Huntington National Bank 2013 Annual Report Download - page 19

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We are subject to the current capital requirements mandated by the Federal Reserve and final capital rules to implement Basel III
that were adopted in July 2013.
The Federal Reserve sets risk-based capital ratio and leverage ratio guidelines for bank holding companies. Under the guidelines
and related policies, bank holding companies must maintain capital sufficient to meet both a risk-based asset ratio test and a leverage
ratio test on a consolidated basis. The risk-based ratio is determined by allocating assets and specified off-balance sheet commitments
into four weighted categories, with higher weighting assigned to categories perceived as representing greater risk. The risk-based ratio
represents total capital divided by total risk-weighted assets. The leverage ratio is core capital divided by total assets adjusted as
specified in the guidelines. The Bank is subject to substantially similar capital requirements.
On July 2, 2013, the Federal Reserve voted to adopt final capital rules implementing Basel III requirements 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 changes 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.
Consistent with the international Basel framework, the final rule includes a new minimum ratio of common equity tier 1 capital (Tier I
Common) to risk-weighted assets and a Tier 1 Common capital conservation buffer of 2.5% of risk-weighted assets that will apply to
all supervised financial institutions. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets and includes a
minimum leverage ratio of 4% for all banking organizations. These new minimum capital ratios will become effective for us on
January 1, 2015, and will be fully phased-in on January 1, 2019.
Following are the Basel III regulatory capital levels that we must satisfy to avoid limitations on capital distributions and
discretionary bonus payments during the applicable transition period, from January 1, 2015 until January 1, 2019:
Basel III Regulatory Capital Levels
January 1, January 1, January 1, January 1, January 1,
2015 2016 2017 2018 2019
Tier 1 Common 4.5% 5.125% 5.75% 6.375% 7.0%
Tier 1 risk-based capital ratio 6.0% 6.625% 7.25% 7.875% 8.5%
Total risk-based capital ratio 8.0% 8.625% 9.25% 9.875% 10.5%
The final rule emphasizes Tier 1 Common capital, the most loss-absorbing form of capital, and implements strict eligibility
criteria for regulatory capital instruments. The final rule also improves the methodology for calculating risk-weighted assets to
enhance risk sensitivity. Banks and regulators use risk weighting to assign different levels of risk to different classes of assets.
We have evaluated the impact of the Basel III final rule on our regulatory capital ratios and estimate a reduction of approximately
60 basis points to our Basel I Tier I Common risk-based capital ratio based on our June 30, 2013 balance sheet composition. The
estimate is based on management’s current interpretation, expectations, and understanding of the final U.S. Basel III rules. We
anticipate that our capital ratios, on a Basel III basis, will continue to exceed the well capitalized minimum capital requirements. We
are evaluating options to mitigate the capital impact of the final rule prior to its effective implementation date.
Based on our review of the Basel III final rule, it is likely that when Basel III becomes effective, the HPCI Class C preferred
securities will no longer constitute Tier 1 capital for us or the Bank. As such, we determined that a “regulatory capital event” had
occurred, based on an opinion of counsel rendered by a law firm experienced in such matters, and the HPCI board of directors
determined to redeem the outstanding Class C preferred securities. HPCI redeemed all $50 million of the Class C preferred securities
on December 31, 2013. The holders of such securities received the redemption price of $25.00 per share.
Based on the final Basel III rule, banking organizations with more than $15 billion in total consolidated assets are required to
phase-out of additional tier 1 capital any non-qualifying capital instruments (such as trust preferred securities and cumulative preferred
shares) issued before September 12, 2010. We will begin the additional tier I capital phase-out our trust preferred securities in 2015,
but will be able to include these instruments in Tier II capital as a non-advanced approaches institution.
Generally, under the currently applicable guidelines, a financial institution's capital is divided into two tiers. Institutions that must
incorporate market risk exposure into their risk-based capital requirements may also have a third tier of capital in the form of restricted
short-term subordinated debt. These tiers are:
x Tier 1 risk-based capital, or core capital, which includes total equity plus qualifying capital securities and minority interests,
excluding unrealized gains and losses accumulated in other comprehensive income, and nonqualifying intangible and
servicing assets.
x Tier 2 risk-based capital, or supplementary capital, which includes, among other things, cumulative and limited-life preferred
stock, mandatory convertible securities, qualifying subordinated debt, and the ACL, up to 1.25% of risk-weighted assets.