Huntington National Bank 2012 Annual Report Download - page 26

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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.
Rising interest rates reduce the value of our fixed-rate debt securities and cash flow hedging derivatives portfolio. 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, notably Tier I and Total risk-based capital ratios. In a rising interest rate
environment, pension and other post-retirement obligations somewhat mitigate negative OCI impacts from securities and financial
instruments.
Certain investment securities, notably mortgage-backed securities, are very sensitive to rising and falling rates. Generally,
when rates rise, the duration of mortgage-backed securities increases as prepayments of principal and interest decrease. Conversely,
when rates fall, the duration of mortgage-backed securities decreases as prepayments increase. In either case, interest rates have a
significant impact on the value of mortgage-backed securities investments.
Liquidity Risks:
1. 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.
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
and limits and Management establishes operating guidelines for liquidity.
Wholesale funding sources include securitization, federal funds purchased, securities sold under repurchase agreements, non-
core deposits, and medium- and long-term debt, which includes a domestic bank note program. 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. The Bank also
can borrow from the Federal Reserve’s discount window.
Capital markets disruptions can directly impact the liquidity of the Bank and Corporation. 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.
2. Due to the losses that the Bank incurred in 2008 and 2009, at December 31, 2012, the Bank and its subsidiaries could
not declare and pay dividends to the holding company, any subsidiary of the holding company outside the Bank's consolidated
group, or any security holder outside the Bank’s consolidated group, without regulatory approval. Also, the Bank may not
pay a dividend in an amount greater than its undivided profits.
Dividends from the Bank to the parent company are the primary source of funds for the payment of dividends to our
shareholders. Under applicable statutes and regulations, a national bank may not declare and pay dividends in any year greater than its
undivided profits or in excess of an amount equal to the sum of the total of the net income of the bank for that year and the retained net
income of the bank for the preceding two years, minus the sum of any transfers required by the OCC and any transfers required to be
made to a fund for the retirement of any preferred stock, unless the OCC approves the declaration and payment of dividends in excess
of such amount. The Bank’s undivided profits were in a deficit position throughout 2012. Since the first quarter of 2008, the Bank
has requested and received OCC approval each quarter to pay periodic dividends to shareholders outside the Bank’s consolidated
group on the preferred and common stock of its REIT and capital financing subsidiaries to the extent necessary to maintain their REIT
status. A wholly-owned nonbank subsidiary of the parent company owns a portion of the preferred shares of the REIT and capital
financing subsidiaries. Outside of the REIT and capital financing subsidiary dividends, we do not anticipate that the Bank will declare
dividends during 2013, due to the deficit position of its undivided profits.