to direct the activities of the entity that most significantly impact the entity’s economic performance or does not have an obligation to absorb losses or the right to receive benefits from the VIE which could potentially be significant to the VIE are not consolidated. For consolidated entities where Huntington holds less than a 100% interest, Huntington recognizes non-controlling interest (included in shareholders’ equity) for the equity held by othersminority shareholders and non-controlling profit or loss (included in noninterest expense) for the portion of the entity’s earnings attributable to other’sminority interests. Investments in companies that are not consolidated are accounted for using the equity method when Huntington has the ability to exert significant influence. Those investmentsInvestments in nonmarketable equity securities for which Huntington does not have the ability to exert significant influence are generally accounted for using the cost method.method adjusted for change in observable prices. Investments in private investment partnerships that are accounted for under the equity method or the cost method are included in Accrued income and other assets and Huntington’s proportional interestearnings in the equity investments’ earningsinvestments are included in other noninterest income. Investment interestsInvestments accounted for under the cost and equity methods are periodically evaluated for impairment.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that significantly affect amounts reported in the Consolidated Financial Statements. Huntington utilizes processes that involve the use of significant estimates and the judgments of management in determining the amount of its allowance for credit losses, income taxes, deferred tax assets, and contingent liabilities, as well as fair value measurements of investment securities, derivatives,derivative instruments, goodwill, other intangible assets, pension assets and liabilities, short-term borrowings, mortgage servicing rights, and loans held for sale. As with any estimate, actual results could differ from those estimates.
For statements of cash flows purposes, cash and cash equivalents are defined as the sum of Cashcash and due from banks which includes amounts on deposit with theand interest-bearing deposits at Federal Reserve and Federal funds sold and securities purchased under resale agreements.Bank.
Certain prior period amounts have been reclassified to conform to the current year’s presentation.
Resale and Repurchase Agreements — Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. The fair value of collateral either received from or provided to a third-party is continually monitored and additional collateral is obtained or requested to be returned to Huntington in accordance with the agreement.
Securities — Securities purchased with the intention of recognizing short-term profits or which are actively bought and sold are classified as trading account securities and reported at fair value. The unrealized gains or losses on trading account securities are recorded in other noninterest income, except for gains and losses on trading account securities used to economically hedge the fair value of MSRs, which are included in mortgage banking income. Debt securities purchased in which Huntington has the positive intent and ability to hold to their maturity are classified as held-to-maturity securities. Held-to-maturity securities are recorded at amortized cost. All other debt and equity securities are classified as available-for-sale andor other securities. Unrealized gains or losses on available-for-sale and other securities are reported as a separate component of accumulated OCI in the Consolidated Statements of Changes in Shareholders’ Equity. Credit-related declines in the value of debt securities that are considered OTTI are recorded in noninterest income.
Huntington evaluates its investment securities portfolio on a quarterly basis for indicators of OTTI. Huntington assesses whether OTTI has occurred when the fair value of a debt security is less than the amortized cost basis at the balance sheet date. Management
reviews the amount of unrealized loss, the length of time the security has been in an unrealized loss position, the credit rating history, market trends of similar security classes, time remaining to maturity, and the source of both interest and principal payments to identify securities which could potentially be impaired. For those debt securities that Huntington intends to sell or is more likely than not
required to sell, before the recovery of their amortized cost bases, the difference between fair value and amortized cost is considered to be OTTI and is recognized in noninterest income. For those debt securities that Huntington does not intend to sell or is not more likely than not required to sell, prior to expected recovery of amortized cost bases, the credit portion of the OTTI is recognized in noninterest income while the noncredit portion is recognized onin OCI. In determining the credit portion, Huntington uses a discounted cash flow analysis, which includes evaluating the timing and amount of the expected cash flows. Non-credit-related OTTI results from other factors, including increased liquidity spreads and higher interest rates. Presentation of OTTI is made in the Consolidated Statements of Income on a gross basis with a reduction for the amount of OTTI recognized in OCI.
Securities transactions are recognized on the trade date (the date the order to buy or sell is executed). The carrying value plus any related accumulated OCI balance of sold securities is used to compute realized gains and losses. Interest and dividends on securities, including amortization of premiums and accretion of discounts using the effective interest method over the period to maturity, are included in interest income.
NonmarketableNon-marketable equity securities include stock acquiredheld for membership and regulatory purposes, such as Federal Home Loan BankFHLB stock and Federal Reserve BankFRB stock. These securities are accounted for at cost, evaluated for impairment, and are included in available-for-saleother securities. Other securities also include mutual funds and other marketable equity securities. These securities are carried at fair value, with changes in fair value recognized in other noninterest income.
Loans and Leases — Loans and direct financing leases for which Huntington has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are classified in the Consolidated Balance Sheets as loans and leases. Except for purchase credit impaired loans and loans for which the fair value option has been elected, loans and leases are carried at the principal amount outstanding, net of charge-offs, unamortized deferred loan origination fees and costs, premiums and net ofdiscounts, and unearned income. Direct financing leases are reported at the aggregate of lease payments receivable and estimated residual values, net of unearned and deferred income.income, and any initial direct costs incurred to originate these leases. Interest income is accrued as earned using the interest method based on unpaid principal balances.method. Huntington defers the fees it receives from the origination of loans and leases, as well as the direct costs of those activities. Huntington also acquires loans at a premium and at a discount to their contractual values. Huntington amortizes loan discounts, premiums, and net loan origination fees and costs on a level-yield basis over the contractual lives of the related loans which would not include purchased credit impaired loans.using the effective interest method.
Troubled debt restructurings are loans for which the original contractual terms have been modified to provide a concession to a borrower experiencing financial difficulties. Loan modifications are considered TDRs when the concessions provided are not available to the borrower through either normal channels or other sources. However, not all loan modifications are TDRs. Modifications resulting in troubled debt restructurings may include changes to one or more terms of the loan, including but not limited to, a change in interest rate, an extension of the repayment period, a reduction in payment amount, and partial forgiveness or deferment of principal or accrued interest.
Residual values on leased equipment are evaluated quarterly for impairment. Impairment of the residual values of direct financing leases is evaluated quarterly, with those determined to be other than temporary is recognized by writing the leases down to fair value with a charge to other noninterest expense. Leased equipment residualResidual value impairment will arise ifarises when the expected fair value is less than the carrying amount, net of estimated amounts reimbursable by the lessee. Future declines in the expected residual valueBeginning January 1, 2019, as a result of the leased equipment would resultimplementation of ASC 842, lessors will assess net investments in expectedleases (including residual values) for impairment, and recognize any impairment losses ofin accordance with the leased equipment.impairment guidance for financial instruments. As such, net investments in leases may be reduced by a recognized allowance for credit losses, with changes recognized as provision expense.
For leased equipment, the residual component of a direct financing lease represents the estimated fair value of the leased equipment at the end of the lease term. Huntington uses industry data, historical experience, and independent appraisals to establish these residual value estimates. Additional information regarding product life cycle, product upgrades, as well as insight into competing products are obtained through relationships with industry contacts and are factored into residual value estimates where applicable.
Loans Held for Sale — Loans in which Huntington does not have the intent and ability to hold for the foreseeable future are classified as loans held for sale. Loans held for sale (excluding loans originated or acquired with the intent to sell, which are carried at fair value) are carried at(a) the lower of cost or fair value less cost to sell.sell, or (b) fair value where the fair value option is elected. The fair value option is generally elected for mortgage loans held for sale to facilitate hedging of the loans. The fair value of such loans is estimated based on the inputs that include prices of mortgage backed securities adjusted for other variables such as, interest rates, expected credit defaults and market discount rates. The adjusted value reflects the price we expect to receive from the sale of such loans.
Nonaccrual and Past Due Loans — Loans are considered past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due date.
Any loan in any portfolio may be placed on nonaccrual status prior to the policies described below when collection of principal or interest is in doubt. When a borrower with debt is discharged in a Chapter 7 bankruptcy and not reaffirmed by the borrower, the loan is determined to be collateral dependent and placed on nonaccrual status, unless there is a co-borrower or the repayment is likely to occur based on objective evidence.
All classes within the C&I and CRE portfolios are placed on nonaccrual status at 90-days past due. First-lien home equity loans are placed on nonaccrual status at 150-days past due. Junior-lien home equity loans are placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien loan has been identified as nonaccrual. Automobile, RV and marine finance and other consumer loans are placed on non-accrual, if not charged off, when the loan is 120-days past due. Residential mortgage loans are placed on nonaccrual status at 150-days past due, with the exception of residential mortgages guaranteed by government agencies which continue to accrue interest at the rate guaranteed by the government agency.
For all classes within all loan portfolios, when a loan is placed on nonaccrual status, any accrued interest income, to the extent it is recognized in the current year, is reversed and charged to interest income, and prior year amounts in interest accrued are charged-off as a credit loss.
For all classes within all loan portfolios, cash receipts on NALs are applied against principal until the loan or lease has been collected in full, including the charged-off portion, after which time any additional cash receipts are recognized as interest income. However, for secured non-reaffirmed debt in a Chapter 7 bankruptcy, payments are applied to principal and interest when the borrower has demonstrated a capacity to continue payment of the debt and collection of the debt is reasonably assured. For unsecured non-reaffirmed debt in a Chapter 7 bankruptcy where the carrying value has been fully charged-off, payments are recorded as loan recoveries.
Within the C&I and CRE portfolios, the determination of a borrower’s ability to make the required principal and interest payments is based on an examination of the borrower’s current financial statements, industry, management capabilities, and other qualitative measures. For all classes within the consumer loan portfolio, the determination of a borrower’s ability to make the required principal and interest payments is based on multiple factors, including number of days past due and, in some instances, an evaluation of the borrower’s financial condition. When, in management’s judgment, the borrower’s ability to make required principal and interest payments resumes and collectability is no longer in doubt, supported by sustained repayment history, the loan is returned to accrual status. For these loans that have been returned to accrual status, cash receipts are applied according to the contractual terms of the loan.
Allowance for Credit Losses — Huntington maintains two reserves, both of which reflect management’s judgment regarding the appropriate level necessary to absorb credit losses inherent in our loan and lease portfolio: the ALLL and the AULC. Combined, these reserves comprise the total ACL. The determination of the ACL requires significant estimates, including the timing and amounts of expected future cash flows on impaired loans and leases, consideration of current economic conditions, and historical loss experience pertaining to pools of homogeneous loans and leases, all of which may be susceptible to change.
The appropriateness of the ACL is based on management’s current judgments about the credit quality of the loan portfolio. These judgments consider on-going evaluations of the loan and lease portfolio, including such factors as the differing economic risks associated with each loan category, the financial condition of specific borrowers, the level of delinquent loans, the value of any collateral and, where applicable, the existence of any guarantees or other documented support. Further, management evaluates the impact of changes in interest rates and overall economic conditions on the ability of borrowers to meet their financial obligations when quantifying our exposure to credit losses and assessing the appropriateness of our ACL at each reporting date. In addition to general economic conditions and the other factors described above, additional factors also considered include: the impact of increasing or decreasing commercial real estate values and the development of new or expanded Commercial business segments. Also, the ACL assessment includes the on-going assessment of credit quality metrics, and a comparison of certain ACL benchmarks to current performance.
The ALLL consists of two components: (1) the transaction reserve which includes a loan level allocation, specific reserves related to loans considered to be impaired, and loans involved in troubled debt restructurings, and (2) the general reserve. The transaction reserve component includes both (1) an estimate of loss based on pools of commercial and consumer loans and leases with similar characteristics and (2) an estimate of loss based on an impairment review of each impaired C&I and CRE loan where obligor balance is greater than $1.0$1 million. For the C&I and CRE portfolios, the estimate of loss based on pools of loans and leases with similar characteristics is made by applying a PD factor and a LGD factorfactors to each individual loan based on a regularly updated loan grade, using a standardized loan grading system. The PD factor and an LGD factorfactors are determined for each loan grade using statistical models based on historical performance data. The PD factor considers on-going reviews of the financial performance of the specific borrower, including cash flow, debt-service coverage ratio, earnings power, debt level, and equity position, in conjunction with an assessment of the borrower’s industry and future prospects. The LGD factor considers analysis of the type of collateral and the relative LTV ratio. These reserve factors are developed based on credit migration models that track historical movements of loans between loan ratings over time and a combination of long-term average loss experience of our own portfolio and external industry data.
In the case of more homogeneous portfolios, such as automobile loans, home equity loans, and residential mortgage loans, the determination of the transaction reserve also incorporates PD and LGD factors. The estimate of loss is based on pools of loans and leases with similar characteristics. The PD factor considers current credit scores unless the account is delinquent, in which case a higher PD factor is used.used driven by the associated delinquency status. The credit score provides a basis for understanding the borrower’s past and current payment performance, and this information is used to estimate expected losses over the emergence period. The performance of first-lien loans ahead of our junior-lien loans is available to use as part of our updated score process. The LGD factor considers analysis of the type of collateral and the relative LTV ratio. Credit scores, models, analyses, and other factors used to determine both the PD and LGD factors are updated frequently to capture the recent behavioral characteristics of the subject portfolios, as well as any changes in loss mitigation or credit origination strategies, and adjustments to the reserve factors are made as required.
The general reserve consists of various risk-profile reserve components. The risk-profile component considerscomponents consider items unique to our structure, policies, processes, and portfolio composition, as well as qualitative measurements and assessments of the loan portfolios including, but not limited to, management quality, concentrations, portfolio composition, industry comparisons, and internal review functions.
The estimate for the AULC is determined using the same procedures and methodologies as used for the ALLL. The loss factors used in the AULC are the same as the loss factors used in the ALLL while also considering a historical utilization of unused commitments. The AULC is recorded in Accrued expenses and other liabilities in the Consolidated Balance Sheets.
Nonaccrual and Past Due Loans — Loans are considered past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due date.
Any loan in any portfolio may be placed on nonaccrual status prior to the policies described below when collection of principal or interest is in doubt. When a borrower with debt is discharged in a Chapter 7 bankruptcy and not reaffirmed by the borrower, the loan is determined to be collateral dependent and placed on nonaccrual status, unless there is a co-borrower.
All classes within the C&I and CRE portfolios (except for purchased credit-impaired loans) are placed on nonaccrual status at 90-days past due. First-lien home equity loans are placed on nonaccrual status at 150-days past due. Junior-lien home equity loans are placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien loan has been identified as nonaccrual. Automobile and other consumer loans are generally charged-off when the loan is 120-days past due. Residential mortgage loans are placed on nonaccrual status at 150-days past due, with the exception of residential mortgages guaranteed by government agencies which continue to accrue interest at the rate guaranteed by the government agency. We are reimbursed from the government agency for reasonable expenses incurred in servicing loans.
For all classes within all loan portfolios, when a loan is placed on nonaccrual status, any accrued interest income is reversed with current year accruals charged to interest income, and prior year amounts charged-off as a credit loss.
For all classes within all loan portfolios, cash receipts on NALs are applied against principal until the loan or lease has been collected in full, including charged-off portion, after which time any additional cash receipts are recognized as interest income. However, for secured non-reaffirmed debt in a Chapter 7 bankruptcy, payments are applied to principal and interest when the borrower has demonstrated a capacity to continue payment of the debt and collection of the debt is reasonably assured. For unsecured non-reaffirmed debt in a Chapter 7 bankruptcy where the carrying value has been fully charged-off, payments are recorded as loan recoveries.
Regarding all classes within the C&I and CRE portfolios, the determination of a borrower’s ability to make the required principal and interest payments is based on an examination of the borrower’s current financial statements, industry, management capabilities, and other qualitative measures. For all classes within the consumer loan portfolio, the determination of a borrower’s ability to make the required principal and interest payments is based on multiple factors, including number of days past due and, in some instances, an evaluation of the borrower’s financial condition. When, in management’s judgment, the borrower’s ability to make required principal and interest payments resumes and collectability is no longer in doubt, supported by sustained repayment history, the loan is returned to accrual status. For these loans that have been returned to accrual status, cash receipts are applied according to the contractual terms of the loan.
Charge-off of Uncollectible Loans — Any loan in any portfolio may be charged-off prior to the policies described below if a loss confirming event has occurred. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency and that asset is the sole source of repayment. Additionally, discharged, collateral dependent non-reaffirmed debt in Chapter 7 bankruptcy filings will result in a charge-off to estimated collateral value, less anticipated selling costs.costs, unless the repayment is likely to occur based on objective evidence.
C&I and CRE loans are generally either charged-off or written down to net realizable value at 90-days past due. Automobile, loansRV and marine finance and other consumer loans are generally charged-off at 120-days past due. First-lien and junior-lien home equity loans are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due and 120-days past due, respectively. Residential mortgages are charged-off to the estimated fair value of the collateral at 150-days past due.
Impaired Loans — For all classes within the C&I and CRE portfolios, all loans with an obligor balance of $1.0$1 million or greater are evaluated on a quarterly basis for impairment. Except for TDRs, consumer loans within any class are generally not individually evaluated on a regular basis for impairment. All TDRs, regardless of the outstanding balance amount, are also considered to be impaired. Loans acquired with evidence of deterioration in credit quality since origination for which it is probable at acquisition that all contractually required payments will not be collected are also considered to be impaired.
Once a loan has been identified for an assessment of impairment, the loan is considered impaired when, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. This determination requires significant judgment and use of estimates, and the eventual outcome may differ significantly from those estimates.
When a loan in any class has been determined to be impaired, the amount of the impairment is measured using the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, the observable market price of the loan, or the fair value of the collateral, less anticipated selling costs, if the loan is collateral dependent. When the present value of expected future cash flows is used, the effective interest rate is the original contractual interest rate of the loan adjusted for any cost, fee, premium, or discount. When the contractual interest rate is variable, the effective interest rate of the loan changes over time. A specific reserve is established as a component of the ALLL when a loan has been determined to be impaired. Subsequent to the initial measurement of impairment, if there is a significant change to the impaired loan’s expected future cash flows, or if actual cash flows are significantly different from the cash flows previously estimated, Huntington recalculates the impairment and appropriately adjusts the specific reserve. Similarly, if Huntington measures impairment based on the observable market price of an impaired loan or the fair value of the collateral of an impaired collateral dependent loan, Huntington will adjust the specific reserve.reserve as appropriate.
When a loan within any class is impaired, the accrual of interest income is discontinued unless the receipt of principal and interest is no longer in doubt. Interest income on TDRs is accrued when all principal and interest is expected to be collected under the post-modification terms. Cash receipts on nonaccruing impaired loans within any class are generally applied entirely against principal until the loan has been collected in full (including already charged-off portion),any portion charged-off) or the loan is deemed current, after which time any additional cash receipts are recognized as interest income. Cash receipts on accruing impaired loans within any class are applied in the same manner as accruing loans that are not considered impaired.
Purchased Credit-Impaired LoansCollateral — PurchasedWe pledge assets as collateral as required for various transactions including security repurchase agreements, public deposits, loan notes, derivative financial instruments, short-term borrowings and long-term borrowings. Assets that have been pledged as collateral, including those that can be sold or repledged by the secured party, continue to be reported on our Consolidated Balance Sheets.
We also accept collateral, primarily as part of various transactions including derivative instruments and security resale agreements. Collateral accepted by us, including collateral that we can sell or repledge, is excluded from our Consolidated Balance Sheets.
The market value of collateral we have accepted or pledged is regularly monitored and additional collateral is obtained or provided as necessary to ensure appropriate collateral coverage in these transactions.
Premises and Equipment — Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed principally by the straight-line method over the estimated useful lives of the related assets. Buildings and building improvements are depreciated over an average of 30 to 40 years and 10 to 30 years, respectively. Land improvements and furniture and fixtures are depreciated over an average of 5 to 20 years, while equipment is depreciated over a range of 3 to 10 years. Leasehold improvements are amortized over the lesser of the asset’s useful life or the lease term, including any renewal periods for which renewal is reasonably assured. Maintenance and repairs are charged to expense as incurred, while improvements that extend the useful life of an asset are capitalized and depreciated over the remaining useful life. Amounts in premises and equipment may
include items classified as held-for-sale, which are carried at lower of cost or fair value, less costs to sell. Premises and equipment is evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
Mortgage Servicing Rights — Huntington recognizes the rights to service mortgage loans as an asset when servicing is contractually separated from the underlying mortgage loans by sale or securitization of the loans with evidenceservicing rights retained or when purchased. MSRs are included in servicing rights and other intangible assets in the Consolidated Balance Sheets.
For loan sales with servicing retained, a servicing asset is recorded on the day of deterioration in credit quality since originationthe sale at fair value for which it is probable at acquisition that we will be unablethe right to collect all contractually required paymentsservice the loans sold. To determine the fair value of a MSR, Huntington uses an option adjusted spread cash flow analysis incorporating market implied forward interest rates to estimate the future direction of mortgage and market interest rates. The forward rates utilized are considered to be credit impaired. Purchased credit-impairedderived from the current yield curve for U.S. dollar interest rate swaps and are consistent with pricing of capital markets instruments. The current and projected mortgage interest rate influences the prepayment rate and, therefore, the timing and magnitude of the cash flows associated with the MSR. Servicing revenues on mortgage loans are initiallyincluded in mortgage banking income.
At the time of initial capitalization, MSRs may be grouped into servicing classes based on the availability of market inputs used in determining fair value and the method used for managing the risks of the servicing assets. MSR assets are recorded using the fair value method or the amortization method. The election of the fair value or amortization method is made at the time each servicing class is established. All newly created MSRs since 2009 were recorded using the amortization method. Any change in the fair value of MSRs carried under the fair value method, as well as amortization and impairment of MSRs under the amortization method, during the period is recorded in mortgage banking income. Huntington economically hedges the value of certain MSRs using derivative instruments and trading securities. Changes in fair value of these derivatives and trading securities are reported as a component of mortgage banking income.
Goodwill and Other Intangible Assets — Under the acquisition method of accounting, the net assets of entities acquired by
Huntington are recorded at their estimated fair value at the date of acquisition. The excess cost of consideration paid over the fair value of net assets acquired is recorded as goodwill. Other intangible assets with finite useful lives are amortized either on an accelerated or straight-line basis over their estimated useful lives. Goodwill is evaluated for impairment on an annual basis at October 1st of each year or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Other intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
Derivative Financial Instruments — A variety of derivative financial instruments, principally interest rate swaps, caps, floors, and collars, are used in asset and liability management activities to protect against the risk of adverse price or interest rate movements. These instruments provide flexibility in adjusting Huntington’s sensitivity to changes in interest rates without exposure to loss of principal and higher funding requirements.
Huntington also uses derivatives, principally loan sale commitments, in hedging its mortgage loan interest rate lock commitments and its mortgage loans held for sale. Mortgage loan sale commitments and the related interest rate lock commitments are carried at fair value on the Consolidated Balance Sheets with changes in fair value reflected in mortgage banking income. Huntington also uses certain derivative financial instruments to offset changes in value of its MSRs. These derivatives consist primarily of forward interest rate agreements and forward mortgage contracts. The derivative instruments used are not designated as qualifying hedges. Accordingly, such derivatives are recorded at fair value whichwith changes in fair value reflected in mortgage banking income.
Derivative financial instruments are recorded in the Consolidated Balance Sheets as either an asset or a liability (in other assets or other liabilities, respectively) and measured at fair value. On the date a derivative contract is estimated by discountingentered into, we designate it as either:
a qualifying hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge);
a qualifying hedge of the variability of cash flows to be received or paid related to a recognized asset liability or forecasted transaction (cash flow hedge); or
a trading instrument or a non-qualifying (economic) hedge.
Changes in the fair value of a derivative that has been designated and qualifies as a fair value hedge, along with the changes in the fair value of the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. Changes in the fair value of a derivative that has been designated and qualifies as a cash flow hedge are recorded in accumulated other comprehensive income, net of income taxes, and reclassified into earnings in the period during which the hedged item affects earnings. Changes in the fair value of derivatives held for trading purposes or which do not qualify for hedge accounting are reported in current period earnings.
For those derivatives to which hedge accounting is applied, Huntington formally documents the hedging relationship and the risk management objective and strategy for undertaking the hedge. This documentation identifies the hedging instrument, the hedged item or transaction, the nature of the risk being hedged, and, unless the hedge meets all of the criteria to assume there is no ineffectiveness, the method that will be used to assess the effectiveness of the hedging instrument and how ineffectiveness will be
measured. The methods utilized to assess retrospective hedge effectiveness, as well as the frequency of testing, vary based on the type of item being hedged and the designated hedge period. For specifically designated fair value hedges of certain fixed-rate debt, Huntington utilizes the short-cut method when certain criteria are met. For other fair value hedges of fixed-rate debt, Huntington utilizes the regression method to evaluate hedge effectiveness on a quarterly basis.
Hedge accounting is discontinued prospectively when:
the derivative is no longer effective or expected to be collected ateffective in offsetting changes in the acquisition date. Because the estimate of expectedfair value or cash flows reflectsof a hedged item (including firm commitments or forecasted transactions);
the derivative expires or is sold, terminated, or exercised;
the forecasted transaction is no longer probable of occurring;
the hedged firm commitment no longer meets the definition of a firm commitment; or
the designation of the derivative as a hedging instrument is removed.
When hedge accounting is discontinued and the derivative no longer qualifies as an estimate of future credit losses expectedeffective fair value or cash flow hedge, the derivative continues to be incurred overcarried on the lifebalance sheet at fair value.
In the case of a discontinued fair value hedge of a recognized asset or liability, as long as the hedged item continues to exist on the balance sheet, the hedged item will no longer be adjusted for changes in fair value. The basis adjustment that had previously been recorded to the hedged item during the period from the hedge designation date to the hedge discontinuation date is recognized as an adjustment to the yield of the loans, an allowance for credit losses is not recorded at the acquisition date. The excess of cash flows expected at acquisition over the estimated fair value, referred to as the accretable yield, is recognized in interest income
hedged item over the remaining life of the loan,hedged item.
In the case of a discontinued cash flow hedge of a recognized asset or poolliability, as long as the hedged item continues to exist on the balance sheet, the changes in fair value of loans,the hedging derivative will no longer be recorded to other comprehensive income. The balance applicable to the discontinued hedging relationship will be recognized in earnings over the remaining life of the hedged item as an adjustment to yield. If the discontinued hedged item was a forecasted transaction that is not expected to occur, any amounts recorded on the balance sheet related to the hedged item, including any amounts recorded in accumulated other comprehensive income, are immediately reclassified to current period earnings.
In the case of either a level-yield basis. The difference betweenfair value hedge or a cash flow hedge, if the contractually required paymentspreviously hedged item is sold or extinguished, the basis adjustment to the underlying asset or liability or any remaining unamortized AOCI balance will be recognized in the current period earnings.
In all other situations in which hedge accounting is discontinued, the derivative will be carried at acquisitionfair value on the consolidated balance sheets, with changes in its fair value recognized in current period earnings unless re-designated as a qualifying hedge.
Like other financial instruments, derivatives contain an element of credit risk, which is the possibility that Huntington will incur a loss because the counterparty fails to meet its contractual obligations. Notional values of interest rate swaps and other off-balance sheet financial instruments significantly exceed the credit risk associated with these instruments and represent contractual balances on which calculations of amounts to be exchanged are based. Credit exposure is limited to the sum of the aggregate fair value of positions that have become favorable to Huntington, including any accrued interest receivable due from counterparties. Potential credit losses are mitigated through careful evaluation of counterparty credit standing, selection of counterparties from a limited group of high quality institutions, collateral agreements, and other contract provisions. Huntington considers the value of collateral held and collateral provided in determining the net carrying value of derivatives.
Huntington offsets the fair value amounts recognized for derivative instruments and the fair value for the right to reclaim cash flows expectedcollateral or the obligation to be collectedreturn cash collateral arising from derivative instrument(s) recognized at acquisitionfair value executed with the same counterparty under a master netting arrangement.
Fair Value Measurements — The Company records or discloses certain of its assets and liabilities at fair value. Fair value is referred todefined as the nonaccretable difference. A subsequent decreaseexchange price that would be received for an asset or paid to transfer a liability (an exit price) in the estimateprincipal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements are classified within one of cash flows expectedthree levels in a valuation hierarchy based upon the observability of inputs to be received on purchased credit-impaired loans generally results in the recognitionvaluation of an allowance for credit losses. Subsequent increases in cash flows result in reversalasset or liability as of any nonaccretable difference (or allowance for loan and lease lossesthe measurement date. The three levels are defined as follows:
Level 1 – inputs to the extent any has been recorded) with a positive impact on interest income subsequently recognized. The measurementvaluation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of cash flows involves assumptions and judgments for interest rates, prepayments, default rates, loss severity, and collateral values. All of these factorsthe financial instrument.
Level 3 – inputs to the valuation methodology are inherently subjectiveunobservable and significant changesto the fair value measurement.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Bank Owned Life Insurance — Huntington’s bank owned life insurance policies are recorded at their cash surrender value. Huntington recognizes tax-exempt income from the periodic increases in the cash flow estimates over the lifesurrender value of these policies and from death
benefits. A portion of the loan can result.cash surrender value is supported by holdings in separate accounts. Book value protection for the separate accounts is provided by the insurance carriers and a highly rated major bank.
Transfers of Financial Assets and Securitizations — Transfers of financial assets in which we have surrendered control over the transferred assets are accounted for as sales. In assessing whether control has been surrendered, we consider whether the transferee would be a consolidated affiliate, the existence and extent of any continuing involvement in the transferred financial assets, and the impact of all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not entered into at the time of transfer. Control is generally considered to have been surrendered when (i) the transferred assets have been legally isolated from us or any of our consolidated affiliates, even in bankruptcy or other receivership, (ii) the transferee (or, if the transferee is an entity whose sole purpose is to engage in securitization or asset-backed financing that is constrained from pledging or exchanging the assets it receives, each third-party holder of its beneficial interests) has the right to pledge or exchange the assets (or beneficial interests) it received without any constraints that provide more than a trivial benefit to us, and (iii) neither we nor our consolidated affiliates and agents have (a) both the right and obligation under any agreement to repurchase or redeem the transferred assets before their maturity, (b) the unilateral ability to cause the holder to return specific financial assets that also provides us with a more-than-trivial benefit (other than through a cleanup call) or (c) an agreement that permits the transferee to require us to repurchase the transferred assets at a price so favorable that it is probable that it will require us to repurchase them.
If the sale criteria are met, the transferred financial assets are removed from our balance sheet and a gain or loss on sale is recognized. If the sale criteria are not met, the transfer is recorded as a secured borrowing in which the assets remain on our balance sheet and the proceeds from the transaction are recognized as a liability. For the majority of financial asset transfers, it is clear whether or not we have surrendered control. For other transfers, such as in connection withthe case of complex transactions or where we have continuing involvement, we generally obtain a legal opinion as to whether the transfer results in a true sale by law.
From time to time we securitize certain automobile receivables. Gains and losses on the loans and leases sold and servicing rights associated with loan and lease sales are determined when the related loans or leases are sold to either a securitization trust or third-party. For loan or lease sales with servicing retained, a servicing asset is recorded at fair value for the right to service the loans sold.
Derivative Financial Instruments — A variety of derivative financial instruments, principally interest rate swaps, caps, floors, and collars, are used in asset and liability management activities to protect against the risk of adverse price or interest rate movements. These instruments provide flexibility in adjusting Huntington’s sensitivity to changes in interest rates without exposure to loss of principal and higher funding requirements.
Huntington also uses derivatives, principally loan sale commitments, in hedging its mortgage loan interest rate lock commitments and its mortgage loans held for sale. Mortgage loan sale commitments and the related interest rate lock commitments are carried at fair value on the Consolidated Balance Sheets with changes in fair value reflected in mortgage banking income. Huntington also uses certain derivative financial instruments to offset changes in value of its MSRs. These derivatives consist primarily of forward interest rate agreements and forward mortgage contracts. The derivative instruments used are not designated as qualifying hedges. Accordingly, such derivatives are recorded at fair value with changes in fair value reflected in mortgage banking income.
Derivative financial instruments are recorded in the Consolidated Balance Sheets as either an asset or a liability (in accrued income and other assets or accrued expenses and other liabilities, respectively) and measured at fair value. On the date a derivative contract is entered into, we designate it as either:
a qualifying hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge);
a qualifying hedge of the variability of cash flows to be received or paid related to a recognized asset liability or forecasted transaction (cash flow hedge); or
a trading instrument or a non-qualifying (economic) hedge.
Changes in the fair value of a derivative that has been designated and qualifies as a fair value hedge, along with the changes in the fair value of the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. Changes in the fair value of a derivative that has been designated and qualifies as a cash flow hedge, to the extent effective as a hedge, are recorded in accumulated other comprehensive income, net of income taxes, and reclassified into earnings in the period during which
the hedged item affects earnings. Ineffectiveness in the hedging relationship is reflected in current period earnings. Changes in the fair value of derivatives held for trading purposes or which do not qualify for hedge accounting are reported in current period earnings.
For those derivatives to which hedge accounting is applied, Huntington formally documents the hedging relationship and the risk management objective and strategy for undertaking the hedge. This documentation identifies the hedging instrument, the hedged item or transaction, the nature of the risk being hedged, and, unless the hedge meets all of the criteria to assume there is no ineffectiveness, the method that will be used to assess the effectiveness of the hedging instrument and how ineffectiveness will be measured. The methods utilized to assess retrospective hedge effectiveness, as well as the frequency of testing, vary based on the type of item being hedged and the designated hedge period. For specifically designated fair value hedges of certain fixed-rate debt, Huntington utilizes the short-cut method when certain criteria are met. For other fair value hedges of fixed-rate debt, including certificates of deposit, Huntington utilizes the regression method to evaluate hedge effectiveness on a quarterly basis. For fair value hedges of portfolio loans, the regression method is used to evaluate effectiveness on a daily basis. For cash flow hedges, the regression method is applied on a quarterly basis.
Hedge accounting is discontinued prospectively when:
the derivative is no longer effective or expected to be effective in offsetting changes in the fair value or cash flows of a hedged item (including firm commitments or forecasted transactions);
the derivative expires or is sold, terminated, or exercised;
it is unlikely that a forecasted transaction will occur;
the hedged firm commitment no longer meets the definition of a firm commitment; or
the designation of the derivative as a hedging instrument is removed.
When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair value or cash flow hedge, the derivative will continue to be carried on the balance sheet at fair value.
In the case of a discontinued fair value hedge of a recognized asset or liability, as long as the hedged item continues to exist on the balance sheet, the hedged item will no longer be adjusted for changes in fair value. The basis adjustment that had previously been recorded to the hedged item during the period from the hedge designation date to the hedge discontinuation date is recognized as an adjustment to the yield of the hedged item over the remaining life of the hedged item.
In the case of a discontinued cash flow hedge of a recognized asset or liability, as long as the hedged item continues to exist on the balance sheet, the effective portion of the changes in fair value of the hedging derivative will no longer be recorded to other comprehensive income. The balance applicable to the discontinued hedging relationship will be recognized in earnings over the remaining life of the hedged item as an adjustment to yield. If the discontinued hedged item was a forecasted transaction that is not expected to occur, any amounts recorded on the balance sheet related to the hedged item, including any amounts recorded in accumulated other comprehensive income, are immediately reclassified to current period earnings.
In the case of either a fair value hedge or a cash flow hedge, if the previously hedged item is sold or extinguished, the basis adjustment to the underlying asset or liability or any remaining unamortized other comprehensive income balance will be reclassified to current period earnings.
In all other situations in which hedge accounting is discontinued, the derivative will be carried at fair value on the consolidated balance sheets, with changes in its fair value recognized in current period earnings unless re-designated as a qualifying hedge.
Like other financial instruments, derivatives contain an element of credit risk, which is the possibility that Huntington will incur a loss because the counterparty fails to meet its contractual obligations. Notional values of interest rate swaps and other off-balance sheet financial instruments significantly exceed the credit risk associated with these instruments and represent contractual balances on which calculations of amounts to be exchanged are based. Credit exposure is limited to the sum of the aggregate fair value of positions that have become favorable to Huntington, including any accrued interest receivable due from counterparties. Potential credit losses are mitigated through careful evaluation of counterparty credit standing, selection of counterparties from a limited group of high quality institutions, collateral agreements, and other contract provisions. Huntington considers the value of collateral held and collateral provided in determining the net carrying value of derivatives.
Huntington offsets the fair value amounts recognized for derivative instruments and the fair value for the right to reclaim cash collateral or the obligation to return cash collateral arising from derivative instrument(s) recognized at fair value executed with the same counterparty under a master netting arrangement.
Repossessed Collateral — Repossessed collateral, also referred to as OREO, is comprised principally of commercial and residential real estate properties obtained in partial or total satisfaction of loan obligations, and is carried at fair value. Collateral obtained in satisfaction of a loan is recorded at the estimated fair value less anticipated selling costs based upon the property’s
appraised value at the date of foreclosure, with any difference between the fair value of the property and the carrying value of the loan recorded as a charge-off. If the fair value is higher than the carrying amount of the loan the excess is recognized first as a recovery and then as noninterest income. Subsequent declines in value are reported as adjustments to the carrying amount and are recorded in noninterest expense. Gains or losses resulting from the sale of collateral are recognized in noninterest expense at the date of sale.
Collateral — We pledge assets as collateral as required for various transactions including security repurchase agreements, public deposits, loan notes, derivative financial instruments, short-term borrowings and long-term borrowings. Assets that have been pledged as collateral, including those that can be sold or repledged by the secured party, continue to be reported on our Consolidated Balance Sheets.
We also accept collateral, primarily as part of various transactions including derivative and security resale agreements. Collateral accepted by us, including collateral that we can sell or repledge, is excluded from our Consolidated Balance Sheets.
The market value of collateral we have accepted or pledged is regularly monitored and additional collateral is obtained or provided as necessary to ensure appropriate collateral coverage in these transactions.
Premises and Equipment — Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed principally by the straight-line method over the estimated useful lives of the related assets. Buildings and building improvements are depreciated over an average of 30 to 40 years and 10 to 30 years, respectively. Land improvements and furniture and fixtures are depreciated over an average of 5 to 20 years, while equipment is depreciated over a range of 3 to 10 years. Leasehold improvements are amortized over the lesser of the asset’s useful life or the lease term, including any renewal periods for which renewal is reasonably assured. Maintenance and repairs are charged to expense as incurred, while improvements that extend the useful life of an asset are capitalized and depreciated over the remaining useful life. Premises and equipment is evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
Mortgage Servicing Rights — Huntington recognizes the rights to service mortgage loans as separate assets, which are included in Servicing Rights in the Consolidated Balance Sheets when purchased, or when servicing is contractually separated from the underlying mortgage loans by sale or securitization of the loans with servicing rights retained.
For loan sales with servicing retained, a servicing asset is recorded on the day of the sale at fair value for the right to service the loans sold. To determine the fair value of a MSR, Huntington uses an option adjusted spread cash flow analysis incorporating market implied forward interest rates to estimate the future direction of mortgage and market interest rates. The forward rates utilized are derived from the current yield curve for U.S. dollar interest rate swaps and are consistent with pricing of capital markets instruments. The current and projected mortgage interest rate influences the prepayment rate and, therefore, the timing and magnitude of the cash flows associated with the MSR. Servicing revenues on mortgage loans are included in mortgage banking income.
At the time of initial capitalization, MSRs may be grouped into servicing classes based on the availability of market inputs used in determining fair value and the method used for managing the risks of the servicing assets. MSR assets are recorded using the fair value method or the amortization method. The election of the fair value or amortization method is made at the time each servicing class is established. All newly created MSRs since 2009 were recorded using the amortization method. Any change in the fair value of MSRs carried under the fair value method, as well as amortization and impairment of MSRs under the amortization method, during the period is recorded in mortgage banking income, which is reflected in the Consolidated Statements of Income. Huntington economically hedges the value of certain MSRs using derivative instruments and trading securities. Changes in fair value of these derivatives and trading securities are reported as a component of mortgage banking income.
Goodwill and Other Intangible Assets — Under the acquisition method of accounting, the net assets of entities acquired by
Huntington are recorded at their estimated fair value at the date of acquisition. The excess cost of the acquisition over the fair value of net assets acquired is recorded as goodwill. Other intangible assets with finite useful lives are amortized either on an accelerated or straight-line basis over their estimated useful lives. Goodwill is evaluated for impairment on an annual basis at October 1st of each year or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Indefinite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
Pension and Other Postretirement Benefits — We recognizeHuntington recognizes the funded status of the postretirement benefit plans on the Consolidated Balance Sheets. Net postretirement benefit cost charged to current earnings related to these plans is predominantly based on various actuarial assumptions regarding expected future experience.
Certain employees are participants in various defined contribution and other non-qualified supplemental retirement plans. Our contributionsContributions to defined contribution plans are charged to current earnings.
In addition, we maintain a 401(k) plan covering substantially all employees. Employer contributions to the plan which are charged to current earnings,earnings.
Noninterest Income — Huntington recognizes revenue when the performance obligations related to the transfer of goods or services under the terms of a contract are based on employee contributions.
Share-Based Compensation — We usesatisfied. Some obligations are satisfied at a point in time while others are satisfied over a period of time. Revenue is recognized as the fair value based methodamount of accountingconsideration to which Huntington expects to be entitled to in exchange for awardstransferring goods or services to a customer. When consideration includes a variable component, the amount of HBAN stock grantedconsideration attributable to employees under various stock option and restricted share plans. Stock compensation costs arevariability is included in the transaction price only to the extent it is probable that significant revenue recognized prospectively for all new awards granted under these plans. Compensation expensewill not be reversed when uncertainty associated with the variable consideration is subsequently resolved. Generally, the variability relating to share optionsthe consideration is calculated using a methodologyexplicitly stated in the contracts, but may also arise from Huntington’s customer business practice, for example, waiving certain fees related to customer’s deposit accounts such as NSF fees. Huntington’s contracts generally do not contain terms that require significant judgement to determine the variability impacting the transaction price.
Revenue is segregated based on the underlying assumptionsnature of product and services offered as part of contractual arrangements. Revenue from contracts with customers is broadly segregated as follows:
Service charges on deposit accounts include fees and other charges Huntington receives to provide various services, including but not limited to, maintaining an account with a customer, providing overdraft services, wire transfer, transferring funds, and accepting and executing stop-payment orders. The consideration includes both fixed (e.g., account maintenance fee) and transaction fees (e.g., wire-transfer fee). The fixed fee is recognized over a period of time while the transaction fee is recognized when a specific service (e.g., execution of wire-transfer) is rendered to the customer. Huntington may, from time to time, waive certain fees (e.g., NSF fee) for customers but generally does not reduce the transaction price to reflect variability for future reversals due to the insignificance of the Black-Scholes option pricing modelamounts. Waiver of fees reduces the revenue in the period the waiver is granted to the customer.
Card and payment processing income includes interchange fees earned on debit cards and credit cards. All other fees (e.g., annual fees), and interest income are recognized in accordance with ASC 310. Huntington recognizes interchange fees for services performed related to authorization and settlement of a cardholder’s transaction with a merchant. Revenue is recognized when a cardholder’s transaction is approved and settled. The revenue may be constrained due to inherent uncertainty related to cardholder’s right to return goods and services but as the uncertainty is resolved within a short period of time (generally within 30 days) interchange revenue is reduced by the amount of returns in the period the return is made by the customer.
Certain volume or transaction based interchange expenses (net of rebates) paid to the payment network reduce the interchange revenue and are presented net on the income statement. Similarly, rewards payable under a reward program to cardholders are recognized as a reduction of the transaction price and are presented net against the interchange revenue.
Trust and investment management services includes fee income generated from personal, corporate and institutional customers. Huntington also provides investment management services, cash management services and tax reporting to customers. Services are rendered over a period of time, over which revenue is recognized. Huntington may also recognize revenue from referring a customer to outside third-parties including mutual fund companies that pay distribution (12b-1) fees and other expenses. 12b-1 fees are received upon initially placing account holder’s funds with a mutual fund company as well as in the future periods as long as the account holder (i.e., the fund investor), remains invested in the fund. The transaction price includes variable consideration which is considered constrained as it is not probable that a significant revenue reversal in the amount of cumulative revenue recognized will not occur. Accordingly, those fees are recognized as revenue when the uncertainty associated with the variable consideration is subsequently resolved, that is, initial fees are recognized in the initial period while the future fees are recognized in future periods.
Insurance income includes agency commissions that are recognized when Huntington sells insurance policies to customers. Huntington is also entitled to renewal commissions and, in some cases, profit sharing which are recognized in subsequent periods. The initial commission is recognized when the insurance policy is sold to a customer. Renewal commission is variable consideration and is chargedrecognized in subsequent periods when the uncertainty around variable consideration is subsequently resolved (i.e., when customer renews the policy). Profit sharing is also a variable consideration that is not recognized until the variability surrounding realization of revenue is resolved (i.e., Huntington has reached a minimum volume of sales). Another source of variability is the ability of the policy holder to expensecancel the policy anytime. In such cases, Huntington may be required, under the terms of the contract, to return part of the commission received. A policy cancellation reserve is established for such expected cancellations.
Other noninterest income includes a variety of other revenue streams including capital markets revenue, miscellaneous consumer fees and marketing allowance revenue. Revenue is recognized when, or as, a performance obligation is satisfied. Inherent variability in the transaction price is not recognized until the uncertainty affecting the variability is resolved.
Control is transferred to a customer either at a point in time or over time. A performance obligation is deemed satisfied when the requisitecontrol over goods or services is transferred to the customer. To determine when control is transferred at a point in time, Huntington considers indicators, including but not limited to the right to payment for the asset, transfer of significant risk and rewards of ownership of the asset and acceptance of the asset by the customer. When control is transferred over a period of time, for different performance obligations, either the input or output method is used to determine the progress. The measure of progress used to assess completion of the performance obligation varies between performance obligations and may be based on time throughout the period of service or on the value of goods and services transferred to the customer. As each distinct service or activity is performed, Huntington transfers control to the customer based on the services performed as the customer simultaneously receives the benefits of those services. This timing of revenue recognition aligns with the resolution of any uncertainty related to variable consideration. Costs to obtain a revenue producing contract are expensed when incurred as a practical expedient as the contractual period (e.g. vesting period). Compensation expense relatingfor majority of contracts is one year or less.
Revenue is recorded in the business segment responsible for the related product or service. Fee sharing arrangements exist to restricted stock awards isallocate portions of such revenue to other business segments involved in selling to, or providing service to, customers. Business segment results are determined based upon the fair valuemanagement’s reporting system, which assigns balance sheet and income statement items to each of the awards onbusiness segments. The process is designed around Huntington’s organizational and management structure and, accordingly, the date of grant and is charged to earnings over the requisite service period (e.g., vesting period) of the award.
Stock Repurchases — Acquisitions of Huntington stockresults derived are recorded at cost. The re-issuance of shares is recorded at weighted-average cost.not necessarily comparable with similar information published by other financial institutions.
Income Taxes — Income taxes are accounted for under the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future book and tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are determined using enacted tax rates expected to apply in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income at the time of enactment of such change in tax rates.
Any interest or penalties due for payment of income taxes are included in the provision for income taxes. To the extent that we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is recorded. All positive and negative evidence is reviewed when determining how much of a valuation allowance is recognized on a quarterly basis. In determining the requirements for a valuation allowance, sources of possible taxable income are evaluated including future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in appropriate carryback years, and tax-planning strategies. Huntington applies a more likely than not recognition threshold for all tax uncertainties.
Bank Owned Life InsuranceShare-Based Compensation — Huntington’s bank owned life insurance policies are recorded at their cash surrender value. Huntington recognizes tax-exempt income from the periodic increases in the cash surrender value of these policies and from death benefits. A portion of the cash surrender value is supported by holdings in separate accounts. Book value protection for the separate accounts is provided by the insurance carriers and a highly rated major bank.
Fair Value Measurements — The Company records or discloses certain of its assets and liabilities at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements are classified within one of three levels in a valuation hierarchy based upon the observability of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – inputs to the valuation methodology are unobservable and significant touses the fair value measurement.based method of accounting for awards of HBAN stock granted to employees under various share-based compensation plans. Share-based compensation costs are recognized prospectively for all
A financial instrument’s categorization within
new awards granted under these plans. Compensation expense relating to stock options is calculated using a methodology that is based on the valuation hierarchyunderlying assumptions of the Black-Scholes option pricing model and is charged to expense over the requisite service period (e.g., vesting period). Compensation expense relating to restricted stock awards is based upon the lowest level of input that is significant to the fair value measurement.of the awards on the date of grant and is charged to earnings over the requisite service period (e.g., vesting period) of the award.
Stock Repurchases — Acquisitions of Huntington stock are recorded at cost.
Segment Results — Accounting policies for the business segments are the same as those used in the preparation of the Consolidated Financial Statements with respect to activities specifically attributable to each business segment. However, the preparation of business segment results requires management to establish methodologies to allocate funding costs and benefits, expenses, and other financial elements to each business segment, which isare described in Note 24.23.
2. ACCOUNTING STANDARDS UPDATE
ASU 2014-09—Revenue from Contracts with Customers (Topic 606): The amendments in ASU 2014-09 supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The general principle of the amendments require an entity to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance sets forth a five step approach for revenue recognition. The amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Management intends to adopt the new guidance on January 1, 2018 using the modified retrospective approach and is well into its outlined implementation plan. In this regard, management has completed a preliminary analysis that includes (a) identification of all revenue streams included in the financial statements; (b) determination of scope exclusions to identify ‘in-scope’ revenue streams; (c) determination of size, timing, and amount of revenue recognition for in-scope items; (d) determination of sample size of contracts for further analysis; and (e) completion of limited analysis on selected contracts to evaluate the potential impact of the new guidance. The key revenue streams identified include service charges, credit card and payment processing fees, trust services fees, insurance income, brokerage services, and mortgage banking income. The new guidance is not expected to have a significant impact on Huntington’s Consolidated Financial Statements.ASU 2016-01 - Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update make targeted improvements to GAAP including, but not limited to, requiring an entity to measure its equity investments with changes in the fair value recognized in the income statement; requiring an entity to present separately in OCI the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments (i.e., FVO liability); requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; assessing deferred tax assets related to a net unrealized loss on AFS securities in combination with the entity’s other deferred tax assets; and eliminating some of the disclosures required by the existing GAAP while requiring entities to present and disclose some additional information. The new guidance is effective for the fiscal period beginning after December 15, 2017, including interim periods within those fiscal years. An entity should apply the amendments as a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendment is not expected to have a material impact on Huntington's Consolidated Financial Statements. |
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Accounting standards adopted in current period |
ASU 2016-02 - Leases. This Update sets forth a new lease accounting model for lessors and lessees. For lessees, virtually all leases will be required to be recognized on the balance sheet by recording a right-of-use asset and lease liability. Subsequent accounting for leases varies depending on whether the lease is an operating lease or a finance lease. The accounting applied by a lessor is largely unchanged from that applied under the existing guidance. The ASU requires additional qualitative and quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Update is effective for the fiscal period beginning after December 15, 2018, with early application permitted. Management is currently assessing the impact of the new guidance on Huntington's Consolidated Financial Statements. Huntington expects to recognize a right-of-use asset and a lease liability for its operating lease commitments. Please refer to Note 21 for Huntington's commitments under operating lease obligations.ASU 2016-05 - Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. This Update provides accounting clarification for changes in the counterparty to a derivative instrument that has been designated as a qualified hedging instrument. Specifically, changes in the derivative counterparty should not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This Update is effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early application is permitted. An entity has an option to apply the amendments in this Update on either a prospective basis or a modified retrospective basis. Management does not believe the new guidance will have a significant impact on Huntington's Consolidated Financial Statements.
ASU 2016-06 - Contingent Put and Call Options in Debt Instruments. This Update clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt instruments. An entity performing the assessment set forth in this Update will be required to assess embedded call (put) options solely in accordance with the four-step decision sequence. This Update is effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. An entity should apply this Update on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. This Update is not expected to have a significant impact on Huntington's Consolidated Financial Statements.
ASU 2016-07 - Simplifying the Transition to the Equity Method of Accounting. This Update eliminates the requirement for the retrospective use of the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence of an investor. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for the equity method accounting. This Update is effective for fiscal years, and interim periods within those fiscal |
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Standard | Summary of guidance | Effects on financial statements |
ASU 2014-09 - Revenue from Contracts with Customers (Topic 606). Issued May 2014 | - Topic 606 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance.
- Requires an entity to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
- Also requires additional qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
- Guidance sets forth a five step approach for revenue recognition. | - Huntington adopted the new guidance on January 1, 2018 using the modified retrospective approach.
- The update did not have a material impact on Huntington’s Consolidated Financial Statements.
- See Note 13 for further detail impact on adoption. |
ASU 2016-01 - Recognition and Measurement of Financial Assets and Financial Liabilities. Issued January 2016
| - Makes targeted improvements related to certain aspects of recognition, measurement, presentation and disclosures for financial instruments including requiring an entity to: (a) Measure its equity investments with changes in the fair value recognized in the income statement. (b) Present separately in OCI the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments (i.e., FVO liability). (c) Use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. (d) Assess deferred tax assets related to a net unrealized loss on AFS securities in combination with the entity’s other deferred tax assets. | - Huntington adopted the new guidance on January 1, 2018 using the modified retrospective approach.
- Amendments were applied as a cumulative-effect adjustment to the balance sheet as of January 1, 2018.
- Huntington reclassified $19 million of equity securities from AFS Securities to Other Securities on the Consolidated Balance Sheets and reclassified unrealized gains of $1 million from AOCI to Retained Earnings. Prior periods have been adjusted to present these securities as Other Securities to facilitate comparison. |
ASU 2016-15 - Classification of Certain Cash Receipts and Cash Payments. Issued August 2016 | - Clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows.
- Provides consistent principles for evaluating the classification of cash payments and receipts in the statement of cash flows to reduce diversity in practice with respect to several types of cash flows. | - Huntington adopted the new guidance on January 1, 2018.
- The update did not have a material impact on Huntington’s Consolidated Financial Statements. |
ASU 2017-07 - Improving the Presentation of Net Periodic Pension Cost and Periodic Postretirement Benefit Cost. Issued March 2017 | - Requires that an employer report the service cost component of the pension cost and postretirement benefit cost in the same line items as other compensation costs arising from services rendered by the pertinent employees during the period.
- Other components of the net benefit cost should be presented or disclosed separately from the service cost component in the income statement. | - Huntington adopted the new guidance on January 1, 2018.
- The update did not have a material impact on Huntington’s Consolidated Financial Statements. |
years, beginning after December 15, 2016. The amendments are not expected to have a significant impact on Huntington's Consolidated Financial Statements.ASU 2016-09 - Improvements to Employee Share-Based Payment Accounting. This Update simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the statement of cash flows. The amendments, among other things, require all tax benefits and tax deficiencies related to share-based awards to be recognized in the income statement. Other changes include an election related to the accounting for forfeitures, changes to the cash flow statement presentation for excess tax benefits, as well as for cash paid by an employer when directly withholding shares for tax withholding purposes. The amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. This Update was adopted in the current reporting period with no significant impact recognized on Huntington’s Consolidated Financial Statements.
ASU 2016-13 - Financial Instruments - Credit Losses. The amendments in this Update eliminate the probable recognition threshold for credit losses on financial assets measured at amortized cost. The Update requires those financial assets to be presented at the net amount expected to be collected (i.e., net of expected credit losses). The measurement of expected credit losses should be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. The Update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018. The amendments should be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. Management currently intends to adopt the guidance on January 1, 2020 and is assessing the impact of this Update on Huntington's Consolidated Financial Statements. Management has formed a working group comprising of teams from different disciplines including credit and finance. The working group is currently evaluating the requirements of the new standard and the impact it will have on our processes. The early stages of this evaluation include a review of existing credit models to identify areas where existing credit models used to comply with other regulatory requirements may be leveraged and areas where new impairment models may be required.
ASU 2016-15 - Classification of Certain Cash Receipts and Cash Payments. The amendments in this Update add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. Current guidance lacks consistent principles for evaluating the classification of cash payments and receipts in the statement of cash flows. This has led to diversity in practice and, in certain circumstances, financial statement restatements. Therefore, the FASB issued the ASU with the intent of reducing diversity in practice with respect to several types of cash flows. The amendments in this Update are effective using a retrospective transition approach for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. This Update is not expected to have a significant impact on Huntington's Consolidated Financial Statements.
ASU 2016-17 - Consolidation - Interests Held Through Related Parties that are Under Common Control. The Update amends the guidance included in ASU 2015-02, Consolidation: Amendments to Consolidation Analysis adopted by Huntington earlier this year. The Update makes a narrow amendment and requires that a single decision maker should consider indirect economic interests in the entity held through related parties that are under common control on a proportionate basis when determining whether it is the primary beneficiary of that VIE. Prior to this amendment, indirect interests held through related parties that are under common control were to be considered equivalent of single decision maker’s direct interests in their entirety. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The adoption of the Update is not expected to have a significant impact on Huntington’s Consolidated Financial Statements.
3.ACQUISITION OF FIRSTMERIT CORPORATION |
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Standard | Summary of guidance | Effects on financial statements |
ASU 2017-09 - Stock Compensation Modification Accounting. Issued May 2017 | - Reduces the current diversity in practice and provides explicit guidance pertaining to the provisions of modification accounting.
- Clarifies that an entity should account for effects of modification unless the fair value, vesting conditions and the classification of the modified award are the same as the original awards immediately before the original award is modified. | - Huntington adopted the new guidance on January 1, 2018.
- The update did not have a material impact on Huntington’s Consolidated Financial Statements. |
ASU 2017-12 - Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities. Issued August 2017 | - Aligns the entity’s risk management activities and financial reporting for hedging relationships.
- Requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported.
- Refines measurement techniques for hedges of benchmark interest rate risk.
- Eliminates the separate measurement and reporting of hedge ineffectiveness.
- Allows stated amount of assets in a closed portfolio to be fair value hedged by excluding proportion of hedged item related to prepayments, defaults and other events.
- Eases hedge effectiveness testing including an option to perform qualitative testing. | - For cash flow and net investment hedges, the cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness should be recognized in AOCI with a corresponding adjustment to retained earnings.
- Huntington adopted the new guidance on January 1, 2018. Except as mentioned in the paragraph below, the update did not have a material impact on Huntington’s Consolidated Financial Statements.
- Huntington reclassified $2.8 billion securities eligible to be hedged under the last-of-layer method from held-to-maturity to available-for-sale and recognized $26 million of fair value loss (net of tax) within OCI. |
ASU 2018-13 - Fair Value Measurement (Topic 820). Issued August 2018 | - Modifies the disclosure requirements on fair value measurements.
- Removes disclosures for transfers between Level 1 and Level 2, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements.
- Clarifies that the information about uncertainty in measurement in uncertainty disclosure should be as of the reporting date.
- Adds disclosures related to (a) changes in unrealized gains/losses in OCI for Level 3 fair value measurements for assets held at the end of the reporting period, and (b) the process of calculating weighted average for significant unobservable inputs used to develop Level 3 fair value measurements. | - Effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years with early adoption permitted.
- Huntington early adopted the guidance effective 4Q 2018. The amendment did not have a material impact on Huntington’s Consolidated Financial Statements.
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ASU 2018-14 - Compensation - Retirement Benefits - Defined Benefit Plans. Issued August 2018 | - Modifies the disclosure requirements for defined benefit pension plans.
- Removes disclosures pertaining to (a) the amounts of AOCI expected to be recognized as pension costs over the next fiscal year, (b) the amount and timing of plan assets expected to be returned to the employer, and (c) the effect of one-percentage-point change in the assumed health care trends on (i) service and interest cost and (ii) postretirement health care benefit obligation.
- Adds a new disclosure requiring an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. | - Effective retrospectively for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years with early adoption permitted.
- Huntington early adopted the guidance effective 4Q 2018. The amendment did not have a material impact on the Huntington’s Consolidated Financial Statements. |
On August 16, 2016, Huntington completed its acquisition of FirstMerit Corporation in a stock and cash transaction valued at approximately $3.7 billion. FirstMerit Corporation was a diversified financial services company headquartered in Akron, Ohio, with operations in Ohio, Michigan, Wisconsin, Illinois and Pennsylvania. Post merger, Huntington now operates across an eight-state Midwestern footprint. The merger resulted in a combined company with a larger market presence and more diversified loan portfolio, as well as a larger core deposit funding base and economies of scale associated with a larger financial institution.
Under the terms of the agreement, shareholders of FirstMerit Corporation received 1.72 shares of Huntington common stock, and $5.00 in cash, for each share of FirstMerit Corporation common stock. The aggregate purchase price was $3.7 billion, including $0.8 billion of cash, $2.8 billion of common stock, and $0.1 billion of preferred stock. Huntington issued 285 million shares of common stock that had a total fair value of $2.8 billion based on the closing market price of $9.68 per share on August 15, 2016.
The acquisition of FirstMerit constituted a business combination. The FirstMerit merger has been accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair value on the acquisition date. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and may require adjustments, which can be updated for up to a year following the acquisition. As of December 31, 2016, Management completed its review of information relating to events or circumstances existing at the acquisition date.
The following table reflects consideration paid for FirstMerit's net assets and the amounts of acquired identifiable assets and liabilities assumed as of the acquisition date: |
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Standard | Summary of guidance | Effects on financial statements |
ASU 2018-15 - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. Issued August 2018 | - Aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software as well as with hosting arrangements that include an internal-use software license.
- Requires the entity to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement.
- Requires the entity to present the expense related to implementation costs in the same statement of income line and statement of cash flows line where the fees for the service contract is recognized for respective statements. | - Effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years with early adoption permitted.
- Huntington early adopted the guidance effective 3Q 2018. The update did not have a material impact on Huntington’s Consolidated Financial Statements as the guidance was consistent with Huntington’s existing accounting treatment for such arrangements. |
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| | FirstMerit |
(dollar amounts in thousands) | | UPB | | Fair Value |
Assets acquired: | | | | |
Cash and due from banks | | | | $ | 703,661 |
|
Interest-bearing deposits in banks | | | | 32,496 |
|
Loans held for sale | | | | 150,576 |
|
Available for sale and other securities | | | | 7,369,967 |
|
Loans and leases: | | | | |
Commercial: | | | | |
Commercial and industrial | | $ | 7,410,503 |
| | 7,252,692 |
|
Commercial real estate | | 1,898,875 |
| | 1,844,150 |
|
Total commercial | | 9,309,378 |
| | 9,096,842 |
|
Consumer: | | | | |
Automobile | | 1,610,007 |
| | 1,609,145 |
|
Home equity | | 1,579,832 |
| | 1,537,791 |
|
Residential mortgage | | 1,098,588 |
| | 1,092,050 |
|
RV and marine finance | | 1,823,312 |
| | 1,816,575 |
|
Other consumer | | 324,350 |
| | 323,512 |
|
Total consumer | | 6,436,089 |
| | 6,379,073 |
|
Total loans and leases | | $ | 15,745,467 |
| | 15,475,915 |
|
Bank owned life insurance | | | | 633,612 |
|
Premises and equipment | | | | 228,635 |
|
Goodwill | | | | 1,320,818 |
|
Core deposit intangible | | | | 309,750 |
|
Other intangible assets | | | | 94,571 |
|
Servicing rights | | | | 15,317 |
|
Accrued income and other assets | | | | 506,578 |
|
Total assets acquired | | | | 26,841,896 |
|
Liabilities assumed: | | | | |
Deposits | | | | 21,157,172 |
|
Short-term borrowings | | | | 1,163,851 |
|
Long-term debt | | | | 519,971 |
|
Accrued expenses and other liabilities | | | | 292,930 |
|
Total liabilities assumed | | | | 23,133,924 |
|
Total consideration paid | | | | $ | 3,707,972 |
|
| | | | |
Consideration: | | | | |
Cash paid | | | | $ | 836,879 |
|
Fair value of common stock issued | | | | 2,766,773 |
|
Fair value of preferred stock exchange | | | | 104,320 |
|
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Accounting standards yet to be adopted |
Information regarding the allocation of goodwill recorded as a result of the acquisition to the Company’s reportable segments, as well as the carrying amounts and amortization of core deposit and other intangible assets, is provided in Note 8 of the Notes to Consolidated Financial Statements. The total amount of goodwill that is expected to be deductible for tax purposes is $339 million.
The following is a description of the methods used to determine the fair values of significant assets and liabilities presented above.
Cash and due from banks, interest-bearing deposits in banks, and loans held for sale: The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets.
Securities: Fair values for securities were based on quoted market prices, where available. If quoted market prices were not available, fair value estimates were based on observable inputs including quoted market prices for similar instruments, quoted market prices that were not in an active market or other inputs that were observable in the market. In the absence of observable inputs, fair value is estimated based on pricing models and/or discounted cash flow methodologies.
Loans and leases: Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan, amortization status and current discount rates. Loans were grouped together according to similar characteristics when applying various valuation techniques. The discount rates used for loans were based on current market rates for new originations of comparable loans and include adjustments for any liquidity concerns. The discount rate does not include a factor for credit losses as that has been included as a reduction to the estimated cash flows.
CDI: This intangible asset represents the value of the relationships with deposit customers. The fair value was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, net maintenance cost of the deposit base, alternative cost of funds, and the interest costs associated with customer deposits. The CDI is being amortized over 10 years based upon the period over which estimated economic benefits were estimated to be received.
Deposits: The fair values used for the demand and savings deposits by definition equal the amount payable on demand at the acquisition date. The fair values for time deposits were estimated using a discounted cash flow calculation that applies interest rates currently being offered to the contractual interest rates on such time deposits.
Debt: The fair values of long-term debt instruments were estimated based on quoted market prices for the instrument if available, or for similar instruments if not available, or by using discounted cash flow analyses, based on current incremental borrowing rates for similar types of instruments.
The following table presents financial information regarding the former FirstMerit operations included in our Consolidated Statements of Income from the date of acquisition (August 16, 2016) through December 31, 2016 under the column “Actual from acquisition date”. The following table also presents unaudited pro forma information as if the entities were combined for the full years ended December 31, 2016 and 2015, respectively under the “Unaudited Pro Forma” columns. The pro forma information does not necessarily reflect the results of operations that would have occurred had Huntington acquired FirstMerit on January 1, 2015. Furthermore, cost savings and other business synergies related to the acquisition are not reflected in the pro forma amounts. |
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Standard | Summary of guidance | Effects on financial statements |
ASU 2016-02 - Leases. Issued February 2016
| - New lease accounting model for lessees and lessors. For lessees, virtually all leases will be required to be recognized on the balance sheet by recording a right-of-use asset and lease liability. Subsequent accounting for leases varies depending on whether the lease is classified as an operating lease or a finance lease. Impact to the income statement is not expected to be material.
- Accounting applied by a lessor is largely unchanged from that applied under the existing guidance.
- Requires additional qualitative and quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. | - Effective for the fiscal period beginning after December 15, 2018, with early application permitted.
- Management adopted the guidance on January 1, 2019, and elected certain practical expedients offered by the FASB, including foregoing the restatement of comparative periods upon adoption. Management also excluded short-term leases from the recognition of right-of-use asset and lease liabilities. Additionally, Huntington elected the transition relief allowed by FASB in foregoing the reassessment of the following: whether any existing contracts were or contained leases, the classification of existing leases, and the determination of initial direct costs for existing leases.
- Huntington expects to recognize right-of-use assets and lease liabilities of approximately $225 million, representing substantially all of its operating lease commitments. This estimate is based, primarily, on the present value of unpaid future minimum lease payments. Additionally, that amount is impacted by assumptions around renewals and/or extensions, and the interest rate used to discount those future lease obligations.
- Existing sale and leaseback guidance, including the detailed guidance applicable to sale-leasebacks of real estate, was replaced with a new model applicable to all assets, which will apply equally to both lessees and lessors. Under the new standard, if the transaction meets sale criteria, the seller-lessee will recognize the sale based on the new revenue recognition standard when control transfers to the buyer-lessor, derecognizing the asset sold and replacing it with a right-of-use asset and lease liability for the leaseback. If the transaction is at fair value, the seller-lessee shall recognize a gain or loss on sale at that time.
- Costs related to exiting an operating lease before the end of its contractual term have been historically accounted for pursuant to ASC 420, with the recognition of a liability measured at the present value of remaining lease payments reduced by any expected sublease income upon the exit of that space. ASC 842 changed the accounting for such costs, with entities evaluating the impairment of right-of-use assets using the guidance in ASC 360. Such an impairment analysis would occur once the entity commits to a plan to abandon the space, and thus may accelerate the timing of these costs.
- The new standard defines initial direct costs as those that would not have been incurred if the lease had not been obtained. Certain incremental costs previously eligible for capitalization, such as internal overhead, will now be expensed. |
ASU 2016-13 - Financial Instruments - Credit Losses. Issued June 2016 | - Eliminates the probable recognition threshold for credit losses on financial assets measured at amortized cost.
- Requires those financial assets to be presented at the net amount expected to be collected (i.e., net of expected credit losses).
- Measurement of expected credit losses should be based on relevant information including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. | - Effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018.
- Adoption will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.
- Management intends to adopt the guidance on January 1, 2020 and has a working group comprised of teams from different disciplines including credit, finance, and risk management to evaluate the requirements of the new standard and the impact it will have on our processes.
- Huntington is currently in the process of developing credit models as well as accounting, reporting, and governance processes to comply with the new credit reserve requirements. |
|
| | | | | | | | | | | |
| Actual from | | Unaudited Pro Forma for |
| acquisition date through | | Year Ended December 31, |
(dollar amounts in thousands) | December 31, 2016 | | 2016 | | 2015 |
Net interest income | $ | 277,143 |
| | $ | 2,788,074 |
| | $ | 2,599,840 |
|
Noninterest income | 96,217 |
| | 1,311,490 |
| | 1,301,798 |
|
Net income | 82,083 |
| | 809,142 |
| | 842,069 |
|
|
| | |
ASU 2017-04 - Simplifying the Test for Goodwill Impairment. Issued January 2017 | - Simplifies the goodwill impairment test by eliminating Step 2 of the goodwill impairment process, which requires an entity to determine the implied fair value of its goodwill by assigning fair value to all its assets and liabilities.
- Entities will instead recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.
- Entities will still have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. | - Effective for annual and interim goodwill tests performed in fiscal years beginning after December 15, 2019. Early adoption is permitted.
- The amendment is not expected to have a material impact on Huntington’s Consolidated Financial Statements. |
ASU 2018-16 - Derivatives and Hedging - Inclusion of SOFR as Benchmark Interest Rate for Hedge Accounting Purposes. Issued October 2018 | - Permits use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the U.S. Treasury, the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate, and the SIFMA Municipal Swap Rate.
| - For public business entities that already have adopted the amendments in ASU 2017-12, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.
- The amendments should be adopted on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after the date of adoption.
- Huntington will evaluate its risk management and may determine to hedge risk associated with OIS based on SOFR on case-to-case basis. |
ASU 2018-20 - Narrow-Scope Improvements for Lessors Issued December 2018 | - The amendments create a lessor practical expedient applicable to sales and other similar taxes incurred in connection with a lease, and simplify lessor accounting for lessor costs paid by the lessee.
- Permits lessors, as an entity-wide accounting policy election, to present sales and other similar taxes that arise from a specific leasing transaction on a net basis.
- Requires lessors to present lessor costs paid by the lessee directly to a third party on a net basis – regardless of whether the lessor knows, can determine or can reliably estimate those costs.
- Requires lessors to present lessor costs paid by the lessee to the lessor (e.g. through direct reimbursement or as part of the fixed lease payments) on a gross basis | - Effective date coincides with the effective date of ASU 2016-02 for Huntington (fiscal period beginning after December 15, 2018).
- Huntington elected to present sales and other similar taxes that arise from specific leasing transactions on a net basis.
- Management will present property taxes on a gross basis where such taxes are paid by Huntington and reimbursed by the lessee, and has assessed the impact of that change to Huntington’s consolidated financial statements.
- The amendment does not have a material impact on Huntington’s Consolidated Financial Statements. |
This unaudited pro forma information combines the historical consolidated results of operations of Huntington and FirstMerit for the periods presented and gives effect to the following nonrecurring adjustments:
Fair value adjustments: Pro forma adjustment to decrease net interest income by $12 million and $18 million for the years ended December 31, 2016 and 2015, to record estimated amortization of premiums and accretion of discounts on acquired loans, securities, deposits, and long-term debt.
FirstMerit accretion /amortization: Pro forma adjustment to decrease net interest income by $34 million and $79 million for the years ended December 31, 2016 and 2015, to eliminate FirstMerit amortization of premiums and accretion of discounts on previously acquired loans, securities, and deposits.
Amortization of acquired intangibles: Pro forma adjustment to increase noninterest expense by $28 million and $44 million for the years ended December 31, 2016 and 2015, to record estimated amortization of acquired intangible assets.
Huntington merger-related costs: Pro forma results include Huntington merger-related costs which primarily included, but were not limited to, severance costs, professional services, data processing fees, marketing and advertising expenses totaling $281 million for the year ended December 31, 2016.
Other adjustments: Pro forma results also include adjustments related to branch divestitures, incremental interest expense on the issuance on acquisition debt, elimination of FirstMerit's intangible amortization expense, FirstMerit merger-related costs, and related income-tax effects.
Branch divestiture: On December 5, 2016, Huntington completed the previously announced sale of 13 acquired branches and certain related assets and deposit liabilities to First Commonwealth Bank, the banking subsidiary of First Commonwealth Financial Corporation. The sale was in connection with an agreement reached with the U.S. Department of Justice in order to resolve its competitive concerns about Huntington’s acquisition of FirstMerit. Total deposits and loans transferred to First Commonwealth Bank in the transaction totaled $620 million and $106 million, respectively.
4.3. LOANS / LEASES AND ALLOWANCE FOR CREDIT LOSSES
ExceptLoans and leases which Huntington has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are classified in the Consolidated Balance Sheets as loans which are accounted for at fair value,and leases. The total balance that is recognized against loans are carried at the principal amount outstanding, net ofand leases pertaining to unamortized premiums, and discounts, deferred loan fees, and costs, and purchase accounting adjustments, which resulted inwas a net premium of $120$428 million and $262$334 million at December 31, 20162018 and 2015,2017, respectively.
LoansLoan and leases withLease Portfolio Composition
The following table provides a fair valuedetailed listing of $15 billion were acquired byHuntington’s loan and lease portfolio at December 31, 2018 and December 31, 2017.
|
| | | | | | | |
| At December 31, |
(dollar amounts in millions) | 2018 | | 2017 |
Loans and leases: | | | |
Commercial and industrial | $ | 30,605 |
| | $ | 28,107 |
|
Commercial real estate | 6,842 |
| | 7,225 |
|
Automobile | 12,429 |
| | 12,100 |
|
Home equity | 9,722 |
| | 10,099 |
|
Residential mortgage | 10,728 |
| | 9,026 |
|
RV and marine finance | 3,254 |
| | 2,438 |
|
Other consumer | 1,320 |
| | 1,122 |
|
Loans and leases | 74,900 |
| | 70,117 |
|
Allowance for loan and lease losses | (772 | ) | | (691 | ) |
Net loans and leases | $ | 74,128 |
| | $ | 69,426 |
|
During the fourth quarter of 2018, Huntington as partannounced the sale of the FirstMerit acquisition. The fair valuesits Wisconsin branch banking operations. As a result, $121 million of the loans were estimated using discounted cash flow analyses using interest rates currently being offered fortransferred to loans with similar terms (Level 3). Ofheld-for-sale on the total acquired loans and leases, Huntington has elected the fair value option for $56 million of consumer loans. These loans will subsequently be measured at fair value with any changes in fair value recognized in noninterest incomeConsolidated Balance Sheet. The sale is expected to close in the Consolidated Statementsfirst half of Income.2019.
Direct Financing Leases
Huntington’s loan and lease portfolio includes lease financing receivables consisting of direct financing leases on equipment, which are included in C&I loans. Net investments in lease financing receivables by category at December 31, 20162018 and 20152017 were as follows:
| | | At December 31, | At December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | |
(dollar amounts in millions) | | 2018 | | 2017 |
Commercial and industrial: | | | | | | |
Lease payments receivable | $ | 1,881,596 |
| | $ | 1,551,885 |
| $ | 1,747 |
| | $ | 1,645 |
|
Estimated residual value of leased assets | 797,611 |
| | 711,181 |
| 726 |
| | 755 |
|
Gross investment in commercial lease financing receivables | 2,679,207 |
| | 2,263,066 |
| 2,473 |
| | 2,400 |
|
Net deferred origination costs | 12,683 |
| | 7,068 |
| |
Deferred origination costs | | 20 |
| | 18 |
|
Deferred fees | (253,423 | ) | | (208,669 | ) | (250 | ) | | (225 | ) |
Total net investment in commercial lease financing receivables | $ | 2,438,467 |
| | $ | 2,061,465 |
| $ | 2,243 |
| | $ | 2,193 |
|
The future lease rental payments due from customers on direct financing leases at December 31, 2016,2018, totaled $1.9$1.7 billion and therefore were due as follows: $0.6 billion in 2017, $0.52019, $0.4 billion in 2018,2020, $0.3 billion in 2019,2021, $0.2 billion in 2020,2022, $0.1 billion in 2021,2023, and $0.2$0.1 billion thereafter.
Purchased Credit-Impaired Loans
The following table reflects the contractually required payments receivable, cash flows expected to be collected, and fair value of the credit impaired FirstMerit loans at acquisition date:
|
| | | | |
(dollar amounts in thousands) | | August 16, 2016 |
Contractually required payments including interest | | $ | 283,947 |
|
Less: nonaccretable difference | | (84,315 | ) |
Cash flows expected to be collected | | 199,632 |
|
Less: accretable yield | | (17,717 | ) |
Fair value of loans acquired | | $ | 181,915 |
|
The following table presents a rollforward of the accretable yield for purchased credit impaired FirstMerit loans for the year ended December 31, 2016: and 2015:
|
| | | |
(dollar amounts in thousands) | 2016 |
Balance, beginning of period | $ | — |
|
Impact of acquisition/purchase on August 16, 2016 | 17,717 |
|
Accretion | (5,401 | ) |
Reclassification (to) from nonaccretable difference | 24,353 |
|
Balance at December 31, | $ | 36,669 |
|
The following table reflects the ending and unpaid balances of the FirstMerit purchased credit-impaired loans at December 31, 2016: 2015
|
| | | | | | | |
| December 31, 2016 |
(dollar amounts in thousands) | Ending Balance | | Unpaid Balance |
Commercial and industrial | $ | 68,338 |
| | $ | 100,031 |
|
Commercial real estate | 34,042 |
| | 56,320 |
|
Total | $ | 102,380 |
| | $ | 156,351 |
|
Loan Purchases and Sales
The following table summarizes significant portfolio loan purchase and sale activity for the years ended December 31, 2016 and 2015. The table below excludes mortgage loans originated for sale.
|
| | | | | | | | | | | |
(dollar amounts in thousands) | | 2016 | | | 2015 | |
Portfolio loans and leases purchased or transferred from held for sale: |
Commercial and industrial | | $ | 394,579 |
| | | $ | 316,252 |
| |
Commercial real estate | | — |
| | | — |
| |
Automobile | | — |
| | | — |
| |
Home equity | | — |
| | | — |
| |
Residential mortgage | | 16,045 |
| | | 20,463 |
| |
RV and marine finance | | — |
| | | — |
| |
Other consumer | | — |
| | | — |
| |
Total | | $ | 410,624 |
| | | $ | 336,715 |
| |
| | | | | | |
Portfolio loans and leases sold or transferred to loans held for sale: |
Commercial and industrial | | $ | 1,293,711 |
| (1 | ) | | $ | 380,713 |
| |
Commercial real estate | | 76,965 |
| (2 | ) | | — |
| |
Automobile | | 1,544,642 |
| | | 764,540 |
| (3) |
Home equity | | — |
| | | 96,786 |
| |
Residential mortgage | | — |
| | | — |
| |
RV and marine finance | | — |
| | | — |
| |
Other consumer | | — |
| | | — |
| |
Total | | $ | 2,915,318 |
| | | $ | 1,242,039 |
| |
(1) Reflects the transfer of approximately $1.0 billion of loans to loans held-for-sale in the 2016 third quarter, net of approximately $341 million of loans transferred back to loans held for investment in the 2016 fourth quarter.
(2) Reflects the transfer of approximately $124 million of loans to loans held-for-sale in the 2016 third quarter, net of approximately $47 million of loans transferred back to loans held for investment in the 2016 fourth quarter.
(3) Reflects the transfer of approximately $1.0 billion of loans to loans held-for-sale during the 2015 first quarter, net of approximately $262 million of loans transferred to loans and leases in the 2015 second quarter.
NALsNonaccrual and Past Due Loans
The following table presents NALs by loan class at December 31, 20162018 and 2015:2017:
| | | December 31, | December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | |
(dollar amounts in millions) | | 2018 | | 2017 |
Commercial and industrial | $ | 234,184 |
| | $ | 175,195 |
| $ | 188 |
| | $ | 161 |
|
Commercial real estate | 20,508 |
| | 28,984 |
| 15 |
| | 29 |
|
Automobile | 5,766 |
| | 6,564 |
| 5 |
| | 6 |
|
Home equity | 71,798 |
| | 66,278 |
| 62 |
| | 68 |
|
Residential mortgage | 90,502 |
| | 94,560 |
| 69 |
| | 84 |
|
RV and marine finance | 245 |
| | — |
| 1 |
| | 1 |
|
Other consumer | — |
| | — |
| — |
| | — |
|
Total nonaccrual loans | $ | 423,003 |
| | $ | 371,581 |
| $ | 340 |
| | $ | 349 |
|
The amount of interest that would have been recorded under the original terms for total NAL loans was $22 million, $21 million, and $24 million $20 million,for 2018, 2017, and $21 million for 2016, 2015, and 2014, respectively. The total amount of interest recorded to interest income for these loans was $12 million, $18 million, and $17 million $10 million,in 2018, 2017, and $8 million in 2016, 2015, and 2014, respectively.
The following table presents an aging analysis of loans and leases, including past due loans and leases, by loan class at December 31, 20162018 and 20152017 (1):
| | | December 31, 2016 | December 31, 2018 |
| Past Due | | | | | | Loans Accounted for Under the Fair Value Option | | Total Loans and Leases | | 90 or more days past due and accruing | | Past Due (1) | | | | Loans Accounted for Under FVO | | Total Loans and Leases | | 90 or more days past due and accruing | |
(dollar amounts in thousands) | 30-59 Days | | 60-89 Days | | 90 or more days | Total | | Current | | Purchased Credit Impaired | | | |
(dollar amounts in millions) | | 30-59 Days | | 60-89 Days | | 90 or more days | Total | | Current | | Loans Accounted for Under FVO | | Total Loans and Leases | | 90 or more days past due and accruing | |
Commercial and industrial | $ | 42,052 |
| | $ | 20,136 |
| | $ | 74,174 |
| | $ | 136,362 |
| | $ | 27,854,012 |
| | $ | 68,338 |
| | $ | — |
| | $ | 28,058,712 |
| | $ | 18,148 |
| (2) | $ | 72 |
| | $ | 17 |
| | $ | 51 |
| | $ | 140 |
| | $ | 30,465 |
| | (2) |
Commercial real estate | 21,187 |
| | 3,202 |
| | 29,659 |
| | 54,048 |
| | 7,212,811 |
| | 34,042 |
| | — |
| | 7,300,901 |
| | 17,215 |
| | 10 |
| | — |
| | 5 |
| | 15 |
| | 6,827 |
| | — |
| | 6,842 |
| | — |
| |
Automobile loans and leases | 76,283 |
| | 17,188 |
| | 10,442 |
| | 103,913 |
| | 10,862,715 |
| | — |
| | 2,154 |
| | 10,968,782 |
| | 10,182 |
| | |
Automobile | | 95 |
| | 19 |
| | 10 |
| | 124 |
| | 12,305 |
| | — |
| | 12,429 |
| | 8 |
| |
Home equity | 38,899 |
| | 23,903 |
| | 53,002 |
| | 115,804 |
| | 9,986,697 |
| | — |
| | 3,273 |
| | 10,105,774 |
| | 11,508 |
| | 51 |
| | 21 |
| | 56 |
| | 128 |
| | 9,593 |
| | 1 |
| | 9,722 |
| | 17 |
| |
Residential mortgage | 122,469 |
| | 37,460 |
| | 116,682 |
| | 276,611 |
| | 7,373,414 |
| | — |
| | 74,936 |
| | 7,724,961 |
| | 66,952 |
| | 108 |
| | 47 |
| | 168 |
| | 323 |
| | 10,327 |
| | 78 |
| | 10,728 |
| | 131 |
| (3) |
RV and marine finance | 10,009 |
| | 2,230 |
| | 1,566 |
| | 13,805 |
| | 1,831,123 |
| | — |
| | 1,519 |
| | 1,846,447 |
| | 1,462 |
| | 12 |
| | 3 |
| | 2 |
| | 17 |
| | 3,237 |
| | — |
| | 3,254 |
| | 1 |
| |
Other consumer | 9,442 |
| | 4,324 |
| | 3,894 |
| | 17,660 |
| | 938,322 |
| | — |
| | 437 |
| | 956,419 |
| | 3,895 |
| | 14 |
| | 7 |
| | 6 |
| | 27 |
| | 1,293 |
| | — |
| | 1,320 |
| | 6 |
| |
Total loans and leases | $ | 320,341 |
| | $ | 108,443 |
| | $ | 289,419 |
| | $ | 718,203 |
| | $ | 66,059,094 |
| | $ | 102,380 |
| | $ | 82,319 |
| | $ | 66,961,996 |
| | $ | 129,362 |
| | $ | 362 |
| | $ | 114 |
| | $ | 298 |
| | $ | 774 |
| | $ | 74,047 |
| | $ | 79 |
| | $ | 74,900 |
| | $ | 170 |
| |
| | | December 31, 2015 | December 31, 2017 |
| Past Due | | | | Total Loans and Leases | | 90 or more days past due and accruing | | Past Due (1) | | | | | | Loans Accounted for Under FVO | | Total Loans and Leases | | 90 or more days past due and accruing | |
(dollar amounts in thousands) | 30-59 Days | | 60-89 Days | | 90 or more days | Total | | Current | | | | |
(dollar amounts in millions) | | 30-59 Days | | 60-89 Days | | 90 or more days | Total | | Current | | Purchased Credit Impaired | | Loans Accounted for Under FVO | | Total Loans and Leases | | 90 or more days past due and accruing | |
Commercial and industrial | $ | 44,715 |
| | $ | 13,580 |
| | $ | 46,978 |
| | $ | 105,273 |
| | $ | 20,454,561 |
| | $ | 20,559,834 |
| | $ | 8,724 |
| (2) | $ | 35 |
| | $ | 14 |
| | $ | 65 |
| | $ | 114 |
| | $ | 27,954 |
| | 39 |
| | (2) |
Commercial real estate | 9,232 |
| | 5,721 |
| | 21,666 |
| | 36,619 |
| | 5,232,032 |
| | 5,268,651 |
| | 9,549 |
| | 10 |
| | 1 |
| | 11 |
| | 22 |
| | 7,201 |
| | 2 |
| | — |
| | 7,225 |
| | 3 |
| |
Automobile loans and leases | 69,553 |
| | 14,965 |
| | 7,346 |
| | 91,864 |
| | 9,388,814 |
| | 9,480,678 |
| | 7,162 |
| | |
Automobile | | 89 |
| | 18 |
| | 10 |
| | 117 |
| | 11,982 |
| | — |
| | 1 |
| | 12,100 |
| | 7 |
| |
Home equity | 36,477 |
| | 16,905 |
| | 56,300 |
| | 109,682 |
| | 8,360,800 |
| | 8,470,482 |
| | 9,044 |
| | 49 |
| | 19 |
| | 60 |
| | 128 |
| | 9,969 |
| | — |
| | 2 |
| | 10,099 |
| | 18 |
| |
Residential mortgage | 102,773 |
| | 34,298 |
| | 119,354 |
| | 256,425 |
| | 5,741,975 |
| | 5,998,400 |
| | 69,917 |
|
| 129 |
| | 48 |
| | 118 |
| | 295 |
| | 8,642 |
| | — |
| | 89 |
| | 9,026 |
| | 72 |
| (3) |
RV and marine finance | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 11 |
| | 3 |
| | 2 |
| | 16 |
| | 2,421 |
| | — |
| | 1 |
| | 2,438 |
| | 1 |
| |
Other consumer | 6,469 |
| | 1,852 |
| | 1,395 |
| | 9,716 |
| | 553,338 |
| | 563,054 |
| | 1,394 |
| | 12 |
| | 5 |
| | 5 |
| | 22 |
| | 1,100 |
| | — |
| | — |
| | 1,122 |
| | 5 |
| |
Total loans and leases | $ | 269,219 |
| | $ | 87,321 |
| | $ | 253,039 |
| | $ | 609,579 |
| | $ | 49,731,520 |
| | $ | 50,341,099 |
| | $ | 105,790 |
| | $ | 335 |
| | $ | 108 |
| | $ | 271 |
| | $ | 714 |
| | $ | 69,269 |
| | $ | 41 |
| | $ | 93 |
| | $ | 70,117 |
| | $ | 115 |
| |
| |
(1) | NALs are included in this aging analysis based on the loan’s past due status. |
| |
(2) | Amounts include Huntington Technology Finance administrative lease delinquencies. |
| |
(3) | Amounts include mortgage loans insured by U.S. government agencies. |
Allowance for Credit Losses
The ACL is increased through a provision for credit losses that is charged to earnings, based on the Company’s quarterly evaluation of the factors disclosed in Note 1. Significant Accounting Policies and is reduced by charge-offs, net of recoveries, and the ACL associated with loans sold or transferred to held-for-sale.
The following table presents ALLL and AULC activity by portfolio segment for the years ended December 31, 2016, 2015,2018, 2017, and 2014:2016:
| | (dollar amounts in thousands) | | Commercial | | Consumer | | Total | |
(dollar amounts in millions) | | | Commercial | | Consumer | | Total |
Year ended December 31, 2018: | | | | | | | |
ALLL balance, beginning of period | | | $ | 482 |
| | $ | 209 |
| | $ | 691 |
|
Loan charge-offs | | | (79 | ) | | (189 | ) | | (268 | ) |
Recoveries of loans previously charged-off | | | 65 |
| | 58 |
| | 123 |
|
Provision for loan and lease losses | | | 74 |
| | 152 |
| | 226 |
|
ALLL balance, end of period | | | $ | 542 |
| | $ | 230 |
| | $ | 772 |
|
AULC balance, beginning of period | | | $ | 84 |
| | $ | 3 |
| | $ | 87 |
|
Provision (reduction in allowance) for unfunded loan commitments and letters of credit | | | 10 |
| | (1 | ) | | 9 |
|
AULC balance, end of period | | | $ | 94 |
| | $ | 2 |
| | $ | 96 |
|
ACL balance, end of period | | | $ | 636 |
| | $ | 232 |
| | $ | 868 |
|
| | | | | | | |
Year ended December 31, 2017: | | | | | | | |
ALLL balance, beginning of period | | | $ | 451 |
| | $ | 187 |
| | $ | 638 |
|
Loan charge-offs | | | (72 | ) | | (180 | ) | | (252 | ) |
Recoveries of loans previously charged-off | | | 41 |
| | 52 |
| | 93 |
|
Provision for loan and lease losses | | | 62 |
| | 150 |
| | 212 |
|
ALLL balance, end of period | | | $ | 482 |
| | $ | 209 |
| | $ | 691 |
|
AULC balance, beginning of period | | | $ | 87 |
| | $ | 11 |
| | $ | 98 |
|
Provision (reduction in allowance) for unfunded loan commitments and letters of credit | | | (3 | ) | | (8 | ) | | (11 | ) |
AULC balance, end of period | | | $ | 84 |
| | $ | 3 |
| | $ | 87 |
|
ACL balance, end of period | | | $ | 566 |
| | $ | 212 |
| | $ | 778 |
|
| | | | | | | |
Year ended December 31, 2016: | | | | | | | | | | | | |
ALLL balance, beginning of period | | $ | 398,753 |
| | $ | 199,090 |
| | $ | 597,843 |
| | $ | 399 |
| | $ | 199 |
| | $ | 598 |
|
Loan charge-offs | | (91,914 | ) | | (135,400 | ) | | (227,314 | ) | | (92 | ) | | (135 | ) | | (227 | ) |
Recoveries of loans previously charged-off | | 73,138 |
| | 45,280 |
| | 118,418 |
| | 73 |
| | 45 |
| | 118 |
|
Provision (reduction in allowance) for loan and lease losses | | 84,381 |
| | 85,026 |
| | 169,407 |
| |
Provision for loan and lease losses | | | 85 |
| | 84 |
| | 169 |
|
Allowance for loans sold or transferred to loans held for sale | | (13,267 | ) | | (6,674 | ) | | (19,941 | ) | | (14 | ) | | (6 | ) | | (20 | ) |
ALLL balance, end of period | | $ | 451,091 |
| | $ | 187,322 |
| | $ | 638,413 |
| | $ | 451 |
| | $ | 187 |
| | $ | 638 |
|
AULC balance, beginning of period | | $ | 63,448 |
| | $ | 8,633 |
| | $ | 72,081 |
| | $ | 64 |
| | $ | 8 |
| | $ | 72 |
|
Provision (reduction in allowance) for unfunded loan commitments and letters of credit | | 18,692 |
| | 2,703 |
| | 21,395 |
| | 19 |
| | 3 |
| | 22 |
|
AULC recorded at acquisition | | 4,403 |
| | — |
| | 4,403 |
| | 4 |
| | — |
| | 4 |
|
AULC balance, end of period | | $ | 86,543 |
| | $ | 11,336 |
| | $ | 97,879 |
| | $ | 87 |
| | $ | 11 |
| | $ | 98 |
|
ACL balance, end of period | | $ | 537,634 |
| | $ | 198,658 |
| | $ | 736,292 |
| | $ | 538 |
| | $ | 198 |
| | $ | 736 |
|
| | | | | | | |
Year ended December 31, 2015: | | | | | | | |
ALLL balance, beginning of period | | $ | 389,834 |
| | $ | 215,362 |
| | $ | 605,196 |
| |
Loan charge-offs | | (97,800 | ) | | (120,081 | ) | | (217,881 | ) | |
Recoveries of loans previously charged-off | | 86,419 |
| | 43,669 |
| | 130,088 |
| |
Provision (reduction in allowance) for loan and lease losses | | 20,300 |
| | 68,379 |
| | 88,679 |
| |
Allowance for loans sold or transferred to loans held for sale | | — |
| | (8,239 | ) | | (8,239 | ) | |
ALLL balance, end of period | | $ | 398,753 |
| | $ | 199,090 |
| | $ | 597,843 |
| |
AULC balance, beginning of period | | $ | 55,029 |
| | $ | 5,777 |
| | $ | 60,806 |
| |
Provision (reduction in allowance) for unfunded loan commitments and letters of credit | | 8,419 |
| | 2,856 |
| | 11,275 |
| |
AULC recorded at acquisition | | — |
| | — |
| | — |
| |
AULC balance, end of period | | $ | 63,448 |
| | $ | 8,633 |
| | $ | 72,081 |
| |
ACL balance, end of period | | $ | 462,201 |
| | $ | 207,723 |
| | $ | 669,924 |
| |
| | | | | | | |
Year ended December 31, 2014: | | | | | | | |
ALLL balance, beginning of period | | $ | 428,358 |
| | $ | 219,512 |
| | $ | 647,870 |
| |
Loan charge-offs | | (101,358 | ) | | (145,243 | ) | | (246,601 | ) | |
Recoveries of loans previously charged-off | | 78,602 |
| | 43,372 |
| | 121,974 |
| |
Provision (reduction in allowance) for loan and lease losses | | (15,768 | ) | | 98,850 |
| | 83,082 |
| |
Allowance for loans sold or transferred to loans held for sale | | — |
| | (1,129 | ) | | (1,129 | ) | |
ALLL balance, end of period | | $ | 389,834 |
| | $ | 215,362 |
| | $ | 605,196 |
| |
AULC balance, beginning of period | | $ | 59,487 |
| | $ | 3,412 |
| | $ | 62,899 |
| |
Provision (reduction in allowance) for unfunded loan commitments and letters of credit | | (4,458 | ) | | 2,365 |
| | (2,093 | ) | |
AULC recorded at acquisition | | — |
| | — |
| | — |
| |
AULC balance, end of period | | $ | 55,029 |
| | $ | 5,777 |
| | $ | 60,806 |
| |
ACL balance, end of period | | $ | 444,863 |
| | $ | 221,139 |
| | $ | 666,002 |
| |
Credit Quality Indicators
To facilitate the monitoring of credit quality for C&I and CREcommercial loans, and for purposes of determining an appropriate ACL level for these loans, Huntington utilizes the following internally defined categories of credit grades:
Pass - Higher quality loans that do not fit any of the other categories described below.
OLEM - The credit risk may be relatively minor yet representrepresents a risk given certain specific circumstances. If the potential weaknesses are not monitored or mitigated, the loan may weaken or the collateral may be inadequate to protect Huntington’s position in the future. For these reasons, Huntington considers the loans to be potential problem loans.
Substandard - Inadequately protected loans by the borrower’s ability to repay, equity, and/or the collateral pledged to secure the loan. These loans have identified weaknesses that could hinder normal repayment or collection of the debt. It is likely Huntington will sustain some loss if any identified weaknesses are not mitigated.
Doubtful - Loans that have all of the weaknesses inherent in those loans classified as Substandard, with the added elements of the full collection of the loan is improbable and that the possibility of loss is high.
The categories above, which
Loans are derived from standard regulatory generally assigned a category of “Pass” rating definitions, are assigned upon initial approval of the loan or lease and subsequently updated as appropriate.appropriate based on the borrower’s financial performance.
Commercial loans categorized as OLEM, Substandard, or Doubtful are considered Criticized loans. Commercial loans categorized as Substandard or Doubtful are both considered Classified loans.
For all classes within consumer loan portfolios, each loan isloans are assigned a specificpool level PD factor that is partiallyfactors based on the FICO range within which the borrower’s most recent credit bureau score which we update quarterly.falls. A credit bureau score is a credit score developed by Fair Isaac
CorporationFICO based on data provided by the credit bureaus. The credit bureau score is widely accepted as the standard measure of consumer credit risk used by lenders, regulators, rating agencies, and consumers. The higher the credit bureau score, the higher likelihood of repayment and therefore, an indicator of higher credit quality.
Huntington assesses the risk in the loan portfolio by utilizing numerous risk characteristics. The classifications described above, and also presented in the table below, represent one of those characteristics that are closely monitored in the overall credit risk management processes.
The following table presents each loan and lease class by credit quality indicator at December 31, 20162018 and 2015:2017:
| | | December 31, 2016 | December 31, 2018 |
| Credit Risk Profile by UCS Classification | Credit Risk Profile by UCS Classification |
(dollar amounts in thousands) | Pass | | OLEM | | Substandard | | Doubtful | | Total | |
(dollar amounts in millions) | | Pass | | OLEM | | Substandard | | Doubtful | | Total |
Commercial and industrial | $ | 26,211,885 |
| | $ | 810,287 |
| | $ | 1,028,819 |
| | $ | 7,721 |
| | $ | 28,058,712 |
| $ | 28,807 |
| | $ | 518 |
| | $ | 1,269 |
| | $ | 11 |
| | $ | 30,605 |
|
Commercial real estate | 7,042,304 |
| | 96,975 |
| | 159,098 |
| | 2,524 |
| | 7,300,901 |
| 6,586 |
| | 181 |
| | 74 |
| | 1 |
| | 6,842 |
|
| Credit Risk Profile by FICO Score (1), (2) | Credit Risk Profile by FICO Score (1), (2) |
| 750+ | | 650-749 | | <650 | | Other (3) | | Total | 750+ | | 650-749 | | <650 | | Other (3) | | Total |
Automobile | 5,369,085 |
| | 4,043,611 |
| | 1,298,460 |
| | 255,472 |
| | 10,966,628 |
| 6,254 |
| | 4,520 |
| | 1,373 |
| | 282 |
| | $ | 12,429 |
|
Home equity | 6,280,328 |
| | 2,891,330 |
| | 637,560 |
| | 293,283 |
| | 10,102,501 |
| 6,098 |
| | 2,975 |
| | 591 |
| | 56 |
| | 9,720 |
|
Residential mortgage | 4,662,777 |
| | 2,285,121 |
| | 615,067 |
| | 87,060 |
| | 7,650,025 |
| 7,159 |
| | 2,801 |
| | 612 |
| | 78 |
| | 10,650 |
|
RV and marine finance | 1,064,143 |
| | 644,039 |
| | 72,995 |
| | 63,751 |
| | 1,844,928 |
| 2,074 |
| | 990 |
| | 105 |
| | 85 |
| | 3,254 |
|
Other consumer | 346,867 |
| | 455,959 |
| | 133,243 |
| | 19,913 |
| | 955,982 |
| 501 |
| | 633 |
| | 129 |
| | 57 |
| | 1,320 |
|
| | | December 31, 2015 | December 31, 2017 |
| Credit Risk Profile by UCS Classification | Credit Risk Profile by UCS Classification |
(dollar amounts in thousands) | Pass | | OLEM | | Substandard | | Doubtful | | Total | |
(dollar amounts in millions) | | Pass | | OLEM | | Substandard | | Doubtful | | Total |
Commercial and industrial | $ | 19,257,789 |
| | $ | 399,339 |
| | $ | 895,577 |
| | $ | 7,129 |
| | $ | 20,559,834 |
| $ | 26,268 |
| | $ | 694 |
| | $ | 1,116 |
| | $ | 29 |
| | $ | 28,107 |
|
Commercial real estate | 5,066,054 |
| | 79,787 |
| | 121,167 |
| | 1,643 |
| | 5,268,651 |
| 6,909 |
| | 200 |
| | 115 |
| | 1 |
| | 7,225 |
|
| Credit Risk Profile by FICO Score (1), (2) | Credit Risk Profile by FICO Score (1), (2) |
| 750+ | | 650-749 | | <650 | | Other (3) | | Total | 750+ | | 650-749 | | <650 | | Other (3) | | Total |
Automobile | 4,680,684 |
| | 3,454,585 |
| | 1,086,914 |
| | 258,495 |
| | 9,480,678 |
| 6,102 |
| | 4,312 |
| | 1,390 |
| | 295 |
| | $ | 12,099 |
|
Home equity | 5,210,741 |
| | 2,466,425 |
| | 582,326 |
| | 210,990 |
| | 8,470,482 |
| 6,352 |
| | 3,024 |
| | 617 |
| | 104 |
| | 10,097 |
|
Residential mortgage | 3,564,064 |
| | 1,813,779 |
| | 567,984 |
| | 52,573 |
| | 5,998,400 |
| 5,697 |
| | 2,581 |
| | 605 |
| | 54 |
| | 8,937 |
|
RV and marine finance | — |
| | — |
| | — |
| | — |
| | — |
| 1,433 |
| | 863 |
| | 96 |
| | 45 |
| | 2,437 |
|
Other consumer | 233,969 |
| | 269,746 |
| | 49,650 |
| | 9,689 |
| | 563,054 |
| 428 |
| | 540 |
| | 143 |
| | 11 |
| | 1,122 |
|
| |
(1) | Excludes loans accounted for under the fair value option. |
| |
(2) | Reflects most recentupdated customer credit scores. |
| |
(3) | Reflects deferred fees and costs, loans in process, loans to legal entities, etc. |
Impaired Loans
For all classes within the C&I and CRE portfolios, all loans with an obligor balance of $1 million or greater are evaluated on a quarterly basis for impairment. Generally, consumer loans within any class are not individually evaluated on a regular basis for impairment. All TDRs, regardless of the outstanding balance amount, are also considered to be impaired. Loans acquired with evidence of deterioration of credit quality since origination for which it is probable at acquisition that all contractually required payments will not be collected are also considered to be impaired.
Once a loan has been identified for an assessment of impairment, the loan is considered impaired when, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. This determination requires significant judgment and use of estimates, and the eventual outcome may differ significantly from those estimates.
The following tables present the balance of the ALLL attributable to loans by portfolio segment individually and collectively evaluated for impairment and the related loan and lease balance for the years ended December 31, 20162018 and 2015:2017:
| | (dollar amounts in thousands) | | Commercial | | Consumer | | Total | |
ALLL at December 31, 2016: | | | | | | | |
(dollar amounts in millions) | | | Commercial | | Consumer | | Total |
ALLL at December 31, 2018 | | | | | | | |
Portion of ALLL balance: | | | | | | | | | | | | |
Attributable to loans individually evaluated for impairment | | $ | 10,525 |
| | $ | 11,021 |
| | $ | 21,546 |
| | $ | 33 |
| | $ | 10 |
| | $ | 43 |
|
Attributable to loans collectively evaluated for impairment | | 440,566 |
| | 176,301 |
| | 616,867 |
| | 509 |
| | 220 |
| | 729 |
|
Total ALLL balance | | $ | 451,091 |
| | $ | 187,322 |
| | $ | 638,413 |
| | $ | 542 |
| | $ | 230 |
| | $ | 772 |
|
Loan and Lease Ending Balances at December 31, 2016: (1) | | | | | | | |
Loan and Lease Ending Balances at December 31, 2018 (1) | | | | | | | |
Portion of loan and lease ending balance: | | | | | | | | | | | | |
Attributable to purchased credit-impaired loans | | $ | 102,380 |
| | $ | — |
| | $ | 102,380 |
| |
Individually evaluated for impairment | | 415,624 |
| | 457,890 |
| | 873,514 |
| | 516 |
| | 591 |
| | 1,107 |
|
Collectively evaluated for impairment | | 34,841,609 |
| | 31,062,174 |
| | 65,903,783 |
| | 36,931 |
| | 36,783 |
| | 73,714 |
|
Total loans and leases evaluated for impairment | | $ | 35,359,613 |
| | $ | 31,520,064 |
| | $ | 66,879,677 |
| | $ | 37,447 |
| | $ | 37,374 |
| | $ | 74,821 |
|
| |
(1) | Excludes loans accounted for under the fair value option. |
| | (dollar amounts in thousands) | | Commercial | | Consumer | | Total | |
ALLL at December 31, 2015: | | | | | | | |
(dollar amounts in millions) | | | Commercial | | Consumer | | Total |
ALLL at December 31, 2017 | | | | | | | |
Portion of ALLL balance: | | | | | | | | | | | | |
Attributable to purchased credit-impaired loans | | $ | 2,602 |
| | $ | 127 |
| | $ | 2,729 |
| |
Attributable to loans individually evaluated for impairment | | 27,428 |
| | 35,008 |
| | 62,436 |
| | $ | 32 |
| | $ | 9 |
| | $ | 41 |
|
Attributable to loans collectively evaluated for impairment | | 368,723 |
| | 163,955 |
| | 532,678 |
| | 450 |
| | 200 |
| | 650 |
|
Total ALLL balance: | | $ | 398,753 |
| | $ | 199,090 |
| | $ | 597,843 |
| | $ | 482 |
| | $ | 209 |
| | $ | 691 |
|
Loan and Lease Ending Balances at December 31, 2015: (1) | | | | | | | |
Loan and Lease Ending Balances at December 31, 2017 (1) | | | | | | | |
Portion of loan and lease ending balances: | | | | | | | | | | | | |
Attributable to purchased credit-impaired loans | | $ | 34,775 |
| | $ | 1,506 |
| | $ | 36,281 |
| | $ | 41 |
| | $ | — |
| | $ | 41 |
|
Individually evaluated for impairment | | 626,010 |
| | 651,778 |
| | 1,277,788 |
| | 607 |
| | 616 |
| | 1,223 |
|
Collectively evaluated for impairment | | 25,167,700 |
| | 23,859,330 |
| | 49,027,030 |
| | 34,684 |
| | 34,076 |
| | 68,760 |
|
Total loans and leases evaluated for impairment | | $ | 25,828,485 |
| | $ | 24,512,614 |
| | $ | 50,341,099 |
| | $ | 35,332 |
| | $ | 34,692 |
| | $ | 70,024 |
|
| |
(1) | Excludes loans accounted for under the fair value option. |
The following tables present by class the ending, unpaid principal balance, and the related ALLL, along with the average balance and interest income recognized only for impaired loans and leases and purchased credit-impaired loans for the years ended December 31, 20162018 and 20152017 (1):
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | Year Ended |
| December 31, 2018 | | December 31, 2018 |
(dollar amounts in millions) | Ending Balance | | Unpaid Principal Balance (6) | | Related Allowance (7) | | Average Balance | | Interest Income Recognized |
With no related allowance recorded: | | | | | | | | | |
Commercial and industrial | $ | 224 |
| | $ | 261 |
| | $ | — |
| | $ | 256 |
| | $ | 22 |
|
Commercial real estate | 36 |
| | 45 |
| | — |
| | 47 |
| | 8 |
|
| | | | | | | | | |
With an allowance recorded: | | | | | | | | | |
Commercial and industrial | 221 |
| | 240 |
| | 31 |
| | 272 |
| | 11 |
|
Commercial real estate | 35 |
| | 39 |
| | 2 |
| | 45 |
| | 2 |
|
Automobile | 38 |
| | 42 |
| | 2 |
| | 37 |
| | 2 |
|
Home equity | 314 |
| | 356 |
| | 10 |
| | 326 |
| | 14 |
|
Residential mortgage | 287 |
| | 323 |
| | 4 |
| | 297 |
| | 11 |
|
RV and marine finance | 2 |
| | 3 |
| | — |
| | 2 |
| | — |
|
Other consumer | 9 |
| | 9 |
| | 3 |
| | 8 |
| | — |
|
| | | | | | | | | |
Total | | | | | | | | | |
Commercial and industrial (3) | 445 |
| | 501 |
| | 31 |
| | 528 |
| | 33 |
|
Commercial real estate (4) | 71 |
| | 84 |
| | 2 |
| | 92 |
| | 10 |
|
Automobile (2) | 38 |
| | 42 |
| | 2 |
| | 37 |
| | 2 |
|
Home equity (5) | 314 |
| | 356 |
| | 10 |
| | 326 |
| | 14 |
|
Residential mortgage (5) | 287 |
| | 323 |
| | 4 |
| | 297 |
| | 11 |
|
RV and marine finance (2) | 2 |
| | 3 |
| | — |
| | 2 |
| | — |
|
Other consumer (2) | 9 |
| | 9 |
| | 3 |
| | 8 |
| | — |
|
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | Year Ended |
| December 31, 2016 | | December 31, 2016 |
(dollar amounts in thousands) | Ending Balance | | Unpaid Principal Balance (4) | | Related Allowance | | Average Balance | | Interest Income Recognized |
With no related allowance recorded: | | | | | | | | | |
Commercial and industrial | $ | 299,606 |
| | $ | 358,712 |
| | $ | — |
| | $ | 292,567 |
| | $ | 9,401 |
|
Commercial real estate | 88,817 |
| | 126,152 |
| | — |
| | 73,040 |
| | 4,191 |
|
Automobile | — |
| | — |
| | — |
| | — |
| | — |
|
Home equity | — |
| | — |
| | — |
| | — |
| | — |
|
Residential mortgage | — |
| | — |
| | — |
| | — |
| | — |
|
RV and marine finance | — |
| | — |
| | — |
| | — |
| | — |
|
Other consumer | — |
| | — |
| | — |
| | — |
| | — |
|
| | | | | | | | | |
With an allowance recorded: | | | | | | | | | |
Commercial and industrial (2) | 406,243 |
| | 448,121 |
| | 22,259 |
| | 301,598 |
| | 8,124 |
|
Commercial real estate (3) | 97,238 |
| | 107,512 |
| | 3,434 |
| | 68,865 |
| | 2,978 |
|
Automobile | 30,961 |
| | 31,298 |
| | 1,850 |
| | 31,722 |
| | 2,162 |
|
Home equity | 319,404 |
| | 352,722 |
| | 15,032 |
| | 277,692 |
| | 13,410 |
|
Residential mortgage (5) | 327,753 |
| | 363,099 |
| | 12,849 |
| | 348,158 |
| | 11,945 |
|
RV and marine finance | — |
| | — |
| | — |
| | — |
| | — |
|
Other consumer | 3,897 |
| | 3,897 |
| | 260 |
| | 4,481 |
| | 233 |
|
| | | | | | | | | |
Total | | | | | | | | | |
Commercial and industrial | 705,849 |
| | 806,833 |
| | 22,259 |
| | 594,165 |
| | 17,525 |
|
Commercial real estate | 186,055 |
| | 233,664 |
| | 3,434 |
| | 141,905 |
| | 7,169 |
|
Automobile | 30,961 |
| | 31,298 |
| | 1,850 |
| | 31,722 |
| | 2,162 |
|
Home equity | 319,404 |
| | 352,722 |
| | 15,032 |
| | 277,692 |
| | 13,410 |
|
Residential mortgage | 327,753 |
| | 363,099 |
| | 12,849 |
| | 348,158 |
| | 11,945 |
|
RV and marine finance | — |
| | — |
| | — |
| | — |
| | — |
|
Other consumer | 3,897 |
| | 3,897 |
| | 260 |
| | 4,481 |
| | 233 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | Year Ended |
| December 31, 2015 | | December 31, 2015 |
(dollar amounts in thousands) | Ending Balance | | Unpaid Principal Balance (4) | | Related Allowance | | Average Balance | | Interest Income Recognized |
With no related allowance recorded: | | | | | | | | | |
Commercial and industrial | $ | 255,801 |
| | $ | 279,551 |
| | $ | — |
| | $ | 114,389 |
| | $ | 2,584 |
|
Commercial real estate | 68,260 |
| | 125,814 |
| | — |
| | 88,173 |
| | 7,199 |
|
Automobile | — |
| | — |
| | — |
| | — |
| | — |
|
Home equity | — |
| | — |
| | — |
| | — |
| | — |
|
Residential mortgage | — |
| | — |
| | — |
| | — |
| | — |
|
RV and marine finance | — |
| | — |
| | — |
| | — |
| | — |
|
Other consumer | 52 |
| | 101 |
| | — |
| | 51 |
| | 17 |
|
| | | | | | | | | |
With an allowance recorded: | | | | | | | | | |
Commercial and industrial (2) | 246,249 |
| | 274,203 |
| | 21,916 |
| | 267,662 |
| | 15,110 |
|
Commercial real estate (3) | 90,475 |
| | 104,930 |
| | 8,114 |
| | 114,019 |
| | 4,833 |
|
Automobile | 31,304 |
| | 31,878 |
| | 1,779 |
| | 30,163 |
| | 2,224 |
|
Home equity | 248,839 |
| | 284,957 |
| | 16,242 |
| | 292,014 |
| | 13,092 |
|
Residential mortgage (5) | 368,449 |
| | 411,114 |
| | 16,938 |
| | 373,573 |
| | 12,889 |
|
RV and marine finance | — |
| | — |
| | — |
| | — |
| | — |
|
Other consumer | 4,640 |
| | 4,649 |
| | 176 |
| | 4,675 |
| | 254 |
|
| | | | | | | | | |
Total | | | | | | | | | |
Commercial and industrial | 502,050 |
| | 553,754 |
| | 21,916 |
| | 382,051 |
| | 17,694 |
|
Commercial real estate | 158,735 |
| | 230,744 |
| | 8,114 |
| | 202,192 |
| | 12,032 |
|
Automobile | 31,304 |
| | 31,878 |
| | 1,779 |
| | 30,163 |
| | 2,224 |
|
Home equity | 248,839 |
| | 284,957 |
| | 16,242 |
| | 292,014 |
| | 13,092 |
|
Residential mortgage | 368,449 |
| | 411,114 |
| | 16,938 |
| | 373,573 |
| | 12,889 |
|
RV and marine finance | — |
| | — |
| | — |
| | — |
| | — |
|
Other consumer | 4,692 |
| | 4,750 |
| | 176 |
| | 4,726 |
| | 271 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | Year Ended |
| December 31, 2017 | | December 31, 2017 |
(dollar amounts in millions) | Ending Balance | | Unpaid Principal Balance (6) | | Related Allowance (7) | | Average Balance | | Interest Income Recognized |
With no related allowance recorded: | | | | | | | | | |
Commercial and industrial | $ | 284 |
| | $ | 311 |
| | $ | — |
| | $ | 206 |
| | $ | 12 |
|
Commercial real estate | 56 |
| | 81 |
| | — |
| | 64 |
| | 8 |
|
| | | | | | | | | |
With an allowance recorded: | | | | | | | | | |
Commercial and industrial | 257 |
| | 280 |
| | 29 |
| | 292 |
| | 16 |
|
Commercial real estate | 51 |
| | 51 |
| | 3 |
| | 52 |
| | 2 |
|
Automobile | 36 |
| | 40 |
| | 2 |
| | 33 |
| | 2 |
|
Home equity | 334 |
| | 385 |
| | 14 |
| | 329 |
| | 15 |
|
Residential mortgage | 308 |
| | 338 |
| | 4 |
| | 325 |
| | 12 |
|
RV and marine finance | 2 |
| | 3 |
| | — |
| | 1 |
| | — |
|
Other consumer | 8 |
| | 8 |
| | 2 |
| | 5 |
| | — |
|
| | | | | | | | | |
Total | | | | | | | | | |
Commercial and industrial (3) | 541 |
| | 591 |
| | 29 |
| | 498 |
| | 28 |
|
Commercial real estate (4) | 107 |
| | 132 |
| | 3 |
| | 116 |
| | 10 |
|
Automobile (2) | 36 |
| | 40 |
| | 2 |
| | 33 |
| | 2 |
|
Home equity (5) | 334 |
| | 385 |
| | 14 |
| | 329 |
| | 15 |
|
Residential mortgage (5) | 308 |
| | 338 |
| | 4 |
| | 325 |
| | 12 |
|
RV and marine finance (2) | 2 |
| | 3 |
| | — |
| | 1 |
| | — |
|
Other consumer (2) | 8 |
| | 8 |
| | 2 |
| | 5 |
| | — |
|
| |
(1) | These tables do not include loans fully charged-off. |
| |
(2) | All automobile, home equity, residential mortgage,RV and marine finance and other consumer impaired loans included in these tables are considered impaired due to their status as a TDR. |
| |
(2) | At December 31, 2016, $293 million of the $406 million C&I loans with an allowance recorded were considered impaired due to their status as a TDR. At December 31, 2015, $91 million of the $246 million C&I loans with an allowance recorded were considered impaired due to their status as a TDR. |
| |
(3) | At December 31, 2016, $81 million of the $97 million CRE loans with an allowance recorded were considered impaired due to their status as a TDR. At2018 and December 31, 2015, $352017, C&I loans of $366 million of the $90and $382 million, CRE loans with an allowance recordedrespectively, were considered impaired due to their status as a TDR. |
| |
(4) | At December 31, 2018 and December 31, 2017, CRE loans of $60 million and $93 million, respectively, were considered impaired due to their status as a TDR. |
| |
(5) | Includes home equity and residential mortgages considered impaired due to collateral dependent designation associated with their non-accrual status as well as home equity and mortgage loans considered impaired due to their status as a TDR. |
| |
(6) | The differences between the ending balance and unpaid principal balance amounts primarily represent partial charge-offs. |
| |
(5)(7) | At December 31, 2016, $29 million ofImpaired loans in the $328 million residential mortgageconsumer portfolio are evaluated in pools and not at the loan level. Thus, these loans do not have an individually assigned allowance and as such all are classified as with an allowance recorded were guaranteed byin the U.S. government. At December 31, 2015, $29 million of the $368 million residential mortgage loans with an allowance recorded were guaranteed by the U.S. government.tables above. |
TDR Loans
The amount of interest that would have been recorded under the original terms for total accruing TDR loans was $51 million, $49 million, $46 million, and $45$49 million for 2016, 2015,2018, 2017, and 2014,2016, respectively. The total amount of actual interest recorded to interest income for these loans was $48 million, $45 million, and $40 million $41 million,for 2018, 2017, and $39 million for 2016, 2015, and 2014, respectively.
TDR Concession Types
The Company’s standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analyses, and collateral valuations. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower’s specific circumstances at a point in time. All commercial TDRs are reviewed and approved by our SAD. The types of concessions provided to borrowers include:
Interest rate reduction: A reduction of the stated interest rate to a nonmarket rate for the remaining original life of the debt.
Amortization or maturity date change beyond what the collateral supports, including any of the following:
Lengthens the amortization period of the amortized principal beyond market terms. This concession reduces the minimum monthly payment and could increase the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.
Reduces the amount of loan principal to be amortized and increases the amount of the balloon payment at the end of the term of the loan. This concession also reduces the minimum monthly payment. Principal is generally not forgiven.
Extends the maturity date or dates of the debt beyond what the collateral supports. This concession generally applies to loans without a balloon payment at the end of the term of the loan.
Chapter 7 bankruptcy: A bankruptcy court’s discharge of a borrower’s debt is considered a concession when the borrower does not reaffirm the discharged debt.
Other: A concession that is not categorized as one of the concessions described above. These concessions include, but are not limited to: principal forgiveness, collateral concessions, covenant concessions, and reduction of accrued interest. Principal forgiveness may result from any TDR modification of any concession type. However, the aggregate amount of principal forgiven as a result of loans modified as TDRs during the years ended December 31, 2016 and 2015, was not significant.
Following is a description of TDRs by the different loan types:
Commercial loan TDRs – Commercial accruing TDRs often result from loans receiving a concession with terms that are not considered a market transaction to Huntington. The TDR remains in accruing status as long as the customer is less than 90-days past due on payments per the restructured loan terms and no loss is expected.
Commercial nonaccrual TDRs result from either: (1) an accruing commercial TDR being placed on nonaccrual status, or (2) a workout where an existing commercial NAL is restructured and a concession is given. At times, these workouts restructure the NAL so that two or more new notes are created. The primary note is underwritten based upon our normal underwriting standards and is sized so projected cash flows are sufficient to repay contractual principal and interest. The terms on the secondary note(s) vary by situation, and may include notes that defer principal and interest payments until after the primary note is repaid. Creating two or more notes often allows the borrower to continue a project and allows Huntington to right-size a loan based upon the current expectations for a borrower’s or project’s performance.
Our strategy involving commercial TDR borrowers includes working with these borrowers to allow them to refinance elsewhere, as well as allow them time to improve their financial position and remain a Huntington customer through refinancing their notes according to market terms and conditions in the future. A subsequent refinancing or modification of a loan may occur when either the loan matures according to the terms of the TDR-modified agreement or the borrower requests a change to the loan agreements. At that time, the loan is evaluated to determine if the borrower is creditworthy. It is subjected to the normal underwriting standards and processes for other similar credit extensions, both new and existing. The refinanced note is evaluated to determine if it is considered a new loan or a continuation of the prior loan. A new loan is considered for removal of the TDR designation, whereas a continuation of the prior note requires a continuation of the TDR designation. In order for a TDR designation to be removed, the borrower must no longer be experiencing financial difficulties and the terms of the refinanced loan must not represent a concession.
Consumer loan TDRs – Residential mortgage TDRs represent loan modifications associated with traditional first-lien mortgage loans in which a concession has been provided to the borrower. The primary concessions given to residential mortgage borrowers are amortization or maturity date changes and interest rate reductions. Residential mortgages identified as TDRs involve borrowers unable to refinance their mortgages through the Company’s normal mortgage origination channels or through other independent sources. Some, but not all, of the loans may be delinquent. The Company may make similar interest rate, term, and principal concessions for Automobile, Home Equity, RV and Marine Finance and Other Consumer loan TDRs.
TDR Impact on Credit Quality
Huntington’s ALLL is largely determined by updated risk ratings assigned to commercial loans, updated borrower credit scores on consumer loans, and borrower delinquency history in both the commercial and consumer portfolios. These updated risk ratings and credit scores consider the default history of the borrower, including payment redefaults. As such, the provision for credit losses is impacted primarily by changes in borrower payment performance rather than the TDR classification. TDRs can be classified as either accrual or nonaccrual loans. Nonaccrual TDRs are included in NALs whereas accruing TDRs are excluded from NALs as it is probable that all contractual principal and interest due under the restructured terms will be collected.
The Company'sCompany’s TDRs may include multiple concessions and the disclosure classifications are presented based on the primary concession provided to the borrower. The majority of the concessions for the C&I and CRE portfolios are the extension of the maturity date, but could also include an increase in the interest rate. In these instances, the primary concession is the maturity date extension.
TDR concessions may also result in the reduction of the ALLL within the C&I and CRE portfolios. This reduction is derived from payments and the resulting application of the reserve calculation within the ALLL. The transaction reserve for non-TDR C&I and CRE loans is calculated based upon several estimated probability factors, such as PD and LGD. Upon the occurrence of a TDR in ourthe C&I and CRE portfolios, the reserve is measured based on discounted expected cash flows or collateral value, less anticipated selling costs, of the modified loan in accordance with ASC 310-10. The resulting TDR ALLL calculation often results in a lower ALLL amount because (1) the discounted expected cash flows or collateral value, less anticipated selling costs, indicate a lower estimated loss, (2) if the modification includes a rate increase, the discounting of the cash flows on the modified loan, using the pre-modification interest rate, exceeds the carrying value of the loan, or (3) payments may occur as part of the modification. TheAlternatively, the ALLL for C&I and CRE loans may increase as a result of the modification, as the discounted cash flow analysis may indicate additional reserves are required.
TDR concessions on consumer loans may increase the ALLL. The concessions made to these borrowers often include interest rate reductions, and therefore, the TDR ALLL calculation results in a greater ALLL compared with the non-TDR calculation as the reserve is measured based on the estimation of the discounted expected cash flows or collateral value, less anticipated selling costs, on the modified loan in accordance with ASC 310-10. The resulting TDR ALLL calculation often results in a higher ALLL amount because (1) the discounted expected cash flows or collateral value, less anticipated selling costs, indicate a higher estimated loss or, (2) due to the rate decrease, the discounting of the cash flows on the modified loan, using the pre-modification interest rate, indicates a reduction in the present value of expected cash flows or collateral value, less anticipated selling costs. However, in certain instances, the ALLL may decrease as a result of payments made in connection with the modification.
Commercial loan TDRs – In instances where the bank substantiates that it will collect its outstanding balance in full, the note is considered for return to accrual status upon the borrower showing a sustained period of repayment performance for a six-month period of time. This six-month period could extend before or after the restructure date. If a charge-off was taken as part of the restructuring, any interest or principal payments received on that note are applied to first reduce the bank’s outstanding book balance and then to recoveries of charged-off principal, unpaid interest, and/or fee expenses while the TDR is in nonaccrual status.
Consumer loan TDRs – Modified consumer loans identified as TDRs are aggregated into pools for analysis. Cash flows and weighted average interest rates are used to calculate impairment at the pooled-loan level. Once the loans are aggregated into the pool, they continue to be classified as TDRs until contractually repaid or charged-off.
Residential mortgage loans not guaranteed by a U.S. government agency such as the FHA, VA, and the USDA, including TDR loans, are reported as accrual or nonaccrual based upon delinquency status. Nonaccrual TDRs are those that are greater than 150-days contractually past due. Loans guaranteed by U.S. government organizations continue to accrue interest on guaranteed rates upon delinquency.
The following table presents, by class and by the reason for the modification type, the number of contracts, post-modification outstanding balance, and the financial effects of the modification for the years ended December 31, 20162018 and 2015:
2017.
|
| | | | | | | | | | | | | | | | | | | | | |
| New Troubled Debt Restructurings During The Year Ended (1) |
| December 31, 2016 | | December 31, 2015 |
(dollar amounts in thousands) | Number of Contracts | | Post-modification Outstanding Balance (2) | | Financial effects of modification (3) | | Number of Contracts | | Post-modification Outstanding Balance (2) | | Financial effects of modification (3) |
Commercial and industrial: | | | | | | | | | | | |
Interest rate reduction | 4 |
| | 161 |
| | 5 |
| | 13 |
| | 8,243 |
| | (1,042 | ) |
Amortization or maturity date change | 872 |
| | 490,488 |
| | (8,751 | ) | | 765 |
| | 524,356 |
| | (5,853 | ) |
Other | 20 |
| | 1,951 |
| | (13.996 | ) | | 16 |
| | 29,842 |
| | (449 | ) |
Total Commercial and industrial | 896 |
| | 492,600 |
| | (8,760 | ) | | 794 |
| | 562,441 |
| | (7,344 | ) |
Commercial real estate: | | | | | | | | | | | |
Interest rate reduction | 2 |
| | 223 |
| | — |
| | 4 |
| | 2,249 |
| | (4 | ) |
Amortization or maturity date change | 111 |
| | 69,192 |
| | (1,868 | ) | | 143 |
| | 141,238 |
| | (1,249 | ) |
Other | 4 |
| | 315 |
| | 16 |
| | 11 |
| | 480 |
| | (30 | ) |
Total commercial real estate: | 117 |
| | 69,730 |
| | (1,852 | ) | | 158 |
| | 143,967 |
| | (1,283 | ) |
Automobile: | | | | | | | | | | | |
Interest rate reduction | 17 |
| | 212 |
| | 12 |
| | 41 |
| | 121 |
| | 5 |
|
Amortization or maturity date change | 1,593 |
| | 14,542 |
| | 1,065 |
| | 1,591 |
| | 12,268 |
| | 533 |
|
Chapter 7 bankruptcy | 1,059 |
| | 8,418 |
| | 400 |
| | 926 |
| | 7,390 |
| | 423 |
|
Other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total Automobile | 2,669 |
| | 23,172 |
| | 1,477 |
| | 2,558 |
| | 19,779 |
| | 961 |
|
Home equity: | | | | | | | | | | | |
Interest rate reduction | 55 |
| | 2,928 |
| | 110 |
| | 55 |
| | 4,399 |
| | 161 |
|
Amortization or maturity date change | 578 |
| | 32,006 |
| | (3,709 | ) | | 1,591 |
| | 79,023 |
| | (10,639 | ) |
Chapter 7 bankruptcy | 282 |
| | 10,035 |
| | 2,819 |
| | 330 |
| | 9,855 |
| | 4,271 |
|
Other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total Home equity | 915 |
| | 44,969 |
| | (780 | ) | | 1,976 |
| | 93,277 |
| | (6,207 | ) |
Residential mortgage: | | | | | | | | | | | |
Interest rate reduction | 13 |
| | 1,287 |
| | (18 | ) | | 15 |
| | 1,565 |
| | (61 | ) |
Amortization or maturity date change | 363 |
| | 39,170 |
| | (1,650 | ) | | 518 |
| | 57,859 |
| | (455 | ) |
Chapter 7 bankruptcy | 62 |
| | 5,715 |
| | (86 | ) | | 139 |
| | 14,183 |
| | (164 | ) |
Other | 4 |
| | 424 |
| | — |
| | 11 |
| | 1,266 |
| | — |
|
Total Residential mortgage | 442 |
| | 46,596 |
| | (1,754 | ) | | 683 |
| | 74,873 |
| | (680 | ) |
RV and marine finance: | | | | | | | | | | | |
Interest rate reduction | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Amortization or maturity date change | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Chapter 7 bankruptcy | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total RV and marine finance | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other consumer: | | | | | | | | | | | |
Interest rate reduction | — |
| | — |
| | — |
| | 1 |
| | 96 |
| | 3 |
|
Amortization or maturity date change | 6 |
| | 575 |
| | 24 |
| | 10 |
| | 198 |
| | 8 |
|
Chapter 7 bankruptcy | 8 |
| | 72 |
| | 7 |
| | 11 |
| | 69 |
| | 9 |
|
Other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total Other consumer | 14 |
| | 647 |
| | 31 |
| | 22 |
| | 363 |
| | 20 |
|
Total new troubled debt restructurings | 5,053 |
| | $ | 677,714 |
| | $ | (11,638 | ) | | 6,191 |
| | $ | 894,700 |
| | $ | (14,533 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | |
| New Troubled Debt Restructurings (1) |
| Year Ended December 31, 2018 |
| Number of Contracts | | Post-modification Outstanding Recorded Investment (2) |
(dollar amounts in millions) | | Interest rate reduction | | Amortization or maturity date change | | Chapter 7 bankruptcy | | Other | | Total |
Commercial and industrial | 725 |
| | $ | — |
| | $ | 352 |
| | $ | — |
| | $ | — |
| | $ | 352 |
|
Commercial real estate | 102 |
| | — |
| | 82 |
| | — |
| | — |
| | 82 |
|
Automobile | 2,867 |
| | — |
| | 15 |
| | 8 |
| | — |
| | 23 |
|
Home equity | 602 |
| | — |
| | 25 |
| | 11 |
| | — |
| | 36 |
|
Residential mortgage | 345 |
| | — |
| | 34 |
| | 3 |
| | — |
| | 37 |
|
RV and marine finance | 117 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Other consumer | 1,633 |
| | 8 |
| | — |
| | — |
| | — |
| | 8 |
|
Total new TDRs | 6,391 |
| | $ | 8 |
| | $ | 508 |
| | $ | 23 |
| | $ | — |
| | $ | 539 |
|
| | | | | | | | | | | |
| Year Ended December 31, 2017 |
| Number of Contracts | | Post-modification Outstanding Recorded Investment (2) |
(dollar amounts in millions) | | Interest rate reduction | | Amortization or maturity date change | | Chapter 7 bankruptcy | | Other | | Total |
Commercial and industrial | 1,047 |
| | $ | 1 |
| | $ | 600 |
| | $ | — |
| | $ | — |
| | $ | 601 |
|
Commercial real estate | 111 |
| | — |
| | 122 |
| | — |
| | — |
| | 122 |
|
Automobile | 2,741 |
| | — |
| | 15 |
| | 8 |
| | — |
| | 23 |
|
Home equity | 922 |
| | 2 |
| | 33 |
| | 11 |
| | 4 |
| | 50 |
|
Residential mortgage | 453 |
| | — |
| | 40 |
| | 7 |
| | 2 |
| | 49 |
|
RV and marine finance | 131 |
| | — |
| | 1 |
| | 1 |
| | — |
| | 2 |
|
Other consumer | 1,340 |
| | — |
| | 6 |
| | — |
| | — |
| | 6 |
|
Total new TDRs | 6,745 |
| | $ | 3 |
| | $ | 817 |
| | $ | 27 |
| | $ | 6 |
| | $ | 853 |
|
| |
(1) | TDRs may include multiple concessions and theconcessions. The disclosure classifications are based on the primary concession provided to the borrower. |
| |
(2) | Post-modification balances approximate pre-modification balances. The aggregate amount of charge-offs as a result of a restructuring are not significant. |
| |
(3) | Amounts represent the financial impact via provision (recovery) for loan and lease losses as a result of the modification. |
The financial effects of modification represent the financial impact via provision (recovery) for loan and lease losses as a result of the modification and were $(15) million and $(13) million at December 31, 2018 and December 31, 2017, respectively.
Pledged Loans and LeasesThe Bank has access to the Federal Reserve’s discount window and advances from the FHLB –of Cincinnati. As of December 31, 20162018 and 2015,2017, these borrowings and advances are secured by $19.7$46.5 billion and $17.5$31.7 billion respectively of loans and securities.securities, respectively.
On March 31, 2015, Huntington completed its acquisition of Macquarie Equipment Finance, which was re-branded Huntington Technology Finance. Huntington assumed debt associated with two securitizations. As of December 31, 2016, the debt is secured by $70 million of on balance sheet leases held by the trusts.
5. AVAILABLE-FOR-SALE4. INVESTMENT SECURITIES AND OTHER SECURITIES
Contractual maturities of available-for-saleDebt securities purchased in which Huntington has the positive intent and ability to hold to their maturity are classified as held-to-maturity securities. All other securities as of December 31, 2016debt and 2015 were:
|
| | | | | | | | | | | | | | | |
| 2016 | | 2015 |
(dollar amounts in thousands) | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Under 1 year | $ | 223,789 |
| | $ | 221,495 |
| | $ | 333,891 |
| | $ | 332,980 |
|
After 1 year through 5 years | 1,147,510 |
| | 1,149,460 |
| | 1,184,454 |
| | 1,189,455 |
|
After 5 years through 10 years | 1,956,893 |
| | 1,962,345 |
| | 1,648,808 |
| | 1,645,759 |
|
After 10 years | 11,884,812 |
| | 11,665,245 |
| | 5,259,855 |
| | 5,263,063 |
|
Other securities: | | | | | | | |
Nonmarketable equity securities | 547,704 |
| | 547,704 |
| | 332,786 |
| | 332,786 |
|
Mutual funds | 15,286 |
| | 15,286 |
| | 10,604 |
| | 10,604 |
|
Marketable equity securities | 861 |
| | 1,302 |
| | 525 |
| | 794 |
|
Total available-for-sale and other securities | $ | 15,776,855 |
| | $ | 15,562,837 |
| | $ | 8,770,923 |
| | $ | 8,775,441 |
|
Other securities at December 31, 2016 and 2015 include nonmarketable equity securities of $249 million and $157 million of stock issued by the FHLB and $299 million and $176 million of Federal Reserve Bank stock, respectively. Nonmarketable equity securities are recorded at amortized cost. Other securities also include mutual funds and marketable equityclassified as available-for-sale or other securities.
The following tables provide amortized cost, fair value, and gross unrealized gains and losses recognized in OCI by investment category at December 31, 20162018 and 2015:2017:
| | | | | Unrealized | | | | | Unrealized | | |
(dollar amounts in thousands) | Amortized Cost | | Gross Gains | | Gross Losses | | Fair Value | |
December 31, 2016 | | | | | | | | |
(dollar amounts in millions) | | Amortized Cost | | Gross Gains | | Gross Losses | | Fair Value |
December 31, 2018 | | | | | | | | |
Available-for-sale securities: | | | | | | | | |
U.S. Treasury | $ | 5,480 |
| | $ | 17 |
| | $ | — |
| | $ | 5,497 |
| $ | 5 |
| | $ | — |
| | $ | — |
| | $ | 5 |
|
Federal agencies: | | | | | | | | | | | | | | |
Mortgage-backed securities | 10,851,461 |
| | 12,548 |
| | (190,667 | ) | | 10,673,342 |
| |
Residential CMO | | 7,185 |
| | 15 |
| | (201 | ) | | 6,999 |
|
Residential MBS | | 1,261 |
| | 9 |
| | (15 | ) | | 1,255 |
|
Commercial MBS | | 1,641 |
| | — |
| | (58 | ) | | 1,583 |
|
Other agencies | 73,012 |
| | 536 |
| | (6 | ) | | 73,542 |
| 128 |
| | — |
| | (2 | ) | | 126 |
|
Total U.S. Treasury, Federal agency securities | 10,929,953 |
| | 13,101 |
| | (190,673 | ) | | 10,752,381 |
| |
Total U.S. Treasury, federal agency and other agency securities | | 10,220 |
| | 24 |
| | (276 | ) | | 9,968 |
|
Municipal securities | 3,260,428 |
| | 28,431 |
| | (38,802 | ) | | 3,250,057 |
| 3,512 |
| | 6 |
| | (78 | ) | | 3,440 |
|
Asset-backed securities | 824,124 |
| | 1,492 |
| | (32,135 | ) | | 793,481 |
| 318 |
| | 1 |
| | (4 | ) | | 315 |
|
Corporate debt | 194,537 |
| | 4,161 |
| | (15 | ) | | 198,683 |
| 54 |
| | — |
| | (1 | ) | | 53 |
|
Other securities | 567,813 |
| | 441 |
| | (19 | ) | | 568,235 |
| |
Total available-for-sale and other securities | $ | 15,776,855 |
| | $ | 47,626 |
| | $ | (261,644 | ) | | $ | 15,562,837 |
| |
Other securities/Sovereign debt | | 4 |
| | — |
| | — |
| | 4 |
|
Total available-for-sale securities | | $ | 14,108 |
| | $ | 31 |
| | $ | (359 | ) | | $ | 13,780 |
|
| | | | | | | | |
Held-to-maturity securities: | | | | | | | | |
Federal agencies: | | | | | | | | |
Residential CMO | | $ | 2,124 |
| | $ | — |
| | $ | (47 | ) | | $ | 2,077 |
|
Residential MBS | | 1,851 |
| | 2 |
| | (42 | ) | | 1,811 |
|
Commercial MBS | | 4,235 |
| | — |
| | (186 | ) | | 4,049 |
|
Other agencies | | 350 |
| | — |
| | (6 | ) | | 344 |
|
Total federal agency and other agency securities | | 8,560 |
| | 2 |
| | (281 | ) | | 8,281 |
|
Municipal securities | | 5 |
| | — |
| | — |
| | 5 |
|
Total held-to-maturity securities | | $ | 8,565 |
| | $ | 2 |
| | $ | (281 | ) | | $ | 8,286 |
|
| | | | | | | | |
Other securities, at cost: | | | | | | | | |
Non-marketable equity securities: | | | | | | | | |
Federal Home Loan Bank stock | | $ | 248 |
| | $ | — |
| | $ | — |
| | $ | 248 |
|
Federal Reserve Bank stock | | 295 |
| | — |
| | — |
| | 295 |
|
Other securities, at fair value | | | | | | | | |
Mutual funds | | 20 |
| | — |
| | — |
| | 20 |
|
Marketable equity securities | | 1 |
| | 1 |
| | — |
| | 2 |
|
Total other securities | | $ | 564 |
| | $ | 1 |
| | $ | — |
| | $ | 565 |
|
| | | | | Unrealized | | | | | Unrealized | | |
(dollar amounts in thousands) | Amortized Cost | | Gross Gains | | Gross Losses | | Fair Value | |
December 31, 2015 | | | | | | | | |
(dollar amounts in millions) | | Amortized Cost | | Gross Gains | | Gross Losses | | Fair Value |
December 31, 2017 | | | | | | | | |
Available-for-sale securities: | | | | | | | | |
U.S. Treasury | $ | 5,457 |
| | $ | 15 |
| | $ | — |
| | $ | 5,472 |
| $ | 5 |
| | $ | — |
| | $ | — |
| | $ | 5 |
|
Federal agencies: | | | | | | | | | | | | | | |
Mortgage-backed securities | 4,505,318 |
| | 30,078 |
| | (13,708 | ) | | 4,521,688 |
| |
Residential CMO | | 6,661 |
| | 1 |
| | (178 | ) | | 6,484 |
|
Residential MBS | | 1,371 |
| | 1 |
| | (5 | ) | | 1,367 |
|
Commercial MBS | | 2,539 |
| | — |
| | (52 | ) | | 2,487 |
|
Other agencies | 115,076 |
| | 888 |
| | (51 | ) | | 115,913 |
| 69 |
| | 1 |
| | — |
| | 70 |
|
Total U.S. Treasury, Federal agency securities | 4,625,851 |
| | 30,981 |
| | (13,759 | ) | | 4,643,073 |
| |
Total U.S. Treasury, federal agency and other agency securities | | 10,645 |
| | 3 |
| | (235 | ) | | 10,413 |
|
Municipal securities | 2,431,943 |
| | 51,558 |
| | (27,105 | ) | | 2,456,396 |
| 3,892 |
| | 21 |
| | (35 | ) | | 3,878 |
|
Asset-backed securities | 901,059 |
| | 535 |
| | (40,181 | ) | | 861,413 |
| 482 |
| | 1 |
| | (16 | ) | | 467 |
|
Corporate debt | 464,207 |
| | 4,824 |
| | (2,554 | ) | | 466,477 |
| 106 |
| | 3 |
| | — |
| | 109 |
|
Other securities | 347,863 |
| | 271 |
| | (52 | ) | | 348,082 |
| |
Total available-for-sale and other securities | $ | 8,770,923 |
| | $ | 88,169 |
| | $ | (83,651 | ) | | $ | 8,775,441 |
| |
Other securities/Sovereign debt | | 2 |
| | — |
| | — |
| | 2 |
|
Total available-for-sale securities | | $ | 15,127 |
| | $ | 28 |
| | $ | (286 | ) | | $ | 14,869 |
|
| | | | | | | | |
Held-to-maturity securities: | | | | | | | | |
Federal agencies: | | | | | | | | |
Residential CMO | | $ | 3,714 |
| | $ | 1 |
| | $ | (58 | ) | | $ | 3,657 |
|
Residential MBS | | 1,049 |
| | 2 |
| | (7 | ) | | 1,044 |
|
Commercial MBS | | 3,791 |
| | — |
| | (55 | ) | | 3,736 |
|
Other agencies | | 532 |
| | 1 |
| | (4 | ) | | 529 |
|
Total federal agency and other agency securities | | 9,086 |
| | 4 |
| | (124 | ) | | 8,966 |
|
Municipal securities | | 5 |
| | — |
| | — |
| | 5 |
|
Total held-to-maturity securities | | $ | 9,091 |
| | $ | 4 |
| | $ | (124 | ) | | $ | 8,971 |
|
| | | | | | | | |
Other securities, at cost: | | | | | | | | |
Non-marketable equity securities: | | | | | | | | |
Federal Home Loan Bank stock | | $ | 287 |
| | $ | — |
| | $ | — |
| | $ | 287 |
|
Federal Reserve Bank stock | | 294 |
| | — |
| | — |
| | 294 |
|
Other securities, at fair value | | | | | | | | |
Mutual funds | | 18 |
| | — |
| | — |
| | 18 |
|
Marketable equity securities | | 1 |
| | — |
| | — |
| | 1 |
|
Total other securities | | $ | 600 |
| | $ | — |
| | $ | — |
| | $ | 600 |
|
The following table provides the amortized cost and fair value of securities by contractual maturity at December 31, 2018. Expected maturities may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without incurring penalties. |
| | | | | | | |
| 2018 |
(dollar amounts in millions) | Amortized Cost | | Fair Value |
Available-for-sale securities: | | | |
Under 1 year | $ | 186 |
| | $ | 185 |
|
After 1 year through 5 years | 1,057 |
| | 1,039 |
|
After 5 years through 10 years | 1,838 |
| | 1,802 |
|
After 10 years | 11,027 |
| | 10,754 |
|
Total available-for-sale securities | $ | 14,108 |
| | $ | 13,780 |
|
| | | |
Held-to-maturity securities: | | | |
Under 1 year | $ | — |
| | $ | — |
|
After 1 year through 5 years | 11 |
| | 11 |
|
After 5 years through 10 years | 362 |
| | 356 |
|
After 10 years | 8,192 |
| | 7,919 |
|
Total held-to-maturity securities | $ | 8,565 |
| | $ | 8,286 |
|
The following tables provide detail on investment securities with unrealized losses aggregated by investment category and the length of time the individual securities have been in a continuous loss position at December 31, 20162018 and 2015:2017:
| | | Less than 12 Months | | Over 12 Months | | Total | Less than 12 Months | | Over 12 Months | | Total |
(dollar amounts in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | |
December 31, 2016 | | | | | | | | | | | | |
(dollar amounts in millions) | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
December 31, 2018 | | | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | |
Federal agencies: | | | | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities | $ | 8,908,470 |
| | $ | (189,318 | ) | | $ | 41,706 |
| | $ | (1,349 | ) | | $ | 8,950,176 |
| | $ | (190,667 | ) | |
Residential CMO | | $ | 425 |
| | $ | (3 | ) | | $ | 5,943 |
| | $ | (198 | ) | | $ | 6,368 |
| | $ | (201 | ) |
Residential MBS | | 259 |
| | (6 | ) | | 319 |
| | (9 | ) | | 578 |
| | (15 | ) |
Commercial MBS | | 10 |
| | — |
| | 1,573 |
| | (58 | ) | | 1,583 |
| | (58 | ) |
Other agencies | 924 |
| | (6 | ) | | — |
| | — |
| | 924 |
| | (6 | ) | — |
| | — |
| | 124 |
| | (2 | ) | | 124 |
| | (2 | ) |
Total Federal agency securities | 8,909,394 |
| | (189,324 | ) | | 41,706 |
| | (1,349 | ) | | 8,951,100 |
| | (190,673 | ) | |
Total federal agency and other agency securities | | 694 |
| | (9 | ) | | 7,959 |
| | (267 | ) | | 8,653 |
| | (276 | ) |
Municipal securities | 1,412,152 |
| | (29,175 | ) | | 272,292 |
| | (9,627 | ) | | 1,684,444 |
| | (38,802 | ) | 1,425 |
| | (24 | ) | | 1,602 |
| | (54 | ) | | 3,027 |
| | (78 | ) |
Asset-backed securities | 361,185 |
| | (3,043 | ) | | 178,924 |
| | (29,092 | ) | | 540,109 |
| | (32,135 | ) | 95 |
| | (2 | ) | | 117 |
| | (2 | ) | | 212 |
| | (4 | ) |
Corporate debt | 3,567 |
| | (15 | ) | | 200 |
| | — |
| | 3,767 |
| | (15 | ) | 40 |
| | — |
| | 1 |
| | (1 | ) | | 41 |
| | (1 | ) |
Other securities | 790 |
| | (11 | ) | | 1,492 |
| | (8 | ) | | 2,282 |
| | (19 | ) | |
Total temporarily impaired securities | $ | 10,687,088 |
| | $ | (221,568 | ) | | $ | 494,614 |
| | $ | (40,076 | ) | | $ | 11,181,702 |
| | $ | (261,644 | ) | $ | 2,254 |
| | $ | (35 | ) | | $ | 9,679 |
| | $ | (324 | ) | | $ | 11,933 |
| | $ | (359 | ) |
| | | | | | | | | | | | |
Held-to-maturity securities: | | | | | | | | | | | | |
Federal agencies: | | | | | | | | | | | | |
Residential CMO | | $ | 12 |
| | $ | — |
| | $ | 2,004 |
| | $ | (47 | ) | | $ | 2,016 |
| | $ | (47 | ) |
Residential MBS | | 16 |
| | — |
| | 1,457 |
| | (42 | ) | | 1,473 |
| | (42 | ) |
Commercial MBS | | — |
| | — |
| | 4,041 |
| | (186 | ) | | 4,041 |
| | (186 | ) |
Other agencies | | 113 |
| | (2 | ) | | 205 |
| | (4 | ) | | 318 |
| | (6 | ) |
Total federal agency and other agency securities | | 141 |
| | (2 | ) | | 7,707 |
| | (279 | ) | | 7,848 |
| | (281 | ) |
Municipal securities | | — |
| | — |
| | 4 |
| | — |
| | 4 |
| | — |
|
Total temporarily impaired securities | | $ | 141 |
| | $ | (2 | ) | | $ | 7,711 |
| | $ | (279 | ) | | $ | 7,852 |
| | $ | (281 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 Months | | Over 12 Months | | Total |
(dollar amounts in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
December 31, 2015 | | | | | | | | | | | |
Federal agencies: | | | | | | | | | | | |
Mortgage-backed securities | $ | 1,658,516 |
| | $ | (11,341 | ) | | $ | 84,147 |
| | $ | (2,367 | ) | | $ | 1,742,663 |
| | $ | (13,708 | ) |
Other agencies | 37,982 |
| | (51 | ) | | — |
| | — |
| | 37,982 |
| | (51 | ) |
Total Federal agency securities | 1,696,498 |
| | (11,392 | ) | | 84,147 |
| | (2,367 | ) | | 1,780,645 |
| | (13,759 | ) |
Municipal securities | 570,916 |
| | (15,992 | ) | | 248,204 |
| | (11,113 | ) | | 819,120 |
| | (27,105 | ) |
Asset-backed securities | 552,275 |
| | (5,791 | ) | | 207,639 |
| | (34,390 | ) | | 759,914 |
| | (40,181 | ) |
Corporate debt | 167,144 |
| | (1,673 | ) | | 21,965 |
| | (881 | ) | | 189,109 |
| | (2,554 | ) |
Other securities | 772 |
| | (28 | ) | | 1,476 |
| | (24 | ) | | 2,248 |
| | (52 | ) |
Total temporarily impaired securities | $ | 2,987,605 |
| | $ | (34,876 | ) | | $ | 563,431 |
| | $ | (48,775 | ) | | $ | 3,551,036 |
| | $ | (83,651 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 Months | | Over 12 Months | | Total |
(dollar amounts in millions) | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
December 31, 2017 | | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | |
Federal agencies: | | | | | | | | | | | |
Residential CMO | $ | 1,660 |
| | $ | (19 | ) | | $ | 4,520 |
| | $ | (159 | ) | | $ | 6,180 |
| | $ | (178 | ) |
Residential MBS | 1,078 |
| | (5 | ) | | 11 |
| | — |
| | 1,089 |
| | (5 | ) |
Commercial MBS | 960 |
| | (15 | ) | | 1,527 |
| | (37 | ) | | 2,487 |
| | (52 | ) |
Other agencies | 39 |
| | — |
| | — |
| | — |
| | 39 |
| | — |
|
Total federal agency and other agency securities | 3,737 |
| | (39 | ) | | 6,058 |
| | (196 | ) | | 9,795 |
| | (235 | ) |
Municipal securities | 1,681 |
| | (21 | ) | | 497 |
| | (14 | ) | | 2,178 |
| | (35 | ) |
Asset-backed securities | 127 |
| | (1 | ) | | 173 |
| | (15 | ) | | 300 |
| | (16 | ) |
Total temporarily impaired securities | $ | 5,545 |
| | $ | (61 | ) | | $ | 6,728 |
| | $ | (225 | ) | | $ | 12,273 |
| | $ | (286 | ) |
| | | | | | | | | | | |
Held-to-maturity securities: | | | | | | | | | | | |
Federal agencies: | | | | | | | | | | | |
Residential CMO | $ | 2,369 |
| | $ | (26 | ) | | $ | 1,019 |
| | $ | (32 | ) | | $ | 3,388 |
| | $ | (58 | ) |
Residential MBS | 974 |
| | (7 | ) | | — |
| | — |
| | 974 |
| | (7 | ) |
Commercial MBS | 3,456 |
| | (49 | ) | | 253 |
| | (6 | ) | | 3,709 |
| | (55 | ) |
Other agencies | 249 |
| | (2 | ) | | 139 |
| | (2 | ) | | 388 |
| | (4 | ) |
Total federal agency and other agency securities | 7,048 |
| | (84 | ) | | 1,411 |
| | (40 | ) | | 8,459 |
| | (124 | ) |
Municipal securities | — |
| | — |
| | 5 |
| | — |
| | 5 |
| | — |
|
Total temporarily impaired securities | $ | 7,048 |
| | $ | (84 | ) | | $ | 1,416 |
| | $ | (40 | ) | | $ | 8,464 |
| | $ | (124 | ) |
Upon adoption of ASU 2017-12, Huntington transferred $2.8 billion of securities eligible to be hedged under the last-of-layer method from the HTM portfolio to the AFS portfolio. At the time of the transfer, $26 million of unrealized losses were recognized in OCI. Concurrently, Huntington transferred $2.7 billion of securities from the AFS portfolio to the HTM portfolio. At the time of the transfer, AOCI included $56 million of unrealized losses attributed to these securities. This loss will be amortized into interest income over the remaining life of the securities.
At December 31, 2016,2018, the carrying value of investment securities pledged to secure public and trust deposits, trading account liabilities, U.S. Treasury demand notes, and security repurchase agreements totaled $5.0$4.5 billion. There were no securities of a single issuer, which are not governmental or government-sponsored, that exceeded 10% of shareholders’ equity at December 31, 2016.2018.
The following table is a summary of realized securities gains and losses for the years ended December 31, 2016, 2015,2018, 2017, and 2014:
| | | Year ended December 31, | Year Ended December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | | 2014 | |
(dollar amounts in millions) | | 2018 | | 2017 | | 2016 |
Gross gains on sales of securities | $ | 23,095 |
| | $ | 6,730 |
| | $ | 17,729 |
| $ | 7 |
| | $ | 10 |
| | $ | 23 |
|
Gross (losses) on sales of securities | (21,060 | ) | | (3,546 | ) | | (175 | ) | (28 | ) | | (10 | ) | | (21 | ) |
Net gain (loss) on sales of securities | $ | 2,035 |
| | $ | 3,184 |
| | $ | 17,554 |
| $ | (21 | ) | | $ | — |
| | $ | 2 |
|
OTTI recognized in earnings | | — |
| | (4 | ) | | (2 | ) |
Net securities (losses) | | $ | (21 | ) | | $ | (4 | ) | | $ | — |
|
Security Impairment
Huntington evaluates the available-for-sale securities portfolio for impairment on a quarterly basis for impairment. The Company conducts a comprehensive security-level assessment on all available-for-sale securities. Huntington does not intend to sell, nor does it believe it will be required to sell these securities until the amortized cost is recovered, which may be maturity. Impairment would exist when the present value of the expected cash flows are not sufficient to recover the entire amortized cost basis at the balance sheet date. Under these circumstances, any credit impairment would be recognized in earnings. The contractual terms and/or cash flows of the investments do not permit the issuer to settle the securities at a price less than the amortized cost.
OTTI totaling $2 million was recorded on two direct purchase municipal instruments during 2016. Direct purchase municipal instruments are underwritten and managed by Huntington. At December 31, 2016, $2.8 billion of direct purchase municipal instruments were managed by Huntington.
The highest risk segment in our investment portfolio is the trust preferred CDO securities which are in the asset-backed securities portfolio. This portfolio is in run off, and the Company has not purchased these types of securities since 2005. The fair values of the CDO assets have been impacted by various market conditions. The unrealized losses are primarily the result of wider liquidity spreads on asset-backed securities and the longer expected average lives of the trust-preferred CDO securities, due to changes in the expectations of when the underlying securities will be repaid.
Collateralized Debt Obligations are backed by a pool of debt securities issued by financial institutions. The collateral generally consists of trust-preferred securities and subordinated debt securities issued by banks, bank holding companies, and insurance companies. Many collateral issuers have the option of deferring interest payments on their debt for up to five years. A full cash flow analysis is used to estimate fair values and assess impairment for each security within this portfolio. A third-party pricing specialist with direct industry experience in pooled-trust-preferred security evaluations is engaged to provide assistance estimating the fair value and expected cash flows on this portfolio. The full cash flow analysis is completed by evaluating the relevant credit and structural aspects of each pooled-trust-preferred security in the portfolio, including collateral performance projections for each piece of collateral in the security and terms of the security’s structure. The credit review includes an analysis of profitability, credit quality, operating efficiency, leverage, and liquidity using available financial and regulatory information for each underlying collateral issuer. The analysis also includes a review of historical industry default data, current / near term operating conditions, and the impact of macroeconomic and regulatory changes. Using the results of the analysis, the Company estimates appropriate default and recovery probabilities for each piece of collateral then estimates the expected cash flows for each security. The fair value of each security is obtained by discounting the expected cash flows at a market discount rate. The market discount rate is determined by reference to yields observed in the market for similarly rated collateralized debt obligations, specifically high-yield collateralized loan obligations. The relatively high market discount rate is reflective of the uncertainty of the cash flows and illiquid nature of these securities. The large differential between the fair value and amortized cost of some of the securities reflects the high market discount rate and the expectation that the majority of the cash flows will not be received until near the final maturity of the security (the final maturities range from 2032 to 2035).
The following table summarizes the relevant characteristics of the Company's CDO securities portfolio, which are included in asset-backed securities, at December 31, 2016 and 2015. Each security is part of a pool of issuers and supports a more senior tranche of securities except for the MM Comm III securities which are the most senior class.
Collateralized Debt Obligation Securities
(dollar amounts in thousands) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Deal Name | Par Value | | Amortized Cost | | Fair Value | | Unrealized Loss (2) | Lowest Credit Rating (3) | # of Issuers Currently Performing/ Remaining (4) | | Actual Deferrals and Defaults as a % of Original Collateral | | Expected Defaults as a % of Remaining Performing Collateral | | Excess Subordination (5) |
ICONS | 18,594 |
| | 18,594 |
| | 15,307 |
| | (3,287 | ) | | BB | | 19/21 | | 7 | | 13 | | 54 |
MM Comm III | 4,573 |
| | 4,369 |
| | 3,618 |
| | (751 | ) | | BB | | 5/8 | | 5 | | 6 | | 38 |
Pre TSL IX (1) | 5,000 |
| | 3,955 |
| | 3,253 |
| | (702 | ) | | C | | 27/37 | | 16 | | 9 | | 8 |
Pre TSL XI (1) | 25,000 |
| | 19,576 |
| | 15,767 |
| | (3,809 | ) | | C | | 43/53 | | 14 | | 8 | | 14 |
Pre TSL XIII (1) | 27,530 |
| | 19,106 |
| | 17,146 |
| | (1,960 | ) | | C | | 45/54 | | 9 | | 11 | | 29 |
Reg Diversified (1) | 25,500 |
| | 4,610 |
| | 1,752 |
| | (2,858 | ) | | D | | 20/37 | | 35 | | 8 | | — |
Tropic III | 31,000 |
| | 31,000 |
| | 19,160 |
| | (11,840 | ) | | BB | | 28/37 | | 16 | | 7 | | 42 |
Total at December 31, 2016 | $ | 137,197 |
| | $ | 101,210 |
| | $ | 76,003 |
| | $ | (25,207 | ) | | | | | | | | | | |
Total at December 31, 2015 | $ | 179,574 |
| | $ | 131,991 |
| | $ | 100,338 |
| | $ | (31,654 | ) | | | | | | | | | | |
| |
(1) | Security was determined to have OTTI. As such, the amortized cost is net of recorded credit impairment. |
| |
(2) | The majority of securities have been in a continuous loss position for 12 months or longer. |
| |
(3) | For purposes of comparability, the lowest credit rating expressed is equivalent to Fitch ratings even where the lowest rating is based on another nationally recognized credit rating agency. |
| |
(4) | Includes both banks and/or insurance companies. |
| |
(5) | Excess subordination percentage represents the additional defaults in excess of both current and projected defaults that the CDO can absorb before the bond experiences credit impairment. Excess subordinated percentage is calculated by (a) determining what percentage of defaults a deal can experience before the bond has credit impairment, and (b) subtracting from this default breakage percentage both total current and expected future default percentages. |
For the periods ended December 31, 2016, 2015, and 2014, the following table summarizes by security type, the total OTTI losses recognized in the Consolidated Statements of Income for securities evaluated for impairment as described above:
|
| | | | | | | | | | | |
| Year ended December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | | 2014 |
Available-for-sale and other securities: | | | | | |
Collateralized Debt Obligations | $ | — |
| | $ | (2,440 | ) | | $ | — |
|
Municipal Securities | (2,119 | ) | | — |
| | — |
|
Total available-for-sale and other securities | $ | (2,119 | ) | | $ | (2,440 | ) | | $ | — |
|
The following table rolls forward the OTTI recognized in earnings on debt securities held by Huntington for the years ended December 31, 2016, and 2015 as follows:
|
| | | | | | | |
| Year Ended December 31, |
(dollar amounts in thousands) | 2016 | | 2015 |
Balance, beginning of year | $ | 18,368 |
| | $ | 30,869 |
|
Reductions from sales | (8,690 | ) | | (14,941 | ) |
Credit losses not previously recognized | 2,119 |
| | — |
|
Additional credit losses | — |
| | 2,440 |
|
Balance, end of year | $ | 11,797 |
| | $ | 18,368 |
|
To reduce asset risk weighting and credit risk in the investment portfolio, the remainder of the private-label CMO portfolio was sold in the 2015 third quarter. Huntington recognized OTTI on this portfolio in prior periods.
6. HELD-TO-MATURITY SECURITIES
These are debt securities that Huntington has the intent and ability to hold until maturity. The debt securities are carried at amortized cost and adjusted for amortization of premiums and accretion of discounts using the interest method.
During 2016 and 2015, Huntington transferred federal agencies, mortgage-backed securities and other agency securities totaling $2.9 billion and $3.0 billion, respectively from the available-for-sale securities portfolio to the held-to-maturity securities portfolio. At the time of the transfer, $58 million of unrealized net losses and $6 million of unrealized net gains were recognized in OCI, respectively. The amounts in OCI will be recognized in earnings over the remaining life of the securities as an offset to the adjustment of yield in a manner consistent with the amortization of the premium on the same transferred securities, resulting in an immaterial impact on net income.
Listed below are the contractual maturities of held-to-maturity securities at December 31, 2016 and December 31, 2015:
|
| | | | | | | | | | | | | | | |
| December 31, 2016 | | December 31, 2015 |
(dollar amounts in thousands) | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Federal agencies: | | | | | | | |
Mortgage-backed securities: | | | | | | | |
1 year or less | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
After 1 year through 5 years | — |
| | — |
| | — |
| | — |
|
After 5 years through 10 years | 41,261 |
| | 40,791 |
| | 25,909 |
| | 25,227 |
|
After 10 years | 7,157,083 |
| | 7,139,943 |
| | 5,506,592 |
| | 5,484,407 |
|
Total mortgage-backed securities | 7,198,344 |
| | 7,180,734 |
| | 5,532,501 |
| | 5,509,634 |
|
Other agencies: | | | | | | | |
1 year or less | — |
| | — |
| | — |
| | — |
|
After 1 year through 5 years | — |
| | — |
| | — |
| | — |
|
After 5 years through 10 years | 398,341 |
| | 399,452 |
| | 283,960 |
| | 284,907 |
|
After 10 years | 204,083 |
| | 201,180 |
| | 336,092 |
| | 334,004 |
|
Total other agencies | 602,424 |
| | 600,632 |
| | 620,052 |
| | 618,911 |
|
Total U.S. Government backed agencies | 7,800,768 |
| | 7,781,366 |
| | 6,152,553 |
| | 6,128,545 |
|
Municipal securities: | | | | | | | |
1 year or less | — |
| | — |
| | — |
| | — |
|
After 1 year through 5 years | — |
| | — |
| | — |
| | — |
|
After 5 years through 10 years | — |
| | — |
| | — |
| | — |
|
After 10 years | 6,171 |
| | 5,902 |
| | 7,037 |
| | 6,913 |
|
Total municipal securities | 6,171 |
| | 5,902 |
| | 7,037 |
| | 6,913 |
|
Total held-to-maturity securities | $ | 7,806,939 |
| | $ | 7,787,268 |
| | $ | 6,159,590 |
| | $ | 6,135,458 |
|
The following table provides amortized cost, gross unrealized gains and losses, and fair value by investment category at December 31, 2016 and 2015:
|
| | | | | | | | | | | | | | | |
| | | Unrealized | | |
(dollar amounts in thousands) | Amortized Cost | | Gross Gains | | Gross Losses | | Fair Value |
December 31, 2016 | | | | | | | |
Federal agencies: | | | | | | | |
Mortgage-backed securities | $ | 7,198,344 |
| | $ | 20,883 |
| | $ | (38,493 | ) | | $ | 7,180,734 |
|
Other agencies | 602,424 |
| | 1,690 |
| | (3,482 | ) | | 600,632 |
|
Total U.S. Government backed agencies | 7,800,768 |
| | 22,573 |
| | (41,975 | ) | | 7,781,366 |
|
Municipal securities | 6,171 |
| | — |
| | (269 | ) | | 5,902 |
|
Total held-to-maturity securities | $ | 7,806,939 |
| | $ | 22,573 |
| | $ | (42,244 | ) | | $ | 7,787,268 |
|
|
| | | | | | | | | | | | | | | |
| | | Unrealized | | |
(dollar amounts in thousands) | Amortized Cost | | Gross Gains | | Gross Losses | | Fair Value |
December 31, 2015 | | | | | | | |
Federal agencies: | | | | | | | |
Mortgage-backed securities | $ | 5,532,501 |
| | $ | 14,637 |
| | $ | (37,504 | ) | | $ | 5,509,634 |
|
Other agencies | 620,052 |
| | 1,645 |
| | (2,786 | ) | | 618,911 |
|
Total U.S. Government backed agencies | 6,152,553 |
| | 16,282 |
| | (40,290 | ) | | 6,128,545 |
|
Municipal securities | 7,037 |
| | — |
| | (124 | ) | | 6,913 |
|
Total held-to-maturity securities | $ | 6,159,590 |
| | $ | 16,282 |
| | $ | (40,414 | ) | | $ | 6,135,458 |
|
The following tables provide detail on HTM securities with unrealized losses aggregated by investment category and the length of time the individual securities have been in a continuous loss position at December 31, 2016 and 2015:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 Months | | Over 12 Months | | Total |
(dollar amounts in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
December 31, 2016 | | | | | | | | | | | |
Federal agencies: | | | | | | | | | | | |
Mortgage-backed securities | $ | 2,855,360 |
| | $ | (31,470 | ) | | $ | 186,226 |
| | $ | (7,023 | ) | | $ | 3,041,586 |
| | $ | (38,493 | ) |
Other agencies | 413,207 |
| | (3,482 | ) | | — |
| | — |
| | 413,207 |
| | (3,482 | ) |
Total U.S. Government backed securities | 3,268,567 |
| | (34,952 | ) | | 186,226 |
| | (7,023 | ) | | 3,454,793 |
| | (41,975 | ) |
Municipal securities | 5,902 |
| | (269 | ) | | — |
| | — |
| | 5,902 |
| | (269 | ) |
Total temporarily impaired securities | $ | 3,274,469 |
| | $ | (35,221 | ) | | $ | 186,226 |
| | $ | (7,023 | ) | | $ | 3,460,695 |
| | $ | (42,244 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 Months | | Over 12 Months | | Total |
(dollar amounts in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
December 31, 2015 | | | | | | | | | | | |
Federal agencies: | | | | | | | | | | | |
Mortgage-backed securities | $ | 3,692,890 |
| | $ | (25,418 | ) | | $ | 519,872 |
| | $ | (12,086 | ) | | $ | 4,212,762 |
| | $ | (37,504 | ) |
Other agencies | 425,410 |
| | (2,689 | ) | | 6,647 |
| | (97 | ) | | 432,057 |
| | (2,786 | ) |
Total U.S. Government backed securities | 4,118,300 |
| | (28,107 | ) | | 526,519 |
| | (12,183 | ) | | 4,644,819 |
| | (40,290 | ) |
Municipal securities | — |
| | — |
| | 6,913 |
| | (124 | ) | | 6,913 |
| | (124 | ) |
Total temporarily impaired securities | $ | 4,118,300 |
| | $ | (28,107 | ) | | $ | 533,432 |
| | $ | (12,307 | ) | | $ | 4,651,732 |
| | $ | (40,414 | ) |
Security Impairment
Huntington evaluates the held-to-maturity securities portfolio on a quarterly basis for impairment. Impairment would exist when the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis at the balance sheet date. Under these circumstances, any impairment would be recognized in earnings.basis. As of December 31, 20162018, the Company has evaluated available-for-sale and 2015, The Company evaluated held-to-maturity securities with gross unrealized losses for impairment and concluded no OTTI is required.
Other securities that are carried at cost are reviewed at least annually for impairment, with valuation adjustments recognized in other noninterest income. As of December 31, 2018, the Company concluded no impairment is required. 7.
5. MORTGAGE LOAN SALES AND SECURITIZATIONSSERVICING RIGHTS
Residential Mortgage Portfolio
The following table summarizes activity relating to residential mortgage loans sold with servicing retained for the years ended December 31, 2016, 2015,2018, 2017, and 2014:
2016:
| | | Year Ended December 31, | Year Ended December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | | 2014 | |
(dollar amounts in millions) | | 2018 | | 2017 | | 2016 |
Residential mortgage loans sold with servicing retained | $ | 3,632,024 |
| | $ | 3,322,723 |
| | $ | 2,330,060 |
| $ | 3,846 |
| | $ | 3,985 |
| | $ | 3,632 |
|
Pretax gains resulting from above loan sales (1) | 96,585 |
| | 83,148 |
| | 57,590 |
| 87 |
| | 99 |
| | 97 |
|
| |
(1) | Recorded in mortgage banking income. |
The following tables summarizetable summarizes the changes in MSRs recorded using either the fair value method or the amortization method for the years ended December 31, 20162018 and 2015:
Fair Value Method
|
| | | | | | | |
(dollar amounts in thousands) | 2016 | | 2015 |
Fair value, beginning of year | $ | 17,585 |
| | $ | 22,786 |
|
Change in fair value during the period due to: | | | |
Time decay (1) | (950 | ) | | (1,295 | ) |
Payoffs (2) | (1,827 | ) | | (3,031 | ) |
Changes in valuation inputs or assumptions (3) | (1,061 | ) | | (875 | ) |
Fair value, end of year | $ | 13,747 |
| | $ | 17,585 |
|
Weighted-average life (years) | 5.7 |
| | 4.6 |
|
|
| | | |
(1) | Represents decrease in value due to passage of time, including the impact from both regularly scheduled loan principal payments and partial loan paydowns. | | |
| |
(2) | Represents decrease in value associated with loans that paid off during the period. |
| |
(3) | Represents change in value resulting primarily from market-driven changes in interest rates and prepayment speeds. |
Amortization Method
| | (dollar amounts in thousands) | 2016 | | 2015 | |
(dollar amounts in millions) | | 2018 | | 2017 |
Carrying value, beginning of year | $ | 143,133 |
| | $ | 132,812 |
| $ | 191 |
| | $ | 172 |
|
New servicing assets created | 37,813 |
| | 35,407 |
| 44 |
| | 44 |
|
Servicing assets acquired | 15,317 |
| | — |
| |
Impairment recovery (charge) | 1,918 |
| | (2,732 | ) | 6 |
| | 1 |
|
Amortization and other | (25,715 | ) | | (22,354 | ) | (30 | ) | | (26 | ) |
Carrying value, end of year | $ | 172,466 |
| | $ | 143,133 |
| $ | 211 |
| | $ | 191 |
|
Fair value, end of year | $ | 172,779 |
| | $ | 143,435 |
| $ | 212 |
| | $ | 191 |
|
Weighted-average life (years) | 7.2 |
| | 5.9 |
| 6.7 |
| | 7.1 |
|
MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs occur, the precise terms and conditions are typically not readily available. Therefore, the fair value of MSRs is estimated using a discounted future cash flow model. The model considers portfolio characteristics, contractually specified servicing fees and assumptions related to prepayments, delinquency rates, late charges, other ancillary revenues, costs to service, and other economic factors. Changes in the assumptions used may have a significant impact on the valuation of MSRs.
MSR values are veryhighly sensitive to movementsmovement in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be greatly impacted by the level of prepayments. Huntington economically hedges the value of certain MSRs against changes in value attributable to changes in interest rates using a combination of derivative instruments and trading securities.
For MSRs under the fair value method, a summary of key assumptions and the sensitivity of the MSR value to changes in these assumptions at December 31, 2016, and 2015 follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | December 31, 2015 |
| | | Decline in fair value due to | | | | Decline in fair value due to |
(dollar amounts in thousands) | Actual | | 10% adverse change | | 20% adverse change | | Actual | | 10% adverse change | | 20% adverse change |
Constant prepayment rate (annualized) | 10.90 | % | | $ | (501 | ) | | $ | (970 | ) | | 14.70 | % | | $ | (864 | ) | | $ | (1,653 | ) |
Spread over forward interest rate swap rates | 536 bps |
| | (454 | ) | | (879 | ) | | 539 bps |
| | (559 | ) | | (1,083 | ) |
For MSRs under the amortization method, a summary of key assumptions and the sensitivity of the MSR value to changes in these assumptions at December 31, 2016,2018, and 20152017 follows:
| | | December 31, 2016 | | December 31, 2015 | December 31, 2018 | | December 31, 2017 |
| | | Decline in fair value due to | | | | Decline in fair value due to | | | Decline in fair value due to | | | | Decline in fair value due to |
(dollar amounts in thousands) | Actual | | 10% adverse change | | 20% adverse change | | Actual | | 10% adverse change | | 20% adverse change | |
(dollar amounts in millions) | | Actual | | 10% adverse change | | 20% adverse change | | Actual | | 10% adverse change | | 20% adverse change |
Constant prepayment rate (annualized) | 7.80 | % | | $ | (4,510 | ) | | $ | (8,763 | ) | | 11.10 | % | | $ | (5,543 | ) | | $ | (10,648 | ) | 9.40 | % | | $ | (6 | ) | | $ | (12 | ) | | 8.30 | % | | $ | (5 | ) | | $ | (10 | ) |
Spread over forward interest rate swap rates | 1,173 bps |
| | (5,259 | ) | | (10,195 | ) | | 875 bps |
| | (4,662 | ) | | (9,017 | ) | 934 | bps | | (7 | ) | | (13 | ) | | 1,049 | bps | | (7 | ) | | (13 | ) |
Additionally, Huntington held MSRs recorded using the fair value method of $10 million and $11 million at December 31, 2018 and 2017, respectively. The change in fair value representing time decay, payoffs and changes in valuation inputs and assumptions for the years ended December 31, 2018 and 2017 was $1 million and $3 million, respectively.
Total servicing, late and other ancillary fees included in mortgage banking income was $50$60 million, $47$56 million, and $44$50 million for the years ended December 31, 2016, 2015,2018, 2017, and 2014,2016, respectively. The unpaid principal balance of residential mortgage loans serviced for third parties was $18.9$21.0 billion, $16.2$19.8 billion, and $15.6$18.9 billion at December 31, 2018, 2017, and 2016, 2015, and 2014, respectively.
Automobile Loans and Leases
The following table summarizes activity relating to automobile loans securitized with servicing retained for the years ended December 31, 2016, 2015, and 2014:
|
| | | | | | | | | |
| Year Ended December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | | 2014 (1) |
UPB of automobile loans securitized with servicing retained | $ | 1,500,000 |
| | 750,000 |
| | — |
|
Net proceeds received in loan securitizations | 1,551,679 |
| | 780,117 |
| | — |
|
Servicing asset recognized in loan securitizations (2) | 15,670 |
| | 11,180 |
| | — |
|
Pretax gains resulting from above loan securitizations (3) | 5,632 |
| | 5,333 |
| | — |
|
| |
(1) | Huntington did not sell or securitize any automobile loans in 2014. |
| |
(2) | Recorded in servicing rights. |
| |
(3) | Recorded in gain on sale of loans. |
Huntington has retained servicing responsibilities on sold automobile loans and receives annual servicing fees and other ancillary fees on the outstanding loan balances. Automobile loan servicing rights are accounted for using the amortization method. A servicing asset is established at fair value at the time of the sale. The servicing asset is then amortized against servicing income. Impairment, if any, is recognized when carrying value exceeds the fair value as determined by calculating the present value of expected net future cash flows. The primary risk characteristic for measuring servicing assets is payoff rates of the underlying loan pools. Valuation calculations rely on the predicted payoff assumption and, if actual payoff is quicker than expected, then future value would be impaired.
Changes in the carrying value of automobile loan servicing rights for the years ended December 31, 2016, and 2015, and the fair value at the end of each period were as follows:
|
| | | | | | | |
(dollar amounts in thousands) | 2016 | | 2015 |
Carrying value, beginning of year | $ | 8,771 |
| | $ | 6,898 |
|
New servicing assets created | 15,670 |
| | 11,180 |
|
Amortization and other | (6,156 | ) | | (9,307 | ) |
Carrying value, end of year | $ | 18,285 |
| | $ | 8,771 |
|
Fair value, end of year | $ | 18,388 |
| | $ | 9,127 |
|
Weighted-average life (years) | 4.2 |
| | 3.2 |
|
A summary of key assumptions and the sensitivity of the automobile loan servicing rights value to changes in these assumptions at December 31, 2016, and 2015 follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | December 31, 2015 |
| | | Decline in fair value due to | | | | Decline in fair value due to |
(dollar amounts in thousands) | Actual | | 10% adverse change | | 20% adverse change | | Actual | | 10% adverse change | | 20% adverse change |
Constant prepayment rate (annualized) | 19.98 | % | | $ | (1,047 | ) | | $ | (2,026 | ) | | 18.36 | % | | $ | (500 | ) | | $ | (895 | ) |
Spread over forward interest rate swap rates | 500 bps |
| | (26 | ) | | (53 | ) | | 500 bps |
| | (10 | ) | | (19 | ) |
Servicing income was $9 million, $5 million, and $8 million for the years ended December 31, 2016, 2015, and 2014, respectively. The unpaid principal balance of automobile loans serviced for third parties was $1.7 billion, $0.9 billion, and $0.8 billion at December 31, 2016, 2015, and 2014, respectively.
Small Business Association (SBA) Portfolio
The following table summarizes activity relating to SBA loans sold with servicing retained for the years ended December 31, 2016, 2015, and 2014:
|
| | | | | | | | | | | |
| Year Ended December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | | 2014 |
SBA loans sold with servicing retained | $ | 269,923 |
| | $ | 232,848 |
| | $ | 214,760 |
|
Pretax gains resulting from above loan sales (1) | 20,516 |
| | 18,626 |
| | 24,579 |
|
| |
(1) | Recorded in gain on sale of loans. |
Huntington has retained servicing responsibilities on sold SBA loans and receives annual servicing fees on the outstanding loan balances. SBA loan servicing rights are accounted for using the amortization method. A servicing asset is established at fair value at the time of the sale using a discounted future cash flow model. The servicing asset is then amortized against servicing income. Impairment, if any, is recognized when carrying value exceeds the fair value as determined by calculating the present value of expected net future cash flows.
The following tables summarize the changes in the carrying value of the servicing asset for the years ended December 31, 2016, and 2015:
|
| | | | | | | |
(dollar amounts in thousands) | 2016 | | 2015 |
Carrying value, beginning of year | $ | 19,747 |
| | $ | 18,536 |
|
New servicing assets created | 8,705 |
| | 8,012 |
|
Amortization and other | (7,372 | ) | | (6,801 | ) |
Carrying value, end of year | $ | 21,080 |
| | $ | 19,747 |
|
Fair value, end of year | $ | 24,270 |
| | $ | 22,649 |
|
Weighted-average life (years) | 3.3 |
| | 3.3 |
|
A summary of key assumptions and the sensitivity of the SBA loan servicing rights value to changes in these assumptions at December 31, 2016, and 2015 follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | December 31, 2015 |
| | | Decline in fair value due to | | | | Decline in fair value due to |
(dollar amounts in thousands) | Actual | | 10% adverse change | | 20% adverse change | | Actual | | 10% adverse change | | 20% adverse change |
Constant prepayment rate (annualized) | 7.40 | % | | $ | (324 | ) | | $ | (644 | ) | | 7.60 | % | | $ | (313 | ) | | $ | (622 | ) |
Discount rate | 15.00 |
| | (1,270 | ) | | (1,870 | ) | | 15.00 |
| | (610 | ) | | (1,194 | ) |
Servicing income was $9 million, $8 million, and $7 million for the years ended December 31, 2016, 2015, and 2014, respectively. The unpaid principal balance of SBA loans serviced for third parties was $1.1 billion, $1.0 billion and $0.9 billion at December 31, 2016, 2015, and 2014, respectively.
8.6. GOODWILL AND OTHER INTANGIBLE ASSETS
Business segments are based on segment leadership structure, which reflects how segment performance is monitored and assessed. We have fivefour major business segments: Consumer and Business Banking, Commercial Banking, Commercial Real Estate
and Vehicle Finance, (CREVF),and Regional Banking and The Huntington Private Client Group (RBHPCG), and Home Lending. A. The Treasury / Other function includes technology and operations, other unallocated assets, liabilities, revenue, and expense.
A rollforward of goodwill by business segment for the years ended December 31, 20162018 and 2015,2017, is presented in the table below:
| | | Consumer & | | | | | | | | | | | Consumer & | | | | | | | | | | |
| Business | | Commercial | | | | | | Home | | Treasury/ | | Huntington | Business | | Commercial | | Vehicle | | | | Treasury/ | | Huntington |
(dollar amounts in thousands) | Banking | | Banking | | CREVF | | RBHPCG | | Lending | | Other | | Consolidated | |
Balance, January 1, 2015 | $ | 368,097 |
| | $ | 59,594 |
| | $ | — |
| | $ | 90,012 |
| | $ | — |
| | $ | 4,838 |
| | $ | 522,541 |
| |
(dollar amounts in millions) | | Banking | | Banking | | Finance | | RBHPCG | | Other | | Consolidated |
Balance, January 1, 2017 | | $ | 1,398 |
| | $ | 453 |
| | $ | — |
| | $ | 142 |
| | $ | — |
| | $ | 1,993 |
|
Adjustments | | — |
| | (28 | ) | | — |
| | 28 |
| | — |
| | — |
|
Balance, December 31, 2017 | | 1,398 |
| | 425 |
| | — |
| | 170 |
| | — |
| | 1,993 |
|
Goodwill acquired during the period | — |
| | 155,828 |
| | — |
| | — |
| | — |
| | — |
| | 155,828 |
| — |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
Adjustments | — |
| | — |
| | — |
| | (1,500 | ) | | — |
| | — |
| | (1,500 | ) | (5 | ) | | — |
| | — |
| | — |
| | — |
| | (5 | ) |
Balance, December 31, 2015 | 368,097 |
| | 215,422 |
| | — |
| | 88,512 |
| | — |
| | 4,838 |
| | 676,869 |
| |
Goodwill acquired during the period | 1,030,046 |
| | 237,542 |
| | — |
| | 53,230 |
| | — |
| | — |
| | 1,320,818 |
| |
Adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | (4,838 | ) | | (4,838 | ) | |
Balance, December 31, 2016 | $ | 1,398,143 |
| | $ | 452,964 |
| | $ | — |
| | $ | 141,742 |
| | $ | — |
| | $ | — |
| | $ | 1,992,849 |
| |
Balance, December 31, 2018 | | $ | 1,393 |
| | $ | 426 |
| | $ | — |
| | $ | 170 |
| | $ | — |
| | $ | 1,989 |
|
Huntington announced a change in its executive leadership team, which became effective at the end of 2017. As a result, Commercial Real Estate is now included as an operating unit in the Commercial Banking segment. During the 2017 second quarter, the previously reported Home Lending segment was included as an operating unit within the Consumer and Business Banking segment, and the Insurance operating unit previously included in Commercial Banking was realigned to RBHPCG. As a result of these changes, Huntington reclassified a net $28 million of goodwill from the Commercial Banking segment to the RBHPCG segment.
On August 16, 2016,October 1, 2018, Huntington completed its acquisition of FirstMerit in a stock and cashHSE. As part of the transaction, valued at approximately $3.7 billion. In connection with the acquisition, the CompanyHuntington recorded $1.3 billion of goodwill, $310 million core deposit intangible asset and $95$1 million of other intangible assets. Huntington allocated goodwill recognized in the acquisition of FirstMerit to its existing operating segments. The allocation was performed using the ‘with and without’ approach, where an entity calculates the fair value of each segment before and after the acquisition, with the difference attributable to the fair value acquired via the acquisition. This method is most appropriate when multiple segments are expected to benefit from synergies realized in an acquisition. The results of the allocation are presented in the table above. For additional information on the acquisition, see Note 3 Acquisition of FirstMerit Corporation.goodwill.
During the 2016 thirdfourth quarter of 2018, Huntington reclassified $5 million of goodwill in the Treasury / OtherConsumer & Business Banking segment related to athe held for sale disposal group.
On March 31, 2015, Huntington completed its acquisition of Macquarie Equipment Finance, which was re-branded Huntington Technology Finance. As part of the transaction, Huntington recorded $156 million of goodwill and $8 million of other intangible assets.
During 2015, Huntington adjusted the goodwill in the RBHPCG segment related to a sale of HASI and HAA. The amount was adjusted based on relative fair value methodology.
Goodwill is not amortized but is evaluated for impairment on an annual basis at October 1 of each year or whenever events or changes in circumstances indicate the carrying value may not be recoverable. As a result of the 2014 first quarter reorganization in our reported business segments, goodwill was reallocated among the business segments. Immediately following the reallocation, impairment of $3 million was recorded in the Home Lending reporting segment. No impairment was recorded in 20162018 or 2015.2017.
At December 31, 20162018 and 2015,2017, Huntington’s other intangible assets consisted of the following:
| | (dollar amounts in thousands) | Gross Carrying Amount | | | Accumulated Amortization | | Net Carrying Value | |
December 31, 2016 | | | | | | |
(dollar amounts in millions) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value |
December 31, 2018 | | | | | | |
Core deposit intangible | $ | 324,619 |
| | $ | (26,778 | ) | | $ | 297,841 |
| $ | 314 |
| | $ | (93 | ) | | $ | 221 |
|
Customer relationship | 194,956 |
| (1) | | (90,383 | ) | | 104,573 |
| 182 |
| | (122 | ) | | 60 |
|
Other | 150 |
| | (106 | ) | | 44 |
| |
Total other intangible assets | $ | 519,725 |
| | $ | (117,267 | ) | | $ | 402,458 |
| $ | 496 |
| | $ | (215 | ) | | $ | 281 |
|
December 31, 2015 | | | | | | |
December 31, 2017 | | | | | | |
Core deposit intangible | $ | 400,058 |
| | $ | (384,606 | ) | | $ | 15,452 |
| $ | 325 |
| | $ | (61 | ) | | $ | 264 |
|
Customer relationship | 116,094 |
| | (76,656 | ) | | 39,438 |
| 190 |
| | (108 | ) | | 82 |
|
Other | 25,164 |
| | (25,076 | ) | | 88 |
| |
Total other intangible assets | $ | 541,316 |
| | $ | (486,338 | ) | | $ | 54,978 |
| $ | 515 |
| | $ | (169 | ) | | $ | 346 |
|
| |
(1) | During the 2016 third quarter, certain commercial merchant relationships, which resulted in an intangible of $14 million, were contributed to a joint venture in which Huntington holds a minority interest. |
The estimated amortization expense of other intangible assets for the next five years is as follows:
| | (dollar amounts in thousands) | Amortization Expense | |
2017 | $ | 56,333 |
| |
2018 | 53,161 |
| |
(dollar amounts in millions) | | Amortization Expense |
2019 | 50,446 |
| $ | 49 |
|
2020 | 42,291 |
| 41 |
|
2021 | 39,783 |
| 38 |
|
2022 | | 36 |
|
2023 | | 34 |
|
9.7. PREMISES AND EQUIPMENT
Premises and equipment were comprised of the following at December 31, 20162018 and 2015:2017:
| | | At December 31, | At December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | |
(dollar amounts in millions) | | 2018 | | 2017 |
Land and land improvements | $ | 199,193 |
| | $ | 140,414 |
| $ | 188 |
| | $ | 193 |
|
Buildings | 523,181 |
| | 366,963 |
| 579 |
| | 563 |
|
Leasehold improvements | 265,384 |
| | 246,222 |
| 199 |
| | 240 |
|
Equipment | 721,014 |
| | 647,769 |
| 739 |
| | 746 |
|
Total premises and equipment | 1,708,772 |
| | 1,401,368 |
| 1,705 |
| | 1,742 |
|
Less accumulated depreciation and amortization | (893,264 | ) | | (780,828 | ) | (915 | ) | | (878 | ) |
Net premises and equipment | $ | 815,508 |
| | $ | 620,540 |
| $ | 790 |
| | $ | 864 |
|
Depreciation and amortization charged to expense and rental income credited to net occupancy expense for the three years ended December 31, 2016, 2015,2018, 2017, and 20142016 were:
| | (dollar amounts in thousands) | 2016 | | 2015 | | 2014 | |
(dollar amounts in millions) | | 2018 | | 2017 | | 2016 |
Total depreciation and amortization of premises and equipment | $ | 125,856 |
| | $ | 85,805 |
| | $ | 82,296 |
| $ | 130 |
| | $ | 123 |
| | $ | 126 |
|
Rental income credited to occupancy expense | 12,512 |
| | 12,563 |
| | 11,556 |
| 13 |
| | 14 |
| | 13 |
|
10.8. SHORT-TERM BORROWINGS
Borrowings with original maturities of one year or less are classified as short-term and were comprised of the following at December 31, 20162018 and 2015:
2017:
| | | At December 31, | At December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | |
(dollar amounts in millions) | | 2018 | | 2017 |
Federal funds purchased and securities sold under agreements to repurchase | $ | 1,248,089 |
| | $ | 601,272 |
| $ | 2,004 |
| | $ | 1,318 |
|
Federal Home Loan Bank advances | 2,425,000 |
| | — |
| — |
| | 3,725 |
|
Other borrowings | 19,565 |
| | 14,007 |
| 13 |
| | 13 |
|
Total short-term borrowings | $ | 3,692,654 |
| | $ | 615,279 |
| $ | 2,017 |
| | $ | 5,056 |
|
Other borrowings consist of borrowings from the U.S. Treasury and other notes payable.
11.9. LONG-TERM DEBT
Huntington’s long-term debt consisted of the following:
| | | At December 31, | At December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | |
(dollar amounts in millions) | | 2018 | | 2017 |
The Parent Company: | | | | | | |
Senior Notes: | | | | | | |
3.19% Huntington Bancshares Incorporated medium-term notes due 2021 | $ | 972,625 |
| | $ | — |
| $ | 969 |
| | $ | 969 |
|
2.33% Huntington Bancshares Incorporated senior note due 2022 | 953,674 |
| | — |
| |
2.64% Huntington Bancshares Incorporated senior note due 2018 | 399,278 |
| | 399,169 |
| |
2.33% Huntington Bancshares Incorporated senior notes due 2022 | | 946 |
| | 953 |
|
4.00% Huntington Bancshares Incorporated senior notes due 2025 | | 507 |
| | — |
|
2.64% Huntington Bancshares Incorporated senior notes due 2018 | | — |
| | 399 |
|
Subordinated Notes: | | | | | | |
7.00% Huntington Bancshares Incorporated subordinated notes due 2020 | 319,857 |
| | 326,379 |
| 305 |
| | 312 |
|
3.55% Huntington Bancshares Incorporated subordinated notes due 2023 | 248,156 |
| | — |
| 239 |
| | 245 |
|
Sky Financial Capital Trust IV 2.40% junior subordinated debentures due 2036 (1) | 74,320 |
| | 74,320 |
| |
Sky Financial Capital Trust III 2.40% junior subordinated debentures due 2036 (1) | 72,165 |
| | 72,165 |
| |
Huntington Capital I Trust Preferred 1.70% junior subordinated debentures due 2027 (2) | 68,720 |
| | 110,706 |
| |
Huntington Capital II Trust Preferred 1.06% junior subordinated debentures due 2028 (3) | 31,576 |
| | 54,030 |
| |
Camco Statutory Trust I 2.30% due 2037 (4) | 4,244 |
| | 4,212 |
| |
Sky Financial Capital Trust IV 4.20% junior subordinated debentures due 2036 (1) | | 74 |
| | 74 |
|
Sky Financial Capital Trust III 4.20% junior subordinated debentures due 2036 (1) | | 72 |
| | 72 |
|
Huntington Capital I Trust Preferred 3.50% junior subordinated debentures due 2027 (2) | | 69 |
| | 69 |
|
Huntington Capital II Trust Preferred 3.42% junior subordinated debentures due 2028 (3) | | 31 |
| | 31 |
|
Camco Financial Statutory Trust I 4.13% due 2037 (4) | | 4 |
| | 4 |
|
Total notes issued by the parent | 3,144,615 |
| | 1,040,981 |
| 3,216 |
| | 3,128 |
|
The Bank: | | | | | | |
Senior Notes: | | | | | | |
3.55% Huntington National Bank senior notes due 2023 | | 756 |
| | — |
|
3.25% Huntington National Bank senior notes due 2021 | | 750 |
| | — |
|
2.47% Huntington National Bank senior notes due 2020 | | 692 |
| | 694 |
|
2.55% Huntington National Bank senior notes due 2022 | | 672 |
| | 685 |
|
2.23% Huntington National Bank senior notes due 2019 | | 498 |
| | 497 |
|
2.43% Huntington National Bank senior notes due 2020 | | 493 |
| | 498 |
|
2.97% Huntington National Bank senior notes due 2020 | | 491 |
| | 492 |
|
3.31% Huntington National Bank senior notes due 2020 (5) | | 300 |
| | 300 |
|
2.24% Huntington National Bank senior notes due 2018 | 843,568 |
| | 841,313 |
| — |
| | 844 |
|
2.10% Huntington National Bank senior notes due 2018 | 747,170 |
| | 745,894 |
| — |
| | 748 |
|
1.75% Huntington National Bank senior notes due 2018 | 499,732 |
| | 501,006 |
| — |
| | 496 |
|
1.43% Huntington National Bank senior note due 2019 | 499,686 |
| | 498,678 |
| |
2.23% Huntington National Bank senior note due 2017 | 499,445 |
| | 500,416 |
| |
2.43% Huntington National Bank senior notes due 2020 | 498,448 |
| | 498,185 |
| |
2.97% Huntington National Bank senior notes due 2020 | 495,088 |
| | 495,998 |
| |
1.42% Huntington National Bank senior notes due 2017 (5) | 250,000 |
| | 250,000 |
| |
5.04% Huntington National Bank medium-term notes due 2018 | 36,351 |
| | 37,469 |
| — |
| | 35 |
|
1.31% Huntington National Bank senior note due 2016 | — |
| | 498,360 |
| |
1.40% Huntington National Bank senior note due 2016 | — |
| | 349,399 |
| |
Subordinated Notes: | | | | | | |
3.86% Huntington National Bank subordinated notes due 2026 | 239,293 |
| | — |
| 229 |
| | 238 |
|
5.45% Huntington National Bank subordinated notes due 2019 | | 76 |
| | 77 |
|
6.67% Huntington National Bank subordinated notes due 2018 | 131,910 |
| | 136,227 |
| — |
| | 129 |
|
5.45% Huntington National Bank subordinated notes due 2019 | 81,155 |
| | 83,833 |
| |
5.59% Huntington National Bank subordinated notes due 2016 | — |
| | 103,357 |
| |
Total notes issued by the bank | 4,821,846 |
| | 5,540,135 |
| 4,957 |
| | 5,733 |
|
FHLB Advances: | | | | | | |
3.47% weighted average rate, varying maturities greater than one year | 7,540 |
| | 7,800 |
| |
3.12% weighted average rate, varying maturities greater than one year | | 6 |
| | 7 |
|
Other: | | | | | | |
Huntington Technology Finance nonrecourse debt, 3.43% effective interest rate, varying maturities | 277,523 |
| | 301,577 |
| |
Huntington Technology Finance ABS Trust 2014 1.70% due 2020 | 57,494 |
| | 123,577 |
| |
Huntington Technology Finance ABS Trust 2012 1.79% due 2017 | — |
| | 27,153 |
| |
Other | 141 |
| | 141 |
| |
Huntington Technology Finance nonrecourse debt, 4.19% effective interest rate, varying maturities | | 322 |
| | 263 |
|
4.68% Huntington Preferred Capital II - Class F securities (6) | | 74 |
| | 75 |
|
4.68% Huntington Preferred Capital II - Class G securities (6) | | 50 |
| | — |
|
Total other | 335,158 |
| | 452,448 |
| 446 |
| | 338 |
|
| | | | |
Total long-term debt | $ | 8,309,159 |
| | $ | 7,041,364 |
| $ | 8,625 |
| | $ | 9,206 |
|
| |
(1) | Variable effective rate at December 31, 2016,2018, based on three-month LIBOR +1.400%+1.40%. |
| |
(2) | Variable effective rate at December 31, 2016,2018, based on three-month LIBOR +0.70% |
| |
(3) | Variable effective rate at December 31, 2016,2018, based on three-month LIBOR +0.625%. |
| |
(4) | Variable effective rate at December 31, 2016,2018, based on three-month LIBOR +1.33%. |
| |
(5) | Variable effective rate at December 31, 2016,2018, based on three-month LIBOR +0.425%+ 0.51% |
| |
(6) | Variable effective rate at December 31, 2018, based on three-month LIBOR +1.88%. |
Amounts above are net of unamortized discounts and adjustments related to hedging with derivative financial instruments. The derivative instruments, principally interest rate swaps, are used to hedge the fair valuesinterest rate risk of certain fixed-rate debt by converting the debt to a variable rate. See Note 18 for more information regarding such financial instruments.
In August 2016, Parent Company and Bank subordinated debt with a fair value totaling $520 million was acquired by Huntington as part of the FirstMerit acquisition. See Note 3 Acquisition of FirstMerit Corporation for additional information on the method used to determine fair value.
In August 2016,May 2018, Huntington issued $1.0 billion$500 million of senior notes at 99.849%99.686% of face value. The senior notes mature on January 14, 2022May 15, 2025 and have a fixed coupon rate of 2.3%4.00%. At December 31, 2016, debt issuance costs of $5 million related to the note are reported on the balance sheet as a direct deduction from the face amount of the note.
In March 2016, HuntingtonMay 2018, the Bank issued $1.0 billion$750 million of senior notes at 99.803%99.774% of face value. The senior notes mature on May 14, 2021 and have a fixed coupon rate of 3.25%.
In August 2018, the Bank issued $750 million of senior notes at 99.780% of face value. The senior notes mature on October 6, 2023 and have a fixed coupon rate of 3.55%.
In March 2017, the Bank issued $700 million of senior notes at 99.994% of face value. The senior notes mature on March 14, 2021 and have a fixed coupon rate of 3.15%. At December 31, 2016, debt issuance costs of $5 million related to the note are reported on the balance sheet as a direct deduction from the face amount of the note.
In November 2015, the Bank issued $850 million of senior notes at 99.88% of face value. The senior bank note issuances mature on November 6, 2018 and have a fixed coupon rate of 2.20%. The senior notes may be redeemed one month prior to maturity date at 100% of principal plus accrued and unpaid interest.
In August 2015, the Bank issued $500 million of senior notes at 99.58% of face value. The senior bank note issuances mature on August 20,10, 2020 and have a fixed coupon rate of 2.88%2.375%.
In June 2015, the Bank issued $750 million of The senior notes at 99.71% of face value. The senior bank note issuances mature on June 30, 2018 and have a fixed coupon rate of 2.00%.
On March 31, 2015, Huntington completed its acquisition of Huntington Technology Finance. As part of the acquisition, Huntington assumed $293 million of non-recourse debt with various financial institutions and maturity dates. The effective interest rate on the non-recourse debt is 3.20%. Huntington also assumed $255 million of debt associated with two securitizations. The securitization debt has various classes and associated maturity dates and has an effective interest rate of 1.70%.
In February 2015, the Bank issued $500 million of senior notes at 99.86% of face value. The senior bank note issuances mature on February 26, 2018 and have a fixed coupon rate of 1.70%. Also, in February 2015, the Bank issued $500 million of senior notes at 99.87% of face value. The senior bank note issuances mature on April 1, 2020 and have a fixed coupon rate of 2.40%. Both senior note issuances may be redeemed one month prior to the maturity date at 100% of principal plus accrued and unpaid interest. Also, in March 2017, the Bank issued $300 million of senior notes at 100% of face value.
In August 2017, the Bank issued $700 million of senior notes at 99.762% of face value. The senior notes mature on August 7, 2022 and have a fixed coupon rate of 2.50%.
Long-term debt maturities for the next five years and thereafter are as follows:
| | (dollar amounts in thousands) | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Thereafter | | Total | |
(dollar amounts in millions) | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Total |
The Parent Company: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior notes | $ | — |
| | $ | 400,000 |
| | $ | — |
| | $ | — |
| | $ | 1,000,000 |
| | $ | 1,000,000 |
| | $ | 2,400,000 |
| $ | — |
| | $ | — |
| | $ | 1,000 |
| | $ | 1,000 |
| | $ | — |
| | $ | 500 |
| | $ | 2,500 |
|
Subordinated notes | — |
| | — |
| | — |
| | 300,000 |
| | — |
| | 503,463 |
| | 803,463 |
| — |
| | 300 |
| | — |
| | — |
| | 250 |
| | 253 |
| | 803 |
|
The Bank: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior notes | 750,000 |
| | 2,135,000 |
| | 500,000 |
| | 1,000,000 |
| | — |
| | — |
| | 4,385,000 |
| 500 |
| | 2,000 |
| | 750 |
| | 700 |
| | 750 |
| | — |
| | 4,700 |
|
Subordinated notes | — |
| | 125,539 |
| | 75,716 |
| | — |
| | — |
| | 250,000 |
| | 451,255 |
| 76 |
| | — |
| | — |
| | — |
| | — |
| | 250 |
| | 326 |
|
FHLB Advances | 100 |
| | 1,115 |
| | 325 |
| | 2,368 |
| | — |
| | 3,769 |
| | 7,677 |
| 1 |
| | 2 |
| | — |
| | 1 |
| | 1 |
| | 1 |
| | 6 |
|
Other | 64,288 |
| | 84,357 |
| | 62,048 |
| | 81,551 |
| | 42,187 |
| | 726 |
| | 335,157 |
| 16 |
| | 74 |
| | 85 |
| | 163 |
| | 108 |
| | — |
| | 446 |
|
Total | $ | 814,388 |
| | $ | 2,746,011 |
| | $ | 638,089 |
| | $ | 1,383,919 |
| | $ | 1,042,187 |
| | $ | 1,757,958 |
| | $ | 8,382,552 |
| $ | 593 |
| | $ | 2,376 |
| | $ | 1,835 |
| | $ | 1,864 |
| | $ | 1,109 |
| | $ | 1,004 |
| | $ | 8,781 |
|
These maturities are based upon the par values of the long-term debt.
The terms of the long-term debt obligations contain various restrictive covenants including limitations on the acquisition of additional debt in excess of specified levels, dividend payments, and the disposition of subsidiaries. As of December 31, 2016,2018, Huntington was in compliance with all such covenants.
12.10. OTHER COMPREHENSIVE INCOME
The components of Huntington’s OCI in the three years ended December 31, 2016, 2015,2018, 2017, and 2014,2016, were as follows:
|
| | | | | | | | | | | |
| 2016 |
| Tax (expense) |
(dollar amounts in thousands) | Pretax | | Benefit | | After-tax |
Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold | $ | 905 |
| | $ | (320 | ) | | $ | 585 |
|
Unrealized holding gains (losses) on available-for-sale debt securities arising during the period | (203,048 | ) | | 70,599 |
| | (132,449 | ) |
Less: Reclassification adjustment for net losses (gains) included in net income | (107,145 | ) | | 37,884 |
| | (69,261 | ) |
Net change in unrealized holding gains (losses) on available-for-sale debt securities | (309,288 | ) | | 108,163 |
| | (201,125 | ) |
Net change in unrealized holding gains (losses) on available-for-sale equity securities | 171 |
| | (60 | ) | | 111 |
|
Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period | 2,381 |
| | (833 | ) | | 1,548 |
|
Less: Reclassification adjustment for net (gains) losses included in net income | (360 | ) | | 126 |
| | (234 | ) |
Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships | 2,021 |
| | (707 | ) | | 1,314 |
|
Net change in pension and other post-retirement obligations | 38,218 |
| | (13,376 | ) | | 24,842 |
|
Total other comprehensive income (loss) | $ | (268,878 | ) | | $ | 94,020 |
| | $ | (174,858 | ) |
|
| | | | | | | | | | | |
| 2018 |
| Tax (expense) |
(dollar amounts in millions) | Pretax | | Benefit | | After-tax |
Unrealized holding gains (losses) on available-for-sale debt securities arising during the period | $ | (151 | ) | | $ | 35 |
| | $ | (116 | ) |
Less: Reclassification adjustment for net losses (gains) included in net income | 41 |
| | (9 | ) | | 32 |
|
Net change in unrealized holding gains (losses) on available-for-sale debt securities | (110 | ) | | 26 |
| | (84 | ) |
Net change in pension and other post-retirement obligations | 4 |
| | — |
| | 4 |
|
Total other comprehensive income (loss) | $ | (106 | ) | | $ | 26 |
| | $ | (80 | ) |
|
| | | | | | | | | | | |
| 2015 |
| | | Tax (expense) | | |
(dollar amounts in thousands) | Pretax | | Benefit | | After-tax |
Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold | $ | 19,606 |
| | $ | (6,933 | ) | | $ | 12,673 |
|
Unrealized holding gains (losses) on available-for-sale debt securities arising during the period | (26,021 | ) | | 9,108 |
| | (16,913 | ) |
Less: Reclassification adjustment for net losses (gains) included in net income | (3,901 | ) | | 1,365 |
| | (2,536 | ) |
Net change in unrealized holding gains (losses) on available-for-sale debt securities | (10,316 | ) | | 3,540 |
| | (6,776 | ) |
Net change in unrealized holding gains (losses) on available-for-sale equity securities | (474 | ) | | 166 |
| | (308 | ) |
Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period | 12,966 |
| | (4,538 | ) | | 8,428 |
|
Less: Reclassification adjustment for net (gains) losses included in net income | (220 | ) | | 77 |
| | (143 | ) |
Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships | 12,746 |
| | (4,461 | ) | | 8,285 |
|
Net change in pension and other post-retirement obligations | (7,795 | ) | | 2,728 |
| | (5,067 | ) |
Total other comprehensive income (loss) | $ | (5,839 | ) | | $ | 1,973 |
| | $ | (3,866 | ) |
|
| | | | | | | | | | | |
| 2014 |
| | | Tax (expense) | | |
(dollar amounts in thousands) | Pretax | | Benefit | | After-tax |
Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold | $ | 13,583 |
| | $ | (4,803 | ) | | $ | 8,780 |
|
Unrealized holding gains (losses) on available-for-sale debt securities arising during the period | 86,618 |
| | (30,914 | ) | | 55,704 |
|
Less: Reclassification adjustment for net gains (losses) included in net income | (15,559 | ) | | 5,446 |
| | (10,113 | ) |
Net change in unrealized holding gains (losses) on available-for-sale debt securities | 84,642 |
| | (30,271 | ) | | 54,371 |
|
Net change in unrealized holding gains (losses) on available-for-sale equity securities | 295 |
| | (103 | ) | | 192 |
|
Unrealized gains and losses on derivatives used in cash flow hedging relationships arising during the period | 14,141 |
| | (4,949 | ) | | 9,192 |
|
Less: Reclassification adjustment for net losses (gains) losses included in net income | (3,971 | ) | | 1,390 |
| | (2,581 | ) |
Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships | 10,170 |
| | (3,559 | ) | | 6,611 |
|
Net change in pension and post-retirement obligations | (106,857 | ) | | 37,400 |
| | (69,457 | ) |
Total other comprehensive income (loss) | $ | (11,750 | ) | | $ | 3,467 |
| | $ | (8,283 | ) |
|
| | | | | | | | | | | |
| 2017 |
| | | Tax (expense) | | |
(dollar amounts in millions) | Pretax | | Benefit | | After-tax |
Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold | $ | 4 |
| | $ | (2 | ) | | $ | 2 |
|
Unrealized holding gains (losses) on available-for-sale debt securities arising during the period | (87 | ) | | 31 |
| | (56 | ) |
Less: Reclassification adjustment for net losses (gains) included in net income | 26 |
| | (9 | ) | | 17 |
|
Net change in unrealized holding gains (losses) on available-for-sale debt securities | (57 | ) | | 20 |
| | (37 | ) |
Net change in unrealized holding gains (losses) on available-for-sale equity securities | 1 |
| | (1 | ) | | — |
|
Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period | 3 |
| | (1 | ) | | 2 |
|
Less: Reclassification adjustment for net (gains) losses included in net income | 1 |
| | — |
| | 1 |
|
Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships | 4 |
| | (1 | ) | | 3 |
|
Net change in pension and other post-retirement obligations | — |
| | — |
| | — |
|
Total other comprehensive income (loss) | $ | (52 | ) | | $ | 18 |
| | $ | (34 | ) |
|
| | | | | | | | | | | |
| 2016 |
| | | Tax (expense) | | |
(dollar amounts in millions) | Pretax | | Benefit | | After-tax |
Noncredit-related impairment recoveries (losses) on debt securities not expected to be sold | $ | 1 |
| | $ | — |
| | $ | 1 |
|
Unrealized holding gains (losses) on available-for-sale debt securities arising during the period | (203 | ) | | 70 |
| | (133 | ) |
Less: Reclassification adjustment for net gains (losses) included in net income | (107 | ) | | 38 |
| | (69 | ) |
Net change in unrealized holding gains (losses) on available-for-sale debt securities | (309 | ) | | 108 |
| | (201 | ) |
Unrealized gains and losses on derivatives used in cash flow hedging relationships arising during the period | 2 |
| | (1 | ) | | 1 |
|
Net change in unrealized gains (losses) on derivatives used in cash flow hedging relationships | 2 |
| | (1 | ) | | 1 |
|
Net change in pension and post-retirement obligations | 38 |
| | (13 | ) | | 25 |
|
Total other comprehensive income (loss) | $ | (269 | ) | | $ | 94 |
| | $ | (175 | ) |
Activity in accumulated OCI for the two years ended December 31, 2018 and 2017 were as follows:
| | (dollar amounts in thousands) | Unrealized gains and (losses) on debt securities (1) | | Unrealized gains and (losses) on equity securities | | Unrealized gains and (losses) on cash flow hedging derivatives | | Unrealized gains (losses) for pension and other post- retirement obligations | | Total | |
December 31, 2014 | $ | 15,137 |
| | $ | 484 |
| | $ | (12,233 | ) | | $ | (225,680 | ) | | $ | (222,292 | ) | |
(dollar amounts in millions) | | Unrealized gains (losses) on debt securities (1) | | Unrealized gains (losses) on cash flow hedging derivatives | | Unrealized gains (losses) for pension and other post-retirement obligations | | Total |
December 31, 2016 | | $ | (193 | ) | | $ | (3 | ) | | $ | (205 | ) | | $ | (401 | ) |
Other comprehensive income before reclassifications | (4,240 | ) | | (308 | ) | | 8,428 |
| | — |
| | 3,880 |
| (54 | ) | | 2 |
| | (10 | ) | | (62 | ) |
Amounts reclassified from accumulated OCI to earnings | (2,536 | ) | | — |
| | (143 | ) | | (5,067 | ) | | (7,746 | ) | 17 |
| | 1 |
| | 10 |
| | 28 |
|
Period change | (6,776 | ) | | (308 | ) | | 8,285 |
| | (5,067 | ) | | (3,866 | ) | (37 | ) | | 3 |
| | — |
| | (34 | ) |
December 31, 2015 | 8,361 |
| | 176 |
| | (3,948 | ) | | (230,747 | ) | | (226,158 | ) | |
TCJA, Reclassification from accumulated OCI to retained earnings | | (48 | ) | | — |
| | (45 | ) | | (93 | ) |
December 31, 2017 | | (278 | ) | | — |
| | (250 | ) | | (528 | ) |
Cumulative-effect adjustments (ASU 2016-01) | | (1 | ) | | — |
| | — |
| | (1 | ) |
Other comprehensive income before reclassifications | (131,864 | ) | | 111 |
| | 1,548 |
| | — |
| | (130,205 | ) | (116 | ) | | — |
| | — |
| | (116 | ) |
Amounts reclassified from accumulated OCI to earnings | (69,261 | ) | | — |
| | (234 | ) | | 24,842 |
| | (44,653 | ) | 32 |
| | — |
| | 4 |
| | 36 |
|
Period change | (201,125 | ) | | 111 |
| | 1,314 |
| | 24,842 |
| | (174,858 | ) | (84 | ) | | — |
| | 4 |
| | (80 | ) |
December 31, 2016 | $ | (192,764 | ) | | $ | 287 |
| | $ | (2,634 | ) | | $ | (205,905 | ) | | $ | (401,016 | ) | |
December 31, 2018 | | $ | (363 | ) | | $ | — |
| | $ | (246 | ) | | $ | (609 | ) |
| |
(1) | AmountAOCI amounts at December 31, 2018, 2017, and 2016 includes $(82)include $137 million,$95 million, and $82 million of net unrealized losses (before any deferred tax benefits) on securities transferred from the available-for-sale securities portfolio to the held-to-maturity securities portfolio. The net unrealized losses will be recognized in earnings over the remaining life of the security using the effective interest method. |
The following table presents the reclassification adjustments out of accumulated OCI included in net income and the impacted line items as listed on the Consolidated Statements of Income for the years ended December 31, 20162018 and 2015:
2017:
| | | Reclassifications out of accumulated OCI | Reclassifications out of accumulated OCI |
Accumulated OCI components | Amounts reclassified from accumulated OCI | | Location of net gain (loss) reclassified from accumulated OCI into earnings | Amounts reclassified from accumulated OCI | | Location of net gain (loss) reclassified from accumulated OCI into earnings |
(dollar amounts in thousands) | 2016 | | 2015 | | | |
(dollar amounts in millions) | | 2018 | | 2017 | | |
Gains (losses) on debt securities: | | | | | | | | |
Amortization of unrealized gains (losses) | $ | 91,058 |
| | $ | (144 | ) | | Interest income—held-to-maturity securities—taxable | |
Realized gain (loss) on sale of securities | 18,206 |
| | 6,485 |
| | Noninterest income—net gains (losses) on sale of securities | |
Amortization of unrealized (losses) | | $ | (13 | ) | | $ | (8 | ) | | Interest income—held-to-maturity securities—taxable |
Realized (loss) on sale of securities | | (28 | ) | | (14 | ) | | Noninterest income—net gains (losses) on sale of securities |
OTTI recorded | (2,119 | ) | | (2,440 | ) | | Noninterest income—net gains (losses) on sale of securities | — |
| | (4 | ) | | Noninterest income—Impairment losses recognized in earnings on available-for-sale securities |
Total before tax | 107,145 |
| | 3,901 |
| | (41 | ) | | (26 | ) | |
Tax (expense) benefit | (37,884 | ) | | (1,365 | ) | | |
Tax benefit | | 9 |
| | 9 |
| |
Net of tax | $ | 69,261 |
| | $ | 2,536 |
| | $ | (32 | ) | | $ | (17 | ) | |
Gains (losses) on cash flow hedging relationships: | | | | | | | | |
Interest rate contracts | $ | 361 |
| | $ | 210 |
| | Interest and fee income—loans and leases | $ | — |
| | $ | (1 | ) | | Interest and fee income—loans and leases |
Interest rate contracts | (1 | ) | | 10 |
| | Noninterest expense—other income | |
Total before tax | 360 |
| | 220 |
| | — |
| | (1 | ) | |
Tax (expense) benefit | (126 | ) | | (77 | ) | | |
Tax benefit | | — |
| | — |
| |
Net of tax | $ | 234 |
| | $ | 143 |
| | $ | — |
| | $ | (1 | ) | |
Amortization of defined benefit pension and post-retirement items: | | | | | | | | |
Actuarial gains (losses) | $ | (40,186 | ) | | $ | 5,827 |
| | Noninterest expense—personnel costs | |
Actuarial losses | | $ | (13 | ) | | $ | (18 | ) | | Noninterest income / expense (1) |
Net periodic benefit costs | 1,968 |
| | 1,968 |
| | Noninterest expense—personnel costs | 4 |
| | 2 |
| | Noninterest income / expense (1) |
Total before tax | (38,218 | ) | | 7,795 |
| | (9 | ) | | (16 | ) | |
Tax (expense) benefit | 13,376 |
| | (2,728 | ) | | |
Tax benefit | | 2 |
| | 6 |
| |
Net of tax | $ | (24,842 | ) | | $ | 5,067 |
| | $ | (7 | ) | | $ | (10 | ) | |
| |
(1) | The activity for 2018 and 2017 is recorded in Noninterest Income - other income and Noninterest Expense - personnel costs, respectively, on the Consolidated Statements of Income. |
13.11. SHAREHOLDERS’ EQUITY
The following is a summary of Huntington'sHuntington’s non-cumulative, non-voting, perpetual preferred stock outstanding as of December 31, 2016.2018. | | (dollar amounts in thousands, except per share amounts) | | | | | | |
(dollar amounts in millions, share amounts in thousands) | | (dollar amounts in millions, share amounts in thousands) | | | | | |
Series | | Issuance Date | | Total Shares Outstanding | | Carrying Amount | | Dividend Rate | | Earliest Redemption Date | | Issuance Date | | Total Shares Outstanding | | Carrying Amount | | Dividend Rate | | Earliest Redemption Date |
Series A | | 11/14/2008 | | 362,506 |
| | 362,506 |
| | 8.50 | % | | N/A | |
Series B | | 12/28/2011 | | 35,500 |
| | 23,785 |
| | 3-mo. LIBOR + 270 bps | | 1/15/2017 | | 12/28/2011 | | 35,500 |
| | $ | 23 |
| | 3-mo. LIBOR + 270 bps |
| | 1/15/2017 |
Series D | | 3/21/2016 | | 400,000 |
| | 386,348 |
| | 6.25 | % | | 7/15/2021 | | 3/21/2016 | | 400,000 |
| | 386 |
| | 6.25 | % | | 7/15/2021 |
Series D | | 5/5/2016 | | 200,000 |
| | 198,588 |
| | 6.25 | % | | 7/15/2021 | | 5/5/2016 | | 200,000 |
| | 199 |
| | 6.25 | % | | 7/15/2021 |
Series C | | 8/16/2016 | | 100,000 |
| | 100,000 |
| | 5.875 | % | | 1/15/2022 | | 8/16/2016 | | 100,000 |
| | 100 |
| | 5.875 | % | | 1/15/2022 |
Series E | | | 2/27/2018 | | 5,000 |
| | 495 |
| | 5.70 | % | | 4/15/2023 |
Total | | 1,098,006 |
| | $ | 1,071,227 |
| | | | | 740,500 |
| | $ | 1,203 |
| | | |
Each seriesSeries B, D, and C of preferred stock has a liquidation value and redemption price per share of $1,000, plus any declared and unpaid dividends. Series E preferred stock has a liquidation value and redemption price per share of $100,000, plus any declared and unpaid dividends. All preferred stock with the exception of Series A, has no stated maturity and redemption is solely at the option of the Company. Under current rules, any redemption of the preferred stock is subject to prior approval of the FRB.
EachPreferred A Stock conversion
On February 21, 2018, Huntington elected to effect the conversion of all of its outstanding 8.50% Series A Non-Cumulative Perpetual Convertible Preferred Stock into common stock pursuant to the terms of the Series A Preferred Stock. On February 22, 2018, each share of Series A Preferred Stock was converted into 83.668 shares of Common Stock. Upon conversion, the Series A Preferred Stock is non-votingno longer outstanding and may be converted at any time, at the option of the holder, into 83.668 shares of common stock of Huntington, which represents an approximate initial conversion price of $11.95 per share of common stock. Since April 15, 2013, at the option of Huntington,all rights with respect to the Series A Preferred Stock is subjectwere ceased and terminated, except the right to mandatory conversion into Huntington’s common stock atreceive the prevailing conversion rate if the closing pricenumber of Huntington’s common stock exceeds 130%whole shares and any required cash-in-lieu of fractional shares of Common Stock. Following the conversion, price for 20the Series A Preferred Stock shares were delisted from trading days during any 30 consecutive trading-day period. At the option of the holder, one share was converted to common stock during the fourth quarter of 2015.on NASDAQ.
Preferred Series CE Stock issued and outstanding
In connection with the FirstMerit acquisition, during the 2016 third quarter,On February 27, 2018, Huntington issued $100$500 million of preferred stock. As part of this transaction, Huntington issued 4,000,000500,000 depositary shares, each depositary shares representing a 1/40th100th ownership interest in a share of 5.875%5.70% Series CE Fixed-to-Floating Non-Cumulative Perpetual Preferred Stock (Preferred CE Stock), par value $0.01 per share, with a liquidation preference of $1,000$100,000 per share (equivalent to $25$1,000 per depositary share). Each holder of a depositary share will be entitled to all proportional rights and preferences of the Preferred CE Stock (including dividend, voting, redemption, and liquidation rights). Costs of $5 million related to the issuance of the Preferred E Stock are reported as a direct deduction from the face amount of the stock.
Dividends on the Preferred CE Stock will be non-cumulative and payable quarterly in arrears, when, as and if, authorized by the Company'sCompany’s board of directors or a duly authorized committee of the board and declared by the Company, at an annual rate of 5.875%5.70% per year on the liquidation preference of $1,000$100,000 per share, equivalent to $25$1,000 per depositary share. The dividend payment dates will beare the fifteenth day of each January, April, July and October, commencingwhich commenced on OctoberJuly 15, 2016, or the next business day if any such day is not a business day.2018.
The Preferred CE Stock is perpetual and has no maturity date. Huntington may redeem the Preferred C Stock at its option, (i) in whole or in part, from time to time, on any dividend payment date on or after October 15, 2021 or (ii) in whole but not in part, within 90 days following a regulatory capital treatment event, in each case, at a redemption price equal to $1,000 per share (equivalent to $25 per depositary share), plus any declared and unpaid dividends, without regard to any undeclared dividends, on the Series C Preferred Stock prior to the date fixed for redemption. If Huntington redeems the Preferred C Stock, the depositary will redeem a proportional number of depositary shares. Neither the holders of Preferred C Stock nor holders of depositary shares will have the right to require the redemption or repurchase of the Preferred C Stock or the depositary shares. Any redemption of the Preferred C Stock is subject to Huntington's receipt of any required prior approval by the Board of Governors of the Federal Reserve System.
Preferred Series D Stock issued and outstanding
During the 2016 first and second quarter, Huntington issued $400 million and $200 million of preferred stock, respectively. As part of these transactions, Huntington issued 24,000,000 depositary shares, each representing a 1/40th ownership interest in a share of 6.250% Series D Non-Cumulative Perpetual Preferred Stock (Preferred D Stock), par value $0.01 per share, with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share). Each holder of a depositary share, will be entitled to all proportional rights and preferences of the Preferred D Stock (including dividend, voting, redemption, and liquidation rights). Costs of $15 million related to the issuance of the Preferred D Stock are reported as a direct deduction from the face amount of the stock.
Dividends on the Preferred D Stock will be non-cumulative and payable quarterly in arrears, when, as and if authorized by the Company's board of directors or a duly authorized committee of the board and declared by the Company, at an annual rate of 6.25% per year on the liquidation preference of $1,000 per share, equivalent to $25 per depositary share. The dividend payment dates will be
the fifteenth day of each January, April, July and October, commencing on July 15, 2016, or the next business day if any such day is not a business day.
The Preferred D Stock is perpetual and has no maturity date. Huntington may redeem the Preferred DE Stock at its option, (i) in whole or in part, from time to time, on any dividend payment date on or after April 15, 20212023 or (ii) in whole but not in part, within 90 days following a regulatory capital treatment event,change in laws or regulations, in each case, at a redemption price equal to $1,000$100,000 per share (equivalent to $25$1,000 per depositary share), plus any declared and unpaid dividends, and, inwithout regard to any undeclared dividends on the case of a redemption following a regulatory capital treatment event, the prorated portion of dividends, whether or not declared, for the dividend period in which such redemption occurs. Notwithstanding the foregoing, pursuant to a commitment Huntington madeSeries E Preferred Stock prior to the Federal Reserve,date fixed for at least five years after the date of the issuance of depositary shares offered by the prospectus supplement, Huntington will not redeem or repurchase the Preferred D Stock, whether issued on March 21, 2016 or on the date of the issuance of the depositary shares offered by the prospectus supplement.redemption. If Huntington redeems the Preferred DE Stock, the depositary will redeem a proportional number of depositary shares. Neither the holders of Preferred DE Stock nor holders of depositary shares will have the right to require the redemption or repurchase of the Preferred DE Stock or the depositary shares. Any redemption of the Preferred D Stock is subject to Huntington's receipt of any required prior approval by the Board of Governors of the Federal Reserve System.
2016 Comprehensive Capital Analysis and Review (CCAR)
On June 29, 2016, Huntington announced that the Federal Reserve did not object to the proposed capital actions included in Huntington's capital plan submitted to the Federal Reserve in April 2016 as part of the 2016 CCAR. These actions included an increase in the quarterly dividend per common share to $0.08, starting in the fourth quarter of 2016. Huntington’s capital plan also included the issuance of capital in connection with the acquisition of FirstMerit Corporation and continues the previously announced suspension of the Company’s 2015 share repurchase program.
2015 Share Repurchase Program
During 2015, Huntington repurchased a total of 23.0 million shares of common stock at a weighted average share price of $10.93.
14.12. EARNINGS PER SHARE
Basic earnings per share is the amount of earnings (adjusted for dividends declared on preferred stock) available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issued for stock options, restricted stock units and awards, distributions from deferred compensation plans, and the conversion of the Company’s convertible preferred stock (See Note 13).stock. Potentially dilutive common shares are excluded from the computation of diluted earnings per share in periods in which the effect would be antidilutive. For diluted earnings per share, net income available
On February 22, 2018, Huntington converted all its outstanding 8.50% Series A Non-Cumulative Perpetual Convertible Preferred Stock to 30.3 million shares of common stock. Following the conversion, the additional shares were included in average common shares can be affectedissued and outstanding. The 2018 and 2017 total diluted average common shares issued and outstanding was impacted by using the conversion of the Company’s convertible preferred stock. Where the effect of this conversion would be dilutive, net income available to common shareholders is adjusted by the associated preferred dividends and deemed dividend.if-converted method. The calculation of basic and diluted earnings per share for each of the three years ended December 31 was as follows:
| | | Year ended December 31, | Year Ended December 31, |
(dollar amounts in thousands, except per share amounts) | 2016 | | 2015 | | 2014 | |
(dollar amounts in millions, except per share data, share count in thousands) | | 2018 | | 2017 | | 2016 |
Basic earnings per common share: | | | | | | | | | | |
Net income | $ | 711,821 |
| | $ | 692,957 |
| | $ | 632,392 |
| $ | 1,393 |
| | $ | 1,186 |
| | $ | 712 |
|
Preferred stock dividends | (65,274 | ) | | (31,873 | ) | | (31,854 | ) | (70 | ) | | (76 | ) | | (65 | ) |
Net income available to common shareholders | $ | 646,547 |
| | $ | 661,084 |
| | $ | 600,538 |
| $ | 1,323 |
| | $ | 1,110 |
| | $ | 647 |
|
Average common shares issued and outstanding | 904,438 |
| | 803,412 |
| | 819,917 |
| 1,081,542 |
| | 1,084,686 |
| | 904,438 |
|
Basic earnings per common share: | $ | 0.72 |
| | $ | 0.82 |
| | $ | 0.73 |
| |
Diluted earnings per common share | | | | | | |
Basic earnings per common share | | $ | 1.22 |
| | $ | 1.02 |
| | $ | 0.72 |
|
Diluted earnings per common share: | | | | | | |
Net income available to common shareholders | $ | 646,547 |
| | $ | 661,084 |
| | $ | 600,538 |
| $ | 1,323 |
| | $ | 1,110 |
| | $ | 647 |
|
Effect of assumed preferred stock conversion | — |
| | — |
| | — |
| — |
| | 31 |
| | — |
|
Net income applicable to diluted earnings per share | $ | 646,547 |
| | $ | 661,084 |
| | $ | 600,538 |
| $ | 1,323 |
| | $ | 1,141 |
| | $ | 647 |
|
Average common shares issued and outstanding | 904,438 |
| | 803,412 |
| | 819,917 |
| 1,081,542 |
| | 1,084,686 |
| | 904,438 |
|
Dilutive potential common shares: | | | | | | |
Dilutive potential common shares | | | | | | |
Stock options and restricted stock units and awards | 11,728 |
| | 11,633 |
| | 11,421 |
| 16,529 |
| | 17,883 |
| | 11,728 |
|
Shares held in deferred compensation plans | 2,486 |
| | 1,912 |
| | 1,420 |
| 3,511 |
| | 3,160 |
| | 2,486 |
|
Dilutive impact of Preferred Stock | | 4,403 |
| | 30,330 |
| | — |
|
Other | 138 |
| | 172 |
| | 323 |
| — |
| | 127 |
| | 138 |
|
Dilutive potential common shares: | 14,352 |
| | 13,717 |
| | 13,164 |
| |
Dilutive potential common shares | | 24,443 |
| | 51,500 |
| | 14,352 |
|
Total diluted average common shares issued and outstanding | 918,790 |
| | 817,129 |
| | 833,081 |
| 1,105,985 |
| | 1,136,186 |
| | 918,790 |
|
Diluted earnings per common share | $ | 0.70 |
| | $ | 0.81 |
| | $ | 0.72 |
| $ | 1.20 |
| | $ | 1.00 |
| | $ | 0.70 |
|
Approximately 3.1There were approximately 2.3 million, 1.61.0 million, and 2.63.1 million options to purchase shares of common stock outstanding at the end of December 31, 2016, 2015, and 2014, respectively, were not included in the computation of diluted earnings per share because the effect would be antidilutive.antidilutive at December 31, 2018, 2017, and 2016, respectively.
15.13. NONINTEREST INCOME
Huntington earns a variety of revenue including interest and fees from customers as well as revenues from non-customers. Certain sources of revenue are recognized within interest or fee income and are outside of the scope of ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). Other sources of revenue fall within the scope of ASC 606 and are generally recognized within noninterest income. These revenues are included within various sections of the Consolidated Financial Statements. The following table shows Huntington’s total noninterest income segregated between contracts with customers within the scope of ASC 606 and those within the scope of other GAAP Topics.
|
| | | | |
(dollar amounts in millions) | | Year Ended December 31, 2018 |
Noninterest income | | |
Noninterest income from contracts with customers | | $ | 881 |
|
Noninterest income within the scope of other GAAP topics | | 440 |
|
Total noninterest income | | $ | 1,321 |
|
The following table illustrates the disaggregation by operating segment and major revenue stream and reconciles disaggregated revenue to segment revenue presented in Note 23:
|
| | | | | | | | | | | | | | | | | | | | | | | |
(dollar amounts in millions) | Year Ended December 31, 2018 |
Major Revenue Streams | Consumer & Business Banking | | Commercial Banking | | Vehicle Finance | | RBHPCG | | Treasury / Other | | Huntington Consolidated |
Service charges on deposit accounts | $ | 290 |
| | $ | 64 |
| | $ | 5 |
| | $ | 4 |
| | $ | — |
| | $ | 363 |
|
Card and payment processing income | 198 |
| | 11 |
| | — |
| | — |
| | — |
| | 209 |
|
Trust and investment management services | 28 |
| | 4 |
| | — |
| | 139 |
| | — |
| | 171 |
|
Insurance income | 34 |
| | 5 |
| | — |
| | 41 |
| | 2 |
| | 82 |
|
Other income | 38 |
| | 6 |
| | 3 |
| | 8 |
| | 1 |
| | 56 |
|
Net revenue from contracts with customers | $ | 588 |
| | $ | 90 |
| | $ | 8 |
| | $ | 192 |
| | $ | 3 |
| | $ | 881 |
|
Noninterest income within the scope of other GAAP topics | 150 |
| | 223 |
| | 2 |
| | 1 |
| | 64 |
| | 440 |
|
Total noninterest income | $ | 738 |
| | $ | 313 |
| | $ | 10 |
| | $ | 193 |
| | $ | 67 |
| | $ | 1,321 |
|
Huntington generally provides services for customers in which it acts as principal. Payment terms and conditions vary amongst services and customers, and thus impact the timing and amount of revenue recognition. Some fees may be paid before any service is rendered and accordingly, such fees are deferred until the obligations pertaining to those fees are satisfied. Most Huntington contracts with customers are cancelable by either party without penalty or they are short-term in nature, with a contract duration of less than one year. Accordingly, most revenue deferred for the reporting period ended December 31, 2018 is expected to be earned within one year. Huntington does not have significant balances of contract assets or contract liabilities and any change in those balances during the reporting period ended December 31, 2018 was determined to be immaterial.
14. SHARE-BASED COMPENSATION
Huntington sponsors nonqualified and incentive share based compensation plans. These plans provide for the granting of stock options and other awards to officers, directors, and other employees. Compensation costs are included in personnel costs on the Consolidated Statements of Income. Stock options and awards are granted at the closing market price on the date of the grant. Options granted typically vest ratably over four years or when other conditions are met. Stock options, which represented a portion of the grant values, have no intrinsic value until the stock price increases. Options granted on or after May 1, 2015 have a contractual term of ten years. All options granted on or before April 30, 2015 have a contractual term of seven years.
20152018 Long-Term Incentive Plan
In 2015,2018, shareholders approved the Huntington Bancshares Incorporated 20152018 Long-Term Incentive Plan (the 20152018 Plan). Shares remaining under the 20122015 Long-Term Incentive Plan have been incorporated into the 2015 Plan and reduced the full number of shares covered by all awards.2018 Plan. Accordingly, the total number of shares authorized for awards under the 20152018 Plan is 3033 million shares. At December 31, 2016, 162018, 26 million shares from the Plan were available for future grants.
Huntington issues shares to fulfill stock option exercises and restricted stock unit and award vesting from available authorized common shares. At December 31, 2016,2018, Huntington believes there are adequate authorized common shares to satisfy anticipated stock option exercises and restricted stock unit and award vesting in 2017.2019.
The following table presents total share-based compensation expense and related tax benefit for the three years ended December 31, 2018, 2017, and 2016:
|
| | | | | | | | | | | |
(dollar amounts in millions) | 2018 | | 2017 | | 2016 |
Share-based compensation expense | $ | 78 |
| | $ | 92 |
| | $ | 66 |
|
Tax benefit | 14 |
| | 32 |
| | 22 |
|
Huntington uses the Black-Scholes option pricing model to value options in determining the share-based compensation expense. Forfeitures are estimated at the date of grant based on historical rates, and updated as necessary, and reduce the compensation expense recognized. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. The expected dividend yield is based on the dividend rate and stock price at the date of the grant. Expected volatility is based on the estimated volatility of Huntington’s stock over the expected term of the option.
The following table presents the weighted average assumptions used in the option-pricing model at the grant date for options granted in the three years ended December 31, 2016, 2015,2018, 2017, and 2014:
| | | 2016 | | 2015 | | 2014 | | | | | | | |
Assumptions | | | | | | 2018 | | 2017 | | 2016 |
Risk-free interest rate | 1.63 | % | | 2.13 | % | | 1.69 | % | 2.88 | % | | 2.04 | % | | 1.63 | % |
Expected dividend yield | 3.18 |
| | 2.57 |
| | 2.61 |
| 3.71 |
| | 3.31 |
| | 3.18 |
|
Expected volatility of Huntington’s common stock | 30.0 |
| | 29.0 |
| | 32.3 |
| 24.0 |
| | 29.5 |
| | 30.0 |
|
Expected option term (years) | 6.5 |
| | 6.5 |
| | 5 |
| 6.5 |
| | 6.5 |
| | 6.5 |
|
Weighted-average grant date fair value per share | $ | 2.17 |
| | $ | 2.57 |
| | $ | 2.13 |
| $ | 2.58 |
| | $ | 2.81 |
| | $ | 2.17 |
|
The following table presents total share-based compensation expense and related tax benefit for the three years ended December 31, 2016, 2015, and 2014:
|
| | | | | | | | | | | |
(dollar amounts in thousands) | 2016 | | 2015 | | 2014 |
Share-based compensation expense | $ | 65,608 |
| | $ | 51,415 |
| | $ | 43,666 |
|
Tax benefit | 22,496 |
| | 17,618 |
| | 14,779 |
|
Huntington’s stock option activity and related information for the year ended December 31, 2016,2018, was as follows:
| | (amounts in thousands, except years and per share amounts) | Options | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Life (Years) | | Aggregate Intrinsic Value | |
Outstanding at January 1, 2016 | 16,121 |
| | $ | 7.25 |
| | | |
(dollar amounts in millions, except per share and options amounts in thousands) | | Options | | Weighted- Average Exercise Price | | Weighted-Average Remaining Contractual Life (Years) | | Aggregate Intrinsic Value |
Outstanding at January 1, 2018 | | 13,918 |
| | $ | 8.21 |
| | |
Granted | 1,596 |
| | 10.06 |
| | | 2,538 |
| | 14.81 |
| | |
Exercised | (2,372 | ) | | 5.90 |
| | | (5,775 | ) | | 6.57 |
| | |
Forfeited/expired | (471 | ) | | 15.73 |
| | | (64 | ) | | 13.31 |
| | |
Outstanding at December 31, 2016 | 14,874 |
| | $ | 7.50 |
| | 3.6 | | $ | 85,159 |
| |
Outstanding at December 31, 2018 | | 10,617 |
| | $ | 10.64 |
| | 5.4 | | $ | 22 |
|
Expected to vest (1) | 3,656 |
| | $ | 9.59 |
| | 7.1 | | $ | 13,267 |
| 4,503 |
| | $ | 13.36 |
| | 8.6 | | $ | 2 |
|
Exercisable at December 31, 2016 | 10,985 |
| | $ | 6.75 |
| | 2.4 | | $ | 71,114 |
| |
Exercisable at December 31, 2018 | | 5,981 |
| | $ | 8.52 |
| | 3.0 | | $ | 21 |
|
| |
(1) | The number of options expected to vest includesreflects an estimate of 233 thousand133,000 shares expected to be forfeited. |
The aggregate intrinsic value represents the amount by which the fair value of underlying stock exceeds the “in-the-money” option exercise price. The total intrinsic value of options exercised for the years ended December 31, 2018, 2017, and 2016 were $52 million, $16 million and $11 million, respectively. For the years ended December 31, 2016, 2015,2018, 2017, and 2014,2016, cash received for the exercises of stock options was $14$5 million, $26$11 million and $21$14 million, respectively. The tax benefit realized for the tax deductions from option exercises totaled $10 million, $5 million and $3 million $7 millionin 2018, 2017, and $4 million in 2016, 2015, and 2014, respectively.
Huntington also grants restricted stock awards, restricted stock units, performance share awards,units, and other stock-based awards. Restricted stock units and awards are issued at no cost to the recipient, and can be settled only in shares at the end of the vesting period. Restricted stock awards provide the holder with full voting rights and cash dividends during the vesting period. Restricted stock units do not provide the holder with voting rights or cash dividends during the vesting period, but do accrue a dividend equivalent that is paid upon vesting, and are subject to certain service restrictions. Performance share awardsunits are payable contingent upon Huntington achieving certain predefined performance objectives over the three-year measurement period. The fair value of these awards isreflects the closing market price of Huntington’s common stock on the grant date.
The following table summarizes the status of Huntington’s restricted stock awards, units, and performance share awardsunits as of December 31, 2016,2018, and activity for the year ended December 31, 2016:2018:
| | | Restricted Stock Awards | | Restricted Stock Units | | Performance Share Awards | Restricted Stock Awards | | Restricted Stock Units | | Performance Share Units |
(amounts in thousands, except per share amounts) | Quantity | | Weighted- Average Grant Date Fair Value Per Share | | Quantity | | Weighted- Average Grant Date Fair Value Per Share | | Quantity | | Weighted- Average Grant Date Fair Value Per Share | Quantity | | Weighted- Average Grant Date Fair Value Per Share | | Quantity | | Weighted- Average Grant Date Fair Value Per Share | | Quantity | | Weighted- Average Grant Date Fair Value Per Share |
Nonvested at January 1, 2016 | 7 |
| | $ | 9.53 |
| | 12,170 |
| | $ | 9.11 |
| | 2,893 |
| | $ | 8.99 |
| |
Nonvested at January 1, 2018 | | 448 |
| | $ | 9.68 |
| | 16,159 |
| | $ | 11.26 |
| | 3,018 |
| | $ | 10.67 |
|
Granted | — |
| | — |
| | 6,526 |
| | 9.69 |
| | 981 |
| | 9.04 |
| — |
| | — |
| | 4,743 |
| | 15.01 |
| | 691 |
| | 14.81 |
|
Assumed | 916 |
| | 9.68 |
| | — |
| | — |
| | 807 |
| | 9.68 |
| |
Vested | (241 | ) | | 9.68 |
| | (3,142 | ) | | 7.91 |
| | (1,307 | ) | | 8.05 |
| (227 | ) | | 9.68 |
| | (4,948 | ) | | 10.56 |
| | (719 | ) | | 10.89 |
|
Forfeited | (26 | ) | | 9.68 |
| | (821 | ) | | 9.52 |
| | (67 | ) | | 9.78 |
| (20 | ) | | 9.68 |
| | (474 | ) | | 12.32 |
| | (32 | ) | | 12.27 |
|
Nonvested at December 31, 2016 | 656 |
| | $ | 9.68 |
| | 14,733 |
| | $ | 9.61 |
| | 3,307 |
| | $ | 9.63 |
| |
Nonvested at December 31, 2018 | | 201 |
| | $ | 9.68 |
| | 15,480 |
| | $ | 12.51 |
| | 2,958 |
| | $ | 11.75 |
|
The weighted-average fair value at grant date fair value of nonvested shares granted for the years ended December 31, 2018, 2017, and 2016 2015,were $14.98, $11.13, and 2014 were $9.59, $10.86, and $9.09, respectively. The total fair value of awards vested during the years ended December 31, 2018, 2017, and 2016 2015, and 2014 was $31$62 million, $30$53 million, and $26$31 million, respectively. As of December 31, 2016,2018, the total unrecognized compensation cost related to nonvested awardsshares was $81$96 million with a weighted-average expense recognition period of 2.3 years.
16.15. BENEFIT PLANS
Huntington sponsors the Plan, a non-contributory defined benefit pension plan covering substantially all employees hired or rehired prior to January 1, 2010. The Plan,plan, which was modified in 2013, and no longer accrues service benefits to participants and provides benefits based upon length of service and compensation levels. TheHuntington’s funding policy of Huntington is to contribute an annual amount that is at least equal to the minimum funding requirements but not more than the amount deductible under the Internal Revenue Code. Although notThere were no required Huntington made a $150 million contribution to the Plan in the third quarter of 2016.minimum contributions during 2018.
In addition, Huntington has an unfunded defined benefit post-retirement plan that provides certain healthcare and life insurance benefits to retired employees who have attained the age of 55 and have at least 10 years of vesting service under this plan. For any employee retiring on or after January 1, 1993, post-retirement healthcare benefits are based upon the employee’s number of months of service and are limited to the actual cost of coverage. Life insurance benefits are a percentage of the employee’s base salary at the time of retirement, with a maximum of $50,000 of coverage. The employer paid portion of the post-retirement health and life insurance plan was eliminated for employees retiring on and after March 1, 2010. Eligible employees retiring on and after March 1, 2010, who elect retiree medical coverage, will pay the full cost of this coverage. Huntington will not provide any employer paid life insurance to employees retiring on and after March 1, 2010. Eligible employees will be able to convert or port their existing life insurance at their own expense under the same terms that are available to all terminated employees.
On January 1, 2015, Huntington terminated the company sponsored retiree health care plan for Medicare eligible retirees and their dependents. Instead, Huntington will partner with a third-party to assist the retirees and their dependents in selecting individual policies from a variety of carriers on a private exchange. This plan amendment resulted in a measurement of the liability at the approval date. The result of the measurement was a $5 million reduction of the liability and increase in accumulated other comprehensive income. It will also result in a reduction of expense over the estimated life of plan participants.
The following table shows the weighted-average assumptions used to determine the benefit obligation at December 31, 20162018 and 2015,2017, and the net periodic benefit cost for the years then ended:
| | | Pension Benefits | | Post-Retirement Benefits | Pension Benefits |
| 2016 | | 2015 | | 2016 | | 2015 | 2018 | | 2017 |
Weighted-average assumptions used to determine benefit obligations | | | | | | | | | | |
Discount rate | 4.38 | % | | 4.54 | % | | 3.64 | % | | 3.81 | % | 4.41 | % | | 3.73 | % |
Rate of compensation increase | N/A |
| | N/A |
| | N/A |
| | N/A |
| |
Weighted-average assumptions used to determine net periodic benefit cost | | | | | | | | | | |
Discount rate (1) | 4.54 |
| | 4.12 |
| | 3.81 |
| | 3.73 |
| |
Discount rate | | 3.73 |
| | 4.38 |
|
Expected return on plan assets | 6.75 |
| | 7.00 |
| | N/A |
| | N/A |
| 5.75 |
| | 6.50 |
|
Rate of compensation increase | N/A |
| | N/A |
| | N/A |
| | N/A |
| |
N/A—Not Applicable | | | | | | | | |
| |
(1) | The 2015 post-retirement benefit expense was remeasured as of September 30, 2015, for the purchase of life insurance contracts for participants due a death benefit. The discount rate was 3.72% from January 1, 2015 to September 30, 2015, and was changed to 3.77% for the period from September 30, 2015 to December 31, 2015. |
The expected long-term rate of return on plan assets is an assumption reflecting the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The expected long-term rate of return is established at the beginning of the plan year based upon historical returns and projected returns on the underlying mix of invested assets.
The following table reconciles the beginning and ending balances of the benefit obligation of the Plan and the post-retirement benefit plan with the amounts recognized in the consolidated balance sheets at December 31:
| | | Pension Benefits | | Post-Retirement Benefits | Pension Benefits |
(dollar amounts in thousands) | 2016 | | 2015 | | 2016 | | 2015 | |
(dollar amounts in millions) | | 2018 | | 2017 |
Projected benefit obligation at beginning of measurement year | $ | 754,714 |
| | $ | 799,594 |
| | $ | 8,025 |
| | $ | 15,963 |
| $ | 900 |
| | $ | 851 |
|
Changes due to: | | | | | | | | | | |
Service cost | 4,100 |
| | 1,830 |
| | — |
| | — |
| 3 |
| | 3 |
|
Interest cost | 26,992 |
| | 31,937 |
| | 219 |
| | 506 |
| 29 |
| | 30 |
|
Benefits paid | (18,306 | ) | | (17,246 | ) | | (1,915 | ) | | (2,211 | ) | (26 | ) | | (27 | ) |
Settlements | (21,684 | ) | | (27,976 | ) | | — |
| | (6,993 | ) | (18 | ) | | (31 | ) |
Medicare subsidies | — |
| | — |
| | — |
| | 117 |
| |
Actuarial assumptions and gains and losses | (9,470 | ) | | (33,425 | ) | | 963 |
| | 643 |
| |
Actuarial assumptions and gains (losses) | | (67 | ) | | 74 |
|
Total changes | (18,368 | ) | | (44,880 | ) | | (733 | ) | | (7,938 | ) | (79 | ) | | 49 |
|
Projected benefit obligation at end of measurement year | $ | 736,346 |
| | $ | 754,714 |
| | $ | 7,292 |
| | $ | 8,025 |
| $ | 821 |
| | $ | 900 |
|
The following table reconciles the beginning and ending balances of the fair value of Plan assets at the December 31, 20162018 and 20152017 measurement dates:
| | | Pension Benefits | Pension Benefits |
(dollar amounts in thousands) | 2016 | | 2015 | |
(dollar amounts in millions) | | 2018 | | 2017 |
Fair value of plan assets at beginning of measurement year | $ | 594,217 |
| | $ | 653,013 |
| $ | 903 |
| | $ | 841 |
|
Changes due to: | | | | | | |
Actual return on plan assets | 39,895 |
| | (16,122 | ) | (30 | ) | | 118 |
|
Employer Contributions | 150,000 |
| | — |
| |
Settlements | (20,081 | ) | | (25,428 | ) | (19 | ) | | (29 | ) |
Benefits paid | (18,306 | ) | | (17,246 | ) | (26 | ) | | (27 | ) |
Total changes | 151,508 |
| | (58,796 | ) | (75 | ) | | 62 |
|
Fair value of plan assets at end of measurement year | $ | 745,725 |
| | $ | 594,217 |
| $ | 828 |
| | $ | 903 |
|
Huntington’s accumulated benefit obligation under the Plan was $736 million and $755 million at December 31, 2016 and 2015. As of December 31, 2016,2018, the difference between the accumulated benefit obligation and the fair value of Huntington'sHuntington’s plan assets was $9$7 million and is recorded in noncurrentother liabilities.
The following table shows the components of net periodic benefit costs recognized in the three years ended December 31, 2016:2018:
| | | Pension Benefits | | Post-Retirement Benefits | Pension Benefits (1) |
(dollar amounts in thousands) | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | |
(dollar amounts in millions) | | 2018 | | 2017 | | 2016 |
Service cost | $ | 4,100 |
| | $ | 1,830 |
| | $ | 1,740 |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | 3 |
| | $ | 3 |
| | $ | 5 |
|
Interest cost | 26,992 |
| | 31,937 |
| | 32,398 |
| | 219 |
| | 506 |
| | 856 |
| 29 |
| | 30 |
| | 30 |
|
Expected return on plan assets | (40,895 | ) | | (44,175 | ) | | (45,783 | ) | | — |
| | — |
| | — |
| (49 | ) | | (55 | ) | | (45 | ) |
Amortization of prior service credit | — |
| | — |
| | — |
| | (1,968 | ) | | (1,968 | ) | | (1,609 | ) | |
Amortization of (gain) / loss | 7,459 |
| | 7,934 |
| | 5,767 |
| | (288 | ) | | (401 | ) | | (571 | ) | |
Amortization of loss | | 9 |
| | 7 |
| | 7 |
|
Settlements | 9,495 |
| | 12,645 |
| | 11,200 |
| | — |
| | (3,090 | ) | | — |
| 7 |
| | 11 |
| | (8 | ) |
Benefit costs | $ | 7,151 |
| | $ | 10,171 |
| | $ | 5,322 |
| | $ | (2,037 | ) | | $ | (4,953 | ) | | $ | (1,324 | ) | $ | (1 | ) | | $ | (4 | ) | | $ | (11 | ) |
| |
(1) | The pension costs for 2018 were recorded in noninterest income - other income. For 2017 and 2016 the costs were recorded in noninterest expense - personnel costs, in the Consolidated Statements of Income. |
Included in benefit costs above are $2 million, $4$2 million, and $2 million of plan expenses that were recognized in each of the three years ended December 31, 2016, 2015,2018, 2017, and 2014.2016. It is Huntington’s policy to recognize settlement gains and losses as incurred. Assuming no cash contributions are made to the Plan during 2017, Management2019, Huntington expects net periodic pension benefit, excluding any expense of settlements, to approximate $14$3 million for 2017. The post-retirement medical and life subsidy was eliminated for anyone who retires on or after March 1, 2010. As such, there were no incremental net periodic post-retirement benefits costs associated with this plan.2019.
The estimated transition obligation, prior service credit, and net actuarial loss for the plans that will be amortized from OCI into net periodic benefit cost over the next fiscal year is zero, $2 million, and a $7 million benefit, respectively.
At December 31, 20162018 and 2015,2017, The Huntington National Bank, as trustee, held all Plan assets. The Plan assets consisted of investments in a variety of corporate and government fixed income investments, money market funds, and mutual funds as follows:
| | | Fair Value | Fair Value |
(dollar amounts in thousands) | 2016 | | 2015 | |
(dollar amounts in millions) | | 2018 | | 2017 |
Cash equivalents: | | | | | | | | | | | | | | |
Federated-money market | $ | 16,087 |
| | 2 | % | | $ | 15,590 |
| | 3 | % | |
Mutual funds-money market | | $ | 4 |
| | — | % | | $ | 14 |
| | 2 | % |
U.S. Treasury bills | | 4 |
| | 1 |
| | 5 |
| | 1 |
|
Fixed income: | | | | | | |
|
| | | | | | |
|
|
Corporate obligations | 212,967 |
| | 28 |
| | 205,081 |
| | 34 |
| 272 |
| | 33 |
| | 293 |
| | 32 |
|
U.S. Government Obligations | 157,764 |
| | 21 |
| | 64,456 |
| | 11 |
| |
Mutual funds-fixed income | 27,851 |
| | 4 |
| | 32,874 |
| | 6 |
| |
U.S. Government Agencies | 7,201 |
| | 1 |
| | 6,979 |
| | 1 |
| |
U.S. Government obligations | | 298 |
| | 36 |
| | 216 |
| | 24 |
|
U.S. Government agencies | | 22 |
| | 3 |
| | 23 |
| | 3 |
|
Equities: | | |
|
| | | |
|
| | |
|
| | | |
|
|
Mutual funds-equities | 134,832 |
| | 18 |
| | 136,026 |
| | 23 |
| 64 |
| | 8 |
| | 118 |
| | 13 |
|
Common stock | 144,754 |
| | 19 |
| | 120,046 |
| | 20 |
| 98 |
| | 12 |
| | 158 |
| | 17 |
|
Preferred stock | 4,778 |
| | 1 |
| | — |
| | — |
| 5 |
| | 1 |
| | 5 |
| | 1 |
|
Exchange Traded Funds | 28,101 |
| | 4 |
| | 6,530 |
| | 1 |
| |
Exchange traded funds | | 45 |
| | 5 |
| | 58 |
| | 6 |
|
Limited Partnerships | 11,390 |
| | 2 |
| | 6,635 |
| | 1 |
| 16 |
| | 1 |
| | 13 |
| | 1 |
|
Fair value of plan assets | $ | 745,725 |
| | 100 | % | | $ | 594,217 |
| | 100 | % | $ | 828 |
| | 100 | % | | $ | 903 |
| | 100 | % |
Investments of the Plan are accounted for at cost on the trade date and are reported at fair value. The valuation methodologies used to measure the fair value of pension plan assets vary depending on the type of asset. For an explanation of the fair value hierarchy, refer to Note 1 “Significant Accounting Policies” under the heading “Fair Value Measurements”. At December 31, 2016, equities and2018, cash equivalent money market funds and U.S. Treasury bills are valued at the closing price reported from an actively traded exchange and are classified as Level 1;1. Mutual funds and exchange traded funds are valued at quoted market prices that represent the net asset value of shares held by the Plan at year-end. The mutual funds-fixed income, corporate obligations, U.S. government obligations,funds held by the Plan are actively traded and U.S. government agencies are classified as Level 2; and limited partnerships1. Fixed income investments are valued using unadjusted quoted prices from active markets for similar assets are classified as Level 3.
In2. Common and preferred stock are valued using the year-end closing price as determined by a national securities exchange and are classified as Level 1. The investment in the limited partnerships is reported at net asset value per share as determined by the general investmentspartners of each limited partnership, based on their proportionate share of the Plan are exposed to various risks suchpartnership’s fair value as interest rate risk, credit risk, and overall market volatility. Due to the level of risk associated with certain investments, it is reasonably possible changesrecorded in the values of investments will occur in the near term and such changes could materially affect the amounts reported in the Plan assets.partnership’s audited financial statements.
The investment objective of the Plan is to maximize the return on Plan assets over a long-time period, while meeting the Plan obligations. At December 31, 2016,2018, Plan assets were invested 2%1% in cash and cash equivalents, 44%27% in equity investments, and 54%72% in bonds, with an average duration of 14.212.7 years on bond investments. The estimated life of benefit obligations was 12.712.4 years. Although it may fluctuate with market conditions, ManagementHuntington has targeted a long-term allocation of Plan assets of 20% to 50% in equity investments and 80% to 50% in bond investments. The allocation of Plan assets between equity investments and fixed income investments will change from time to time with the allocation to fixed income investments increasing as the funding level increases.time.
At December 31, 2016,2018, the following table shows when benefit payments were expected to be paid:
|
| | | | | | | |
(dollar amounts in thousands) | Pension Benefits | | Post- Retirement Benefits |
2017 | $ | 46,199 |
| | $ | 923 |
|
2018 | 45,077 |
| | 761 |
|
2019 | 43,720 |
| | 684 |
|
2020 | 41,827 |
| | 640 |
|
2021 | 41,528 |
| | 606 |
|
2022 through 2026 | 205,278 |
| | 2,482 |
|
Although not required, a cash contribution can be made to the Plan up to the maximum deductible limit in the plan year. Anticipated contributions for 2017 to the post-retirement benefit plan are zero.
The 2017 healthcare cost trend rate is projected to be 6.8% for participants. This rate is assumed to decrease gradually until it reaches 4.5% in the year 2028 and remain at that level thereafter. Huntington updated the immediate healthcare cost trend rate assumption based on current market data and Huntington’s claims experience. This trend rate is expected to decline over time to a trend level consistent with medical inflation and long-term economic assumptions. |
| | | |
(dollar amounts in millions) | Pension Benefits |
2019 | $ | 49 |
|
2020 | 49 |
|
2021 | 48 |
|
2022 | 48 |
|
2023 | 48 |
|
2024 through 2028 | 238 |
|
Huntington also sponsors an unfunded defined benefit post-retirement plan as well as other nonqualified retirement plans, the most significant being the SRIP and FirstMerit SERP. The SRIP and FirstMerit SERP and the SRIP. The SERP providesplans provide certain former officers and directors, and the SRIP provides certain current and former officers and directors of Huntington and its subsidiaries with defined pension benefits in excess of limits imposed by federal tax law. At December 31, 2016 and 2015, Huntington has an accrued pension liability of $33 million and $34 million, respectively, associated with these plans. Pension expense for the plans was $1 million, $1 million, and $1 million in 2016, 2015, and 2014, respectively.
The following table presents the amounts recognized in the Consolidated Balance Sheets at December 31, 20162018 and 2015,2017, for all defined benefit and nonqualified retirement plans:
|
| | | | | |
(dollar amounts in thousands) | 2016 | | 2015 |
Noncurrent liabilities | 169,657 |
| | 192,734 |
|
|
| | | | | | | |
(dollar amounts in millions) | 2018 | | 2017 |
Other liabilities | $ | 63 |
| | $ | 78 |
|
The following tables present the amounts recognized in OCI as of December 31, 2016, 2015,2018, 2017, and 2014,2016, and the changes in accumulated OCI for the years ended December 31, 2016, 2015,2018, 2017, and 2014:2016:
| | (dollar amounts in thousands) | 2016 | | 2015 | | 2014 | |
(dollar amounts in millions) | | 2018 | | 2017 | | 2016 |
Net actuarial loss | $ | (217,863 | ) | | $ | (243,984 | ) | | $ | (240,197 | ) | $ | (257 | ) | | $ | (264 | ) | | $ | (217 | ) |
Prior service cost | 11,958 |
| | 13,237 |
| | 14,517 |
| 11 |
| | 14 |
| | 12 |
|
Defined benefit pension plans | $ | (205,905 | ) | | $ | (230,747 | ) | | $ | (225,680 | ) | $ | (246 | ) | | $ | (250 | ) | | $ | (205 | ) |
| | | 2016 | 2018 |
(dollar amounts in thousands) | Pretax | | Tax (expense) Benefit | | After-tax | |
Balance, beginning of year | $ | (354,997 | ) | | $ | 124,250 |
| | $ | (230,747 | ) | |
(dollar amounts in millions) | | Pretax | | Tax (expense) Benefit | | After-tax |
Net actuarial (loss) gain: | | | | | | | | | | |
Amounts arising during the year | 37,818 |
| | (13,236 | ) | | 24,582 |
| $ | (5 | ) | | $ | 2 |
| | $ | (3 | ) |
Amortization included in net periodic benefit costs | 2,368 |
| | (829 | ) | | 1,539 |
| 13 |
| | (3 | ) | | 10 |
|
Prior service cost: | | | | | | | | | | |
Amounts arising during the year | — |
| | — |
| | — |
| — |
| | — |
| | — |
|
Amortization included in net periodic benefit costs | (1,968 | ) | | 689 |
| | (1,279 | ) | (4 | ) | | 1 |
| | (3 | ) |
Balance, end of year | $ | (316,779 | ) | | $ | 110,874 |
| | $ | (205,905 | ) | |
Total recognized in OCI | | $ | 4 |
| | $ | — |
| | $ | 4 |
|
| | | 2015 | 2017 |
(dollar amounts in thousands) | Pretax | | Tax (expense) Benefit | | After-tax | |
Balance, beginning of year | $ | (347,202 | ) | | $ | 121,522 |
| | $ | (225,680 | ) | |
(dollar amounts in millions) | | Pretax | | Tax (expense) Benefit | | After-tax (1) |
Net actuarial (loss) gain: | | | | | | | | | | |
Amounts arising during the year | (25,520 | ) | | 8,931 |
| | (16,589 | ) | $ | (16 | ) | | $ | 6 |
| | $ | (10 | ) |
Amortization included in net periodic benefit costs | 19,693 |
| | (6,892 | ) | | 12,801 |
| 18 |
| | (7 | ) | | 11 |
|
Prior service cost: | | | | | | | | | | |
Amounts arising during the year | — |
| | — |
| | — |
| — |
| | — |
| | — |
|
Amortization included in net periodic benefit costs | (1,968 | ) | | 689 |
| | (1,279 | ) | (2 | ) | | 1 |
| | (1 | ) |
Balance, end of year | $ | (354,997 | ) | | $ | 124,250 |
| | $ | (230,747 | ) | |
Total recognized in OCI | | $ | — |
| | $ | — |
| | $ | — |
|
| |
(1) | TCJA reclassification from AOCI to retained earnings recorded during 2017 was $45 million. |
| | | 2014 | 2016 |
(dollar amounts in thousands) | Pretax | | Tax (expense) Benefit | | After-tax | |
Balance, beginning of year | $ | (240,345 | ) | | $ | 84,122 |
| | $ | (156,223 | ) | |
(dollar amounts in millions) | | Pretax | | Tax (expense) Benefit | | After-tax |
Net actuarial (loss) gain: | | | | | | | | | | |
Amounts arising during the year | (133,085 | ) | | 46,580 |
| | (86,505 | ) | $ | 38 |
| | $ | (13 | ) | | $ | 25 |
|
Amortization included in net periodic benefit costs | 19,056 |
| | (6,670 | ) | | 12,386 |
| 2 |
| | (1 | ) | | 1 |
|
Prior service cost: | | | | | | | | | | |
Amounts arising during the year | 8,781 |
| | (3,073 | ) | | 5,708 |
| — |
| | — |
| | — |
|
Amortization included in net periodic benefit costs | (1,609 | ) | | 563 |
| | (1,046 | ) | (2 | ) | | 1 |
| | (1 | ) |
Balance, end of year | $ | (347,202 | ) | | $ | 121,522 |
| | $ | (225,680 | ) | |
Total recognized in OCI | | $ | 38 |
| | $ | (13 | ) | | $ | 25 |
|
Huntington has a defined contribution plan that is available to eligible employees. Beginning January 1, 2018, Huntington increased the company match such that Huntington matches participant contributions up to150% of the first 4%2% of base pay contributedand 100% of the next 2%. Huntington’s expense related to the Plan. For 2015 and 2016, a discretionary profit-sharing contribution equal to 1% of eligible participants’ annual base pay was awarded.
The following table shows the costs of providing the defined contribution plan:plans for the years ended December 31, 2018, 2017, and 2016 was $46 million, $35 million, and $36 million, respectively. For 2018, the discretionary contribution was not made.
|
| | | | | | | | | | | |
| Year ended December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | | 2014 |
Defined contribution plan | $ | 36,107 |
| | $ | 31,896 |
| | $ | 31,110 |
|
The following table shows the number of shares, market value, and dividends received on shares of Huntington stock held by the defined contribution plan:
| | | December 31, | December 31, |
(dollar amounts in thousands, except share amounts) | 2016 | | 2015 | |
(dollar amounts in millions, share amounts in thousands) | | 2018 | | 2017 |
Shares in Huntington common stock | 11,748,379 |
| | 13,076,164 |
| 11,635 |
| | 13,566 |
|
Market value of Huntington common stock | $ | 162,245 |
| | $ | 144,622 |
| $ | 139 |
| | $ | 198 |
|
Dividends received on shares of Huntington stock | 3,692 |
| | 3,076 |
| 6 |
| | 4 |
|
FirstMerit Benefit Plans
As part of the FirstMerit acquisition, Huntington agreed to assume and honor all FirstMerit benefit plans. The FirstMerit Pension Plan was frozen for nonvested employees and closed to new entrants after December 31, 2006. Effective December 31, 2012, the FirstMerit Pension Plan was frozen for vested employees. At the time of acquisition, the benefit obligation was $330 million and the fair value of assets was $280 million. In addition, FirstMerit had a post retirement benefit plan which provided medical and life insurance for retired employees. At the time of acquisition, the benefit obligation was $7 million.16. INCOME TAXES
The following table showsCompany’s deferred federal and state income tax and related valuation accounts represents the weighted-average assumptions used to determine the benefit obligation at December 31, 2016,estimated impact of temporary differences between how we recognize our assets and the net periodic benefit cost for the year then ended:
|
| | | | | |
| Pension Benefits | | Post-Retirement Benefits |
| 2016 | | 2016 |
Weighted-average assumptions used to determine benefit obligations | | | |
Discount rate | 4.49 | % | | 4.16 | % |
Rate of compensation increase | N/A |
| | N/A |
|
Weighted-average assumptions used to determine net periodic benefit cost | | | |
Discount rate | 4.12 | % | | 3.57 | % |
Expected return on plan assets | 6.00 |
| | N/A |
|
Rate of compensation increase | N/A |
| | N/A |
|
N/A—Not Applicable | | | |
The following table reconciles the beginningliabilities under GAAP and ending balances of the benefit obligation of FirstMerit's pensionhow such assets and post-retirement benefit plan with the amountsliabilities are recognized in the consolidated balance sheet at the December 31, 2016:
|
| | | | | | | |
| Pension Benefits | | Post-Retirement Benefits |
(dollar amounts in thousands) | 2016 | | 2016 |
Projected benefit obligation at beginning of measurement year (1) | $ | 329,679 |
| | $ | 7,196 |
|
Changes due to: | | | |
Service cost | 954 |
| | 49 |
|
Interest cost | 3,218 |
| | 70 |
|
Benefits paid | (2,463 | ) | | (250 | ) |
Settlements | (180,885 | ) | | — |
|
Actuarial assumptions and gains and losses | (35,840 | ) | | (703 | ) |
Total changes | (215,016 | ) | | (834 | ) |
Projected benefit obligation at end of measurement year | $ | 114,663 |
| | $ | 6,362 |
|
| |
(1) | The beginning measurement period started August 15, 2016. |
During the 2016 fourth quarter, Huntington completed two settlements of the FirstMerit pension benefit obligation totaling $181 million. The settlements triggered settlement accounting, requiring a remeasurement of the plan as of November 30, 2016,under federal and the recognition in the income statement of previously deferred amounts in OCI. The result was a gain of approximately $18 millionstate tax law. Deferred tax assets and is reflected in personnel costs.
The following table reconciles the beginning and ending balances of the fair value of FirstMerit's plan assets at the December 31, 2016 measurement date:
|
| | | |
| Pension Benefits |
(dollar amounts in thousands) | 2016 |
Fair value of plan assets at beginning of measurement year (1) | $ | 280,217 |
|
Changes due to: | |
Actual return on plan assets | (3,068 | ) |
Settlements | (179,114 | ) |
Benefits paid | (2,463 | ) |
Total changes | (184,645 | ) |
Fair value of plan assets at end of measurement year | $ | 95,572 |
|
| |
(1) | The beginning measurement period started August 15, 2016. |
FirstMerit’s accumulated benefit obligation under the pension plan was $115 million at December 31, 2016. As of December 31, 2016,liabilities are determined based on the difference between the accumulatedfinancial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the TCJA, the Company revalued its ending net deferred tax liabilities at December 31, 2017. The Company recognized a $123 million tax benefit obligation andin the fair value was $19 million and is recorded in noncurrent liabilities.
The following table shows the componentsCompany’s Consolidated Statement of FirstMerit's net periodic benefit costs recognized inIncome for the year ended December 31, 2016:
|
| | | | | | | |
| Pension Benefits | | Post-Retirement Benefits |
(dollar amounts in thousands) | 2016 | | 2016 |
Service cost | $ | 954 |
| | $ | 49 |
|
Interest cost | 3,218 |
| | 70 |
|
Expected return on plan assets | (4,893 | ) | | — |
|
Amortization of (gain) / loss | (20 | ) | | — |
|
Settlements | (17,605 | ) | | — |
|
Benefit costs | $ | (18,346 | ) | | $ | 119 |
|
Included in FirstMerit's2017, as a result of the TCJA, of which the benefit costsrecognized is $1 million of plan expenses that were recognized in the year ended December 31, 2016. It is Huntington’s policy to recognize settlement gains and losses as incurred. Assuming no cash contributions are madeprimarily attributable to the Planrevaluation of net deferred tax liabilities. The Company completed its provisional estimate related to tax reform during 2017, Management expects net periodic pension2018, recognizing an additional immaterial benefit excluding any expense of settlements, to approximate $1 million in 2017.
At December 31, 2016during the fair value of FirstMerit plan assets are as follows:
|
| | | | | | |
| Fair Value |
(dollar amounts in thousands) | 2016 |
Cash equivalents: | | | |
Federated-money market | $ | 5,431 |
| | 6 | % |
Fixed income: | | | |
Corporate obligations | 5,375 |
| | 6 |
|
U.S. Government Obligations | 6,466 |
| | 7 |
|
Mutual funds-fixed income | 23,317 |
| | 24 |
|
U.S. Government Agencies | 2,801 |
| | 3 |
|
Equities: | | | |
Mutual funds-equities | 15,395 |
| | 16 |
|
Common stock | 36,787 |
| | 38 |
|
Fair value of plan assets | $ | 95,572 |
| | 100 | % |
At December 31, 2016, the following table shows when benefit payments were expected to be paid:
|
| | | | | | | |
(dollar amounts in thousands) | Pension Benefits | | Post- Retirement Benefits |
2017 | $ | 8,673 |
| | $ | 904 |
|
2018 | 4,471 |
| | 841 |
|
2019 | 4,811 |
| | 220 |
|
2020 | 4,926 |
| | 221 |
|
2021 | 4,945 |
| | 222 |
|
2022 through 2026 | 26,853 |
| | 1,150 |
|
17. INCOME TAXES2018 third quarter.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state, city, and foreign jurisdictions. Federal income tax audits have been completed for tax years through 2009. TheCertain proposed adjustments resulting from the IRS is currently examiningexamination of our 2010 through 2011 tax returns have been settled, subject to final approval by the Joint Committee on Taxation of the U.S. Congress. While the statute of limitations remains open for tax years 2012 through 2017, the IRS has advised that tax years 2012 through 2014 will not be audited, and 2011 consolidatedbegan the examination of the 2015 federal income tax returns.return in second quarter 2018. Various state and other jurisdictions remain open to examination, including Ohio, Kentucky, Indiana, Michigan, Pennsylvania, West Virginia, Wisconsin, and Illinois.
Huntington accounts for uncertainties in income taxes in accordance with ASC 740, Income Taxes. At December 31, 2016, Huntington had gross unrecognized tax benefits of $24 million in income tax liability related to uncertain tax positions. Due to the complexities of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. Huntington does not anticipate the total amount of gross unrecognized tax benefits to significantly change within the next 12 months.
The following table provides a reconciliation of the beginning and ending amounts of gross unrecognized tax benefits:
| | (dollar amounts in thousands) | 2016 | | 2015 | |
(dollar amounts in millions) | | 2018 | | 2017 |
Unrecognized tax benefits at beginning of year | $ | 23,104 |
| | $ | 1,172 |
| $ | 50 |
| | $ | 24 |
|
Gross increases for tax positions taken during current period | 657 |
| | 23,104 |
| |
Gross increases for tax positions taken during prior years | — |
| | — |
| — |
| | 26 |
|
Gross decreases for tax positions taken during prior years | — |
| | (1,172 | ) | (12 | ) | | — |
|
Settlements with taxing authorities | | (38 | ) | | — |
|
Unrecognized tax benefits at end of year | $ | 23,761 |
| | $ | 23,104 |
| $ | — |
| | $ | 50 |
|
Any interest and penalties on income tax assessments or income tax refunds are recognized in the Consolidated Statements of Income as a component of provision for income taxes. Huntington recognized, no interest expense, $0.1 million of interest benefit, and $0.1 million of interest expense for the years ended December 31, 2016, 2015 and 2014, respectively. Total interest accrued was $0.1 million and $0.1less than $1 million at December 31, 20162018 and 2015, respectively.2017. All of the gross unrecognized tax benefits would impact the Company’s effective tax rate if recognized.
The following is a summary of the provision (benefit) for income taxes:
| | | Year Ended December 31, | Year Ended December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | | 2014 | |
(dollar amounts in millions) | | 2018 | | 2017 | | 2016 |
Current tax provision (benefit) | | | | | | | | | | |
Federal | $ | 39,738 |
| | $ | 146,195 |
| | $ | 186,436 |
| $ | 152 |
| | $ | 41 |
| | $ | 40 |
|
State | 3,456 |
| | 5,677 |
| | (1,017 | ) | 20 |
| | (1 | ) | | 3 |
|
Total current tax provision (benefit) | 43,194 |
| | 151,872 |
| | 185,419 |
| |
Total current tax provision | | 172 |
| | 40 |
| | 43 |
|
Deferred tax provision (benefit) | | | | | | | | | | |
Federal | 160,610 |
| | 66,823 |
| | 41,167 |
| 71 |
| | 151 |
| | 161 |
|
State | 4,137 |
| | 1,953 |
| | (5,993 | ) | (8 | ) | | 17 |
| | 4 |
|
Total deferred tax provision (benefit) | 164,747 |
| | 68,776 |
| | 35,174 |
| |
Total deferred tax provision | | 63 |
| | 168 |
| | 165 |
|
Provision for income taxes | $ | 207,941 |
| | $ | 220,648 |
| | $ | 220,593 |
| $ | 235 |
| | $ | 208 |
| | $ | 208 |
|
The following is a reconciliation for provision for income taxes: |
| | | | | | | | | | | |
| Year Ended December 31, |
(dollar amounts in millions) | 2018 | | 2017 | | 2016 |
Provision for income taxes computed at the statutory rate | $ | 342 |
| | $ | 488 |
| | $ | 322 |
|
Increases (decreases): | | | | | |
Tax-exempt income | (23 | ) | | (31 | ) | | (27 | ) |
Tax-exempt bank owned life insurance income | (14 | ) | | (23 | ) | | (20 | ) |
General business credits | (80 | ) | | (71 | ) | | (64 | ) |
Capital loss | (60 | ) | | (67 | ) | | (46 | ) |
Impact from TCJA | (3 | ) | | (123 | ) | | — |
|
Affordable housing investment amortization, net of tax benefits | 64 |
| | 46 |
| | 37 |
|
State income taxes, net | 10 |
| | 11 |
| | 5 |
|
Stock based compensation | (14 | ) | | (13 | ) | | (4 | ) |
Other | 13 |
| | (9 | ) | | 5 |
|
Provision for income taxes | $ | 235 |
| | $ | 208 |
| | $ | 208 |
|
|
| | | | | | | | | | | |
| Year Ended December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | | 2014 |
Provision for income taxes computed at the statutory rate | $ | 321,925 |
| | $ | 319,762 |
| | $ | 298,545 |
|
Increases (decreases): | | | | | |
Tax-exempt income | (27,453 | ) | | (20,839 | ) | | (17,971 | ) |
Tax-exempt bank owned life insurance income | (20,149 | ) | | (18,340 | ) | | (19,967 | ) |
General business credits | (64,151 | ) | | (47,894 | ) | | (46,047 | ) |
State deferred tax asset valuation allowance adjustment, net | — |
| | — |
| | (7,430 | ) |
Capital loss | (45,500 | ) | | (46,288 | ) | | (26,948 | ) |
Affordable housing investment amortization, net of tax benefits | 36,848 |
| | 31,741 |
| | 33,752 |
|
State income taxes, net | 4,936 |
| | 4,960 |
| | 2,873 |
|
Other | 1,485 |
| | (2,454 | ) | | 3,786 |
|
Provision for income taxes | $ | 207,941 |
| | $ | 220,648 |
| | $ | 220,593 |
|
The significant components of deferred tax assets and liabilities at December 31, were as follows:
| | | At December 31, | At December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | |
(dollar amounts in millions) | | 2018 | | 2017 |
Deferred tax assets: | | | | | | |
Allowances for credit losses | $ | 254,977 |
| | $ | 238,415 |
| $ | 184 |
| | $ | 162 |
|
Fair value adjustments | 216,768 |
| | 121,642 |
| 173 |
| | 142 |
|
Net operating and other loss carryforward | 140,842 |
| | 61,492 |
| 95 |
| | 108 |
|
Tax credit carryforward | 76,328 |
| | 1,823 |
| |
Accrued expense/prepaid | 64,380 |
| | 44,733 |
| 16 |
| | 17 |
|
Pension and other employee benefits | 34,921 |
| | 2,405 |
| 14 |
| | — |
|
Market discount | | 6 |
| | 10 |
|
Partnership investments | 22,514 |
| | 21,614 |
| 5 |
| | 7 |
|
Market discount | 8,295 |
| | 11,781 |
| |
Purchase accounting adjustments | — |
| | 41,917 |
| |
Other | 10,506 |
| | 11,645 |
| |
Tax credit carryforward | | — |
| | 153 |
|
Other assets | | 6 |
| | 6 |
|
Total deferred tax assets | 829,531 |
| | 557,467 |
| 499 |
| | 605 |
|
Deferred tax liabilities: | | | | | | |
Lease financing | 325,091 |
| | 261,078 |
| 262 |
| | 249 |
|
Loan origination costs | 137,577 |
| | 114,488 |
| 148 |
| | 116 |
|
Operating assets | | 69 |
| | 53 |
|
Mortgage servicing rights | | 45 |
| | 39 |
|
Purchase accounting adjustments | 74,371 |
| | 6,944 |
| 25 |
| | 68 |
|
Securities adjustments | 55,786 |
| | 19,952 |
| 6 |
| | 6 |
|
Operating assets | 54,372 |
| | 46,685 |
| |
Mortgage servicing rights | 51,440 |
| | 48,514 |
| |
Deferred dividend income | | — |
| | 77 |
|
Pension and other employee benefits | — |
| | — |
| — |
| | 5 |
|
Other | 8,796 |
| | 5,463 |
| |
Other liabilities | | 2 |
| | 18 |
|
Total deferred tax liabilities | 707,433 |
| | 503,124 |
| 557 |
| | 631 |
|
Net deferred tax asset before valuation allowance | 122,098 |
| | 54,343 |
| |
Net deferred tax (liability) asset before valuation allowance | | (58 | ) | | (26 | ) |
Valuation allowance | (5,003 | ) | | (3,620 | ) | (6 | ) | | (6 | ) |
Net deferred tax asset | $ | 117,095 |
| | $ | 50,723 |
| |
Net deferred tax (liability) asset | | $ | (64 | ) | | $ | (32 | ) |
At December 31, 2016,2018, Huntington’s net deferred tax asset related to loss and other carryforwards was $217$95 million. This was comprised of federal net operating loss carryforwards of $97$51 million, which will begin expiring in 2023,2030, $44 million of state net operating loss carryforwards, which will begin expiring in 2017,2019, and an alternative minimum tax credit carryforward of $73 million, which may be carried forward indefinitely, and a general business credit carryforward of $3less than $1 million, which will begin expiring in 2030.be fully utilized or refunded by 2022.
In prior periods, Huntington established a valuation allowance against deferred tax assets for state deferred tax assets, and state net operating loss carryforwards. The state valuation allowance was based on the uncertainty of forecasted state taxable income
expected in applicable jurisdictions in order to utilize the state deferred tax assets$6 million at both December 31, 2018 and state net operating loss carryforwards. Based on current analysis of both positive and negative evidence and projected forecasted taxable income within applicable jurisdictions,December 31, 2017, as the Company believes that it is more likely than not, portions of the state deferred tax assets and state net operating loss carryforwards will not be realized. As a result of this analysis, the state valuation allowance was $5 million at December 31, 2016 compared to $4 million at December 31, 2015.
At December 31, 20162018, retained earnings included approximately $12 million of base year reserves of acquired thrift institutions, for which no deferred federal income tax liability has been recognized. Under current law, if these bad debt reserves are used for purposes other than to absorb bad debt losses, they will be subject to federal income tax at the current corporate rate.tax rate enacted at the time. The amount of unrecognized deferred tax liability relating to the cumulative bad debt deduction was approximately $4$3 million at December 31, 2016.2018.
18.17. FAIR VALUES OF ASSETS AND LIABILITIES
Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Loans held for sale
Huntington has elected to apply the fair value option for mortgage loans originated with the intent to sell which are included in loans held for sale. Mortgage loans held for sale are classified as Level 2 and are estimated using security prices for similar product types.
Loans held for investment
Certain mortgage loans originated with the intent to sell for which the FVO was elected have been reclassified to mortgage loans held for investment. These loans continue to be measured at fair value. The fair value is determined using fair value of similar mortgage-backed securities adjusted for loan specific variables.
Huntington elected the fair value option for consumer loans with deteriorated credit quality acquired from FirstMerit in accordance with ASC 825. Management decided to elect the fair value option on these consumer loans to allow for operational efficiencies not normally associated with purchased credit impaired loans. TheFirstMerit. These consumer loans are classified as Level 3. The key assumption used to determine the fair value of the consumer loans is discounted cash flows.
Available-for-sale securities and trading account securities
Securities accounted for at fair value include both the available-for-sale and trading portfolios. Huntington uses prices obtained from third-party pricing services and recent trades to determinedetermines the fair value of securities.securities utilizing quoted market prices obtained for identical or similar assets, third-party pricing services, third-party valuation specialists and other observable inputs such as recent trade observations. AFS and trading securities are classified as Level 1 using quoted market prices (unadjusted) in active markets for identical securities that Huntington has the ability to access at the measurement date. Less than 1% of the positions in these portfolios are Level 1, and consist of U.S. Treasury securities and money market mutual funds. When quoted market prices are not available, fair values are classified as Level 2 using quoted prices for similar assets in active markets, quoted prices of identical or similar assets in markets that are not active, and inputs that are observable for the asset, either directly or indirectly, for substantially the full term of the financial instrument. 81%Level 2 represents 77% of the positions in these portfolios, are Level 2, and consistwhich consists of U.S. Government and agency debt securities, agency mortgage backed securities, private-label asset-backed securities, other than the CDO-preferred securities portfolio, certain municipal securities and other securities. For Level 2 securities managementHuntington primarily uses prices obtained from third-party pricing services to determine the fair value of securities. Huntington independently evaluates and corroborates the fair value received from pricing services through various methods and techniques, to corroborate prices obtained from the pricing service, including references to dealer or other market quotes, and by reviewing valuations of comparable instruments.instruments, and by comparing the prices realized on the sale of similar securities. If relevant market prices are limited or unavailable, valuations may require significant management judgment or estimation to determine fair value, in which case the fair values are classified as Level 3. 19%3 which represent 23% of our positions arethe positions. The Level 3 andpositions consist of CDO-preferred securities anddirect purchase municipal securities. A significant change in the unobservable inputs for these securities may result in a significant change in the ending fair value measurement of these securities.
The direct purchase municipal securities portion that isare classified as Level 3 usesand require significant estimates to determine the fair value of these securities which results in greater subjectivity. The fair value is determined by utilizing a discounted cash flow valuation technique employed by a third-party valuation services.specialist. The third-party service provider reviewsspecialist uses assumptions related to yield, prepayment speed, conditional default rates and loss severity based on certain factors such as, credit worthiness of the counterparty, prevailing market rates, and analysis of similar securities, and projected cash flows. The third-party service provider also incorporates industry and general economic conditions into their analysis.securities. Huntington evaluates the analysis provided for reasonableness.
The CDO-preferred securities portfolios are classified as Level 3 and as such use significant estimates to determine the fair value of these securities which results in greater subjectivity. The CDO-preferred securities portfolio are subjected to a quarterly review of the projected cash flows. These reviews are supported with analysis from independent third parties, and are used as a basis for impairment analysis.
CDO-preferred securities are CDOs backed by a pool of debt securities issued by financial institutions. The collateral generally consists of trust-preferred securities and subordinated debt securities issued by banks, bank holding companies, and insurance companies. A cash flow analysis is used to estimate fair values and assess impairment for each security within this portfolio. We engage a third-party pricing specialist with direct industry experience in CDO-preferred securities valuations to provide assistance in estimating the fair value and expected cash flows for each security in this portfolio. The PD of each issuer and the market discount rate are the most significant inputs in determining fair value. The Company evaluates the PD assumptions provided by the third-party pricing specialist by comparing the current PD to the assumptions used the previous quarter, actual defaults and deferrals in the current period, and trend data on certain financial ratios of the issuers. Huntington also evaluates the assumptions related to discount rates. Relying on cash flows is necessary because there was a lack of observable transactions in the market and many of the original sponsors or dealers for these securities are no longer able to provide a fair value.reasonableness.
MSRs
MSRs do not trade in an active, open market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. Huntington determines the fair value of MSRs using an income approacha discounted cash flow model based upon the month-end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs, and changes in valuation inputs and assumptions. Servicing brokers and other sources of information (e.g. discussion with other mortgage servicers and industry surveys) are used to obtain information on market practice and assumptions. On at least a quarterly basis, third-party marks are obtained from at least one servicing broker. Huntington reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. Any recommended change in assumptions and/or inputs are presented for review to the Mortgage Price Risk Subcommittee for final approval.
Derivative assets and liabilities
Derivatives classified as Level 2 consist of foreign exchange and commodity contracts, which are valued using exchange traded swaps and futures market data. In addition, Level 2 includes interest rate contracts, which are valued using a discounted cash flow method that incorporates current market interest rates. Level 2 also includes exchange traded options and forward commitments to deliver mortgage-backed securities, which are valued using quoted prices.
Derivatives classified as Level 3 consist of interest rate lock agreements related to mortgage loan commitments.commitments and Visa® shares swap. The determination of fair value includes assumptions related to the likelihood that a commitment will ultimately result in a closed loan, which is a significant unobservable assumption. A significant increase or decrease in the external market price would result in a significantly higher or lower fair value measurement.
Short-term borrowings
Short-term borrowings classified as Level 2 consist primarily of U.S. Treasury bond securities sold under agreement to repurchase. These securities are borrowed from other institutions and must be repaid by purchasing the securities in the open market.
Assets and Liabilities measured at fair value on a recurring basis
Assets and liabilities measured at fair value on a recurring basis at December 31, 20162018 and 20152017 are summarized below:
|
| | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at Reporting Date Using | | Netting Adjustments (1) | | December 31, 2018 |
(dollar amounts in millions) | Level 1 | | Level 2 | | Level 3 | | |
Assets | | | | | | | | | |
Trading account securities: | | | | | | | | | |
Municipal securities | $ | 1 |
| | $ | 27 |
| | $ | — |
| | $ | — |
| | $ | 28 |
|
Other securities | 77 |
| | — |
| | — |
| | — |
| | 77 |
|
| 78 |
| | 27 |
| | — |
| | — |
| | 105 |
|
Available-for-sale securities: | | | | | | | | | |
U.S. Treasury securities | 5 |
| | — |
| | — |
| | — |
| | 5 |
|
Residential CMOs | — |
| | 6,999 |
| | — |
| | — |
| | 6,999 |
|
Residential MBS | — |
| | 1,255 |
| | — |
| | — |
| | 1,255 |
|
Commercial MBS | — |
| | 1,583 |
| | — |
| | — |
| | 1,583 |
|
Other agencies | — |
| | 126 |
| | — |
| | — |
| | 126 |
|
Municipal securities | — |
| | 275 |
| | 3,165 |
| | — |
| | 3,440 |
|
Asset-backed securities | — |
| | 315 |
| | — |
| | — |
| | 315 |
|
Corporate debt | — |
| | 53 |
| | — |
| | — |
| | 53 |
|
Other securities/Sovereign debt | — |
| | 4 |
| | — |
| | — |
| | 4 |
|
| 5 |
| | 10,610 |
| | 3,165 |
| | — |
| | 13,780 |
|
| | | | | | | | | |
Other securities | $ | 22 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 22 |
|
Loans held for sale | — |
| | 613 |
| | — |
| | — |
| | 613 |
|
Loans held for investment | — |
| | 49 |
| | 30 |
| | — |
| | 79 |
|
MSRs | — |
| | — |
| | 10 |
| | — |
| | 10 |
|
Derivative assets | 21 |
| | 474 |
| | 5 |
| | (291 | ) | | 209 |
|
Liabilities | | | | | | | | | |
Derivative liabilities | 11 |
| | 390 |
| | 3 |
| | (217 | ) | | 187 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at Reporting Date Using | | Netting Adjustments (1) | | December 31, 2016 |
(dollar amounts in thousands) | Level 1 | | Level 2 | | Level 3 | | |
Assets | | | | | | | | | |
Loans held for sale | $ | — |
| | $ | 438,224 |
| | $ | — |
| | $ | — |
| | $ | 438,224 |
|
Loans held for investment | — |
| | 34,439 |
| | 47,880 |
| | — |
| | 82,319 |
|
Trading account securities: | | | | | | | | | |
Municipal securities | — |
| | 1,148 |
| | — |
| | — |
| | 1,148 |
|
Other securities | 132,147 |
| | — |
| | — |
| | — |
| | 132,147 |
|
| 132,147 |
| | 1,148 |
| | — |
| | — |
| | 133,295 |
|
Available-for-sale and other securities: | | | | | | | | | |
U.S. Treasury securities | 5,497 |
| | — |
| | — |
| | — |
| | 5,497 |
|
Federal agencies: Mortgage-backed | — |
| | 10,673,342 |
| | — |
| | — |
| | 10,673,342 |
|
Federal agencies: Other agencies | — |
| | 73,542 |
| | — |
| | — |
| | 73,542 |
|
Municipal securities | — |
| | 452,013 |
| | 2,798,044 |
| | — |
| | 3,250,057 |
|
Asset-backed securities | — |
| | 717,478 |
| | 76,003 |
| | — |
| | 793,481 |
|
Corporate debt | — |
| | 198,683 |
| | — |
| | — |
| | 198,683 |
|
Other securities | 16,588 |
| | 3,943 |
| | — |
| | — |
| | 20,531 |
|
| 22,085 |
| | 12,119,001 |
| | 2,874,047 |
| | — |
| | 15,015,133 |
|
MSRs | — |
| | — |
| | 13,747 |
| | — |
| | 13,747 |
|
Derivative assets | — |
| | 414,412 |
| | 5,747 |
| | (181,940 | ) | | 238,219 |
|
Liabilities | | | | | | | | | |
Derivative liabilities | — |
| | 362,777 |
| | 7,870 |
| | (272,361 | ) | | 98,286 |
|
Short-term borrowings | 474 |
| | — |
| | — |
| | — |
| | 474 |
|
| | | Fair Value Measurements at Reporting Date Using | | Netting Adjustments (1) | | December 31, 2015 | Fair Value Measurements at Reporting Date Using | | Netting Adjustments (1) | | December 31, 2017 |
(dollar amounts in thousands) | Level 1 | | Level 2 | | Level 3 | | |
(dollar amounts in millions) | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments (1) | | December 31, 2017 |
Assets | | | | | | | | | | | | | | | |
Loans held for sale | $ | — |
| | $ | 337,577 |
| | $ | — |
| | $ | — |
| | $ | 337,577 |
| |
Loans held for investment | — |
| | 32,889 |
| | 1,748 |
| | — |
| | 34,637 |
| |
Trading account securities: | | | | | | | | | | | | | | | | | | |
Municipal securities | — |
| | 4,159 |
| | — |
| | — |
| | 4,159 |
| |
Other securities | 32,475 |
| | 363 |
| | — |
| | — |
| | 32,838 |
| 83 |
| | 3 |
| | — |
| | — |
| | 86 |
|
| 32,475 |
| | 4,522 |
| | — |
| | — |
| | 36,997 |
| 83 |
| | 3 |
| | — |
| | — |
| | 86 |
|
Available-for-sale and other securities: | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | |
U.S. Treasury securities | 5,472 |
| | — |
| | — |
| | — |
| | 5,472 |
| 5 |
| | — |
| | — |
| | — |
| | 5 |
|
Federal agencies: Mortgage-backed | — |
| | 4,521,688 |
| | — |
| | — |
| | 4,521,688 |
| |
Federal agencies: Other agencies | — |
| | 115,913 |
| | — |
| | — |
| | 115,913 |
| |
Residential CMOs | | — |
| | 6,484 |
| | — |
| | — |
| | 6,484 |
|
Residential MBS | | | | 1,367 |
| | | | | | 1,367 |
|
Commercial MBS | | | | 2,487 |
| | | | | | 2,487 |
|
Other agencies | | — |
| | 70 |
| | — |
| | — |
| | 70 |
|
Municipal securities | — |
| | 360,845 |
| | 2,095,551 |
| | — |
| | 2,456,396 |
| — |
| | 711 |
| | 3,167 |
| | — |
| | 3,878 |
|
Asset-backed securities | — |
| | 761,076 |
| | 100,337 |
| | — |
| | 861,413 |
| — |
| | 443 |
| | 24 |
| | — |
| | 467 |
|
Corporate debt | — |
| | 466,477 |
| | — |
| | — |
| | 466,477 |
| — |
| | 109 |
| | — |
| | — |
| | 109 |
|
Other securities/Sovereign debt | | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
| | 5 |
| | 11,673 |
| | 3,191 |
| | — |
| | 14,869 |
|
Other securities | 11,397 |
| | 3,899 |
| | — |
| | — |
| | 15,296 |
| 19 |
| | — |
| | — |
| | — |
| | 19 |
|
| 16,869 |
| | 6,229,898 |
| | 2,195,888 |
| | — |
| | 8,442,655 |
| |
Loans held for sale | | — |
| | 413 |
| | — |
| | — |
| | 413 |
|
Loans held for investment | | — |
| | 55 |
| | 38 |
| | — |
| | 93 |
|
MSRs | — |
| | — |
| | 17,585 |
| | — |
| | 17,585 |
| — |
| | — |
| | 11 |
| | — |
| | 11 |
|
Derivative assets | — |
| | 429,448 |
| | 6,721 |
| | (161,297 | ) | | 274,872 |
| — |
| | 316 |
| | 6 |
| | (190 | ) | | 132 |
|
Liabilities | | | | | | | | | | | | | | | | | | |
Derivative liabilities | — |
| | 287,994 |
| | 665 |
| | (144,309 | ) | | 144,350 |
| — |
| | 326 |
| | 5 |
| | (245 | ) | | 86 |
|
Short-term borrowings | — |
| | 1,770 |
| | — |
| | — |
| | 1,770 |
| |
| |
(1) | Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions and cash collateral held or placed with the same counterparties. |
The tables below present a rollforward of the balance sheet amounts for the years ended December 31, 2016, 2015,2018, 2017, and 20142016 for financial instruments measured on a recurring basis and classified as Level 3. The classification of an item as Level 3 is based on the significance of the unobservable inputs to the overall fair value measurement. However, Level 3 measurements may also include observable components of value that can be validated externally. Accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology. |
| | | | | | | | | | | | | | | | | | | |
| Level 3 Fair Value Measurements Year Ended December 31, 2018 |
| | | | | Available-for-sale securities | | |
(dollar amounts in millions) | MSRs | | Derivative instruments | | Municipal securities | | Asset- backed securities | | Loans held for investment |
Opening balance | $ | 11 |
| | $ | (1 | ) | | $ | 3,167 |
| | $ | 24 |
| | $ | 38 |
|
Transfers out of Level 3 (1) | — |
| | (35 | ) | | — |
| | — |
| | — |
|
Total gains/losses for the period: | | | | | | | | | |
Included in earnings | (1 | ) | | 35 |
| | (3 | ) | | (2 | ) | | — |
|
Included in OCI | — |
| | — |
| | (52 | ) | | 11 |
| | — |
|
Purchases/originations | — |
| | — |
| | 658 |
| | — |
| | — |
|
Sales | — |
| | — |
| | — |
| | (33 | ) | | — |
|
Repayments | — |
| | — |
| | — |
| | — |
| | (8 | ) |
Settlements | — |
| | 3 |
| | (605 | ) | | — |
| | — |
|
Closing balance | $ | 10 |
| | $ | 2 |
| | $ | 3,165 |
| | $ | — |
| | $ | 30 |
|
Change in unrealized gains or losses for the period included in earnings for assets held at end of the reporting date | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Change in unrealized gains or losses for the period included in other comprehensive income for assets held at the end of the reporting period | $ | — |
| | $ | — |
| | $ | (52 | ) | | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | |
| Level 3 Fair Value Measurements Year ended December 31, 2016 |
| | | | | Available-for-sale securities | | |
(dollar amounts in thousands) | MSRs | | Derivative instruments | | Municipal securities | | Asset- backed securities | | Loans held for investment |
Opening balance | $ | 17,585 |
| | $ | 6,056 |
| | $ | 2,095,551 |
| | $ | 100,337 |
| | $ | 1,748 |
|
Transfers into Level 3 | — |
| | — |
| | — |
| | — |
| | — |
|
Transfers out of Level 3 (1) | — |
| | (7,251 | ) | | — |
| | — |
| | — |
|
Total gains/losses for the period: | | | | | | | | | |
Included in earnings | (3,838 | ) | | (928 | ) | | 7,049 |
| | (2,593 | ) | | (2,353 | ) |
Included in OCI | — |
| | — |
| | (28,270 | ) | | 6,448 |
| | — |
|
Purchases/originations | — |
| | — |
| | 1,399,394 |
| | — |
| | 56,469 |
|
Sales | — |
| | — |
| | (37,444 | ) | | (25,196 | ) | | — |
|
Repayments | — |
| | — |
| | — |
| | — |
| | (7,984 | ) |
Settlements | — |
| | — |
| | (638,236 | ) | | (2,993 | ) | | — |
|
Closing balance | $ | 13,747 |
| | $ | (2,123 | ) | | $ | 2,798,044 |
| | $ | 76,003 |
| | $ | 47,880 |
|
Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at end of the reporting date | $ | (3,838 | ) | | $ | (928 | ) | | $ | (33,415 | ) | | $ | 3,722 |
| | $ | — |
|
(1) Transfers out of Level 3 represent the settlement value of the derivative instruments (i.e. interest rate lock agreements) that is transferred to loans held for sale, which is classified as Level 2. |
| | | | | | | | | | | | | | | | | | | |
| Level 3 Fair Value Measurements Year Ended December 31, 2017 |
| | | | | Available-for-sale securities | | |
(dollar amounts in millions) | MSRs | | Derivative instruments | | Municipal securities | | Asset- backed securities | | Loans held for investment |
Opening balance | $ | 14 |
| | $ | (2 | ) | | $ | 2,798 |
| | $ | 76 |
| | $ | 48 |
|
Transfers out of Level 3 (1) | — |
| | (15 | ) | | — |
| | — |
| | — |
|
Total gains/losses for the period: | | | | | | | | | |
Included in earnings | (3 | ) | | 16 |
| | (2 | ) | | (5 | ) | | 1 |
|
Included in OCI | — |
| | — |
| | (8 | ) | | 14 |
| | — |
|
Purchases/originations | — |
| | — |
| | 787 |
| | — |
| | — |
|
Sales | — |
| | — |
| | — |
| | (60 | ) | | — |
|
Repayments | — |
| | — |
| | — |
| | — |
| | (11 | ) |
Settlements | — |
| | — |
| | (408 | ) | | (1 | ) | | — |
|
Closing balance | $ | 11 |
| | $ | (1 | ) | | $ | 3,167 |
| | $ | 24 |
| | $ | 38 |
|
Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at end of the reporting date | $ | (3 | ) | | $ | — |
| | $ | — |
| | $ | (4 | ) | | $ | — |
|
| | | Level 3 Fair Value Measurements Year ended December 31, 2015 | Level 3 Fair Value Measurements Year Ended December 31, 2016 |
| | | | | Available-for-sale securities | | | | | | | Available-for-sale securities | | |
(dollar amounts in thousands) | MSRs | | Derivative instruments | | Municipal securities | | Private- label CMO | | Asset- backed securities | | Loans held for investment | |
(dollar amounts in millions) | | MSRs | | Derivative instruments | | Municipal securities | | Asset- backed securities | | Loans held for investment |
Opening balance | $ | 22,786 |
| | $ | 3,360 |
| | $ | 1,417,593 |
| | $ | 30,464 |
| | $ | 82,738 |
| | $ | 10,590 |
| $ | 18 |
| | $ | 6 |
| | $ | 2,095 |
| | $ | 100 |
| | $ | 2 |
|
Transfers into Level 3 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Transfers out of Level 3 | — |
| | (2,793 | ) | | — |
| | — |
| | — |
| | — |
| |
Transfers out of Level 3 (1) | | — |
| | (7 | ) | | — |
| | — |
| | — |
|
Total gains/losses for the period: | | | | | | | | | | | | | | | | | | | | |
Included in earnings | (5,201 | ) | | 5,489 |
| | 149 |
| | 47 |
| | (2,400 | ) | | (497 | ) | (4 | ) | | (1 | ) | | 7 |
| | (2 | ) | | (2 | ) |
Included in OCI | — |
| | — |
| | (3,652 | ) | | 1,832 |
| | 24,802 |
| | — |
| — |
| | — |
| | (28 | ) | | 6 |
| | — |
|
Purchases/originations | — |
| | — |
| | 1,002,153 |
| | — |
| | — |
| | — |
| — |
| | — |
| | 1,399 |
| | — |
| | 56 |
|
Sales | — |
| | — |
| | (9,656 | ) | | (30,077 | ) | | — |
| | — |
| — |
| | — |
| | (37 | ) | | (25 | ) | | — |
|
Repayments | — |
| | — |
| | — |
| | — |
| | — |
| | (8,345 | ) | — |
| | — |
| | — |
| | — |
| | (8 | ) |
Settlements | — |
| | — |
| | (311,036 | ) | | (2,266 | ) | | (4,803 | ) | | — |
| — |
| | — |
| | (638 | ) | | (3 | ) | | — |
|
Closing balance | $ | 17,585 |
| | $ | 6,056 |
| | $ | 2,095,551 |
| | $ | — |
| | $ | 100,337 |
| | $ | 1,748 |
| $ | 14 |
| | $ | (2 | ) | | $ | 2,798 |
| | $ | 76 |
| | $ | 48 |
|
Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at end of the reporting date | $ | (5,201 | ) | | $ | 5,489 |
| | $ | — |
| | $ | — |
| | $ | (2,440 | ) | | $ | (497 | ) | $ | (4 | ) | | $ | (1 | ) | | $ | (33 | ) | | $ | 4 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Level 3 Fair Value Measurements Year Ended December 31, 2014 |
| | | | | Available-for-sale securities | | |
(dollar amounts in thousands) | MSRs | | Derivative instruments | | Municipal securities | | Private label CMO | | Asset- backed securities | | Loans held for investment |
Balance, beginning of year | $ | 34,236 |
| | $ | 2,390 |
| | $ | 654,537 |
| | $ | 32,140 |
| | $ | 107,419 |
| | $ | 52,286 |
|
Transfers into Level 3 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Transfers out of Level 3 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total gains/losses for the period: | | | | | | | | | | | |
Included in earnings | (11,450 | ) | | 3,047 |
| | — |
| | 36 |
| | 226 |
| | (918 | ) |
Included in OCI | — |
| | — |
| | 14,776 |
| | 452 |
| | 21,839 |
| | — |
|
Purchases/originations | — |
| | — |
| | 1,038,348 |
| | — |
| | — |
| | — |
|
Sales | — |
| | — |
| | — |
| | — |
| | (22,870 | ) | | — |
|
Repayments | — |
| | — |
| | — |
| | — |
| | — |
| | (40,778 | ) |
Settlements | — |
| | (2,077 | ) | | (290,068 | ) | | (2,164 | ) | | (23,876 | ) | | — |
|
Balance, end of year | $ | 22,786 |
| | $ | 3,360 |
| | $ | 1,417,593 |
| | $ | 30,464 |
| | $ | 82,738 |
| | $ | 10,590 |
|
Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at end of the reporting date | $ | (11,450 | ) | | $ | 3,047 |
| | $ | 14,776 |
| | $ | 452 |
| | $ | 21,137 |
| | $ | (1,624 | ) |
| |
(1) | Transfers out of Level 3 represent the settlement value of the derivative instruments (i.e. interest rate lock agreements) that are transferred to loans held for sale, which is classified as Level 2. |
The tables below summarize the classification of gains and losses due to changes in fair value, recorded in earnings for Level 3 assets and liabilities for the years ended December 31, 2016, 2015,2018, 2017, and 2014:2016:
|
| | | | | | | | | | | | | | | | | | | |
| Level 3 Fair Value Measurements Year ended December 31, 2016 |
| | | | | Available-for-sale securities | | |
(dollar amounts in thousands) | MSRs | | Derivative instruments | | Municipal securities | | Asset- backed securities | | Loans held for investment |
Classification of gains and losses in earnings: | | | | | | | | | |
Mortgage banking income | $ | (3,838 | ) | | $ | (928 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
Securities gains (losses) | — |
| | — |
| | 788 |
| | (2,598 | ) | | — |
|
Interest and fee income | — |
| | — |
| | — |
| | — |
| | — |
|
Noninterest income | — |
| | — |
| | 6,261 |
| | 5 |
| | (2,353 | ) |
Total | $ | (3,838 | ) | | $ | (928 | ) | | $ | 7,049 |
| | $ | (2,593 | ) | | $ | (2,353 | ) |
| | | Level 3 Fair Value Measurements Year ended December 31, 2015 | Level 3 Fair Value Measurements Year Ended December 31, 2018 |
| | | | | Available-for-sale securities | | | | | | | Available-for-sale securities |
(dollar amounts in thousands) | MSRs | | Derivative instruments | | Municipal securities | | Private- label CMO | | Asset- backed securities | | Loans held for investment | |
(dollar amounts in millions) | | MSRs | | Derivative instruments | | Municipal securities | | Asset- backed securities |
Classification of gains and losses in earnings: | | | | | | | | | | | | | | | | | | |
Mortgage banking income | $ | (5,201 | ) | | $ | 5,489 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | (1 | ) | | $ | 35 |
| | $ | — |
| | $ | — |
|
Securities gains (losses) | — |
| | — |
| | 149 |
| | — |
| | (2,440 | ) | | — |
| — |
| | — |
| | — |
| | (2 | ) |
Interest and fee income | — |
| | — |
| | — |
| | 47 |
| | 40 |
| | (497 | ) | — |
| | — |
| | (3 | ) | | — |
|
Noninterest income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Total | $ | (5,201 | ) | | $ | 5,489 |
| | $ | 149 |
| | $ | 47 |
| | $ | (2,400 | ) | | $ | (497 | ) | $ | (1 | ) | | $ | 35 |
| | $ | (3 | ) | | $ | (2 | ) |
| | | Level 3 Fair Value Measurements Year Ended December 31, 2014 | Level 3 Fair Value Measurements Year Ended December 31, 2017 |
| | | | | Available-for-sale securities | | | | | | | Available-for-sale securities | | |
(dollar amounts in thousands) | MSRs | | Derivative instruments | | Municipal securities | | Private label CMO | | Asset- backed securities | | Loans held for investment | |
(dollar amounts in millions) | | MSRs | | Derivative instruments | | Municipal securities | | Asset- backed securities | | Loans held for investment |
Classification of gains and losses in earnings: | | | | | | | | | | | | | | | | | | | | |
Mortgage banking income (loss) | $ | (11,450 | ) | | $ | 3,047 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
Mortgage banking income | | $ | (3 | ) | | $ | 16 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Securities gains (losses) | — |
| | — |
| | — |
| | — |
| | 170 |
| | — |
| — |
| | — |
| | — |
| | (5 | ) | | — |
|
Interest and fee income | — |
| | — |
| | — |
| | 36 |
| | 56 |
| | (1,032 | ) | — |
| | — |
| | (2 | ) | | — |
| | — |
|
Noninterest income | — |
| | — |
| | — |
| | — |
| | — |
| | 114 |
| — |
| | — |
| | — |
| | — |
| | 1 |
|
Total | $ | (11,450 | ) | | $ | 3,047 |
| | $ | — |
| | $ | 36 |
| | $ | 226 |
| | $ | (918 | ) | $ | (3 | ) | | $ | 16 |
| | $ | (2 | ) | | $ | (5 | ) | | $ | 1 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Level 3 Fair Value Measurements Year Ended December 31, 2016 |
| | | | | Available-for-sale securities | | |
(dollar amounts in millions) | MSRs | | Derivative instruments | | Municipal securities | | Asset- backed securities | | Loans held for investment |
Classification of gains and losses in earnings: | | | | | | | | | |
Mortgage banking income (loss) | $ | (4 | ) | | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
Securities gains (losses) | — |
| | — |
| | 1 |
| | (2 | ) | | — |
|
Noninterest income | — |
| | — |
| | 6 |
| | — |
| | (2 | ) |
Total | $ | (4 | ) | | $ | (1 | ) | | $ | 7 |
| | $ | (2 | ) | | $ | (2 | ) |
Assets and liabilities under the fair value option
The following table presents the fair value and aggregate principal balance of certain assets and liabilities under the fair value option: |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
| Total Loans | | Loans that are 90 or more days past due |
(dollar amounts in millions) | Fair value carrying amount | | Aggregate unpaid principal | | Difference | | Fair value carrying amount | | Aggregate unpaid principal | | Difference |
Assets | | | | | | | | | | | |
Loans held for sale | $ | 613 |
| | $ | 594 |
| | $ | 19 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Loans held for investment | 79 |
| | 87 |
| | (8 | ) | | 6 |
| | 7 |
| | (1 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| Total Loans | | Loans that are 90 or more days past due |
(dollar amounts in thousands) | Fair value carrying amount | | Aggregate unpaid principal | | Difference | | Fair value carrying amount | | Aggregate unpaid principal | | Difference |
Assets | | | | | | | | | | | |
Loans held for sale | $ | 438,224 |
| | $ | 433,760 |
| | $ | 4,464 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Loans held for investment | 82,319 |
| | 91,998 |
| | (9,679 | ) | | 8,408 |
| | 11,082 |
| | (2,674 | ) |
| | | December 31, 2015 | December 31, 2017 |
| Total Loans | | Loans that are 90 or more days past due | Total Loans | | Loans that are 90 or more days past due |
(dollar amounts in thousands) | Fair value carrying amount | | Aggregate unpaid principal | | Difference | | Fair value carrying amount | | Aggregate unpaid principal | | Difference | |
(dollar amounts in millions) | | Fair value carrying amount | | Aggregate unpaid principal | | Difference | | Fair value carrying amount | | Aggregate unpaid principal | | Difference |
Assets | | | | | | | | | | | | | | | | | | | | | | |
Loans held for sale | $ | 337,577 |
| | $ | 326,802 |
| | $ | 10,775 |
| | $ | 1,268 |
| | $ | 1,294 |
| | $ | (26 | ) | $ | 413 |
| | $ | 400 |
| | $ | 13 |
| | $ | 1 |
| | $ | 1 |
| | $ | — |
|
Loans held for investment | 34,637 |
| | 35,385 |
| | $ | (748 | ) | | 428 |
| | 497 |
| | $ | (69 | ) | 93 |
| | 102 |
| | $ | (9 | ) | | 10 |
| | 11 |
| | $ | (1 | ) |
The following tables present the net gains (losses) from fair value changes including net gains (losses) associated with instrument specific credit risk for the years ended December 31, 2016, 2015,2018, 2017, and 2014:2016:
| | | Net gains (losses) from fair value changes Year ended December 31, | Net gains (losses) from fair value changes Year Ended December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | | 2014 | |
(dollar amounts in millions) | | 2018 | | 2017 | | 2016 |
Assets | | | | | | | | | | |
Loans held for sale | $ | 6,741 |
| | $ | (2,342 | ) | | $ | (1,978 | ) | $ | 5 |
| | $ | 8 |
| | $ | 7 |
|
Loans held for investment | — |
| | (568 | ) | | (918 | ) | — |
| | — |
| | — |
|
|
| | | | | | | | | | | |
| Gains (losses) included in fair value changes associated with instrument specific credit risk Year ended December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | | 2014 |
Assets | | | | | |
Loans held for investment | $ | 436 |
| | $ | 199 |
| | $ | 911 |
|
Assets and Liabilities measured at fair value on a nonrecurring basis
Certain assets and liabilities may be required to be measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition. These assets and liabilities are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. ForThe amounts presented represent the year ended December 31, 2016, assetsfair value on the various measurement dates throughout the period. The gains(losses) represent the amounts recorded during the period regardless of whether the asset is still held at period end.
The amounts measured at fair value on a nonrecurring basis at December 31, 2018 were as follows:
| | | | | Fair Value Measurements Using | | | | | Fair Value Measurements Using | | |
(dollar amounts in thousands) | Fair Value | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Other Unobservable Inputs (Level 3) | | Total Gains/(Losses) Year ended December 31, 2016
| |
MSRs | $ | 171,309 |
| | $ | — |
| | $ | — |
| | $ | 171,309 |
| | $ | 1,918 |
| |
(dollar amounts in millions) | | Fair Value | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Other Unobservable Inputs (Level 3) | | Total Gains/(Losses) Year Ended December 31, 2018 |
Impaired loans | 53,818 |
| | — |
| | — |
| | 53,818 |
| | 11,412 |
| 33 |
| | — |
| | — |
| | 33 |
| | (1 | ) |
Other real estate owned | 50,930 |
| | — |
| | — |
| | 50,930 |
| | (620 | ) | 20 |
| | — |
| | — |
| | 20 |
| | (7 | ) |
Loans held for sale | | 145 |
| | — |
| | — |
| | 145 |
| | (11 | ) |
MSRs accounted for under the amortization method are subject to nonrecurring fair value measurement when the fair value is lower than the carrying amount.
Periodically, Huntington records nonrecurring adjustments of collateral-dependent loans measured for impairment when establishing the ACL.ALLL. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Appraisals are generally obtained to support the fair value of the collateral and incorporate measures such as recent sales prices for comparable properties and cost of construction. InPeriodically, in cases where the carrying value exceeds the fair value of the collateral less cost to sell, an impairment charge is recognized.
Other real estate owned properties are included in accrued income and other assets and valued based on appraisals and third-party price opinions, less estimated selling costs.opinions.
The appraisals supporting the fair value of the collateral to recognize loan impairment or unrealized loss on other real estate owned properties may not have been obtained as of December 31, 2016.2018.
Loans held for sale are measured at lower of cost or fair value less costs to sell. The fair value of loans held for sale is determined based on discounted cash flows or based on the fair value of the underlying collateral supporting the loan.
Significant unobservable inputs for assets and liabilities measured at fair value on a recurring and nonrecurring basis
The table below presents quantitative information about the significant unobservable inputs for assets and liabilities measured at fair value on a recurring and nonrecurring basis at December 31, 2016:2018 and 2017:
|
| | | | | | | | | | | | | | | | |
| Quantitative Information about Level 3 Fair Value Measurements at December 31, 2018 |
(dollar amounts in millions) | Fair Value | | Valuation Technique | | Significant Unobservable Input | | Range | | Weighted Average |
Measured at fair value on a recurring basis: | | | | | | | | |
MSRs | $ | 10 |
| | Discounted cash flow | | Constant prepayment rate | | 6 | % | - | 54 | % | | 8 | % |
| | | | | Spread over forward interest rate swap rates | | 5 | % | - | 11 | % | | 8 | % |
Derivative assets | 5 |
| | Consensus Pricing | | Net market price | | (5 | )% | - | 23 | % | | 2 | % |
| | | | | Estimated Pull through % | | 1 | % | - | 100 | % | | 92 | % |
Derivative liabilities | 3 |
| | Discounted cash flow | | Estimated conversion factor | | | | | | 163 | % |
| | | | | Estimated growth rate of Visa Class A shares | | | | | | 7 | % |
| | | | | Discount rate | | | | | | 4 | % |
| | | | | Timing of the resolution of the litigation | | | | | | 6/30/2020 |
|
Municipal securities | 3,165 |
| | Discounted cash flow | | Discount rate | | 4 | % | - | 4 | % | | 4 | % |
| | | | | Cumulative default | | — | % | - | 39 | % | | 3 | % |
| | | | | Loss given default | | 5 | % | - | 90 | % | | 25 | % |
Loans held for investment | 30 |
| | Discounted cash flow | | Discount rate | | 7 | % | - | 9 | % | | 9 | % |
| | | | | Constant prepayment rate | | 9 | % | - | 9 | % | | 9 | % |
Measured at fair value on a nonrecurring basis: | | | | | | | | |
Impaired loans | 33 |
| | Appraisal value | | NA | | | | | | NA |
|
Other real estate owned | 20 |
| | Appraisal value | | NA | | | | | | NA |
|
Loans held for sale | 121 |
| | Discounted cash flow | | Discount rate | | 5 | % | | 6 | % | | 5 | % |
| 24 |
| | Appraisal value | | NA | | | | | | N/A |
|
| | | Quantitative Information about Level 3 Fair Value Measurements at December 31, 2016 | Quantitative Information about Level 3 Fair Value Measurements at December 31, 2017 |
(dollar amounts in thousands) | Fair Value | | Valuation Technique | | Significant Unobservable Input | | Range (Weighted Average) | |
(dollar amounts in millions) | | Fair Value | | Valuation Technique | | Significant Unobservable Input | | Range | | Weighted Average |
Measured at fair value on a recurring basis: | Measured at fair value on a recurring basis: | | Measured at fair value on a recurring basis: | | | | | | |
MSRs | $ | 13,747 |
| | Discounted cash flow | | Constant prepayment rate | | 5.63% - 34.4% (10.9%) | $ | 11 |
| | Discounted cash flow | | Constant prepayment rate | | 8 | % | - | 33 | % | | 12 | % |
| | | | | Spread over forward interest rate swap rates | | 3.0% - 9.2% (5.4%) | | | | | Spread over forward interest rate swap rates | | 8 | % | - | 10 | % | | 8 | % |
Derivative assets | 5,747 |
| | Consensus Pricing | | Net market price | | -7.1% - 25.4% (1.1%) | 6 |
| | Consensus Pricing | | Net market price | | (5 | )% | - | 20 | % | | 2 | % |
| | | | Estimated Pull through % | | 3 | % | - | 100 | % | | 75 | % |
Derivative liabilities | 7,870 |
| | | | Estimated Pull through % | | 8.1% - 99.8% (76.9%) | 5 |
| | Discounted cash flow | | Estimated conversion factor | | | | | | 165 | % |
| | | | Estimated growth rate of Visa Class A shares | | | | | | 7 | % |
| | | | Discount rate | | | | | | 3 | % |
| | | | | | Timing of the resolution of the litigation | | 12/31/2017 | | - | 06/30/2020 |
|
Municipal securities | 2,798,044 |
| | Discounted cash flow | | Discount rate | | 0.0% - 10.0% (3.6%) | 3,167 |
| | Discounted cash flow | | Discount rate | | — | % | - | 10 | % | | 4 | % |
| | | Cumulative default | | 0.3% - 37.8% (4.0%) | | | Cumulative default | | — | % | - | 64 | % | | 3 | % |
| | | | | Loss given default | | 5.0% - 80.0% (24.1%) | | | | | Loss given default | | 5 | % | - | 90 | % | | 24 | % |
Asset-backed securities | 76,003 |
| | Discounted cash flow | | Discount rate | | 5.0% - 12.0% (6.3%) | 24 |
| | Discounted cash flow | | Discount rate | | 7 | % | | 7 | % | | 7 | % |
| | | Cumulative prepayment rate | | 0.0% - 73% (6.5%) | | | Cumulative prepayment rate | | — | % | | 72 | % | | 7 | % |
| | | Cumulative default | | 1.1% - 100% (11.2%) | | | Cumulative default | | 3 | % | | 53 | % | | 7 | % |
| | | Loss given default | | 85% - 100% (96.3%) | | | Loss given default | | 90 | % | | 100 | % | | 98 | % |
| | | | | Cure given deferral | | 0.0% - 75.0% (36.2%) | | | | | Cure given deferral | | 50 | % | | 50 | % | | 50 | % |
Loans held for investment | 47,880 |
| | Discounted cash flow | | Discount rate | | 5.4% - 16.2% (5.6%) | 38 |
| | Discounted cash flow | | Discount rate | | 7 | % | - | 18 | % | | 8 | % |
Measured at fair value on a nonrecurring basis: | | |
MSRs | 171,309 |
| | Discounted cash flow | | Constant prepayment rate | | 5.57% - 30.4% (7.8%) | |
| | | | | Spread over forward interest rate swap rates | | 4.2% - 20.0% (11.7%) | | | | | Constant prepayment rate | | 2 | % | - | 22 | % | | 9 | % |
Impaired loans | 53,818 |
| | Appraisal value | | NA | | NA | |
Other real estate owned | 50,930 |
| | Appraisal value | | NA | | NA | |
The following provides a general description of the impact of a change in an unobservable input on the fair value measurement and the interrelationship between unobservable inputs, where relevant/significant. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below.
A significant change in the unobservable inputs may result in a significant change in the ending fair value measurement of Level 3 instruments. In general, prepayment rates increase when market interest rates decline and decrease when market interest rates rise and higher prepayment rates generally result in lower fair values for MSR assets, Asset-backed securities, and Automobile loans.
Credit loss estimates, such as probability of default, constant default, cumulative default, loss given default, cure given deferral, and loss severity, are driven by the ability of the borrowers to pay their loans and the value of the underlying collateral and are impacted by changes in macroeconomic conditions, typically increasing when economic conditions worsen and decreasing when conditions improve. An increase in the estimated prepayment rate typically results in a decrease in estimated credit losses and vice versa. Higher credit loss estimates generally result in lower fair values. Credit spreads generally increase when liquidity risks and market volatility increase and decrease when liquidity conditions and market volatility improve.
Discount rates and spread over forward interest rate swap rates typically increase when market interest rates increase and/or credit and liquidity risks increase, and decrease when market interest rates decline and/or credit and liquidity conditions improve. Higher discount rates and credit spreads generally result in lower fair market values.
Net market price and pull through percentages generally increase when market interest rates increase and decline when market interest rates decline. Higher net market price and pull through percentages generally result in higher fair values.
Fair values of financial instruments
The following table provides the carrying amounts and estimated fair values of Huntington’s financial instruments that are carried either at fair value or cost at December 31, 20162018 and December 31, 2015:2017: |
| | | | | | | | | | | | | | |
| December 31, 2018 |
(dollar amounts in millions) | Amortized Cost | | Lower of Cost or Market | | Fair Value or Fair Value Option | | Total Carrying Amount | | Estimated Fair Value |
Financial Assets | | | | | | | | | |
Cash and short-term assets | 2,725 |
| | — |
| | — |
| | 2,725 |
| | 2,725 |
|
Trading account securities | — |
| | — |
| | 105 |
| | 105 |
| | 105 |
|
Available-for-sale securities | — |
| | — |
| | 13,780 |
| | 13,780 |
| | 13,780 |
|
Held-to-maturity securities | 8,565 |
| | — |
| | — |
| | 8,565 |
| | 8,286 |
|
Other securities | 543 |
| | — |
| | 22 |
| | 565 |
| | 565 |
|
Loans held for sale | — |
| | 191 |
| | 613 |
| | 804 |
| | 806 |
|
Net loans and leases (1) | 74,049 |
| | — |
| | 79 |
| | 74,128 |
| | 73,668 |
|
Derivatives | — |
| | — |
| | 209 |
| | 209 |
| | 209 |
|
Financial Liabilities | | | | | | | | | |
Deposits | 84,774 |
| | — |
| | — |
| | 84,774 |
| | 84,731 |
|
Short-term borrowings | 2,017 |
| | — |
| | — |
| | 2,017 |
| | 2,017 |
|
Long-term debt | 8,625 |
| | — |
| | — |
| | 8,625 |
| | 8,718 |
|
Derivatives | — |
| | — |
| | 187 |
| | 187 |
| | 187 |
|
| | | December 31, 2016 | | December 31, 2015 | December 31, 2017 |
| Carrying | | Fair | | Carrying | | Fair | |
(dollar amounts in thousands) | Amount | | Value | | Amount | | Value | |
Financial Assets: | | | | | | | | |
(dollar amounts in millions) | | Amortized Cost | | Lower of Cost or Market | | Fair Value or Fair Value Option | | Total Carrying Amount | | Estimated Fair Value |
Financial Assets | | | | | | | | | | |
Cash and short-term assets | $ | 1,443,037 |
| | $ | 1,443,037 |
| | $ | 898,994 |
| | $ | 898,994 |
| 1,567 |
| | — |
| | — |
| | $ | 1,567 |
| | $ | 1,567 |
|
Trading account securities | 133,295 |
| | 133,295 |
| | 36,997 |
| | 36,997 |
| — |
| | — |
| | 86 |
| | 86 |
| | 86 |
|
Available-for-sale securities | | — |
| | — |
| | 14,869 |
| | 14,869 |
| | 14,869 |
|
Held-to-maturity securities | | 9,091 |
| | — |
| | — |
| | 9,091 |
| | 8,971 |
|
Other securities | | 581 |
| | — |
| | 19 |
| | 600 |
| | 600 |
|
Loans held for sale | 512,951 |
| | 515,640 |
| | 474,621 |
| | 484,511 |
| — |
| | 75 |
| | 413 |
| | 488 |
| | 491 |
|
Available-for-sale and other securities | 15,562,837 |
| | 15,562,837 |
| | 8,775,441 |
| | 8,775,441 |
| |
Held-to-maturity securities | 7,806,939 |
| | 7,787,268 |
| | 6,159,590 |
| | 6,135,458 |
| |
Net loans and direct financing leases | 66,323,583 |
| | 66,294,639 |
| | 49,743,256 |
| | 48,024,998 |
| |
Net loans and leases (1) | | 69,333 |
| | — |
| | 93 |
| | 69,426 |
| | 69,146 |
|
Derivatives | 238,219 |
| | 238,219 |
| | 274,872 |
| | 274,872 |
| — |
| | — |
| | 132 |
| | 132 |
| | 132 |
|
Financial Liabilities: | | | | | | | | |
Financial Liabilities | | | | | | | | | | |
Deposits | 75,607,717 |
| | 76,161,091 |
| | 55,294,979 |
| | 55,299,435 |
| 77,041 |
| | — |
| | — |
| | 77,041 |
| | 77,010 |
|
Short-term borrowings | 3,692,654 |
| | 3,692,654 |
| | 615,279 |
| | 615,279 |
| 5,056 |
| | — |
| | — |
| | 5,056 |
| | 5,056 |
|
Long-term debt | 8,309,159 |
| | 8,387,444 |
| | 7,041,364 |
| | 7,016,789 |
| 9,206 |
| | — |
| | — |
| | 9,206 |
| | 9,402 |
|
Derivatives | 98,286 |
| | 98,286 |
| | 144,350 |
| | 144,350 |
| — |
| | — |
| | 86 |
| | 86 |
| | 86 |
|
| |
(1) | Includes collateral-dependent loans measured for impairment. |
The following table presents the level in the fair value hierarchy for the estimated fair values of only Huntington’s financial instruments that are not already on the Consolidated Balance Sheets at fair value at December 31, 20162018 and December 31, 2015:2017: |
| | | | | | | | | | | | | | | |
| Estimated Fair Value Measurements at Reporting Date Using | | December 31, 2018 |
(dollar amounts in millions) | Level 1 | | Level 2 | | Level 3 | |
Financial Assets | | | | | | | |
Trading account securities | $ | 78 |
| | $ | 27 |
| | $ | — |
| | $ | 105 |
|
Available-for-sale securities | 5 |
| | 10,610 |
| | 3,165 |
| | 13,780 |
|
Held-to-maturity securities | — |
| | 8,286 |
| | — |
| | 8,286 |
|
Other securities (1) | 22 |
| | — |
| | — |
| | 22 |
|
Loans held for sale | — |
| | 613 |
| | 193 |
| | 806 |
|
Net loans and direct financing leases | — |
| | 49 |
| | 73,619 |
| | 73,668 |
|
Financial Liabilities | | | | | | | |
Deposits | — |
| | 76,922 |
| | 7,809 |
| | 84,731 |
|
Short-term borrowings | 1 |
| | — |
| | 2,016 |
| | 2,017 |
|
Long-term debt | — |
| | 8,158 |
| | 560 |
| | 8,718 |
|
|
| | | | | | | | | | | | | | | |
| Estimated Fair Value Measurements at Reporting Date Using | | December 31, 2017 |
(dollar amounts in millions) | Level 1 | | Level 2 | | Level 3 | |
Financial Assets | | | | | | | |
Trading account securities | $ | 83 |
| | $ | 3 |
| | $ | — |
| | $ | 86 |
|
Available-for-sale securities | 5 |
| | 11,673 |
| | 3,191 |
| | 14,869 |
|
Held-to-maturity securities | — |
| | 8,971 |
| | — |
| | 8,971 |
|
Other securities (1) | 19 |
| | — |
| | — |
| | 19 |
|
Loans held for sale | — |
| | 413 |
| | 78 |
| | 491 |
|
Net loans and direct financing leases | — |
| | — |
| | 69,146 |
| | 69,146 |
|
Financial Liabilities |
| |
| |
| | |
Deposits | — |
| | 73,975 |
| | 3,035 |
| | 77,010 |
|
Short-term borrowings | — |
| | — |
| | 5,056 |
| | 5,056 |
|
Long-term debt | — |
| | 8,944 |
| | 458 |
| | 9,402 |
|
|
| | | | | | | | | | | | | | | |
| Estimated Fair Value Measurements at Reporting Date Using | | December 31, 2016 |
(dollar amounts in thousands) | Level 1 | | Level 2 | | Level 3 | |
Financial Assets | | | | | | | |
Held-to-maturity securities | $ | — |
| | $ | 7,787,268 |
| | $ | — |
| | $ | 7,787,268 |
|
Net loans and direct financing leases | — |
| | — |
| | 66,294,639 |
| | 66,294,639 |
|
Financial Liabilities | | | | | | | |
Deposits | — |
| | 72,319,328 |
| | 3,841,763 |
| | 76,161,091 |
|
Short-term borrowings | 474 |
| | — |
| | 3,692,180 |
| | 3,692,654 |
|
Long-term debt | — |
| | 7,980,176 |
| | 407,268 |
| | 8,387,444 |
|
|
| | | | | | | | | | | | | | | |
| Estimated Fair Value Measurements at Reporting Date Using | | December 31, 2015 |
(dollar amounts in thousands) | Level 1 | | Level 2 | | Level 3 | |
Financial Assets | | | | | | | |
Held-to-maturity securities | $ | — |
| | $ | 6,135,458 |
| | $ | — |
| | $ | 6,135,458 |
|
Net loans and direct financing leases | — |
| | — |
| | 48,024,998 |
| | 48,024,998 |
|
Financial Liabilities | | | | | | | |
Deposits | — |
| | 51,869,105 |
| | 3,430,330 |
| | 55,299,435 |
|
Short-term borrowings | — |
| | 1,770 |
| | 613,509 |
| | 615,279 |
|
Long-term debt | — |
| | — |
| | 7,016,789 |
| | 7,016,789 |
|
| |
(1) | Excludes securities without readily determinable fair values. |
The short-term nature of certain assets and liabilities result in their carrying value approximating fair value. These include trading account securities, customers’ acceptance liabilities, short-term borrowings, bank acceptances outstanding, FHLB advances, and cash and short-term assets, which include cash and due from banks, interest-bearing deposits in banks, andinterest-bearing deposits at Federal Reserve Bank, federal funds sold, and securities purchased under resale agreements. Loan commitments and letters-of-credit generally have short-term, variable-rate features and contain clauses that limit Huntington’s exposure to changes in customer credit quality. Accordingly, their carrying values, which are immaterial at the respective balance sheet dates, are reasonable estimates of fair value.
Certain assets, the most significant being operating lease assets, bank owned life insurance, and premises and equipment, do not meet the definition of a financial instrument and are excluded from this disclosure. Similarly, mortgage and nonmortgage servicing rights, deposit base, and other customer relationship intangibles are not considered financial instruments and are not included above. Accordingly, this fair value information is not intended to, and does not, represent Huntington’s underlying value. Many of the assets and liabilities subject to the disclosure requirements are not actively traded, requiring fair values to be estimated
by Management. These estimations necessarily involve the use of judgment about a wide variety of factors, including but not limited to, relevancy of market prices of comparable instruments, expected future cash flows, and appropriate discount rates.
The following methods and assumptions were used by Huntington to estimate the fair value of the remaining classes of financial instruments:
Held-to-maturity securities
Fair values are determined by using models that are based on security-specific details, as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices, and interest rate spreads on relevant benchmark securities.
Loans and Direct Financing Leases
Variable-rate loans that reprice frequently are based on carrying amounts, as adjusted for estimated credit losses. The fair values for other loans and leases are estimated using discounted cash flow analyses and employ interest rates currently being offered for loans and leases with similar terms. The rates take into account the position of the yield curve, as well as an adjustment for prepayment risk, operating costs, and profit. This value is also reduced by an estimate of expected losses and the credit risk associated in the loan and lease portfolio. The valuation of the loan portfolio reflected discounts that Huntington believed are consistent with transactions occurring in the marketplace.
Deposits
Demand deposits, savings accounts, and money market deposits are, by definition, equal to the amount payable on demand. The fair values of fixed-rate time deposits are estimated by discounting cash flows using interest rates currently being offered on certificates with similar maturities.
Debt
Long-term debt is based upon quoted market prices, which are inclusive of Huntington’s credit risk. In the absence of quoted market prices, discounted cash flows using market rates for similar debt with the same maturities are used in the determination of fair value.
19.18. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are recorded in the Consolidated Balance Sheets as either an asset or a liability (in accrued income and other assets or accrued expenses and other liabilities, respectively) and measured at fair value.
Derivative financial instruments can be designated as accounting hedges under GAAP. Designating a derivative as an accounting hedge allows Huntington to recognize gains and losses, less any ineffectiveness, in the income statement within the same period that the hedged item affects earnings. Gains and losses on derivatives that are not designated to an effective hedge relationship under GAAP immediately impact earnings within the period they occur.
The following table presents the fair values of all derivative instruments included in the Consolidated Balance Sheets at December 31, 2018 and December 31, 2017. Amounts in the table below are presented gross without the impact of any net collateral arrangements. |
| | | | | | | | | | | | | | | |
| December 31, 2018 | December 31, 2017 |
(dollar amounts in millions) | Asset | | Liability | | Asset | | Liability |
Derivatives designated as Hedging Instruments | | | | | | | |
Interest rate contracts | $ | 44 |
| | $ | 42 |
| | $ | 22 |
| | $ | 121 |
|
Derivatives not designated as Hedging Instruments | | | | | | | |
Interest rate contracts | 261 |
| | 165 |
| | 187 |
| | 100 |
|
Foreign exchange contracts | 23 |
| | 19 |
| | 18 |
| | 18 |
|
Commodities contracts | 172 |
| | 168 |
| | 92 |
| | 87 |
|
Equity contracts | — |
| | 10 |
| | 3 |
| | 5 |
|
Total Contracts | $ | 500 |
| | $ | 404 |
| | $ | 322 |
| | $ | 331 |
|
The following table presents the amount of gain or loss recognized in income for derivatives not designated as hedging instruments under ASC Subtopic 815-10 in the Condensed Consolidated Income Statement for the year ended December 31, 2018. |
| | | | | | | |
| | Location of Gain or (Loss) Recognized in Income on Derivative | | Amount of Gain or (Loss) Recognized in Income on Derivative |
(dollar amounts in millions) | | | | | Year Ended December 31, |
Interest rate contracts: | | | | | |
Customer | | Capital markets fees | | | $ | 41 |
|
Mortgage Banking | | Mortgage banking income | | | (19 | ) |
Foreign exchange contracts | | Capital markets fees | | | 27 |
|
Commodities contracts | | Capital markets fees | | | 6 |
|
Equity contracts | | Other noninterest expense | | | 4 |
|
Total | | | | | $ | 59 |
|
Derivatives used in Asset and Liability Management Activities
Huntington engages in balance sheet hedging activity, principally for asset liability management purposes, to convert fixed rate assets or liabilities into floating rate or vice versa. Balance sheet hedging activity is arranged to receive hedge accounting treatment and is classified as either fair value or cash flow hedges. Fair value hedges are purchasedexecuted to convert deposits and subordinated and other long-term debt from fixed-rate obligationsliabilities to floating rate. Cash flow hedges are also used to convert floating rate loans made to customersassets into fixed rate loans.assets.
The following table presents the gross notional values of derivatives used in Huntington’s asset and liability management activities at December 31, 2016,2018 and December 31, 2017, identified by the underlying interest rate-sensitive instruments:
|
| | | | | | | | | | | |
(dollar amounts in thousands) | Fair Value Hedges | | Cash Flow Hedges | | Total |
Instruments associated with: | | | | | |
Loans | $ | — |
| | $ | 3,325,000 |
| | $ | 3,325,000 |
|
Deposits | — |
| | — |
| | — |
|
Subordinated notes | 950,000 |
| | — |
| | 950,000 |
|
Long-term debt | 6,525,000 |
| | — |
| | 6,525,000 |
|
Total notional value at December 31, 2016 | $ | 7,475,000 |
| | $ | 3,325,000 |
| | $ | 10,800,000 |
|
|
| | | | | | | | | | | |
| December 31, 2018 |
(dollar amounts in millions) | Fair Value Hedges | | Cash Flow Hedges | | Total |
Instruments associated with: | | | | | |
Investment securities | — |
| | 12 |
| | 12 |
|
Long-term debt | 4,865 |
| | — |
| | 4,865 |
|
Total notional value at December 31, 2018 | $ | 4,865 |
| | $ | 12 |
| | $ | 4,877 |
|
| | | | | |
| | | | | |
| December 31, 2017 |
(dollar amounts in millions) | Fair Value Hedges | | Cash Flow Hedges | | Total |
Instruments associated with: | | | | | |
Long-term debt | 8,375 |
| | — |
| | 8,375 |
|
Total notional value at December 31, 2017 | $ | 8,375 |
| | $ | — |
| | $ | 8,375 |
|
The following table presents additional information about the interest rate swaps used in Huntington’s asset and liability management activities at December 31, 2016:
2018 and December 31, 2017:
| | | | | | | Weighted-Average Rate | December 31, 2018 |
(dollar amounts in thousands) | Notional Value | | Average Maturity (years) | | Fair Value | | Receive | | Pay | |
| | | | Average Maturity (years) | | | | Weighted-Average Rate |
(dollar amounts in millions) | | Notional Value | | Fair Value | | Receive | | Pay |
Asset conversion swaps | | | | | | | | | | | | | | | | | | |
Receive fixed—generic | $ | 3,325,000 |
| | 0.6 | | $ | (2,060 | ) | | 1.04 | % | | 0.91 | % | $ | 12 |
| | 1.2 | | $ | — |
| | 2.20 | % | | 2.46 | % |
Liability conversion swaps | | | | | | | | | | | | | | |
Receive fixed—generic | 7,475,000 |
| | 3.1 | | (51,496 | ) | | 1.49 |
| | 0.88 |
| 4,865 |
| | 2.6 | | 2 |
| | 2.24 |
| | 2.54 |
|
Total swap portfolio at December 31, 2016 | $ | 10,800,000 |
| | 2.3 | | $ | (53,556 | ) | | 1.35 | % | | 0.89 | % | |
Total swap portfolio at December 31, 2018 | | $ | 4,877 |
| | 2.6 | | $ | 2 |
| | 2.24 | % | | 2.54 | % |
| | | | | | | | |
| | December 31, 2017 |
| | | | Average Maturity (years) | | | | Weighted-Average Rate |
(dollar amounts in millions) | | Notional Value | | Fair Value | | Receive | | Pay |
Liability conversion swaps | | | | | | | | |
Receive fixed—generic | | 8,375 |
| | 2.5 | | (99 | ) | | 1.56 | % | | 1.44 | % |
Total swap portfolio at December 31, 2017 | | $ | 8,375 |
| | 2.5 | | $ | (99 | ) | |
|
| |
|
|
These derivative financial instruments were entered into for the purpose of managing the interest rate risk of assets and liabilities. Consequently, net amounts receivable or payable on contracts hedging either interest earning assets or interest bearing liabilities were accrued as an adjustment to either interest income or interest expense. The net amounts resulted in an increase (decrease) to net interest income of $72$(36) million, $108$23 million, and $98$72 million for the years ended December 31, 2016, 2015,2018, 2017, and 2014,2016, respectively.
In connection withDuring the salesecond quarter of Huntington’s Class B Visa2018, Huntington terminated ®$2.9 billion shares, Huntington entered into a swap agreement with the purchaser(notional value) of liability conversion swaps subsequent to de-designating these swaps as fair value hedges. The adjusted basis of the shares. The swap agreement adjusts for dilution inhedged item at termination was recorded as a loss of $149 million, which is being amortized over the conversion ratioremaining life of Class B sharesthe long-term debt using the effective yield method. Cash payments to counterparties resulting from the Visa® litigation. At December 31, 2016, the fair valuetermination of the swap liabilityinterest rate swaps are classified as operating activities in our Consolidated Statement of $6 million is an estimate of the exposure liability based upon Huntington’s assessment of the potential Visa® litigation losses.Cash Flows.
The following table presents the fair values at December 31, 2016 and 2015 of Huntington’s derivatives that are designated and not designated as hedging instruments. Amounts in the table below are presented gross without the impact of any net collateral arrangements:
Asset derivatives included in accrued income and other assets:
|
| | | | | | | |
(dollar amounts in thousands) | December 31, 2016 | | December 31, 2015 |
Interest rate contracts designated as hedging instruments | $ | 46,440 |
| | $ | 80,513 |
|
Interest rate contracts not designated as hedging instruments | 213,587 |
| | 190,846 |
|
Foreign exchange contracts not designated as hedging instruments | 23,265 |
| | 37,727 |
|
Commodity contracts not designated as hedging instruments | 108,026 |
| | 117,894 |
|
Equity contracts not designated as hedging instruments | 9,775 |
| | — |
|
Total contracts | $ | 401,093 |
| | $ | 426,980 |
|
Liability derivatives included in accrued expenses and other liabilities:
|
| | | | | | | |
(dollar amounts in thousands) | December 31, 2016 | | December 31, 2015 |
Interest rate contracts designated as hedging instruments | $ | 99,996 |
| | $ | 15,215 |
|
Interest rate contracts not designated as hedging instruments | 143,976 |
| | 121,815 |
|
Foreign exchange contracts not designated as hedging instruments | 19,576 |
| | 35,283 |
|
Commodity contracts not designated as hedging instruments | 104,328 |
| | 114,887 |
|
Equity contracts not designated as hedging instruments | — |
| | — |
|
Total contracts | $ | 367,876 |
| | $ | 287,200 |
|
Fair Value Hedges
The changes in fair value of the fair value hedges are to the extent that the hedging relationship is effective, recorded through earnings and offset against changes in the fair value of the hedged item.
The following table presents the change in fair value for derivatives designated as fair value hedges as well as the offsetting change in fair value on the hedged item:
|
| | | | | | | | | | | |
| Year ended December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | | 2014 |
Interest rate contracts | | | | | |
Change in fair value of interest rate swaps hedging deposits (1) | $ | (82 | ) | | $ | (996 | ) | | $ | (1,045 | ) |
Change in fair value of hedged deposits (1) | 72 |
| | 992 |
| | 1,025 |
|
Change in fair value of interest rate swaps hedging subordinated notes (2) | (47,852 | ) | | (8,237 | ) | | 476 |
|
Change in fair value of hedged subordinated notes (2) | 45,019 |
| | 8,237 |
| | (476 | ) |
Change in fair value of interest rate swaps hedging long-term debt (2) | (74,481 | ) | | 3,903 |
| | 1,990 |
|
Change in fair value of hedged other long-term debt (2) | 67,389 |
| | (3,602 | ) | | 828 |
|
|
| | | | | | | | |
| Year Ended December 31, |
(dollar amounts in millions) | 2018 | | 2017 | | 2016 |
Interest rate contracts | | | | | |
Change in fair value of interest rate swaps hedging long-term debt (1) | 112 |
| | (53 | ) | | (122 | ) |
Change in fair value of hedged long term debt (1) | (104 | ) | | 54 |
| | 112 |
|
| |
(1) | Effective portion of the hedging relationship is recognizedRecognized in Interest expense—deposits in the Consolidated Statements of Income. Any resulting ineffective portion of the hedging relationship is recognized in noninterest income long-term debt in the Consolidated Statements of Income. |
| |
(2) | Effective portionAs of December 31, 2018, the hedging relationship is recognized in Interest expense—subordinated notes and other long-term debt in the Consolidated Statements of Income. Any resulting ineffective portion of the hedging relationship is recognized in noninterest income in the Consolidated Statements of Income. |
The following table presentsamounts were recorded on the gains and (losses) recognized in OCI and the location in the Consolidated Statements of Income of gains and (losses) reclassified from OCI into earningsbalance sheet related to cumulative basis adjustments for derivatives designated as effective cash flow hedges:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives in cash flow hedging relationships | Amount of gain or (loss) recognized in OCI on derivatives (effective portion) | | Location of gain or (loss) reclassified from accumulated OCI into earnings (effective portion) | | Amount of (gain) or loss reclassified from accumulated OCI into earnings (effective portion) (pre-tax) |
(dollar amounts in thousands) | 2016 | | 2015 | | 2014 | | | | 2016 | | 2015 | | 2014 |
Interest rate contracts | | | | | | | | | | | | | |
Loans | $ | 1,548 |
| | $ | 8,428 |
| | $ | 9,192 |
| | Interest and fee income—loans and leases | | $ | (361 | ) | | $ | (210 | ) | | $ | (4,064 | ) |
Investment securities | — |
| | — |
| | — |
| | Noninterest income - other income | | 1 |
| | (10 | ) | | 93 |
|
Total | $ | 1,548 |
| | $ | 8,428 |
| | $ | 9,192 |
| | | | $ | (360 | ) | | $ | (220 | ) | | $ | (3,971 | ) |
|
| | | | | | | |
| Carrying Amount of the Hedged Liabilities | | Cumulative Amount of Fair Value Hedging Adjustment To Hedged Liabilities |
(dollar amounts in millions) | December 31, 2018 | | December 31, 2018 |
Long-term debt | $ | 4,845 |
| | $ | (12 | ) |
Reclassified gains and losses on swaps related to loans and investment securities and swaps related to subordinated debt are recorded within interest income and interest expense, respectively. During the next twelve months, Huntington expects to reclassify to earnings approximately $(2) million after-tax,The cumulative amount of unrealized gains (losses) on cash flow hedging derivatives currently in OCI.
To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair value will not be included in current earnings but are reported as a component of OCI in the Consolidated Statements of Changes in Shareholders’ Equity. These changes in fair value will be included in earnings of future periods when earnings are also affected by the changes in thehedging adjustments remaining for any hedged cash flows. To the extent these derivatives are not effective, changes in their fair values are immediately included in noninterest income.
The following table presents the gainsassets and (losses) recognized in noninterest incomeliabilities for the ineffective portion of interest rate contracts for derivatives designated as cash flow hedges for the years endingwhich hedge accounting has been discontinued is $(127) million at December 31, 2016, 2015, and 2014:
|
| | | | | | | | | | | |
| December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | | 2014 |
Derivatives in cash flow hedging relationships | | | | | |
Interest rate contracts: | | | | | |
Loans | $ | (317 | ) | | $ | (763 | ) | | $ | 74 |
|
2018.Derivatives used in mortgage banking activities
Mortgage loan origination hedging activity
Huntington’s mortgage origination hedging activity is related to the hedging of the mortgage pricing commitments to customers and the secondary sale to third parties. The value of a newly originated mortgage is not firm until the interest rate is committed or locked. TheForward commitments to sell economically hedge the possible loss on interest rate lock commitments due to interest rate change. The net asset (liability) position of these derivatives at December 31, 2018 and December 31, 2017 are derivative positions offset by forward$(4) million and $7 million, respectively. At December 31, 2018 and 2017, Huntington had commitments to sell loans.securities collateralized by mortgage loans of $0.8 billion and $0.7 billion, respectively. These contracts mature in less than one year.
Huntington uses two types of mortgage-backed securities in its forward commitments to sell loans. The first type of forward commitment is a “To Be Announced” (or TBA), the second is a “Specified Pool” mortgage-backed security. Huntington uses these derivatives to hedge the value of mortgage-backed securities until they are sold.
The following table summarizes the derivative assets and liabilitiesDerivatives used in mortgage banking activities:municipal bond underwriting
|
| | | | | | | |
(dollar amounts in thousands) | December 31, 2016 | | December 31, 2015 |
Derivative assets: | | | |
Interest rate lock agreements | $ | 5,747 |
| | $ | 6,721 |
|
Forward trades and options | 13,319 |
| | 2,468 |
|
Total derivative assets | 19,066 |
| | 9,189 |
|
Derivative liabilities: | | | |
Interest rate lock agreements | (1,598 | ) | | (220 | ) |
Forward trades and options | (1,173 | ) | | (1,239 | ) |
Total derivative liabilities | (2,771 | ) | | (1,459 | ) |
Net derivative asset | $ | 16,295 |
| | $ | 7,730 |
|
MSR hedging activity
Huntington’s MSR economic hedging activity usesInterest rate futures contracts are used to offset interest rate exposure of the broker-dealer underwriting inventory. These derivative financial instruments are recorded on the consolidated balance sheets as trading account securities and the related net gain associated is recorded in capital market fees on the Consolidated Statement of Income. These derivatives to manage the value of the MSR asset and to mitigate the various types of risk inherent in the MSR asset, including risks related to duration, basis, convexity, volatility, and yield curve. Theare not designated as hedging instruments include forward commitments, interest rate swaps, and options on interest rate swaps.
instruments. The total notional value of these derivative financial instruments at December 31, 20162018 was $11 million and 2015, was $0.3 billion and $0.5 billion, respectively. The total notional amount at December 31, 2016 corresponds to trading assets withhad a fair value of less than $1 million and trading liabilities with a fair value of $3 million. Net trading gains (losses) related to MSR hedging for the years ended December 31, 2016, 2015, and 2014, were $(1) million, $(2) million, and $7 million, respectively. These amounts are included in mortgage banking income in the Consolidated Statements of Income.
Derivatives used in tradingcustomer related activities
Various derivative financial instruments are offered to enable customers to meet their financing and investing objectives and for their risk management purposes. Derivative financial instruments used in trading activities consistedconsist of commodity, interest rate, and foreign exchange contracts. The derivative contracts grant the option holder the right to buy or sell an underlying financial instrument for a predetermined price before the contract expires. Huntington may enterenters into offsetting third-party contracts with approved, reputable counterparties with substantially matching terms and currencies in order to economically hedge significant exposure related to derivatives used in trading activities.
The interest rate or price risk of customer derivatives is mitigated by entering into similar derivatives having offsetting terms with other counterparties. The credit risk to these customers is evaluated and included in the calculation of fair value. Foreign currency derivatives help the customer hedge risk and reduce exposure to fluctuations in exchange rates. Transactions are primarily in liquid currencies with Canadian dollars and Euros comprising a majority of all transactions. Commodity derivatives help the customer hedge risk and reduce exposure to fluctuations in the price of various commodities. Hedging of energy-related products and base metals comprise the majority of all transactions.
The net fair values of these derivative financial instruments, for which the gross amounts are included in accrued income and other assets or accrued expenses and other liabilities at December 31, 20162018 and December 31, 2015,2017, were $80$92 million and $76$88 million, respectively. The total notional values of derivative financial instruments used by Huntington on behalf of customers, including offsetting derivatives, were $20.6$26 billion and $14.6$22 billion at December 31, 20162018 and December 31, 2015,2017, respectively. Huntington’s credit risksrisk from interest rate swaps used for trading purposes were $196customer derivatives was $132 million and $224$119 million at the same dates, respectively.
Share Swap Economic Hedge
Huntington acquires and holdsVisa®-related Swaps
In connection with the sale of Huntington’s Class B Visa® shares, of Huntington common stock in a Rabbi Trust for the Executive Deferred Compensation Plan. Huntington common stock held in the Rabbi Trust is recorded at cost and the corresponding deferred compensation liability is recorded at fair value using Huntington's share price as a significant input.
During the second quarter of 2016, Huntington entered into an economic hedgea swap agreement with a $20 million notional amount to hedge deferred compensation expense related to the Executive Deferred Compensation Plan.purchaser of the shares. The economic hedge is recorded at fair value within other assets or liabilities. Changesswap agreement adjusts for dilution in the fair value are recorded directly through other noninterest expenseconversion ratio of Class B shares resulting from changes in the Consolidated Statements of Income.Visa® litigation. In connection with the FirstMerit acquisition, Huntington acquired an additional Visa® related swap agreement. At December 31, 2016,2018, the combined fair value of the share swap was $10 million.
Risk Participation Agreements
Huntington periodically enters into risk participation agreements in order to manage credit risk of its derivative positions. These agreements transfer counterparty credit risk related to interest rate swaps to and from other financial institutions. Huntington can mitigate exposure to certain counterparties or take on exposure to generate additional income. Huntington’s notional exposure for interest rate swaps originated by other financial institutions was $582 million and $344 million at December 31, 2016 and December 31, 2015, respectively. Huntington will make payments under these agreements if a customer defaults on its obligation to perform under the terms of the underlying interest rate derivative contract. The amount Huntington would have to pay if all counterparties defaulted on their swap contracts is the fair value of these risk participations, which was a positive value (receivable)liabilities of $3 million at December 31, 2016is an estimate of the exposure liability based upon Huntington’s assessment of the potential Visa® litigation losses and a negative value (payable)timing of $6 million at December 31, 2015. These contracts mature between 2017 and 2043 and are deemed investment grade.the litigation settlement.
Financial assets and liabilities that are offset in the Consolidated Balance Sheets
Huntington records derivatives at fair value as further described in Note 18. Huntington records these derivatives net of any master netting arrangement in the Consolidated Balance Sheets. Collateral agreements are regularly entered into as part of the underlying derivative agreements with Huntington’s counterparties to mitigate counterparty credit risk.17.
All derivatives are carried on the Consolidated Balance Sheets at fair value. Derivative balances are presented on a net basis taking into consideration the effects of legally enforceable master netting agreements. CashAdditionally, collateral exchanged with counterparties is also netted against the applicable derivative fair values. Huntington enters into derivative transactions with two primary groups: broker-dealers and banks, and Huntington’s customers. Different methods are utilized for managing counterparty credit exposure and credit risk for each of these groups.
Huntington enters into transactions with broker-dealers and banks for various risk management purposes. These types of transactions generally are high dollar volume. Huntington enters into bilateral collateral and master netting agreements with these counterparties, and routinely exchangeexchanges cash and high quality securities collateral with these counterparties.collateral. Huntington enters into transactions with customers to meet their financing, investing, payment and risk management needs. These types of transactions generally are low dollar volume. Huntington generally enters into master netting agreements with customer counterparties, however collateral is generally not exchanged with customer counterparties.
At December 31, 20162018 and December 31, 2015,2017, aggregate credit risk associated with these derivatives, net of collateral that has been pledged by the counterparty, was $26$37 million and $15$30 million, respectively. The credit risk associated with interest rate swaps is calculated after considering master netting agreements with broker-dealers and banks.
At December 31, 2016,2018, Huntington pledged $172$45 million of investment securities and cash collateral to counterparties, while other counterparties pledged $90$144 million of investment securities and cash collateral to Huntington to satisfy collateral netting agreements. In the event of credit downgrades, Huntington would not be required to provide additional collateral.
The following tables present the gross amounts of these assets and liabilities with any offsets to arrive at the net amounts recognized in the Consolidated Balance Sheets at December 31, 20162018 and December 31, 2015:
2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Offsetting of Financial Assets and Derivative Assets |
| | | | | | | | Gross amounts not offset in the consolidated balance sheets | | |
(dollar amounts in thousands) | | Gross amounts of recognized assets | | Gross amounts offset in the consolidated balance sheets | | Net amounts of assets presented in the consolidated balance sheets | | Financial instruments | | Cash collateral received | | Net amount |
Offsetting of Financial Assets and Derivative Assets | | | | | | | | | | | | |
December 31, 2016 | Derivatives | $ | 420,159 |
| | $ | (181,940 | ) | | $ | 238,219 |
| | $ | (34,328 | ) | | $ | (5,428 | ) | | $ | 198,463 |
|
December 31, 2015 | Derivatives | 436,169 |
| | (161,297 | ) | | 274,872 |
| | (39,305 | ) | | (3,462 | ) | | 232,105 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Offsetting of Derivative Assets |
| | | | Gross amounts offset in the consolidated balance sheets | | Net amounts of assets presented in the consolidated balance sheets | | Gross amounts not offset in the condensed consolidated balance sheets | | |
(dollar amounts in millions) | | Gross amounts of recognized assets | | | | Financial instruments | | Cash collateral received | | Net amount |
December 31, 2018 | Derivatives | $ | 500 |
| | $ | (291 | ) | | $ | 209 |
| | $ | (4 | ) | | $ | (53 | ) | | $ | 152 |
|
December 31, 2017 | Derivatives | 322 |
| | (190 | ) | | 132 |
| | (11 | ) | | (18 | ) | | 103 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Offsetting of Financial Liabilities and Derivative Liabilities |
| | | | | | | | Gross amounts not offset in the consolidated balance sheets | | |
(dollar amounts in thousands) | | Gross amounts of recognized liabilities | | Gross amounts offset in the consolidated balance sheets | | Net amounts of assets presented in the consolidated balance sheets | | Financial instruments | | Cash collateral delivered | | Net amount |
Offsetting of Financial Liabilities and Derivative Liabilities | | | | | | | | | | | | |
December 31, 2016 | Derivatives | $ | 370,647 |
| | $ | (272,361 | ) | | $ | 98,286 |
| | $ | (7,550 | ) | | $ | (23,943 | ) | | $ | 66,793 |
|
December 31, 2015 | Derivatives | 288,659 |
| | (144,309 | ) | | 144,350 |
| | (62,460 | ) | | (20 | ) | | 81,870 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Offsetting of Derivative Liabilities |
| | | | Gross amounts offset in the consolidated balance sheets | | Net amounts of liabilities presented in the consolidated balance sheets | | Gross amounts not offset in the condensed consolidated balance sheets | | |
(dollar amounts in millions) | | Gross amounts of recognized liabilities | | | | Financial instruments | | Cash collateral delivered | | Net amount |
December 31, 2018 | Derivatives | $ | 404 |
| | $ | (217 | ) | | $ | 187 |
| | $ | — |
| | $ | (12 | ) | | $ | 175 |
|
December 31, 2017 | Derivatives | 331 |
| | (245 | ) | | 86 |
| | — |
| | (21 | ) | | 65 |
|
20.19. VIEs
Consolidated VIEs
Consolidated VIEs at December 31, 2016, consisted of certain loan and lease securitization trusts. Huntington has determined the trusts are VIEs. Huntington has concluded that it is the primary beneficiary of these trusts because it has the power to direct the activities of the entity that most significantly affect the entity’s economic performance and it has either the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. During the 2015 first quarter, Huntington acquired two securitization trusts with its acquisition of Huntington Technology Finance. During the 2016 first quarter, Huntington canceled the Series 2012A Trust. As a result, any remaining assets at the time of the cancellation were no longer part of the trust.
The following tables present the carrying amount and classification of the consolidated trusts’ assets and liabilities that were included in the Consolidated Balance Sheets at December 31, 2016 and 2015:
|
| | | | | | | | | | | | |
| December 31, 2016 |
| Huntington Technology Funding Trust | | Other Consolidated VIEs | | Total |
(dollar amounts in thousands) | | Series 2014A | | |
Assets: | | | | | | |
Cash | | $ | 1,564 |
| | $ | — |
| | $ | 1,564 |
|
Net loans and leases | | 69,825 |
| | — |
| | 69,825 |
|
Accrued income and other assets | | — |
| | 281 |
| | 281 |
|
Total assets | | $ | 71,389 |
| | $ | 281 |
| | $ | 71,670 |
|
Liabilities: | | | | | | |
Other long-term debt | | $ | 57,494 |
| | $ | — |
| | $ | 57,494 |
|
Accrued interest and other liabilities | | — |
| | 281 |
| | 281 |
|
Total liabilities | | 57,494 |
| | 281 |
| | 57,775 |
|
Equity: | | | | | | |
Beneficial Interest owned by third party | | 13,895 |
| | — |
| | 13,895 |
|
Total liabilities and equity | | $ | 71,389 |
| | $ | 281 |
| | $ | 71,670 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2015 |
| Huntington Technology Funding Trust | | Other Consolidated VIEs | | Total |
(dollar amounts in thousands) | Series 2012A | | Series 2014A | | |
Assets: | | | | | | | |
Cash | $ | 1,377 |
| | $ | 1,561 |
| | $ | — |
| | $ | 2,938 |
|
Net loans and leases | 32,180 |
| | 152,331 |
| | — |
| | 184,511 |
|
Accrued income and other assets | — |
| | — |
| | 229 |
| | 229 |
|
Total assets | $ | 33,557 |
| | $ | 153,892 |
| | $ | 229 |
| | $ | 187,678 |
|
Liabilities: | | | | | | | |
Other long-term debt | $ | 27,153 |
| | $ | 123,577 |
| | $ | — |
| | $ | 150,730 |
|
Accrued interest and other liabilities | — |
| | — |
| | 229 |
| | 229 |
|
Total liabilities | 27,153 |
| | 123,577 |
| | 229 |
| | 150,959 |
|
Equity: | | | | | | | |
Beneficial Interest owned by third party | $ | 6,404 |
| | $ | 30,315 |
| | — |
| | 36,719 |
|
Total liabilities and equity | $ | 33,557 |
| | $ | 153,892 |
| | $ | 229 |
| | $ | 187,678 |
|
The loans and leases were designated to repay the securitized notes. Huntington services the loans and leases and uses the proceeds from principal and interest payments to pay the securitized notes during the amortization period. Huntington has not provided financial or other support that was not previously contractually required.
Unconsolidated VIEs
The following tables provide a summary of the assets and liabilities included in Huntington’s Consolidated Financial Statements, as well as the maximum exposure to losses, associated with its interests related to unconsolidated VIEs for which Huntington holds an interest, but is not the primary beneficiary, to the VIE at December 31, 2016,2018, and 2015:
2017:
|
| | | | | | | | | | | |
| December 31, 2016 |
(dollar amounts in thousands) | Total Assets | | Total Liabilities | | Maximum Exposure to Loss |
2016-1 Automobile Trust | $ | 14,770 |
| | $ | — |
| | $ | 14,770 |
|
2015-1 Automobile Trust | 2,227 |
| | — |
| | 2,227 |
|
2012-1 Automobile Trust | — |
| | — |
| | — |
|
2012-2 Automobile Trust | — |
| | — |
| | — |
|
Trust Preferred Securities | 13,919 |
| | 252,552 |
| | — |
|
Low Income Housing Tax Credit Partnerships | 576,880 |
| | 292,721 |
| | 576,880 |
|
Other Investments | 79,195 |
| | 42,316 |
| | 79,195 |
|
Total | $ | 686,991 |
| | $ | 587,589 |
| | $ | 673,072 |
|
|
| | | | | | | | | | | |
| December 31, 2018 |
(dollar amounts in millions) | Total Assets | | Total Liabilities | | Maximum Exposure to Loss |
Trust Preferred Securities | 14 |
| | 252 |
| | — |
|
Affordable Housing Tax Credit Partnerships | 708 |
| | 357 |
| | 708 |
|
Other Investments | 126 |
| | 53 |
| | 126 |
|
Total | $ | 848 |
| | $ | 662 |
| | $ | 834 |
|
|
| | | | | | | | | | | |
| December 31, 2015 |
(dollar amounts in thousands) | Total Assets | | Total Liabilities | | Maximum Exposure to Loss |
2015-1 Automobile Trust | $ | 7,695 |
| | $ | — |
| | $ | 7,695 |
|
2012-1 Automobile Trust | 94 |
| | — |
| | 94 |
|
2012-2 Automobile Trust | 771 |
| | — |
| | 771 |
|
Trust Preferred Securities | 13,919 |
| | 317,106 |
| | — |
|
Low Income Housing Tax Credit Partnerships | 425,500 |
| | 196,001 |
| | 425,500 |
|
Other Investments | 68,746 |
| | 25,762 |
| | 68,746 |
|
Total | $ | 516,725 |
| | $ | 538,869 |
| | $ | 502,806 |
|
|
| | | | | | | | | | | |
| December 31, 2017 |
(dollar amounts in millions) | Total Assets | | Total Liabilities | | Maximum Exposure to Loss |
Trust Preferred Securities | 14 |
| | 252 |
| | — |
|
Affordable Housing Tax Credit Partnerships | 636 |
| | 335 |
| | 636 |
|
Other Investments | 125 |
| | 53 |
| | 125 |
|
Total | $ | 775 |
| | $ | 640 |
| | $ | 761 |
|
AUTOMOBILE TRUST SECURITIZATIONS
The following table provides a summary of automobile transfers to trusts in separate securitization transactions. |
| | | | | | |
(dollar amounts in millions) | | Year | | Amount Transferred |
2016-1 Automobile Trust | | 2016 | | $ | 1,500 |
|
2015-1 Automobile Trust | | 2015 | | 750 |
|
2012-1 Automobile Trust | | 2012 | | 1,300 |
|
2012-2 Automobile Trust | | 2012 | | 1,000 |
|
The securitizations and the resulting sale of all underlying securities qualified for sale accounting. Huntington has concluded that it is not the primary beneficiary of these trusts because it has neither the obligation to absorb losses of the entities that could potentially be significant to the VIEs nor the right to receive benefits from the entities that could potentially be significant to the VIEs. Huntington is not required and does not currently intend to provide any additional financial support to the trusts. Investors and creditors only have recourse to the assets held by the trusts. The interest Huntington holds in the VIEs relates to servicing rights which are included within accrued income and other assets of Huntington’s Consolidated Balance Sheets. The maximum exposure to loss is equal to the carrying value of the servicing asset. See Note 7 for more information.
During the 2016 first quarter, Huntington canceled the 2012-1 Automobile Trust. As a result, any remaining assets at the time of the cancellation were no longer part of the trust. During the 2016 third quarter, Huntington canceled the 2012-2 Automobile Trust. As a result, any remaining assets at the time of the cancellation were no longer part of the trust.
TRUST-PREFERRED SECURITIESTrust-Preferred Securities
Huntington has certain wholly-owned trusts whose assets, liabilities, equity, income, and expenses are not included within Huntington’s Consolidated Financial Statements. These trusts have been formed for the sole purpose of issuing trust-preferred securities, from which the proceeds are then invested in Huntington junior subordinated debentures, which are reflected in Huntington’s Consolidated Balance Sheet as subordinated notes.long-term debt. The trust securities are the obligations of the trusts, and as such, are not consolidated within Huntington’s Consolidated Financial Statements.
A list of trust-preferred securities outstanding at December 31, 20162018 follows:
| | (dollar amounts in thousands) | Rate | | Principal amount of subordinated note/ debenture issued to trust (1) | | Investment in unconsolidated subsidiary | |
(dollar amounts in millions) | | Rate | | Principal amount of subordinated note/ debenture issued to trust (1) | | Investment in unconsolidated subsidiary |
Huntington Capital I | 1.59 | % | (2) | $ | 69,730 |
| | $ | 6,186 |
| 3.50 | % | (2) | $ | 70 |
| | $ | 6 |
|
Huntington Capital II | 1.59 |
| (3) | 32,093 |
| | 3,093 |
| 3.42 |
| (3) | 32 |
| | 3 |
|
Sky Financial Capital Trust III | 2.40 |
| (4) | 72,165 |
| | 2,165 |
| 4.20 |
| (4) | 72 |
| | 2 |
|
Sky Financial Capital Trust IV | 2.25 |
| (4) | 74,320 |
| | 2,320 |
| 4.20 |
| (4) | 74 |
| | 2 |
|
Camco Financial Trust | 3.43 |
| (5) | 4,244 |
| | 155 |
| 4.13 |
| (5) | 4 |
| | 1 |
|
Total | | | $ | 252,552 |
| | $ | 13,919 |
| | | $ | 252 |
| | $ | 14 |
|
| |
(1) | Represents the principal amount of debentures issued to each trust, including unamortized original issue discount. |
| |
(2) | Variable effective rate at December 31, 2016,2018, based on three-month LIBOR + 0.70.0.70%. |
| |
(3) | Variable effective rate at December 31, 2016,2018, based on three-month LIBOR + 62.5.0.625%. |
| |
(4) | Variable effective rate at December 31, 2016,2018, based on three-month LIBOR + 1.40.1.40%. |
| |
(5) | Variable effective rate (including impact of purchase accounting accretion) at December 31, 2016,2018, based on three month LIBOR + 1.33.1.33%. |
Each issue of the junior subordinated debentures has an interest rate equal to the corresponding trust securities distribution rate. Huntington has the right to defer payment of interest on the debentures at any time, or from time-to-time for a period not exceeding five years provided that no extension period may extend beyond the stated maturity of the related debentures. During any such extension period, distributions to the trust securities will also be deferred and Huntington’s ability to pay dividends on its common stock will be restricted. Periodic cash payments and payments upon liquidation or redemption with respect to trust securities are guaranteed by Huntington to the extent of funds held by the trusts. The guarantee ranks subordinate and junior in right of payment to all indebtedness of the Company to the same extent as the junior subordinated debt. The guarantee does not place a limitation on the amount of additional indebtedness that may be incurred by Huntington.
LOW INCOME HOUSING TAX CREDIT PARTNERSHIPSAffordable Housing Tax Credit Partnerships
Huntington makes certain equity investments in various limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (LIHTC)LIHTC pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital, to facilitate the sale of additional affordable housing product offerings, and to assist in achieving goals associated with the Community Reinvestment Act. The primary activities of the limited partnerships include the identification, development, and operation of multi familymulti-family housing that is leased to qualifying residential tenants. Generally, these types of investments are funded through a combination of debt and equity.
Huntington uses the proportional amortization method to account for a majority of its investments in these entities. These investments are included in accrued income and other assets. Investments that do not meet the requirements of the proportional amortization method are recognizedaccounted for using the equity method. Investment losses related to these investments are included in noninterest income in the Consolidated Statements of Income.
The following table presents the balances of Huntington’s affordable housing tax credit investments and related unfunded commitments at December 31, 20162018 and 2015.2017.
| | (dollar amounts in thousands) | December 31, 2016 | | December 31, 2015 | |
(dollar amounts in millions) | | December 31, 2018 | | December 31, 2017 |
Affordable housing tax credit investments | $ | 877,237 |
| | $ | 674,157 |
| $ | 1,147 |
| | $ | 996 |
|
Less: amortization | (300,357 | ) | | (248,657 | ) | (439 | ) | | (360 | ) |
Net affordable housing tax credit investments | $ | 576,880 |
| | $ | 425,500 |
| $ | 708 |
| | $ | 636 |
|
Unfunded commitments | $ | 292,721 |
| | $ | 196,001 |
| $ | 357 |
| | $ | 335 |
|
The following table presents other information relating to Huntington’s affordable housing tax credit investments for the years ended December 31, 2016, 2015,2018, 2017, and 2014:2016:
| | | Year Ended December 31, | Year Ended December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | | 2014 | |
(dollar amounts in millions) | | 2018 | | 2017 | | 2016 |
Tax credits and other tax benefits recognized | $ | 79,696 |
| | $ | 59,614 |
| | $ | 51,317 |
| $ | 92 |
| | $ | 91 |
| | $ | 80 |
|
Proportional amortization method | | | | | | | | | | |
Tax credit amortization expense included in provision for income taxes | 52,713 |
| | 42,951 |
| | 39,021 |
| 79 |
| | 70 |
| | 53 |
|
Equity method | | | | | | | | | | |
Tax credit investment losses included in noninterest income | 637 |
| | 355 |
| | 434 |
| — |
| | — |
| | 1 |
|
There were no material sales of LIHTCaffordable housing tax credit investments in 2016, 20152018, 2017 or 2014.2016. Huntington recognized immaterial impairment losses for the years ended December 31, 2016, 20152018, 2017 and 2014.2016. The impairment losses recognized related to the fair value of the tax credit investments that were less than carrying value.
OTHER INVESTMENTSOther Investments
Other investments determined to be VIE’s include investments in New Market Tax Credit Investments,Small Business Investment Companies, Historic Tax Credit Investments, Small Business Investment Companies, Rural Business Investment Companies, certain equity method investments, automobile securitizations and other miscellaneous investments.
21.20. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments to extend credit
In the ordinary course of business, Huntington makes various commitments to extend credit that are not reflected in the Consolidated Financial Statements. The contract amounts of these financial agreements at December 31, 2016,2018, and December 31, 20152017 were as follows:
| | | At December 31, | At December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | |
Contract amount represents credit risk | | | | |
(dollar amounts in millions) | | 2018 | | 2017 |
Contract amount representing credit risk | | | | |
Commitments to extend credit: | | | | | | |
Commercial | $ | 15,190,056 |
| | $ | 11,448,927 |
| $ | 17,149 |
| | $ | 16,219 |
|
Consumer | 12,235,943 |
| | 8,574,093 |
| 14,974 |
| | 13,384 |
|
Commercial real estate | 1,697,671 |
| | 813,271 |
| 1,188 |
| | 1,366 |
|
Standby letters of credit | 637,182 |
| | 511,706 |
| 676 |
| | 510 |
|
Commercial letters-of-credit | 4,610 |
| | 56,119 |
| 14 |
| | 21 |
|
Commitments to extend credit generally have fixed expiration dates, are variable-rate, and contain clauses that permit Huntington to terminate or otherwise renegotiate the contracts in the event of a significant deterioration in the customer’s credit
quality. These arrangements normally require the payment of a fee by the customer, the pricing of which is based on prevailing market conditions, credit quality, probability of funding, and other relevant factors. Since many of these commitments are expected to expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements. The interest rate risk arising from these financial instruments is insignificant as a result of their predominantly short-term, variable-rate nature.
Standby letters-of-credit are conditional commitments issued to guarantee the performance of a customer to a third-party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most of these arrangements mature within two years. The carrying amount of deferred revenue associated with these guarantees was $8$13 million and $7$10 million at December 31, 20162018 and December 31, 2015,2017, respectively.
Commercial letters-of-credit represent short-term, self-liquidating instruments that facilitate customer trade transactions and generally have maturities of no longer than 90 days. The goods or cargo being traded normally securessecure these instruments.
CommitmentsLitigation and Regulatory Matters
In the ordinary course of business, Huntington is routinely a defendant in or party to sell loanspending and threatened legal and regulatory actions and proceedings.
Activity related to our mortgage origination activity supports the hedgingIn view of the mortgage pricing commitments to customers andinherent difficulty of predicting the secondary sale to third parties. At December 31, 2016 and 2015,outcome of such matters, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, Huntington had commitments to sell residential real estate loans of $819 million and $659 million, respectively. These contracts mature in less than one year.
Litigation
The nature of Huntington’s business ordinarily results in a certain amount of pending as well as threatened claims, litigation, investigations, regulatory and legal and administrative cases, matters and proceedings, all of which are considered incidental togenerally cannot predict what the normal conduct of business. When the Company determines it has meritorious defenses to the claims asserted, it vigorously defends itself. The Company considers settlement of cases when, in management’s judgment, it is in the best interests of both the Company and its shareholders to do so.
On at least a quarterly basis, Huntington assesses its liabilities and contingencies in connection with threatened and outstanding legal cases, matters and proceedings, utilizing the latest information available. For cases, matters and proceedings where it is both probable the Company will incur a loss and the amount can be reasonably estimated, Huntington establishes an accrual for the loss. Once established, the accrual is adjusted as appropriate to reflect any relevant developments. For cases, matters or proceedings where a loss is not probable or the amounteventual outcome of the loss cannotpending matters will be, estimated, no accrual is established.
In certain cases, matters and proceedings, exposure to loss exists in excesswhat the timing of the accrual to the extent such loss is reasonably possible, but not probable. Management believes an estimate of the aggregate range of reasonably possible losses, in excess of amounts accrued, for current legal proceedings is up to $65 million at December 31, 2016. For certain other cases, and matters, Management cannot reasonably estimate the possible loss at this time. Any estimate involves significant judgment, given the varying stages of the proceedings (including the fact that many of them are currently in preliminary stages), the existence of multiple defendants in several of the current proceedings whose share of liability has yet to be determined, the numerous unresolved issues in many of the proceedings, and the inherent uncertainty of the various potential outcomes of such proceedings. Accordingly, Management’s estimate will change from time-to-time, and actual losses may be more or less than the current estimate.
While the final outcome of legal cases, matters, and proceedings is inherently uncertain, based on information currently available, advice of counsel, and available insurance coverage, Management believes that the amount it has already accrued is adequate and any incremental liability arising from the Company’s legal cases, matters, or proceedings will not have a material negative adverse effect on the Company’s consolidated financial position as a whole. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each matter may be.
Huntington establishes an accrued liability when those matters present loss contingencies that are both probable and estimable. In such cases, matters, and proceedings, if unfavorable,there may be materialan exposure to loss in excess of any amounts accrued. Huntington thereafter continues to monitor the Company’s consolidated financial position in a particular period.
Meoli v. The Huntington National Bank (Cyberco Litigation). The Bank has been named a defendant in a lawsuit arising from the Bank’s commercial lending, depository, and equipment leasing relationships with Cyberco Holdings, Inc. (Cyberco), based in Grand Rapids, Michigan. In November 2004, an equipment leasing fraud was uncovered, whereby Cyberco sought financing from equipment lessors and financial institutions, including Huntington, allegedly to purchase computer equipment from Teleservices Group, Inc. (Teleservices). Cyberco created fraudulent documentation to close the financing transactions when, in fact, no computer equipment was ever purchased or leased from Teleservices, which later proved to be a shell corporation. Bankruptcy proceedingsmatter for both Cyberco and Teleservices later ensued.
On September 28, 2015, adopting the bankruptcy court's recommendation, the U.S. District Court for the Western District of Michigan entered a judgment against Huntington in the amount of $72 million plus costs and pre- and post-judgment interest. Huntington increased its legal reserve by approximately $38 million to fully accrue forfurther developments that could affect the amount of the judgmentaccrued liability that has been previously established.
For certain matters, Huntington is able to estimate a range of possible loss. In cases in the third quarterwhich Huntington possesses information to estimate a range of 2015 while appealing the decision to the U.S. Sixth Circuit Court of Appeals. On February 8, 2017, the appellate court reversed the district court decision in partpossible loss, that estimate is aggregated and remanded the case to the district courtdisclosed below. There may be other matters for further proceedings. Consistent with its readingwhich a loss is probable or reasonably possible but such an estimate of the appellate court opinion, Huntington decreased its legal reserve by approximately $42range of possible loss may not be possible. For those matters where an estimate of the range of possible loss is possible, management currently estimates the aggregate range of possible loss is $0 to $30 million at December 31, 2018 in excess of the fourth quarteraccrued liability (if any) related to those matters. This estimated range of 2016.possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate. The estimated range of possible loss does not represent Huntington’s maximum loss exposure.
Powell v. Huntington National Bank. Huntington isBased on current knowledge, management does not believe that loss contingencies arising from pending matters will have a defendantmaterial adverse effect on the consolidated financial position of Huntington. Further, management believes that amounts accrued are adequate to address Huntington’s contingent liabilities. However, in a class action filed on October 15, 2013 alleging Huntington charged late fees on mortgage loanslight of the inherent uncertainties involved in a method that violated West Virginia lawthese matters, some of which are beyond Huntington’s control, and the loan documents. Plaintiffs seek statutory civil penalties, compensatorylarge or indeterminate damages and attorney’s fees. Huntington filed a motion for summary judgment on the plaintiffs’ claims, which was granted by the U.S. District Court on December 28, 2016. Plaintiffs have filed a noticesought in some of appeal to the U.S. Fourth Circuit Court of Appeals.
FirstMerit Merger Shareholder Litigation. Huntington is a defendantthese matters, an adverse outcome in five lawsuits filed in February and March of 2016 in state and federal courts in Ohio relating to the FirstMerit merger. The plaintiffs in each case are FirstMerit shareholders and have filed class action and derivative claims seeking to enjoin the merger. The parties in the federal court cases have entered into a tentative settlement. The defendants made agreed supplemental disclosures in advance of the shareholder vote in exchange for which plaintiffs agreed to withdraw their preliminary injunction motion and agreed to a release of all claims in the federal and state actions. The parties jointly moved for approval of the settlement by the federal court, which was granted on February 1, 2017. The plaintiffs in the state court cases did not join in the settlement, but their claims will be released in the federal court settlement.
FirstMerit Overdraft Litigation. Commencing in December 2010, two separate lawsuits were filed in the Summit County Court of Common Pleas and the Lake County Court of Common Pleas against FirstMerit. The complaints were brought as class actions on behalf of Ohio residents who maintained a checking account at FirstMerit and who incurred one or more overdraft fees as a result of the alleged re-sequencingthese matters could be material to Huntington’s results of debit transactions. The parties have reached a global settlementoperations for approximately $9 million cash to a common fund plus an additional $7 million in debt forgiveness. Attorneys' fees will be paid from the fund, with any remaining funds going to charity. FirstMerit’s insurer has agreed to reimburse Huntington 49% of the approximately $9 million, which totals approximately $4.4 million. The court preliminarily approved the settlement on December 5, 2016 and the cash portion of the settlement was funded on December 12, 2016. The final approval hearing is scheduled for June 2, 2017.particular reporting period.
Commitments Underunder Operating Lease Obligations
At December 31, 2016,2018, Huntington and its subsidiaries were obligated under noncancelable leases for land, buildings, and equipment. Many of these leases contain renewal options and certain leases provide options to purchase the leased property during or at the expiration of the lease period at specified prices. Some leases contain escalation clauses calling for rentals to be adjusted for increased real estate taxes and other operating expenses or proportionately adjusted for increases in the consumer or other price indices.
The future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2016,2018, were as follows: $59 million in 2017, $54 million in 2018, $48 million in 2019, $46$55 million in 2020, $30$40 million in 2021, $35 million in 2022, $27 million in 2023, and $152$95 million thereafter. At December 31, 2016,2018, total minimum lease payments have not been reduced by minimum sublease rentals of $8$4 million due in the future under noncancelable subleases. At December 31, 2016,2018, the future minimum sublease rental payments that Huntington expects to receive were as follows: $3 million in 2017, $2 million in 2018, $2 million in 2019, $1$2 million in 2020, $0 million in 2021, and $0less than $1 million thereafter. The rental expense for all operating leases was $70 million, $76 million, and $65 million $58 million,for 2018, 2017, and $57 million for 2016, 2015, and 2014, respectively. Huntington had no material obligations under capital leases.
22.21. OTHER REGULATORY MATTERS
Huntington and its bank subsidiary, The Huntington Nationalthe Bank (the Bank), are subject to variouscertain risk-based capital and leverage ratio requirements under the U.S. Basel III capital rules adopted by the Federal Reserve, for Huntington, and by the OCC, for the Bank. These rules implement the Basel III international regulatory capital requirements administered bystandards in the United States, as well as certain provisions of the Dodd-Frank Act. These quantitative calculations are minimums, and the Federal Reserve and OCC may determine that a banking regulators. These requirements involve qualitative judgmentsorganization, based on its size, complexity or risk profile, must maintain a higher level of capital in order to operate in a safe and quantitative measures ofsound manner.
Under the U.S. Basel III capital rules, Huntington’s and the Bank’s assets, liabilities, capital amounts,exposures and certain off-balance sheet items as calculated under regulatory accounting practices. Failureare subject to meetrisk weights used to determine the institutions’ risk-weighted assets. These risk-weighted assets are used to calculate the following minimum capital requirements can initiate certain actions by regulators that, if undertaken, could have a material adverse effect on Huntington’s and the Bank’s financial statements.
Beginning in 2015,ratios for Huntington and the Bank became subjectBank:
CET1 Risk-Based Capital Ratio, equal to the Basel III capital requirements including the standardized approach for calculating risk-weighted assets in accordance with subpart Dratio of the final capital rule. The Basel III capital requirements emphasize CET1 capital the most loss-absorbing form of capital, and implement strict eligibility criteria for regulatory capital instruments.to risk-weighted assets. CET1 capital primarily includes common shareholders’ equity lesssubject to certain regulatory adjustments and deductions, forincluding with respect to goodwill, and other intangibles net of related taxes, andintangible assets, certain deferred tax assets, and AOCI. Certain of these adjustments and deductions were subject to phase-in periods that arise from taxbegan on January 1, 2015, and was scheduled to end on January 1, 2018. Together with the FDIC, the Federal Reserve and OCC have issued proposed rules that would simplify the capital treatment of certain capital deductions and adjustments, and the final phase-in period for these capital deductions and adjustments has been indefinitely delayed. In addition, in December 2018, the U.S. federal banking agencies finalized rules that would permit BHCs and banks to phase-in, for regulatory capital purposes, the day-one impact of the new current expected credit loss andaccounting rule on retained earnings over a period of three years. For further discussion of the new current expected credit carryforwards.loss accounting rule, see Note 2 of the Notes to Consolidated Financial Statements.
Tier 1 Risk-Based Capital Ratio, equal to the ratio of Tier 1 capital to risk-weighted assets. Tier 1 capital is primarily comprised of CET1 capital, perpetual preferred stock and certain qualifying capital instruments (TRUPS) that are subjectinstruments.
Total Risk-Based Capital Ratio, equal to eventual phase-out from tierthe ratio of total capital, including CET1 capital, Tier 1 capital in 2017.and Tier 2 capital, to risk-weighted assets. Tier 2 capital primarily includes qualifying subordinated debt and qualifying ALLL. WeTier 2 capital also includes, among other things, certain trust preferred securities.
Tier 1 Leverage Ratio, equal to the ratio of Tier 1 capital to quarterly average assets (net of goodwill, certain other intangible assets and certain other deductions).
The total minimum regulatory capital ratios and well-capitalized minimum ratios are reflected on the following page. The Federal Reserve has not yet revised the well-capitalized standard for BHCs to reflect the higher capital requirements imposed under the U.S. Basel III capital rules. For purposes of the Federal Reserve’s Regulation Y, including determining whether a BHC meets the requirements to be an FHC, BHCs, such as Huntington, must maintain a Tier 1 Risk-Based Capital Ratio of 6.0% or greater and a Total Risk-Based Capital Ratio of 10.0% or greater. If the Federal Reserve were to apply the same or a very similar well-capitalized standard to BHCs as that applicable to the Bank, Huntington’s capital ratios as of December 31, 2018 would exceed such revised well-capitalized standard. The Federal Reserve may require BHCs, including Huntington, to maintain capital ratios substantially in excess of mandated minimum levels, depending upon general economic conditions and a BHC’s particular condition, risk profile and growth plans.
Failure to be well-capitalized or to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our operations or financial condition. Failure to be well-capitalized or to meet minimum capital requirements could also result in restrictions on Huntington’s or the Bank’s ability to pay dividends or otherwise distribute capital or to receive regulatory approval of applications.
In addition to meeting the minimum capital requirements, under the U.S. Basel III capital rules Huntington and the Bank must also maintain the required Capital Conservation Buffer to avoid becoming subject to CCARrestrictions on capital distributions and must submit annualcertain discretionary bonus payments to management. The Capital Conservation Buffer is calculated as a ratio of CET1 capital plans to ourrisk-weighted assets, and it effectively increases the required minimum risk-based capital ratios. The Capital Conservation Buffer requirement was phased in over a three-year period that began on January 1, 2016. The phase-in period ended on January 1, 2019, and the Capital Conservation Buffer is now at its fully phased-in level of 2.5%. Throughout 2018, the required Capital Conservation Buffer was 1.875%. The Tier 1 Leverage Ratio is not impacted by the Capital Conservation Buffer, and a banking regulators. Weinstitution may pay dividends and repurchase stock upbe considered well-capitalized while remaining out of compliance with the Capital Conservation Buffer. In April 2018, the Federal Reserve issued a proposal that would, among other things, replace the Capital Conservation Buffer with stress buffer requirements for certain large BHCs, including Huntington. Please refer to the levels submittedProposed Stress Buffer Requirements section in our 2016 CCAR capital plan submission to which the FRB did not object.Item 1: Business for further details.
As of December 31, 2016, Huntington2018, Huntington’s and the Bank met all capital adequacy requirements and hadBank’s regulatory capital ratios in excesswere above the well-capitalized standards and met the then-applicable Capital Conservation Buffer. Please refer to the table below for a summary of Huntington’s and the levels established for well-capitalized institutions. The period-end capital amounts andBank’s regulatory capital ratios as of Huntington andDecember 31, 2018, calculated using the Bank are as follows, including the CET1 ratio on a Basel III basis. The implementation of the Basel IIIregulatory capital requirements is transitional and phases-in from January 1, 2015 through the end ofmethodology applicable during 2018.
|
| | | | | | | | | | | | | | | | | | | | |
| | Well- | | | | December 31, |
| | capitalized | | Minimum | | 2016 | | 2015 |
| | Capital | | Capital | | Basel III |
(dollar amounts in thousands) | | Ratios | | Ratios | | Ratio | | Amount | | Ratio | | Amount |
Common equity tier 1 risk-based capital | Consolidated | N.A. |
| | 4.50 | % | | 9.56 | % | | $ | 7,485,816 |
| | 9.79 | % | | $ | 5,721,028 |
|
| Bank | 6.50 | % | | 4.50 |
| | 10.42 |
| | 8,153,091 |
| | 9.46 |
| | 5,518,748 |
|
Tier 1 risk-based capital | Consolidated | 6.00 |
| | 6.00 |
| | 10.92 |
| | 8,547,154 |
| | 10.53 |
| | 6,154,000 |
|
| Bank | 8.00 |
| | 6.00 |
| | 11.61 |
| | 9,085,921 |
| | 9.83 |
| | 5,735,274 |
|
Total risk-based capital | Consolidated | 10.00 |
| | 8.00 |
| | 13.05 |
| | 10,215,627 |
| | 12.64 |
| | 7,386,936 |
|
| Bank | 10.00 |
| | 8.00 |
| | 13.83 |
| | 10,817,597 |
| | 11.74 |
| | 6,850,596 |
|
Tier 1 leverage capital | Consolidated | N.A. |
| | 4.00 |
| | 8.70 |
| | 8,547,154 |
| | 8.79 |
| | 6,154,000 |
|
| Bank | 5.00 |
| | 4.00 |
| | 9.29 |
| | 9,085,921 |
| | 8.21 |
| | 5,735,274 |
|
Huntington has the ability to provide additional capital to the Bank to maintain the Bank’s risk-based capital ratios at levels at which would be considered well-capitalized. |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Minimum | | Minimum | | | | Basel III |
| | Regulatory | | Ratio+Capital | | Well- | | December 31, |
| | Capital | | Conservation | | Capitalized | | 2018 | | 2017 |
(dollar amounts in millions) | | Ratios | | Buffer | | Minimums | | Ratio | | Amount | | Ratio | | Amount |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
CET 1 risk-based capital | Consolidated | 4.50 |
| | 6.375 | % | | N/A |
| | 9.65 |
| | 8,271 |
| | 10.01 |
| | 8,041 |
|
| Bank | 4.50 |
| | 6.375 |
| | 6.50 |
| | 10.19 |
| | 8,732 |
| | 11.02 |
| | 8,856 |
|
Tier 1 risk-based capital | Consolidated | 6.00 |
| | 7.875 |
| | 6.00 |
| | 11.06 |
| | 9,478 |
| | 11.34 |
| | 9,110 |
|
| Bank | 6.00 |
| | 7.875 |
| | 8.00 |
| | 11.21 |
| | 9,611 |
| | 12.10 |
| | 9,727 |
|
Total risk-based capital | Consolidated | 8.00 |
| | 9.875 |
| | 10.00 |
| | 12.98 |
| | 11,122 |
| | 13.39 |
| | 10,757 |
|
| Bank | 8.00 |
| | 9.875 |
| | 10.00 |
| | 13.42 |
| | 11,504 |
| | 14.33 |
| | 11,517 |
|
Tier 1 leverage | Consolidated | 4.00 | % | | N/A |
| | N/A |
| | 9.10 | % | | $ | 9,478 |
| | 9.09 | % | | $ | 9,110 |
|
| Bank | 4.00 |
| | N/A |
| | 5.00 | % | | 9.23 |
| | 9,611 |
| | 9.70 |
| | 9,727 |
|
Huntington and its subsidiaries are also subject to various regulatory requirements that impose restrictions on cash, debt, and dividends. The Bank is required to maintain cash reserves based on the level of certain of its deposits. This reserve requirement may be met by holding cash in banking offices or on deposit at the Federal Reserve Bank.FRB. During 20162018 and 2015,2017, the average balances of these deposits were $0.3$0.4 billion and $0.5$0.4 billion, respectively.
Under current Federal Reserve regulations, the Bank is limited as to the amount and type of loans it may make to the parent company and nonbank subsidiaries. At December 31, 2016,2018, the Bank could lend $1.1$1.2 billion to a single affiliate, subject to the qualifying collateral requirements defined in the regulations.
Dividends from the Bank are one of the major sources of funds for the Company. These funds aid the Company in the payment of dividends to shareholders, expenses, and other obligations. Payment of dividends and/or return of capital to the parent company is subject to various legal and regulatory limitations. During 2016,2018, the Bank paid dividends and returned capital of $638.2 million$1.7 billion to the holding company. Also, there are statutory and regulatory limitations on the ability of national banks to pay dividends or make other capital distributions.
23.22. PARENT-ONLY FINANCIAL STATEMENTS
The parent-only financial statements, which include transactions with subsidiaries, are as follows:
| | Balance Sheets | December 31, | December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | |
(dollar amounts in millions) | | 2018 | | 2017 |
Assets | | | | | | |
Cash and due from banks | $ | 1,752,889 |
| | $ | 917,368 |
| $ | 2,352 |
| | $ | 1,618 |
|
Due from The Huntington National Bank | 730,004 |
| | 406,253 |
| 739 |
| | 798 |
|
Due from non-bank subsidiaries | 45,193 |
| | 48,151 |
| 40 |
| | 58 |
|
Investment in The Huntington National Bank | 10,668,303 |
| | 5,966,783 |
| 11,493 |
| | 11,696 |
|
Investment in non-bank subsidiaries | 499,611 |
| | 489,205 |
| 142 |
| | 111 |
|
Accrued interest receivable and other assets | 320,666 |
| | 192,444 |
| 239 |
| | 252 |
|
Total assets | $ | 14,016,666 |
| | $ | 8,020,204 |
| $ | 15,005 |
| | $ | 14,533 |
|
Liabilities and shareholders’ equity | | | | | | |
Long-term borrowings | $ | 3,144,615 |
| | $ | 1,040,981 |
| $ | 3,216 |
| | $ | 3,128 |
|
Dividends payable, accrued expenses, and other liabilities | 563,905 |
| | 384,617 |
| 687 |
| | 591 |
|
Total liabilities | 3,708,520 |
| | 1,425,598 |
| 3,903 |
| | 3,719 |
|
Shareholders’ equity (1) | 10,308,146 |
| | 6,594,606 |
| 11,102 |
| | 10,814 |
|
Total liabilities and shareholders’ equity | $ | 14,016,666 |
| | $ | 8,020,204 |
| $ | 15,005 |
| | $ | 14,533 |
|
| |
(1) | See Consolidated Statements of Changes in Shareholders’ Equity. |
| | Statements of Income | Year Ended December 31, | Year Ended December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | | 2014 | |
(dollar amounts in millions) | | 2018 | | 2017 | | 2016 |
Income | | | | | | | | | | |
Dividends from | | | | | | |
Dividends from: | | | | | | |
The Huntington National Bank | $ | 188,200 |
| | $ | 822,000 |
| | $ | 244,000 |
| $ | 1,722 |
| | $ | 298 |
| | $ | 188 |
|
Non-bank subsidiaries | 11,378 |
| | 38,883 |
| | 27,773 |
| — |
| | 14 |
| | 11 |
|
Interest from | | | | | | |
Interest from: | | | | | | |
The Huntington National Bank | 13,892 |
| | 5,954 |
| | 3,906 |
| 27 |
| | 20 |
| | 14 |
|
Non-bank subsidiaries | 2,221 |
| | 2,317 |
| | 2,613 |
| 2 |
| | 2 |
| | 3 |
|
Other | — |
| | 4,529 |
| | 2,994 |
| (2 | ) | | 4 |
| | — |
|
Total income | 215,691 |
| | 873,683 |
| | 281,286 |
| 1,749 |
| | 338 |
| | 216 |
|
Expense | | | | | | | | | | |
Personnel costs | 11,960 |
| | 4,770 |
| | 53,359 |
| 2 |
| | 19 |
| | 12 |
|
Interest on borrowings | 59,027 |
| | 17,428 |
| | 17,031 |
| 124 |
| | 91 |
| | 59 |
|
Other | 122,869 |
| | 92,735 |
| | 52,662 |
| 118 |
| | 115 |
| | 123 |
|
Total expense | 193,856 |
| | 114,933 |
| | 123,052 |
| 244 |
| | 225 |
| | 194 |
|
Income (loss) before income taxes and equity in undistributed net income of subsidiaries | 21,835 |
| | 758,750 |
| | 158,234 |
| |
Income before income taxes and equity in undistributed net income of subsidiaries | | 1,505 |
| | 113 |
| | 22 |
|
Provision (benefit) for income taxes | (56,255 | ) | | (109,867 | ) | | (62,897 | ) | (48 | ) | | (56 | ) | | (56 | ) |
Income (loss) before equity in undistributed net income of subsidiaries | 78,090 |
| | 868,617 |
| | 221,131 |
| |
Income before equity in undistributed net income of subsidiaries | | 1,553 |
| | 169 |
| | 78 |
|
Increase (decrease) in undistributed net income (loss) of: | | | | | | | | | | |
The Huntington National Bank | 629,220 |
| | (160,567 | ) | | 414,049 |
| (186 | ) | | 1,015 |
| | 629 |
|
Non-bank subsidiaries | 4,511 |
| | (15,093 | ) | | (2,788 | ) | 26 |
| | 2 |
| | 5 |
|
Net income | $ | 711,821 |
| | $ | 692,957 |
| | $ | 632,392 |
| $ | 1,393 |
| | $ | 1,186 |
| | $ | 712 |
|
Other comprehensive income (loss) (1) | (174,858 | ) | | (3,866 | ) | | (8,283 | ) | (80 | ) | | (34 | ) | | (175 | ) |
Comprehensive income | $ | 536,963 |
| | $ | 689,091 |
| | $ | 624,109 |
| $ | 1,313 |
| | $ | 1,152 |
| | $ | 537 |
|
| |
(1) | See Consolidated Statements of Comprehensive Income for other comprehensive income (loss) detail. |
| | Statements of Cash Flows | Year Ended December 31, | Year Ended December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | | 2014 | |
(dollar amounts in millions) | | 2018 | | 2017 | | 2016 |
Operating activities | | | | | | | | | | |
Net income | $ | 711,821 |
| | $ | 692,957 |
| | $ | 632,392 |
| $ | 1,393 |
| | $ | 1,186 |
| | $ | 712 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
Equity in undistributed net income of subsidiaries | (633,730 | ) | | 175,660 |
| | (411,261 | ) | 197 |
| | (997 | ) | | (634 | ) |
Depreciation and amortization | (1,390 | ) | | 609 |
| | 548 |
| (2 | ) | | 4 |
| | (1 | ) |
Loss on sales of securities available-for-sale | — |
| | 540 |
| | — |
| |
Other, net | (23,600 | ) | | (44,197 | ) | | 26,685 |
| 121 |
| | (37 | ) | | (24 | ) |
Net cash (used for) provided by operating activities | 53,101 |
| | 825,569 |
| | 248,364 |
| 1,709 |
| | 156 |
| | 53 |
|
Investing activities | | | | | | | | | | |
Repayments from subsidiaries | 464,284 |
| | 494,905 |
| | 9,250 |
| 21 |
| | 442 |
| | 464 |
|
Advances to subsidiaries | (1,758,745 | ) | | (612,610 | ) | | (32,350 | ) | (13 | ) | | (29 | ) | | (1,758 | ) |
Proceeds from sale of securities available-for-sale | (1,589 | ) | | 449 |
| | — |
| — |
| | 1 |
| | (2 | ) |
Cash paid for acquisitions, net of cash received | (133,218 | ) | | — |
| | (13,452 | ) | (15 | ) | | — |
| | (133 | ) |
Proceeds from business divestitures | — |
| | 9,029 |
| | — |
| |
Net cash (used for) provided by investing activities | (1,429,268 | ) | | (108,227 | ) | | (36,552 | ) | (7 | ) | | 414 |
| | (1,429 | ) |
Financing activities | | | | | | | | | | |
Proceeds from issuance of long-term borrowings | 1,989,938 |
| | — |
| | — |
| |
Payment of borrowings | (64,586 | ) | | — |
| | — |
| |
Dividends paid on stock | (299,588 | ) | | (224,390 | ) | | (198,789 | ) | |
Net proceeds from issuance of common stock | — |
| | — |
| | 2,597 |
| |
Net proceeds from issuance of medium-term notes | | 501 |
| | — |
| | — |
|
Net proceeds from issuance of long-term borrowings | | — |
| | — |
| | 1,990 |
|
Payment of medium-term notes | | (400 | ) | | — |
| | — |
|
Payment of long-term debt | | — |
| | — |
| | (65 | ) |
Dividends paid on common stock | | (584 | ) | | (425 | ) | | (299 | ) |
Repurchases of common stock | | (939 | ) | | (260 | ) | | — |
|
Net proceeds from issuance of preferred stock | 584,936 |
| | — |
| | — |
| 495 |
| | — |
| | 585 |
|
Repurchases of common stock | — |
| | (251,844 | ) | | (334,429 | ) | |
Other, net | 988 |
| | 13,492 |
| | 15,512 |
| (41 | ) | | (20 | ) | | 1 |
|
Net cash provided by (used for) financing activities | 2,211,688 |
| | (462,742 | ) | | (515,109 | ) | (968 | ) | | (705 | ) | | 2,212 |
|
Increase (decrease) in cash and due from banks | 835,521 |
| | 254,600 |
| | (303,297 | ) | |
Cash and due from banks at beginning of year | 917,368 |
| | 662,768 |
| | 966,065 |
| |
Cash and due from banks at end of year | $ | 1,752,889 |
| | $ | 917,368 |
| | $ | 662,768 |
| |
Increase (decrease) in cash and cash equivalents | | 734 |
| | (135 | ) | | 836 |
|
Cash and cash equivalents at beginning of year | | 1,618 |
| | 1,753 |
| | 917 |
|
Cash and cash equivalents at end of year | | $ | 2,352 |
| | $ | 1,618 |
| | $ | 1,753 |
|
Supplemental disclosure: | | | | | | | | | | |
Interest paid | $ | 36,068 |
| | $ | 17,384 |
| | $ | 21,321 |
| $ | 126 |
| | $ | 90 |
| | $ | 36 |
|
24.23. SEGMENT REPORTING
OurHuntington’s business segments are based on ourthe internally-aligned segment leadership structure, which is how we monitormanagement monitors results and assessassesses performance. We have fiveThe Company has four major business segments: Consumer and Business Banking, Commercial Banking, Commercial Real Estate and Vehicle Finance, (CREVF), Regional Banking and The Huntington Private Client Group (RBHPCG), and Home Lending.. The Treasury / Other function includes our technology and operations, other unallocated assets, liabilities, revenue, and expense.
Business segment results are determined based upon ourHuntington’s management reporting system, which assigns balance sheet and income statement items to each of the business segments. The process is designed around ourthe organizational and management structure and, accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entitiesentities.
Revenue is recorded in the business segment responsible for the related product or service. Fee sharing is recorded to allocate portions of such revenue to other business segments involved in selling to, or providing service to customers. Results of operations for the business segments reflect these fee sharing allocations.
The management accounting process that develops the business segment reporting utilizes various estimates and allocation methodologies to measure the performance of the business segments. Expenses are allocated to business segments using a two-phase approach. The first phase consists of measuring and assigning unit costs (activity-based costs) to activities related to product
origination and servicing. These activity-based costs are then extended, based on volumes, with the resulting amount allocated to business segments that own the related products. The second phase consists of the allocation of overhead costs to all fivefour business segments from Treasury / Other. We utilizeHuntington utilizes a full-allocation methodology, where all Treasury / Other expenses, except reported Significant Items, and a small amount of other residual unallocated expenses, are allocated to the fivefour business segments.
The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to GAAP. As a result, reported segment results are not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes in management
structure or allocation methodologies and procedures result in changes in reported segment financial data. Accordingly, certain amounts have been reclassified to conform to the current period presentation.
We useHuntington uses an active and centralized FTP methodology to attribute appropriate net interest income to the business segments. The intent of the FTP methodology is to transfer interest rate risk from the business segments by providing matched duration funding of assets and liabilities. The result is to centralize the financial impact, management, and reporting of interest rate risk in the Treasury / Other function where it can be centrally monitored and managed. The Treasury / Other function charges (credits) an internal cost of funds for assets held in (or pays for funding provided by) each business segment. The FTP rate is based on prevailing market interest rates for comparable duration assets (or liabilities).
Consumer and Business Banking - The Consumer and Business Banking segment, including Home Lending, provides a wide array of financial products and services to consumer and small business customers including but not limited to checking accounts, savings accounts, money market accounts, certificates of deposit, investments,mortgage loans, consumer loans, credit cards, and small business loans.loans and investment products. Other financial services available to consumer and small business customers include mortgages, insurance, interest rate risk protection, foreign exchange, and treasury management. Business Banking is defined as serving companies with revenues up to $20 millionmillion. Home Lending supports origination and consistsservicing of approximately 254,000 businessesconsumer loans and mortgages for customers who are generally located in our primary banking markets across all segments.
Commercial Banking - Through a relationship banking model, this segment provides a wide array of products and services to the middle market, large corporate, real estate and government public sector customers located primarily within our geographic footprint. The segment is divided into sevensix business units: middle market, large corporate, specialty banking, asset finance, capital markets, treasury management, and insurance.
Middle Market, Specialty Banking, Asset Finance, Capital Markets/Institutional Corporate Banking, Commercial Real Estate, and Treasury Management.
Vehicle Finance - This segment provides lending and other banking products and services to customers outside of our traditional retail and commercial banking segments. Our products and services include providing financing to consumers for the purchase of automobiles, light-duty trucks, recreational vehicles, and marine craft at franchised and other select dealerships, and providing financing to franchised dealerships for the acquisition of new and used vehicle inventory of franchised automotive dealerships, and financing for land, buildings, and other commercial real estate owned or constructed by real estate developers, automobile dealerships, or other customers with real estate project financing needs.inventory. Products and services are delivered through highly specialized relationship-focused bankers and product partners.
Regional Banking and The Huntington Private Client Group - The core business of The Huntington Private Client Group is The Huntington Private Bank, which consists of Private Banking, Wealth & Investment Management, and Retirement plan services.Plan Services. The Huntington Private Bank provides high net-worth customers with deposit, lending (including specialized lending options), and banking services. The Huntington Private Bank also delivers wealth management and legacy planning through investment and portfolio management, fiduciary administration, and trust services. This group also provides retirement plan services to corporate businesses. The Huntington Private Client Group also provides corporate trust services and institutional and mutual fund custody servicesservices.
Home Lending - Home Lending originates and services consumer loans and mortgages for customers who are generally located in our primary banking markets. Consumer and mortgage lending products are primarily distributed through the Consumer and Business Banking and Regional Banking and the Private Client Group segments, as well as through commissioned loan originators. Home lending earns interest portfolio loans and loans held-for-sale, earns fee income from the origination and servicing of mortgage loans, and recognizes gains or losses from the sale of mortgage loans. Home Lending supports the origination and servicing of mortgage loans across all segments.
Listed below is certain financial information reconciled to Huntington’s December 31, 2016,2018, December 31, 2015,2017, and December 31, 2014,2016, reported results by business segment:
| | Income Statements (dollar amounts in thousands) | Consumer & Business Banking | | Commercial Banking | | CREVF | | RBHPCG | | Home Lending | | Treasury / Other | | Huntington Consolidated | |
Income Statements (dollar amounts in millions) | | Consumer & Business Banking | | Commercial Banking | | Vehicle Finance | | RBHPCG | | Treasury / Other | | Huntington Consolidated |
2018 | | | | | | | | | | | | |
Net interest income | | $ | 1,685 |
| | $ | 938 |
| | $ | 403 |
| | $ | 192 |
| | $ | (29 | ) | | $ | 3,189 |
|
Provision (benefit) for credit losses | | 141 |
| | 38 |
| | 55 |
| | 1 |
| | — |
| | 235 |
|
Noninterest income | | 738 |
| | 313 |
| | 10 |
| | 193 |
| | 67 |
| | 1,321 |
|
Noninterest expense | | 1,696 |
| | 513 |
| | 149 |
| | 250 |
| | 39 |
| | 2,647 |
|
Provision (benefit) for income taxes | | 123 |
| | 147 |
| | 44 |
| | 28 |
| | (107 | ) | | 235 |
|
Net income (loss) | | $ | 463 |
| | $ | 553 |
| | $ | 165 |
| | $ | 106 |
| | $ | 106 |
| | $ | 1,393 |
|
2017 | | | | | | | | | | | | |
Net interest income | | $ | 1,549 |
| | $ | 901 |
| | $ | 424 |
| | $ | 172 |
| | $ | (44 | ) | | $ | 3,002 |
|
Provision (benefit) for credit losses | | 108 |
| | 30 |
| | 63 |
| | — |
| | — |
| | 201 |
|
Noninterest income | | 735 |
| | 278 |
| | 14 |
| | 188 |
| | 92 |
| | 1,307 |
|
Noninterest expense | | 1,647 |
| | 474 |
| | 149 |
| | 243 |
| | 201 |
| | 2,714 |
|
Provision (benefit) for income taxes | | 185 |
| | 236 |
| | 79 |
| | 41 |
| | (333 | ) | | 208 |
|
Net income (loss) | | $ | 344 |
| | $ | 439 |
| | $ | 147 |
| | $ | 76 |
| | $ | 180 |
| | $ | 1,186 |
|
2016 | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income | $ | 1,272,713 |
| | $ | 512,995 |
| | $ | 468,969 |
| | $ | 177,431 |
| | $ | 58,354 |
| | $ | (121,144 | ) | | $ | 2,369,318 |
| $ | 1,224 |
| | $ | 717 |
| | $ | 344 |
| | $ | 153 |
| | $ | (69 | ) | | $ | 2,369 |
|
Provision (benefit) for credit losses | 71,945 |
| | 98,816 |
| | 26,922 |
| | (3,467 | ) | | (3,412 | ) | | (2 | ) | | 190,802 |
| 68 |
| | 79 |
| | 47 |
| | (3 | ) | | — |
| | 191 |
|
Noninterest income | 558,811 |
| | 275,258 |
| | 40,582 |
| | 120,687 |
| | 90,358 |
| | 64,035 |
| | 1,149,731 |
| 649 |
| | 245 |
| | 15 |
| | 177 |
| | 64 |
| | 1,150 |
|
Noninterest expense | 1,208,585 |
| | 385,783 |
| | 170,276 |
| | 196,194 |
| | 124,683 |
| | 322,964 |
| | 2,408,485 |
| 1,339 |
| | 397 |
| | 118 |
| | 229 |
| | 325 |
| | 2,408 |
|
Provision (benefit) for income taxes | 192,848 |
| | 106,279 |
| | 109,324 |
| | 36,887 |
| | 9,604 |
| | (247,001 | ) | | 207,941 |
| 163 |
| | 170 |
| | 68 |
| | 36 |
| | (229 | ) | | 208 |
|
Net income (loss) | $ | 358,146 |
|
| $ | 197,375 |
|
| $ | 203,029 |
|
| $ | 68,504 |
|
| $ | 17,837 |
|
| $ | (133,070 | ) |
| $ | 711,821 |
| $ | 303 |
| | $ | 316 |
| | $ | 126 |
| | $ | 68 |
| | $ | (101 | ) | | $ | 712 |
|
2015 | | | | | | | | | | | | | | |
Net interest income | $ | 1,027,950 |
| | $ | 379,409 |
| | $ | 381,231 |
| | $ | 139,188 |
| | $ | 50,404 |
| | $ | (27,445 | ) | | $ | 1,950,737 |
| |
Provision (benefit) for credit losses | 42,777 |
| | 49,534 |
| | 4,890 |
| | 87 |
| | 2,671 |
| | (5 | ) | | 99,954 |
| |
Noninterest income | 478,142 |
| | 258,778 |
| | 29,254 |
| | 114,814 |
| | 87,021 |
| | 70,721 |
| | 1,038,730 |
| |
Noninterest expense | 1,099,779 |
| | 284,026 |
| | 152,010 |
| | 195,667 |
| | 144,848 |
| | 99,578 |
| | 1,975,908 |
| |
Provision (benefit) for income taxes | 127,238 |
| | 106,619 |
| | 88,755 |
| | 20,387 |
| | (3,533 | ) | | (118,818 | ) | | 220,648 |
| |
Net income (loss) | $ | 236,298 |
|
| $ | 198,008 |
|
| $ | 164,830 |
|
| $ | 37,861 |
|
| $ | (6,561 | ) |
| $ | 62,521 |
|
| $ | 692,957 |
| |
2014 | | | | | | | | | | | | | | |
Net interest income | $ | 912,992 |
| | $ | 306,434 |
| | $ | 379,363 |
| | $ | 101,839 |
| | $ | 58,015 |
| | $ | 78,498 |
| | $ | 1,837,141 |
| |
Provision (benefit) for credit losses | 75,529 |
| | 31,521 |
| | (52,843 | ) | | 4,893 |
| | 21,889 |
| | — |
| | 80,989 |
| |
Noninterest income | 409,746 |
| | 209,238 |
| | 26,628 |
| | 173,550 |
| | 69,899 |
| | 90,118 |
| | 979,179 |
| |
Noninterest expense | 982,288 |
| | 249,300 |
| | 156,715 |
| | 236,634 |
| | 136,374 |
| | 121,035 |
| | 1,882,346 |
| |
Provision (benefit) for income taxes | 92,722 |
| | 82,198 |
| | 105,742 |
| | 11,852 |
| | (10,622 | ) | | (61,299 | ) | | 220,593 |
| |
Net income (loss) | $ | 172,199 |
|
| $ | 152,653 |
|
| $ | 196,377 |
|
| $ | 22,010 |
|
| $ | (19,727 | ) |
| $ | 108,880 |
|
| $ | 632,392 |
| |
| | | Assets at December 31, | | Deposits at December 31, | Assets at December 31, | | Deposits at December 31, |
(dollar amounts in thousands) | 2016 | | 2015 | | 2016 | | 2015 | |
(dollar amounts in millions) | | 2018 | | 2017 | | 2018 | | 2017 |
Consumer & Business Banking | $ | 21,796,887 |
| | $ | 15,759,561 |
| | $ | 44,860,515 |
| | $ | 30,964,241 |
| $ | 27,486 |
| | $ | 26,262 |
| | $ | 50,300 |
| | $ | 45,427 |
|
Commercial Banking | 23,918,429 |
| | 17,022,387 |
| | 15,616,241 |
| | 11,498,883 |
| 34,818 |
| | 32,067 |
| | 23,185 |
| | 21,286 |
|
CREVF | 23,580,331 |
| | 17,856,358 |
| | 1,886,626 |
| | 1,649,301 |
| |
Vehicle Finance | | 19,435 |
| | 17,865 |
| | 346 |
| | 381 |
|
RBHPCG | 5,553,012 |
| | 4,277,970 |
| | 8,521,401 |
| | 7,530,241 |
| 6,540 |
| | 5,829 |
| | 6,809 |
| | 6,202 |
|
Home Lending | 3,502,304 |
| | 3,080,690 |
| | 639,418 |
| | 361,881 |
| |
Treasury / Other | 21,363,134 |
| | 13,021,335 |
| | 4,083,516 |
| | 3,290,432 |
| 20,502 |
| | 22,162 |
| | 4,134 |
| | 3,745 |
|
Total | $ | 99,714,097 |
| | $ | 71,018,301 |
| | $ | 75,607,717 |
| | $ | 55,294,979 |
| $ | 108,781 |
| | $ | 104,185 |
| | $ | 84,774 |
| | $ | 77,041 |
|
Supplementary Data
25. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)Quarterly Results of Operations (unaudited)
The following is a summary of the quarterly results of operations, for the years ended December 31, 20162018 and 2015:2017:
| | | | | | | | | | Three Months Ended |
| Three months ended | December 31, | | September 30, | | June 30, | | March 31, |
| December 31, | | September 30, | | June 30, | | March 31, | |
(dollar amounts in thousands, except per share data) | 2016 | | 2016 | | 2016 | | 2016 | |
(dollar amounts in millions, except per share data) | | 2018 | | 2018 | | 2018 | | 2018 |
Interest income | $ | 814,858 |
| | $ | 694,346 |
| | $ | 565,658 |
| | $ | 557,251 |
| $ | 1,056 |
| | $ | 1,007 |
| | $ | 972 |
| | $ | 914 |
|
Interest expense | 79,877 |
| | 68,956 |
| | 59,777 |
| | 54,185 |
| 223 |
| | 205 |
| | 188 |
| | 144 |
|
Net interest income | 734,981 |
| | 625,390 |
| | 505,881 |
| | 503,066 |
| 833 |
| | 802 |
| | 784 |
| | 770 |
|
Provision for credit losses | 74,906 |
| | 63,805 |
| | 24,509 |
| | 27,582 |
| 60 |
| | 53 |
| | 56 |
| | 66 |
|
Noninterest income | 334,337 |
| | 302,415 |
| | 271,112 |
| | 241,867 |
| 329 |
| | 342 |
| | 336 |
| | 314 |
|
Noninterest expense | 681,497 |
| | 712,247 |
| | 523,661 |
| | 491,080 |
| 711 |
| | 651 |
| | 652 |
| | 633 |
|
Income before income taxes | 312,915 |
| | 151,753 |
| | 228,823 |
| | 226,271 |
| 391 |
| | 440 |
| | 412 |
| | 385 |
|
Provision for income taxes | 73,952 |
| | 24,749 |
| | 54,283 |
| | 54,957 |
| 57 |
| | 62 |
| | 57 |
| | 59 |
|
Net income | 238,963 |
| | 127,004 |
| | 174,540 |
| | 171,314 |
| 334 |
| | 378 |
| | 355 |
| | 326 |
|
Dividends on preferred shares | 18,865 |
| | 18,537 |
| | 19,874 |
| | 7,998 |
| 19 |
| | 18 |
| | 21 |
| | 12 |
|
Net income applicable to common shares | $ | 220,098 |
| | $ | 108,467 |
| | $ | 154,666 |
| | $ | 163,316 |
| $ | 315 |
| | $ | 360 |
| | $ | 334 |
| | $ | 314 |
|
Net income per common share — Basic | $ | 0.20 |
| | $ | 0.12 |
| | $ | 0.19 |
| | $ | 0.21 |
| $ | 0.30 |
| | $ | 0.33 |
| | $ | 0.30 |
| | $ | 0.29 |
|
Net income per common share — Diluted | 0.20 |
| | 0.11 |
| | 0.19 |
| | 0.20 |
| 0.29 |
| | 0.33 |
| | 0.30 |
| | 0.28 |
|
| | | | | | | | | | Three Months Ended |
| Three months ended | December 31, | | September 30, | | June 30, | | March 31, |
| December 31, | | September 30, | | June 30, | | March 31, | |
(dollar amounts in thousands, except per share data) | 2015 | | 2015 | | 2015 | | 2015 | |
(dollar amounts in millions, except per share data) | | 2017 | | 2017 | | 2017 | | 2017 |
Interest income | $ | 544,153 |
| | $ | 538,477 |
| | $ | 529,795 |
| | $ | 502,096 |
| $ | 894 |
| | $ | 873 |
| | $ | 846 |
| | $ | 820 |
|
Interest expense | 47,242 |
| | 43,022 |
| | 39,109 |
| | 34,411 |
| 124 |
| | 115 |
| | 101 |
| | 91 |
|
Net interest income | 496,911 |
| | 495,455 |
| | 490,686 |
| | 467,685 |
| 770 |
| | 758 |
| | 745 |
| | 729 |
|
Provision for credit losses | 36,468 |
| | 22,476 |
| | 20,419 |
| | 20,591 |
| 65 |
| | 43 |
| | 25 |
| | 68 |
|
Noninterest income | 272,215 |
| | 253,119 |
| | 281,773 |
| | 231,623 |
| 340 |
| | 330 |
| | 325 |
| | 312 |
|
Noninterest expense | 498,766 |
| | 526,508 |
| | 491,777 |
| | 458,857 |
| 633 |
| | 680 |
| | 694 |
| | 707 |
|
Income before income taxes | 233,892 |
| | 199,590 |
| | 260,263 |
| | 219,860 |
| 412 |
| | 365 |
| | 351 |
| | 266 |
|
Provision for income taxes | 55,583 |
| | 47,002 |
| | 64,057 |
| | 54,006 |
| |
Provision (benefit) for income taxes | | (20 | ) | | 90 |
| | 79 |
| | 59 |
|
Net income | 178,309 |
| | 152,588 |
| | 196,206 |
| | 165,854 |
| 432 |
| | 275 |
| | 272 |
| | 207 |
|
Dividends on preferred shares | 7,972 |
| | 7,968 |
| | 7,968 |
| | 7,965 |
| 19 |
| | 19 |
| | 19 |
| | 19 |
|
Net income applicable to common shares | $ | 170,337 |
| | $ | 144,620 |
| | $ | 188,238 |
| | $ | 157,889 |
| $ | 413 |
| | $ | 256 |
| | $ | 253 |
| | $ | 188 |
|
Net income per common share — Basic | $ | 0.21 |
| | $ | 0.18 |
| | $ | 0.23 |
| | $ | 0.19 |
| $ | 0.38 |
| | $ | 0.24 |
| | $ | 0.23 |
| | $ | 0.17 |
|
Net income per common share — Diluted | 0.21 |
| | 0.18 |
| | 0.23 |
| | 0.19 |
| 0.37 |
| | 0.23 |
| | 0.23 |
| | 0.17 |
|
Item 9: Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A: Controls and Procedures
Disclosure Controls and Procedures
Huntington maintains disclosure controls and procedures designed to ensure that the information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the Exchange Act), are recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its
principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Huntington’s Management, with the participation of its Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of Huntington’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2016.2018. Based upon such evaluation, Huntington’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2016,2018, Huntington’s disclosure controls and procedures were effective.
Internal Control Over Financial Reporting
Information required by this item is set forth in the Report of Management'sManagement’s Assessment of Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm.
Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2016,2018, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
Item 9B: Other Information
Not applicable.
PART III
We refer in Part III of this report to relevant sections of our 20172019 Proxy Statement for the 20172019 annual meeting of shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days of the close of our 20162018 fiscal year. Portions of our 20172019 Proxy Statement, including the sections we refer to in this report, are incorporated by reference into this report.
Item 10: Directors, Executive Officers and Corporate Governance
Information required by this item is set forth under the captions Election of Directors, Corporate Governance, Our Executive Officers, Board Meetings and Committee Information, Report of the Audit Committee, and Section 16(a) Beneficial Ownership Reporting Compliance of our 20172019 Proxy Statement, which is incorporated by reference into this item.
Item 11: Executive Compensation
Information required by this item is set forth under the captions Compensation of Executive Officers of our 20172019 Proxy Statement, which is incorporated by reference into this item.
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information about Huntington common stock authorized for issuance under Huntington’s existing equity compensation plans as of December 31, 2016.2018.
| | Plan Category (1) | | Number of securities to be issued upon exercise of outstanding options, warrants, and rights (2) (a) | | Weighted-average exercise price of outstanding options, warrants, and rights (3) (b) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (4) (c) | | Number of securities to be issued upon exercise of outstanding options, warrants, and rights (2) (a) | | Weighted-average exercise price of outstanding options, warrants, and rights (3) (b) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (4) (c) |
Equity compensation plans approved by security holders | | 33,552,345 |
| | $ | 3.32 |
| | 15,979,699 |
| | 29,252,019 |
| | $ | 3.86 |
| | 26,185,301 |
|
Equity compensation plans not approved by security holders | | 18,263 |
| | 12.86 |
| | — |
| | 3,290 |
| | 6.08 |
| | — |
|
Total | | 33,570,608 |
| | $ | 3.32 |
| | 15,979,699 |
| | 29,255,309 |
| | $ | 3.86 |
| | 26,185,301 |
|
| |
(1) | All equity compensation plan authorizations for shares of common stock provide for the number of shares to be adjusted for stock splits, stock dividends, and other changes in capitalization. The Huntington Investment and Tax Savings Plan, a broad-based plan qualified under Code Section 401(a) which includes Huntington common stock as one of a number of investment options available to participants, is excluded from the table. |
| |
(2) | The numbers in this column (a) reflect shares of common stock to be issued upon exercise of outstanding stock options and the vesting of outstanding awards of RSUs, RSAs and PSUs and the release of DSUs. The shares of common stock to be issued upon exercise or vesting under equity compensation plans not approved by shareholders include an inducement grant issued outside of the Company’s stock plans, and awards granted under the following plans which are no longer active and for which Huntington has not reserved the right to make subsequent grants or awards: employee and director stock plans of Unizan Financial Corp., Camco Financial Corporation, and FirstMerit Corporation assumed in the acquisitions of these companies. |
issued upon exercise or vesting under equity compensation plans not approved by shareholders include an inducement grant issued outside of the Company’s stock plans, and awards granted under the following plans which are no longer active and for which Huntington has not reserved the right to make subsequent grants or awards: employee and director stock plans of Unizan Financial Corp. and Camco Financial Corporation assumed in the acquisitions of these companies.
| |
(3) | The weighted-average exercise prices in this column are based on outstanding options and do not take into account unvested awards of RSUs, RSAs and PSUs and unreleased DSUs as these awards do not have an exercise price. |
| |
(4) | The number of shares in this column (c) reflects the number of shares remaining available for future issuance under Huntington’s 20152018 Plan, excluding shares reflected in column (a). The number of shares in this column (c) does not include shares of common stock to be issued under the following compensation plans: the Executive Deferred Compensation Plan, which provides senior officers designated by the Compensation Committee the opportunity to defer up to 90% of base salary, annual bonus compensation and certain equity awards, and up to 90% of long-term incentive awards; the Supplemental Plan under which voluntary participant contributions made by payroll deduction are used to purchase shares; the Deferred Compensation for Huntington Bancshares Incorporated Directors under which directors may defer their director compensation and such amounts may be invested in shares of common stock; and the Deferred Compensation Plan for directors (now inactive) under which directors of selected subsidiaries may defer their director compensation and such amounts may be invested in shares of Huntington common stock. These plans do not contain a limit on the number of shares that may be issued under them. |
Additional information required by this item is set forth under the captions Ownership of Voting Stock of our 20172019 Proxy Statement, which is incorporated by reference into this item.
Item 13: Certain Relationships and Related Transactions, and Director Independence
Information required by this item is set forth under the captions IndebtednessIndependence of ManagementDirectors and Certain otherReview, Approval or Ratification of Transactions with Related Persons of our 20172019 Proxy Statement, which isare incorporated by reference into this item.
Item 14: Principal Accountant Fees and Services
Information required by this item is set forth under the caption Proposal to Ratify the Appointment of Independent Registered Public Accounting Firm of our 20172019 Proxy Statement which is incorporated by reference into this item.
PART IV
Item 15: Exhibits and Financial Statement Schedules
Financial Statements and Financial Statement Schedules
Our consolidated financial statements required in response to this Item are incorporated by reference from Item 8 of this Report.
Exhibits
Our exhibits listed on the Exhibit Index of this Form 10-K are filed with this Report or are incorporated herein by reference.
Item 16: 10-K Summary
Not applicable.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 22nd day of February, 2017.
HUNTINGTON BANCSHARES INCORPORATED
(Registrant)
|
| | | | | | |
| | | | | | |
By: | | /s/ Stephen D. Steinour | | By: | | /s/ Howell D. McCullough III |
| | Stephen D. Steinour | | | | Howell D. McCullough III |
| | Chairman, President, Chief Executive | | | | Chief Financial Officer |
| | Officer, and Director (Principal Executive | | | | (Principal Financial Officer) |
| | Officer) | | | | |
| | | | By: | | /s/ Nancy E. Maloney |
| | | | | | Nancy E. Maloney |
| | | | | | Executive Vice President, Controller |
| | | | | | (Principal Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 22nd day of February, 2017.
|
| |
Lizabeth Ardisana * | |
Lizabeth Ardisana | |
Director | |
| |
Ann B. Crane * | |
Ann B. Crane | |
Director | |
| |
Robert S. Cubbin * | |
Robert S. Cubbin | |
Director | |
| |
Steven G. Elliott * | |
Steven G. Elliott | |
Director | |
| |
Michael J. Endres * | |
Michael J. Endres | |
Director | |
| |
Gina D. France * | |
Gina D. France | |
Director | |
| |
John B. Gerlach, Jr. * | |
|
| |
John B. Gerlach, Jr. | |
Director | |
| |
J. Michael Hochschwender * | |
J. Michael Hochschwender | |
Director | |
| |
John C. Inglis * | |
John C. Inglis | |
Director | |
| |
Peter J. Kight * | |
Peter J. Kight | |
Director | |
| |
Jonathan A. Levy * | |
Jonathan A. Levy | |
Director | |
| |
Eddie R. Munson * | |
Eddie R. Munson | |
Director | |
| |
Richard W. Neu * | |
Richard W. Neu | |
Director | |
| |
David L. Porteous * | |
David L. Porteous | |
Director | |
| |
Kathleen H. Ransier * | |
Kathleen H. Ransier | |
Director | |
| |
*/s/ Richard A. Cheap | |
Richard A. Cheap | |
Attorney-in-fact for each of the persons indicated | |
Exhibit Index
This report incorporates by reference the documents listed below that we have previously filed with the SEC. The SEC allows us to incorporate by reference information in this document. The information incorporated by reference is considered to be a part of this document, except for any information that is superseded by information that is included directly in this document.
This information may be read and copied at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. The SEC also maintains an Internet web site that contains reports, proxy statements, and other information about issuers, like us, who file electronically with the SEC. The address of the site is http://www.sec.gov. The reports and other information filed by us with the SEC are also available free of charge at our Internet web site. The address of the site is http://www.huntington.com. Except as specifically incorporated by reference into this Annual Report on Form 10-K, information on those web sites is not part of this report. You also should be able to inspect reports, proxy statements, and other information about us at the offices of the NASDAQ National Market at 33 Whitehall Street, New York, New York.York 10004.
| | Exhibit Number | Document Description | Report or Registration Statement | SEC File or Registration Number | Exhibit Reference | Document Description | Report or Registration Statement | SEC File or Registration Number | Exhibit Reference |
2.1 | Agreement and Plan of Merger, dated as of January 25, 2016, by and among Huntington Bancshares Incorporated, FirstMerit Corporation, and West Subsidiary Corporation. | Current Report on Form 8-K dated January 28, 2016. | 001-34073 | 2.1 |
| |
3.1 | Articles of Restatement of Charter. | Annual Report on Form 10-K for the year ended December 31, 1993. | 000-02525 | 3(i) |
| | | | |
3.2 | Articles of Amendment to Articles of Restatement of Charter. | Current Report on Form 8-K dated May 31, 2007 | 000-02525 | 3.1 |
| | | | |
3.3 | Articles of Amendment to Articles of Restatement of Charter | Current Report on Form 8-K dated May 7, 2008 | 000-02525 | 3.1 |
| | | | |
3.4 | Articles of Amendment to Articles of Restatement of Charter | Current Report on Form 8-K dated April 27, 2010 | 001-34073 | 3.1 |
| |
3.5 | Articles Supplementary of Huntington Bancshares Incorporated, as of April 22, 2008. | Current Report on Form 8-K dated April 22, 2008 | 000-02525 | 3.1 |
| |
3.6 | Articles Supplementary of Huntington Bancshares Incorporated, as of April 22, 2008. | Current Report on Form 8-K dated April 22, 2008 | 000-02525 | 3.2 |
| |
3.7 | Articles Supplementary of Huntington Bancshares Incorporated, as of November 12, 2008. | Current Report on Form 8-K dated November 12, 2008 | 001-34073 | 3.1 |
| |
3.8 | Articles Supplementary of Huntington Bancshares Incorporated, as of December 31, 2006. | Annual Report on Form 10-K for the year ended December 31, 2006 | 000-02525 | 3.4 |
| |
3.9 | Articles Supplementary of Huntington Bancshares Incorporated, as of December 28, 2011 | Current Report on Form 8-K dated December 28, 2011 | 001-34073 | 3.1 |
| |
3.10 | Bylaws of Huntington Bancshares Incorporated, as amended and restated, as of July 16, 2014. | Current Report on Form 8-K dated July 17, 2014. | 001-34073 | 3.1 |
| |
4.1 | Instruments defining the Rights of Security Holders — reference is made to Articles Fifth, Eighth, and Tenth of Articles of Restatement of Charter, as amended and supplemented. Instruments defining the rights of holders of long-term debt will be furnished to the Securities and Exchange Commission upon request. | | | Instruments defining the Rights of Security Holders — reference is made to Articles Fifth, Eighth, and Tenth of Articles of Restatement of Charter, as amended and supplemented. Instruments defining the rights of holders of long-term debt will be furnished to the Securities and Exchange Commission upon request. | |
10.1 | * Form of Executive Agreement for certain executive officers. | Current Report on Form 8-K, dated November 28, 2012 | 001-34073 | 10.3 |
| | | | |
10.2 | * Management Incentive Plan for Covered Officers as amended and restated effective for plan years beginning on or after January 1, 2011. | Definitive Proxy Statement for the 2011 Annual Meeting of Shareholders | 001-34073 | A |
| | | | |
10.3 | * Huntington Supplemental Retirement Income Plan, amended and restated, effective December 31, 2013. | Annual Report on Form 10-K for the year ended December 31, 2013. | 001-34073 | 10.3 |
| | | | |
10.4 | * Deferred Compensation Plan and Trust for Directors | Post-Effective Amendment No. 2 to Registration Statement on Form S-8 filed on January 28, 1991. | 33-10546 | 4(a) |
| |
10.5 | * Deferred Compensation Plan and Trust for Huntington Bancshares Incorporated Directors | Registration Statement on Form S-8 filed on July 19, 1991. | 33-41774 | 4(a) |
| |
10.6 | * First Amendment to Huntington Bancshares Incorporated Deferred Compensation Plan and Trust for Huntington Bancshares Incorporated Directors | Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 | 000-02525 | 10(q) |
| |
10.4(P) | | * Deferred Compensation Plan and Trust for Directors | Post-Effective Amendment No. 2 to Registration Statement on Form S-8 filed on January 28, 1991. | 33-10546 | 4(a) |
10.7 | * Executive Deferred Compensation Plan, as amended and restated on January 1, 2012. | Annual Report on Form 10-K for the year ended December 31, 2012 | 001-34073 | 10.7 |
| | | | |
10.8 | * The Huntington Supplemental Stock Purchase and Tax Savings Plan and Trust, amended and restated, effective January 1, 2014 | Annual Report on Form 10-K for the year ended December 31, 2013. | 001-34073 | 10.8 |
| | | | |
10.9 | * Form of Employment Agreement between Stephen D. Steinour and Huntington Bancshares Incorporated effective December 1, 2012. | Current Report on Form 8-K dated November 28, 2012. | 001-34073 | 10.1 |
| | | | |
10.10 | * Form of Executive Agreement between Stephen D. Steinour and Huntington Bancshares Incorporated effective December 1, 2012. | Current Report on Form 8-K dated November 28, 2012. | 001-34073 | 10.2 |
| | | | |
10.11 | | | | | |
10.12 | | | | | |
10.13 | | | | | |
10.14 | | | | | |
10.15 | | | | | |
10.16 | | | | | |
10.17 | | | | | |
10.18 | | | | | |
10.19 | | | | | |
10.20 | | | | | |
10.21 | | | | | |
| | 10.11 | * Restricted Stock Unit Grant Notice with three year vesting | Current Report on Form 8-K dated July 24, 2006 | 000-02525 | 99.1 |
| |
10.12 | * Restricted Stock Unit Grant Notice with six month vesting | Current Report on Form 8-K dated July 24, 2006 | 000-02525 | 99.2 |
| |
10.13 | * Restricted Stock Unit Deferral Agreement | Current Report on Form 8-K dated July 24, 2006 | 000-02525 | 99.3 |
| |
10.14 | * Director Deferred Stock Award Notice | Current Report on Form 8-K dated July 24, 2006 | 000-02525 | 99.4 |
| |
10.15 | * Huntington Bancshares Incorporated 2007 Stock and Long-Term Incentive Plan | Definitive Proxy Statement for the 2007 Annual Meeting of Stockholders | 000-02525 | G |
| |
10.16 | * First Amendment to the 2007 Stock and Long-Term Incentive Plan | Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 | 000-02525 | 10.7 |
| |
10.17 | * Second Amendment to the 2007 Stock and Long-Term Incentive Plan | Definitive Proxy Statement for the 2010 Annual Meeting of Shareholders | 001-34073 | A |
| |
10.18 | * 2009 Stock Option Grant Notice to Stephen D. Steinour. | Quarterly Report on Form 10-Q for the quarter ended March 31, 2009. | 001-34073 | 10.1 |
| |
10.19 | * Form of Consolidated 2012 Stock Grant Agreement for Executive Officers Pursuant to Huntington’s 2012 Long-Term Incentive Plan. | Quarterly Report on Form 10-Q for the quarter ended June 30, 2012. | 001-34073 | 10.2 |
| |
10.20 | * Form of 2014 Restricted Stock Unit Grant Agreement for Executive Officers | Quarterly Report on Form 10-Q dated July 30, 2014 | 001-34073 | 10.1 |
| |
10.21 | * Form of 2014 Stock Option Grant Agreement for Executive Officers | Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 | 001-34073 | 10.2 |
| |
10.22 | * Form of 2014 Performance Stock Unit Grant Agreement for Executive Officers | Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 | 001-34073 | 10.3 |
| | | | |
10.23 | * Form of 2014 Restricted Stock Unit Grant Agreement for Executive Officers Version II | Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 | 001-34073 | 10.4 |
| | | | |
10.24 | * Form of 2014 Stock Option Grant Agreement for Executive Officers Version II | Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 | 001-34073 | 10.5 |
| | | | |
10.25 | *Form of 2014 Performance Stock Unit Grant Agreement for Executive Officers Version II | Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 | 001-34073 | 10.6 |
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10.26 | *Huntington Bancshares Incorporated 2012 Long-Term Incentive Plan. Definitive Proxy Statement for the 2012 Annual Meeting of Shareholders. | Definitive Proxy Statement for the 2012 Annual Meeting of Shareholders. | 001-34073 | A |
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10.27 | *Huntington Bancshares Incorporated 2015 Long-Term Incentive Plan. Definitive Proxy Statement for the 2015 Annual Meeting of Shareholders | Definitive Proxy Statement for the 2015 Annual Meeting of Shareholders | 001-34073 | A |
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10.28 | *Form of 2015 Stock Option Grant Agreement | Quarterly Report on Form 10-Q for the quarter ended June 30, 2015. | 001-34073 | 10.2 |
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10.29 | *Form of 2015 Restricted Stock Unit Grant Agreement. | Quarterly Report on Form 10-Q for the quarter ended June 30, 2015. | 001-34073 | 10.3 |
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10.30 | *Form of 2015 Performance Share Unit Grant Agreement. | Quarterly Report on Form 10-Q for the quarter ended June 30, 2015. | 001-34073 | 10.4 |
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10.31 | *Huntington Bancshares Incorporated Restricted Stock Unit Grant Agreement. | Quarterly Report on Form 10-Q for the quarter ended June 30, 2015. | 001-34073 | 10.1 |
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12.1 | Ratio of Earnings to Fixed Charges. | | | |
12.2 | Ratio of Earnings to Fixed Charges and Preferred Dividends. | | | |
14.1 | Code of Business Conduct and Ethics dated January 14, 2003 and revised on January 15, 2013 and Financial Code of Ethics for Chief Executive Officer and Senior Financial Officers, adopted January 18, 2003 and revised on October 15, 2014, are available on our website at https://www.huntington.com/us/corp_governance.htm | | | |
10.32 | | | | | |
10.33 | | | | | |
10.34 | | | | | |
10.35 | | | | | |
10.36 | | | | | |
10.37 | | | | | |
10.38 | | | | | |
10.39 | | | | | |
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14.1(P) | | Code of Business Conduct and Ethics dated January 14, 2003 and revised on January 24, 2018 and Financial Code of Ethics for Chief Executive Officer and Senior Financial Officers, adopted January 18, 2003 and revised on October 20, 2015, are available on our website at http://www.huntington.com/About-Us/corporate-governance | |
21.1 | Subsidiaries of the Registrant | | | | |
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23.1 | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm. | | | | |
23.2 | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm. | | | |
24.1 | Power of Attorney | | | | |
31.1 | Rule 13a-14(a) Certification – Chief Executive Officer. | | | | |
31.2 | Rule 13a-14(a) Certification – Chief Financial Officer. | | | | |
32.1 | Section 1350 Certification – Chief Executive Officer. | | | | |
32.2 | Section 1350 Certification – Chief Financial Officer. | | | | |
101 | The following material from Huntington’s Form 10-K Report for the year ended December 31, 2016, formatted in XBRL: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Income, (3), Consolidated Statements of Comprehensive Income, (4) Consolidated Statements of Changes in Shareholders’ Equity, (5) Consolidated Statements of Cash Flows, and (6) the Notes to the Consolidated Financial Statements. | | | The following material from Huntington’s Form 10-K Report for the year ended December 31, 2018, formatted in XBRL: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Income, (3), Consolidated Statements of Comprehensive Income, (4) Consolidated Statements of Changes in Shareholders’ Equity, (5) Consolidated Statements of Cash Flows, and (6) the Notes to the Consolidated Financial Statements. | |
| * Denotes management contract or compensatory plan or arrangement. | | | * Denotes management contract or compensatory plan or arrangement. | |
Signatures
195Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 15th day of February, 2019.
HUNTINGTON BANCSHARES INCORPORATED
(Registrant)
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By: | | /s/ Stephen D. Steinour | | By: | | /s/ Howell D. McCullough III |
| | Stephen D. Steinour | | | | Howell D. McCullough III |
| | Chairman, President, Chief Executive | | | | Chief Financial Officer |
| | Officer, and Director (Principal Executive Officer) | | | | (Principal Financial Officer) |
| | | | | | |
| | | | By: | | /s/ Nancy E. Maloney |
| | | | | | Nancy E. Maloney |
| | | | | | Executive Vice President, Controller |
| | | | | | (Principal Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 15th day of February, 2019.
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| |
Lizabeth Ardisana * | |
Lizabeth Ardisana | |
Director | |
| |
Ann B. Crane * | |
Ann B. Crane | |
Director | |
| |
Robert S. Cubbin * | |
Robert S. Cubbin | |
Director | |
| |
Steven G. Elliott * | |
Steven G. Elliott | |
Director | |
| |
Gina D. France * | |
Gina D. France | |
Director | |
| |
J. Michael Hochschwender * | |
J. Michael Hochschwender | |
Director | |
| |
John C. Inglis * | |
John C. Inglis | |
Director | |
| |
Peter J. Kight * | |
Peter J. Kight | |
Director | |
| |
Richard W. Neu * | |
Richard W. Neu | |
Director | |
| |
David L. Porteous * | |
David L. Porteous | |
Director | |
| |
Kathleen H. Ransier * | |
Kathleen H. Ransier | |
Director | |
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*/s/ Jana J. Litsey | |
Jana J. Litsey | |
Attorney-in-fact for each of the persons indicated | |