Huntington National Bank 2013 Annual Report Download - page 25

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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, 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 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. 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 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, prior to December 31, 2013, 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 until December 2013. We anticipate that the Bank will
declare dividends to the holding company during the first half of 2014.
Operational and Legal Risks:
1. The resolution of significant pending litigation, if unfavorable, could have a material 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.
Note 22 of the Notes to Consolidated Financial Statements updates the status of litigation concerning Cyberco Holdings, Inc.
Although the bank maintains litigation reserves related to this case, the ultimate resolution of the matter, if unfavorable, may be
material to our results of operations for a particular reporting period.