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HUNTINGTON BANCSHARES INC/MD - 10-Q - : Management's Discussion and Analysis of Financial Condition and Results of Operations

July 30, 2014


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

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

Our discussion is divided into key segments:

Executive Overview-Provides a summary of our current financial performance and business overview, including our thoughts on the impact of the economy, legislative and regulatory initiatives, and recent industry developments. This section also provides our outlook regarding our expectations for the next several quarters. Discussion of Results of Operations-Reviews financial performance from a consolidated Company perspective. It also includes a Significant Items section that summarizes key issues helpful for understanding performance trends. Key consolidated average balance sheet and income statement trends are also discussed in this section. Risk Management and Capital-Discusses credit, market, liquidity, operational, and compliance risks, including how these are managed, as well as performance trends. It also includes a discussion of liquidity policies, how we obtain funding, and related performance. In addition, there is a discussion of guarantees and / or commitments made for items such as standby letters of credit and commitments to sell loans, and a discussion that reviews the adequacy of capital, including regulatory capital requirements. Business Segment Discussion-Provides an overview of financial performance for each of our major business segments and provides additional discussion of trends underlying consolidated financial performance. Additional Disclosures-Provides comments on important matters including forward-looking statements, critical accounting policies and use of significant estimates, and recent accounting pronouncements and developments.

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



Table of Contents


Summary of 2014 Second Quarter Results

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

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

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

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

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

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

Business Overview


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

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



Table of Contents

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


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

2014 Expectations

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

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

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

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

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



Table of Contents


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

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Source: Edgar Glimpses

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