UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

QUARTERLY PERIOD ENDED March 31, 2013

Commission File Number 1-34073

 

 

Huntington Bancshares Incorporated

 

 

 

Maryland   31-0724920

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

41 South High Street, Columbus, Ohio 43287

Registrant’s telephone number (614) 480-8300

 

 

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 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ¨   Yes     x   No

There were 838,757,987 shares of Registrant’s common stock ($0.01 par value) outstanding on March 31, 2013.

 

 

 


Table of Contents

HUNTINGTON BANCSHARES INCORPORATED

INDEX

 

PART I.   FINANCIAL INFORMATION   

Item 1.

  Financial Statements (Unaudited)   
  Condensed Consolidated Balance Sheets at March 31, 2013 and December 31, 2012      58   
  Condensed Consolidated Statements of Income for the three months ended March 31, 2013 and 2012      59   
  Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012      60   
  Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2013 and 2012      61   
  Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012      62   
  Notes to Unaudited Condensed Consolidated Financial Statements      63   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations   
  Executive Overview      6   
  Discussion of Results of Operations      9   
  Risk Management and Capital:   
  Credit Risk      20   
  Market Risk      33   
  Liquidity Risk      36   
  Operational Risk      39   
  Compliance Risk      41   
  Capital      41   
  Fair Value      44   
  Business Segment Discussion      45   
  Additional Disclosures      56   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      127   

Item 4.

  Controls and Procedures      127   
PART II.   OTHER INFORMATION   

Item 1.

  Legal Proceedings      127   

Item 1A.

  Risk Factors      127   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      127   

Item 6.

  Exhibits      128   
Signatures      130   

 

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Glossary of Acronyms and Terms

The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:

 

2012 Form 10-K    Annual Report on Form 10-K for the year ended December 31, 2012
ABL    Asset Based Lending
ACL    Allowance for Credit Losses
AFCRE    Automobile Finance and Commercial Real Estate
ABS    Asset-Backed Securities
AFS    Available-for-Sale
ALCO    Asset & Liability Management Committee
ALLL    Allowance for Loan and Lease Losses
ARM    Adjustable Rate Mortgage
ASC    Accounting Standards Codification
ASU    Accounting Standards Update
ATM    Automated Teller Machine
AULC    Allowance for Unfunded Loan Commitments
AVM    Automated Valuation Methodology
C&I    Commercial and Industrial
CapPR    Capital Plan Review
CCAR    Comprehensive Capital Analysis and Review
CDO    Collateralized Debt Obligations
CDs    Certificates of Deposit
CFPB    Bureau of Consumer Financial Protection
CMO    Collateralized Mortgage Obligations
CRE    Commercial Real Estate
Dodd-Frank Act    Dodd-Frank Wall Street Reform and Consumer Protection Act
EPS    Earnings Per Share
EVE    Economic Value of Equity
FASB    Financial Accounting Standards Board
FDIC    Federal Deposit Insurance Corporation
FHA    Federal Housing Administration
FHLB    Federal Home Loan Bank
FHLMC    Federal Home Loan Mortgage Corporation
FICA    Federal Insurance Contributions Act
FICO    Fair Isaac Corporation
FNMA    Federal National Mortgage Association
FRB    Federal Reserve Bank
FTE    Fully-Taxable Equivalent
FTP    Funds Transfer Pricing
GAAP    Generally Accepted Accounting Principles in the United States of America
HAMP    Home Affordable Modification Program
HARP    Home Affordable Refinance Program
HTM    Held-to-Maturities
IRS    Internal Revenue Service
ISE    Interest Sensitive Earnings
LCR    Liquidity Coverage Ratio
LIBOR    London Interbank Offered Rate

 

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LGD    Loss-Given-Default
LTV    Loan to Value
MBS    Mortgage-Backed Security
MD&A    Management’s Discussion and Analysis of Financial Condition and Results of Operations
MSA    Metropolitan Statistical Area
MSR    Mortgage Servicing Rights
NALs    Nonaccrual Loans
NCO    Net Charge-off
NIM    Net interest margin
NPAs    Nonperforming Assets
NPR    Notice of Proposed Rulemaking
N.R.    Not relevant. Denominator of calculation is a gain in the current period compared with a loss in the prior period, or vice-versa.
OCC    Office of the Comptroller of the Currency
OCI    Other Comprehensive Income (Loss)
OCR    Optimal Customer Relationship
OLEM    Other Loans Especially Mentioned
OREO    Other Real Estate Owned
OTTI    Other-Than-Temporary Impairment
PD    Probability-Of-Default
Plan    Huntington Bancshares Retirement Plan
Problem Loans    Includes nonaccrual loans and leases (Table 13), troubled debt restructured loans (Table 14), accruing loans and leases past due 90 days or more (aging analysis section of Footnote 3), and Criticized commercial loans (credit quality indicators section of Footnote 3).
REIT    Real Estate Investment Trust
ROC    Risk Oversight Committee
SAD    Special Assets Division
SBA    Small Business Administration
SEC    Securities and Exchange Commission
SERP    Supplemental Executive Retirement Plan
SRIP    Supplemental Retirement Income Plan
TDR    Troubled Debt Restructured Loan
U.S. Treasury    U.S. Department of the Treasury
UCS    Uniform Classification System
UPB    Unpaid Principal Balance
USDA    U.S. Department of Agriculture
VA    U.S. Department of Veteran Affairs
VIE    Variable Interest Entity
WGH    Wealth Advisors, Government Finance, and Home Lending

 

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PART I. FINANCIAL INFORMATION

When we refer to “we,” “our,” and “us” 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” in this report, we mean our only bank subsidiary, The Huntington National Bank, and its subsidiaries.

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

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 147 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, customized insurance service programs, and other financial products and services. Our over 700 banking offices are located in Indiana, Kentucky, Michigan, Ohio, Pennsylvania, and West Virginia. 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 2012 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2012 Form 10-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 remainder of 2013.

 

   

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, recent accounting pronouncements and developments, and acquisitions.

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

 

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EXECUTIVE OVERVIEW

Summary of 2013 First Quarter Results

For the quarter, we reported net income of $151.8 million, or $0.17 per common share, compared with $167.3 million, or $0.19 per common share, in the prior quarter ( see Table 1 ).

Fully-taxable equivalent net interest income was $430.1 million for the quarter, down $9.4 million, or 2%, from the prior quarter. The decrease reflected the seasonal impact of a fewer number of calendar days in the quarter, as well as a 3 basis point decrease in NIM, partially offset by a $0.3 billion increase in average earnings assets. The primary items affecting the NIM were a 5 basis point negative impact from the mix and yield of earning assets and a 3 basis point lower benefit from noninterest-bearing funds, which were partially offset by a 5 basis point positive impact from the reduction in total funding costs.

The provision for credit losses decreased $9.9 million, or 25%, from the prior quarter. This reflected an $18.4 million, or 26%, decrease in NCOs to $51.7 million, or an annualized 0.51% of average total loans and leases, from $70.1 million, or an annualized 0.69%, in the prior quarter.

Noninterest income decreased $45.4 million, or 15%, from the prior quarter. Gain on sale of loans decreased $18.1 million, or 87%, primarily related to the prior quarter automobile loan securitization. Mortgage banking income decreased $16.5 million, or 27%, primarily due to lower origination and secondary marketing income. Lower than expected commercial customer transactions negatively impacted both capital markets revenue and service charges on commercial deposit accounts, more than offsetting the favorable impact from continued commercial customer relationship growth of 11.9% annualized during the quarter. The decrease in service charges on deposit accounts also reflects typical seasonality and the February 2013 implementation of a new posting order for consumer transaction accounts. The full-year impact from the new posting order, which was incorporated into previous 2013 guidance, is estimated to be between $25 million and $30 million. Consumer household checking account growth of 11.8% annualized during the quarter partially offset the unfavorable impact from the new posting order.

Noninterest expense decreased $27.8 million, or 6%, from the prior quarter. Professional services decreased $15.3 million, 68%, primarily reflecting the decline in regulatory-related expenses. Other expenses decreased $8.2 million, or 20%, due to lower litigation and travel expenses, while marketing decreased $5.5 million, or 33%, as the latest advertising campaign did not launch until late in the quarter. Personnel costs increased $4.9 million, or 2%, reflecting approximately $8 million of costs related to the annual payroll tax resets, partially offset by approximately $5 million in lower commission expense due to lower levels of capital markets and other customer-related activities.

The period-end ACL as a percentage of total loans and leases decreased to 1.91% from 1.99% in the prior quarter. The ACL as a percentage of period end NALs increased 8 percentage points to 207%. NALs declined by $27.3 million, or 7%, to $380.3 million, or 0.92% of total loans. The decreases primarily reflect continued improvement in commercial NALs.

The tangible common equity to tangible asset ratio increased to 8.92% from 8.76% in the prior quarter. Our Tier 1 common risk-based capital ratio at quarter end was 10.62%, up from 10.48% in the prior quarter. The regulatory Tier 1 risk-based capital ratio at March 31, 2013 was 12.16%, up from 12.02%, at December 31, 2012. All capital ratios were impacted by the repurchase of 4.7 million common shares over the quarter at an average price per share of $7.07.

The Federal Reserve completed its review of our January 2013 capital plan submission and did not object to our proposed capital actions. This allows us to increase our quarterly common stock dividend to $0.05 per common share and gives us the potential to repurchase up to $227.0 million of common stock through the first quarter of 2014. Reinvesting excess capital to organically grow the business remains our priority. Importantly, dividends and share repurchases provide us additional means of creating long-term shareholder value.

Business Overview

General

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.

The year is off to a solid start, and the first quarter results continue to demonstrate that our strategies are working. We have differentiated ourselves by investing in innovative products and customer services, including our Fair Play approach. As a result, we are continuing to see double digit household growth and recognition by national entities of our customer service execution. Our growth has occurred in a challenging economic and regulatory environment. While some companies are hesitant to invest in light of the uncertain economy, we will continue to look for areas where we can improve efficiency, continue to deliver positive operating leverage, and selectively invest in our businesses in order to drive our long-term profitability.

 

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Economy

The FRB of Philadelphia Coincident Economic Activity Index, a proxy for overall economic growth, indicates the recoveries in Michigan, Ohio, and Indiana have been stronger than in the overall nation since the recession ended in June 2009. Led by Indiana and Michigan, five of our six footprint states are forecasted to grow faster than the overall nation over the six months beginning in March 2013. For the 12 months ended January 31, 2013, home prices rose 13.9% in the Detroit MSA, well above the S&P Case Shiller index for the nation, which rose 8.1%. In aggregate, housing markets in our footprint states have mirrored the national recovery trend. Firming of natural gas prices and a gradual improvement in the global economy should also provide some additional support to economic growth as the year progresses.

Legislative and Regulatory

Regulatory reforms continue to be adopted which impose additional restrictions on current business practices. Recent items affecting us include the Federal Reserve’s Capital Plan Review and a recently issued CFPB bulletin.

Capital Plans Rule / Supervisory and Company-Run Stress Test Requirements – During 2012, we participated in the Federal Reserve’s Capital Plan Review (CapPR) process and made our capital plan submission in January 2013. On March 14, 2013, we announced that the Federal Reserve had completed its review of our capital plan submission and did not object to our proposed capital actions. The capital plan review process included reviews of our internal capital planning process and our plans to make capital distributions, such as dividend payments or stock repurchases, as well as a stress test requirement designed to test our capital adequacy throughout times of economic and financial stress.

CFPB Issues Bulletin on Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act – On March 21, 2013, the CFPB issued a bulletin to provide guidance about compliance with requirements of the Equal Credit Opportunity Act (ECOA) for indirect auto lenders that permit auto dealers to increase consumer interest rates and that compensate dealers with a share of the increased interest revenues. The Bulletin states that indirect auto lenders may be liable for pricing disparities on a prohibited basis within the lender’s portfolio arising from dealer markup and compensation policies. The Bulletin further states that indirect auto lenders should take steps to ensure they are operating in compliance with ECOA. Those steps may include, but are not limited to, eliminating dealer pricing discretion or, if dealer pricing discretion is retained, imposing controls on dealer pricing discretion, testing the lender’s portfolio, monitoring dealer compliance, and when unexplained disparities on prohibited bases are found, addressing the effects of such discretion through corrective action against dealers and remuneration of affected consumers. Our indirect auto lending business is subject to this Bulletin, and we are currently evaluating this regulatory guidance to ensure it is appropriately incorporated into the operation and conduct of our business.

Expectations

We are starting to see positive signs in both our business and consumer customer bases as the economic recovery progresses. We believe the soundness of our strategy will continue to drive growth and improve our profitability. Our retail customers and our mortgage lending businesses are benefiting from recovering housing markets. Although a recent uptick among our business customers of drawing down cash balances to support working capital needs and to fund new projects has negative near-term implications on our balance sheet, we are encouraged by this activity as it suggests improving confidence among business owners and implies a more robust long-term economic outlook. Competition continues to pressure asset yields and more recently loan structure, but we will remain disciplined as we manage our aggregate moderate-to-low risk profile.

Net interest income is expected to modestly grow over the course of 2013, as we anticipate an increase in total loans, excluding the impact of any future loan securitizations. However, those benefits to net interest income are expected to be mostly offset by downward NIM pressure. 2013 NIM is not expected to fall below the mid 3.30%’s due to continued deposit repricing and mix shift opportunities while maintaining a disciplined approach to loan pricing.

The C&I portfolio is expected to continue to see growth in 2013, although we expect growth will be more heavily weighted to the back half of the year as the economic recovery progresses. Our C&I sales pipeline remains robust with much of this reflecting the positive impact from our investments in specialized commercial verticals, focused OCR sales process and continued support of middle market and small business lending. While on-balance sheet loans are expected to increase, we will continue to evaluate the use of automobile loan securitizations due to our expectation of continued strong levels of originations. We currently anticipate one securitization in the second half of 2013. Residential mortgages and home equity loan balances are expected to increase modestly. CRE loans likely will experience declines from current levels but are expected to remain in the $5.0 billion range.

 

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Excluding potential future automobile loan securitizations, we anticipate the increase in total loans will modestly outpace growth in total deposits. This reflects our continued focus on the overall cost of funds, the continued shift towards low- and no-cost demand deposits and money market deposit accounts.

Noninterest income over the course of the year, excluding the impact of any automobile loan sales and any net MSR impact, is expected to be at similar levels as 2012. The anticipated slowdown in mortgage banking activity is expected to be offset by continued growth in new customers, increased contribution from higher cross-sell, and the continued maturation of our previous strategic investments.

Noninterest expense in the 2013 first quarter was below our expected average quarterly run rate for the year. The second quarter is expected to increase due to higher commission expense related to a more normal level of commercial customer-related activity, annual merit increases, higher marketing expense as we continue the launch our new media campaign, and equipment related to our continued in-store expansion. We remain committed to posting positive operating leverage in 2013 as growth in total revenue is expected to outpace total expense growth.

Overall credit quality is expected to experience continued improvement, and NCOs while in the normalized range this quarter, are expected to remain volatile but reach normalized levels by the end of 2013. The level of provision for credit losses was at the low end of our long-term expectation, and we expect some quarterly volatility within each of the loan categories given the absolute low level of the provision for credit losses and the uncertain and uneven nature of the economic recovery.

We anticipate an effective tax rate for the remainder of 2013 to be in the range of 25% to 28%, primarily reflecting the impact of tax-exempt income, tax advantaged investments, and general business credits.

 

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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 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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Table 1 - Selected Quarterly Income Statement Data (1)

 

     2013     2012  

(dollar amounts in thousands, except per share amounts)

   First     Fourth     Third     Second     First  

Interest income

   $ 465,319     $ 478,995     $ 483,787     $ 487,544     $ 479,937  

Interest expense

     41,149       44,940       53,489       58,582       62,728  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     424,170       434,055       430,298       428,962       417,209  

Provision for credit losses

     29,592       39,458       37,004       36,520       34,406  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     394,578       394,597       393,294       392,442       382,803  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     60,883       68,083       67,806       65,998       60,292  

Mortgage banking income

     45,248       61,711       44,614       38,349       46,418  

Trust services

     31,160       31,388       29,689       29,914       30,906  

Electronic banking

     20,713       21,011       22,135       20,514       18,630  

Brokerage income

     17,995       17,415       16,526       19,025       19,260  

Insurance income

     19,252       17,268       17,792       17,384       18,875  

Gain on sale of loans

     2,616       20,690       6,591       4,131       26,770  

Bank owned life insurance income

     13,442       13,767       14,371       13,967       13,937  

Capital markets fees

     8,051       12,918       11,805       13,455       9,982  

Securities gains (losses)

     (509     863       4,169       350       (613

Other income

     33,358       32,537       25,569       30,732       40,863  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     252,209       297,651       261,067       253,819       285,320  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Personnel costs

     258,895       253,952       247,709       243,034       243,498  

Outside data processing and other services

     49,265       48,699       50,396       48,568       42,592  

Net occupancy

     30,114       29,008       27,599       25,474       29,079  

Equipment

     24,880       26,580       25,950       24,872       25,545  

Deposit and other insurance expense

     15,490       16,327       15,534       15,731       20,738  

Professional services

     7,192       22,514       17,510       15,037       10,697  

Marketing

     10,971       16,456       16,842       17,396       13,569  

Amortization of intangibles

     10,320       11,647       11,431       11,940       11,531  

OREO and foreclosure expense

     2,666       4,233       4,982       4,106       4,950  

Loss (Gain) on early extinguishment of debt

     —          —          1,782       (2,580     —     

Other expense

     33,000       41,212       38,568       40,691       60,477  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     442,793       470,628       458,303       444,269       462,676  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     203,994       221,620       196,058       201,992       205,447  

Provision for income taxes

     52,214       54,341       28,291       49,286       52,177  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 151,780     $ 167,279     $ 167,767     $ 152,706     $ 153,270  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends on preferred shares

     7,970       7,973       7,983       7,984       8,049  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to common shares

   $ 143,810     $ 159,306     $ 159,784     $ 144,722     $ 145,221  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares—basic

     841,103       847,220       857,871       862,261       864,499  

Average common shares—diluted

     848,708       853,306       863,588       867,551       869,164  

Net income per common share—basic

   $ 0.17     $ 0.19     $ 0.19     $ 0.17     $ 0.17  

Net income per common share—diluted

     0.17       0.19       0.19       0.17       0.17  

Cash dividends declared per common share

     0.04       0.04       0.04       0.04       0.04  

Return on average total assets

     1.10     1.19     1.19     1.10     1.13

Return on average common shareholders’ equity

     10.7       11.6       11.9       11.1       11.4  

Return on average tangible common shareholders’ equity (2)

     12.4       13.5       13.9       13.1       13.5  

Net interest margin (3)

     3.42       3.45       3.38       3.42       3.40  

Efficiency ratio (4)

     63.3       62.3       64.5       62.8       63.8  

Effective tax rate

     25.6       24.5       14.4       24.4       25.4  

Revenue—FTE

          

Net interest income

   $ 424,170     $ 434,055     $ 430,298     $ 428,962     $ 417,209  

FTE adjustment

     5,923       5,470       5,254       5,747       3,935  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (3)

     430,093       439,525       435,552       434,709       421,144  

Noninterest income

     252,209       297,651       261,067       253,819       285,320  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue (3)

   $ 682,302     $ 737,176     $ 696,619     $ 688,528     $ 706,464  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  

Comparisons for presented periods are impacted by a number of factors. Refer to the “Significant Items” for additional discussion regarding these key factors.

 

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(2)  

Net income 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.

(3)  

On a fully-taxable equivalent (FTE) basis assuming a 35% tax rate

(4)  

Noninterest expense less amortization of intangibles divided by the sum of FTE net interest income and noninterest income excluding securities gains.

Significant Items

Definition of 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.

Significant Items Influencing Financial Performance Comparisons

Earnings comparisons were impacted by the Significant Items summarized below:

 

  1. Litigation Reserve. During the 2012 first quarter, a $23.5 million addition to litigation reserves was recorded in other noninterest expense. This resulted in a negative impact of $0.02 per common share.

 

  2. Bargain Purchase Gain. During the 2012 first quarter, an $11.4 million bargain purchase gain associated with the FDIC-assisted Fidelity Bank acquisition was recorded in noninterest income. This resulted in a positive impact of $0.01 per common share.

 

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The following table reflects the earnings impact of the above-mentioned Significant Items for periods affected by this Results of Operations discussion:

Table 2 - Significant Items Influencing Earnings Performance Comparison

 

     Three Months Ended  
     March 31, 2013     December 31, 2012     March 31, 2012  

(dollar amounts in thousands, except per share amounts)

   After-tax      EPS (2)     After-tax      EPS (2)     After-tax     EPS (2)  

Net income

   $ 151,780        $ 167,279        $ 153,270    

Earnings per share, after-tax

      $ 0.17        $ 0.19       $ 0.17  

Change from prior quarter—$

        (0.02        —            0.03  

Change from prior quarter—%

        (11 )%         —         21

Change from year-ago—$

      $ —           $ 0.05       $ 0.03  

Change from year-ago—%

        —          36       21

Significant Items—favorable (unfavorable) impact:

   Earnings (1)      EPS (2)     Earnings (1)      EPS (2)     Earnings (1)     EPS (2)  

Bargain purchase gain

   $ —         $ —        $ —         $ —        $ 11,409       0.01  

Litigation reserves addition

     —           —          —           —          (23,500     (0.02

 

(1)  

Pretax unless otherwise noted.

(2)  

After-tax.

Net Interest Income / Average Balance Sheet

The following tables detail the change in our average balance sheet and the net interest margin:

 

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Table 3 - Consolidated Quarterly Average Balance Sheets

 

     Average Balances     Change  
     2013     2012     1Q13 vs. 1Q12  

(dollar amounts in millions)

   First     Fourth     Third     Second (2)     First     Amount     Percent  

Assets:

              

Interest-bearing deposits in banks

   $ 72     $ 73     $ 82     $ 124     $ 100     $ (28     (28 )% 

Loans held for sale

     709       840       1,829       410       1,265       (556     (44

Securities:

              

Available-for-sale and other securities:

              

Taxable

     6,964       7,131       8,014       8,285       8,171       (1,207     (15

Tax-exempt

     549       492       423       387       404       145       36  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     7,513       7,623       8,437       8,672       8,575       (1,062     (12

Trading account securities

     85       97       66       54       50       35       70  

Held-to-maturity securities—taxable

     1,717       1,652       796       611       632       1,085       172  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     9,315       9,372       9,299       9,337       9,257       58       1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (1)

              

Commercial:

              

Commercial and industrial

     16,954       16,507       16,343       16,094       14,824       2,130       14  

Commercial real estate:

              

Construction

     598       576       569       584       598       —         —    

Commercial

     4,694       4,897       5,153       5,491       5,254       (560     (11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     5,292       5,473       5,722       6,075       5,852       (560     (10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     22,246       21,980       22,065       22,169       20,676       1,570       8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

              

Automobile

     4,833       4,486       4,065       4,985       4,576       257       6  

Home equity

     8,395       8,345       8,369       8,310       8,234       161       2  

Residential mortgage

     4,978       5,155       5,177       5,253       5,174       (196     (4

Other consumer

     412       431       444       462       485       (73     (15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     18,618       18,417       18,055       19,010       18,469       149       1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     40,864       40,397       40,120       41,179       39,145       1,719       4  

Allowance for loan and lease losses

     (772     (783     (855     (908     (961     189       (20
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans and leases

     40,092       39,614       39,265       40,271       38,184       1,908       5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     50,960       50,682       51,330       51,050       49,767       1,193       2  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and due from banks

     904       1,459       960       928       1,012       (108     (11

Intangible assets

     571       581       597       609       613       (42     (7

All other assets

     4,065       4,115       4,106       4,158       4,225       (160     (4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 55,728     $ 56,054     $ 56,138     $ 55,837     $ 54,656     $ 1,072       2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Shareholders’ Equity:

              

Deposits:

              

Demand deposits—noninterest-bearing

   $ 12,165     $ 13,121     $ 12,329     $ 12,064     $ 11,273     $ 892       8

Demand deposits—interest-bearing

     5,977       5,843       5,814       5,939       5,646       331       6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     18,142       18,964       18,143       18,003       16,919       1,223       7  

Money market deposits

     15,045       14,749       14,515       13,182       13,141       1,904       14  

Savings and other domestic deposits

     5,083       4,960       4,975       4,978       4,817       266       6  

Core certificates of deposit

     5,346       5,637       6,131       6,618       6,510       (1,164     (18
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     43,616       44,310       43,764       42,781       41,387       2,229       5  

Other domestic time deposits of $250,000 or more

     360       359       300       298       347       13       4  

Brokered deposits and negotiable CDs

     1,697       1,756       1,878       1,421       1,301       396       30  

Deposits in foreign offices

     340       342       356       357       430       (90     (21
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     46,013       46,767       46,298       44,857       43,465       2,548       6  

Short-term borrowings

     762       1,012       1,329       1,391       1,512       (750     (50

Federal Home Loan Bank advances

     686       42       107       626       419       267       64  

Subordinated notes and other long-term debt

     1,348       1,374       1,638       2,251       2,652       (1,304     (49
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     36,644       36,074       37,043       37,061       36,775       (131     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

All other liabilities

     1,085       1,017       1,035       1,094       1,116       (31     (3

Shareholders’ equity

     5,834       5,842       5,731       5,618       5,492       342       6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 55,728     $ 56,054     $ 56,138     $ 55,837     $ 54,656     $ 1,072       2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) For purposes of this analysis, NALs are reflected in the average balances of loans.
(2) The acquisition of Fidelity Bank on March 30, 2012, contributed to the increase in average loans and deposits

 

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Table 4 - Consolidated Quarterly Net Interest Margin Analysis

 

     Average Rates (2)  

Fully-taxable equivalent basis (1)

   2013     2012  
     First     Fourth     Third     Second     First  

Assets

          

Interest-bearing deposits in banks

     0.16     0.28     0.21     0.31     0.05

Loans held for sale

     3.22       3.18       3.18       3.46       3.80  

Securities:

          

Available-for-sale and other securities:

          

Taxable

     2.31       2.32       2.29       2.33       2.39  

Tax-exempt

     3.96       4.03       4.15       4.23       4.17  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     2.43       2.43       2.39       2.41       2.47  

Trading account securities

     0.50       1.01       1.07       1.64       1.65  

Held-to-maturity securities—taxable

     2.29       2.24       2.81       2.97       2.98  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     2.39       2.38       2.41       2.45       2.50  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (3)

          

Commercial:

          

Commercial and industrial

     3.83       3.88       3.90       3.99       4.01  

Commercial real estate:

          

Construction

     4.05       4.13       3.84       3.66       3.85  

Commercial

     4.00       4.20       3.85       3.93       3.82  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     4.01       4.19       3.85       3.89       3.82  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     3.87       3.96       3.89       3.97       3.96  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

          

Automobile

     4.28       4.52       4.87       4.68       4.87  

Home equity

     4.20       4.24       4.27       4.30       4.30  

Residential mortgage

     3.97       4.07       4.02       4.14       4.17  

Other consumer

     7.05       7.16       7.16       7.42       7.47  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     4.22       4.33       4.40       4.43       4.49  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     4.03       4.13       4.12       4.18       4.21  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     3.75     3.80     3.79     3.89     3.91
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

          

Deposits:

          

Demand deposits—noninterest-bearing

                    

Demand deposits—interest-bearing

     0.04       0.05       0.07       0.07       0.06  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     0.01       0.02       0.02       0.02       0.02  

Money market deposits

     0.23       0.27       0.33       0.30       0.26  

Savings and other domestic deposits

     0.30       0.33       0.37       0.39       0.45  

Core certificates of deposit

     1.19       1.21       1.25       1.38       1.60  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     0.37       0.41       0.47       0.50       0.54  

Other domestic time deposits of $250,000 or more

     0.52       0.61       0.68       0.66       0.68  

Brokered deposits and negotiable CDs

     0.67       0.71       0.71       0.75       0.79  

Deposits in foreign offices

     0.17       0.18       0.18       0.19       0.18  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     0.38       0.42       0.48       0.51       0.55  

Short-term borrowings

     0.12       0.14       0.16       0.16       0.16  

Federal Home Loan Bank advances

     0.18       1.20       0.50       0.21       0.21  

Subordinated notes and other long-term debt

     2.54       2.55       2.91       2.83       2.74  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     0.45     0.50     0.58     0.63     0.68
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest rate spread

     3.30     3.30     3.21     3.26     3.23

Impact of noninterest-bearing funds on margin

     0.12       0.15       0.17       0.16       0.17  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin

     3.42     3.45     3.38     3.42     3.40
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  

FTE yields are calculated assuming a 35% tax rate.

(2)  

Loan and lease and deposit average rates include impact of applicable derivatives, non-deferrable fees, and amortized deferred fees.

(3)  

For purposes of this analysis, NALs are reflected in the average balances of loans.

 

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Table 5 - Average Loans/Leases and Deposits

 

     First Quarter      Fourth Quarter      1Q13 vs 1Q12     1Q13 vs 4Q12  

(dollar amounts in millions)

   2013      2012      2012      Amount     Percent     Amount     Percent  

Loans/Leases:

                 

Commercial and industrial

   $ 16,954      $ 14,824      $ 16,507      $ 2,130       14   $ 447       3

Commercial real estate

     5,292        5,852        5,473        (560     (10     (181     (3
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     22,246        20,676        21,980        1,570       8       266       1  

Automobile

     4,833        4,576        4,486        257       6       347       8  

Home equity

     8,395        8,234        8,345        161       2       50       1  

Residential mortgage

     4,978        5,174        5,155        (196     (4     (177     (3

Other loans

     412        485        431        (73     (15     (19     (4
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     18,618        18,469        18,417        149       1       201       1  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

   $ 40,864      $ 39,145      $ 40,397      $ 1,719       4   $ 467       1
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Deposits:

                 

Demand deposits—noninterest-bearing

   $ 12,165      $ 11,273      $ 13,121      $ 892       8   $ (956     (7 )% 

Demand deposits—interest-bearing

     5,977        5,646        5,843        331       6       134       2  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     18,142        16,919        18,964        1,223       7       (822     (4

Money market deposits

     15,045        13,141        14,749        1,904       14       296       2  

Savings and other domestic time deposits

     5,083        4,817        4,960        266       6       123       2  

Core certificates of deposit

     5,346        6,510        5,637        (1,164     (18     (291     (5
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     43,616        41,387        44,310        2,229       5       (694     (2

Other deposits

     2,397        2,078        2,457        319       15       (60     (2
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

   $ 46,013      $ 43,465      $ 46,767      $ 2,548       6   $ (754     (2 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

2013 First Quarter versus 2012 First Quarter

Fully-taxable equivalent net interest income increased $8.9 million, or 2%, from the year-ago quarter. This reflected a $1.2 billion, or 2%, increase in average total earning assets and a 2 basis point increase in the FTE net interest margin. The primary items impacting the increase in the net interest margin were:

 

   

20 basis point impact from the reduction in the cost of subordinated notes and other long-term debt, reflecting the benefit of the redemption of $230 million of trust preferred securities in 2012.

 

   

17 basis point positive impact from the reduction in total deposit costs.

Partially offset by:

 

   

18 basis point negative impact from the mix and yield of loans.

 

   

11 basis point negative impact from the yield on total securities.

The $1.7 billion, or 4%, increase in average total loans and leases primarily reflected:

 

   

$2.1 billion, or 14%, increase in C&I loans. This reflected the continued growth across most business lines with particularly strong growth in equipment finance, dealer floorplan, and health care.

 

   

$0.3 billion, or 6%, increase in automobile loans. No automobile loans were transferred to held for sale during the 2013 first quarter as the only currently planned securitization is expected to be in the second half of 2013.

Partially offset by:

 

   

$0.6 billion, or 10%, decrease in CRE loans. This reflected continued runoff of the noncore and core portfolios as we balanced acceptable returns for new core origination against internal concentration limits and increased competition, particularly pricing, for high quality developers and projects.

 

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$0.2 billion, or 4%, decrease in residential mortgages due to payoffs and the mix of originations shifted towards more saleable loans.

The $2.2 billion, or 5%, increase in average core deposits from the year-ago quarter reflected:

 

   

$1.9 billion, or 14%, increase in money market deposits.

 

   

$1.2 billion, or 7%, increase in total demand deposits.

Partially offset by:

 

   

$1.2 billion, or 18%, decrease in core certificates of deposit.

2013 First Quarter versus 2012 Fourth Quarter

Fully-taxable equivalent net interest income decreased $9.4 million, or 2%, from the last quarter reflecting the seasonal impact of a fewer number of calendar days in the quarter, as well as a 3 basis point decrease in NIM, partially offset by a $0.3 billion increase in average earnings assets. The primary items affecting the NIM were:

 

   

5 basis point negative impact from the mix and yield of earning assets.

 

   

3 basis point lower benefit from noninterest bearing funds.

Partially offset by:

 

   

5 basis point positive impact from the reduction in total funding costs.

The $0.5 billion, or 1%, increase in average total loans and leases from the 2012 fourth quarter reflected:

 

   

$0.4 billion, or 3%, increase in commercial and industrial loans.

 

   

$0.3 billion, or 8%, increase in automobile loans.

Partially offset by:

 

   

$0.2 billion, or 3%, decrease in commercial real estate loans.

 

   

$0.2 billion, or 3%, decrease in residential mortgages.

The $0.7 billion, or 2%, decrease in average total core deposits from the 2012 fourth quarter reflected:

 

   

$1.0 billion, or 7%, decrease in noninterest-bearing deposits primarily reflecting our continued effort to reduce collateralized deposits.

Partially offset by:

 

   

$0.3 billion, or 2%, increase in money market deposits.

 

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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 inherent credit losses in the loan and lease portfolio and the portfolio of unfunded loan commitments and letters-of-credit.

The provision for credit losses for the 2013 first quarter declined $9.9 million, or 25%, from the prior quarter and declined $4.8 million, or 14%, from the year-ago quarter. The current quarter’s provision for credit losses was $22.1 million less than total NCOs. (See Credit Quality discussion). Given the absolute low level of the provision for credit losses and the uncertain and uneven nature of the economic recovery, some degree of volatility on a quarter to quarter basis is expected.

Noninterest Income

(This section should be read in conjunction with Significant Item 2.)

The following table reflects noninterest income for each of the past five quarters:

Table 6 - Noninterest Income

 

     2013     2012     1Q13 vs 1Q12     1Q13 vs 4Q12  

(dollar amounts in thousands)

   First     Fourth      Third      Second      First     Amount     Percent     Amount     Percent  

Service charges on deposit accounts

   $ 60,883     $ 68,083      $ 67,806      $ 65,998      $ 60,292     $ 591       1   $ (7,200     (11 )% 

Mortgage banking income

     45,248       61,711        44,614        38,349        46,418       (1,170     (3     (16,463     (27

Trust services

     31,160       31,388        29,689        29,914        30,906       254       1       (228     (1

Electronic banking

     20,713       21,011        22,135        20,514        18,630       2,083       11       (298     (1

Brokerage income

     17,995       17,415        16,526        19,025        19,260       (1,265     (7     580       3  

Insurance income

     19,252       17,268        17,792        17,384        18,875       377       2       1,984       11  

Gain on sale of loans

     2,616       20,690        6,591        4,131        26,770       (24,154     (90     (18,074     (87

Bank owned life insurance income

     13,442       13,767        14,371        13,967        13,937       (495     (4     (325     (2

Capital markets fees

     8,051       12,918        11,805        13,455        9,982       (1,931     (19     (4,867     (38

Securities gains (losses)

     (509     863        4,169        350        (613     104       (17     (1,372     (159

Other income

     33,358       32,537        25,569        30,732        40,863       (7,505     (18     821       3  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 252,209     $ 297,651      $ 261,067      $ 253,819      $ 285,320     $ (33,111     (12 )%    $ (45,442     (15 )% 
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2013 First Quarter versus 2012 First Quarter

The $33.1 million, or 12%, decrease in total noninterest income from the year-ago quarter reflected:

 

   

$24.2 million, or 90%, decrease in gain on sale of loans, primarily related to the prior year’s automobile loan securitization.

 

   

$7.5 million, or 18%, decrease in other income related to the prior year’s $11.4 million bargain purchase gain from the FDIC-assisted Fidelity Bank acquisition and a $2.7 million decrease in operating lease income. 2013 first quarter other income included a $7.6 million gain on the sale of Low Income Housing Tax Credit investments.

2013 First Quarter versus 2012 Fourth Quarter

The $45.4 million, or 15%, decrease in total noninterest income from the prior quarter reflected:

 

   

$18.1 million, or 87%, decrease in gain on sale of loans, primarily related to prior quarter’s automobile loan securitization.

 

   

$16.5 million, or 27%, decrease in mortgage banking income, primarily related to lower origination and secondary marketing income.

 

   

$7.2 million, or 11%, decrease in service charges on deposit accounts reflect typical seasonality and the February implementation of a new posting order for consumer transaction accounts.

 

   

$4.9 million, or 38%, decrease in capital market activity. Lower than expected commercial customer transactions negatively impacted both capital markets revenue and service charges on commercial deposit accounts, more than offsetting the favorable impact from continued growth in total customer relationships.

 

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Noninterest Expense

(This section should be read in conjunction with Significant Item 1.)

The following table reflects noninterest expense for each of the past five quarters:

Table 7 - Noninterest Expense

 

     2013      2012      1Q13 vs 1Q12     1Q13 vs 4Q12  

(dollar amounts in thousands)

   First      Fourth      Third      Second     First      Amount     Percent     Amount     Percent  

Personnel costs

   $ 258,895      $ 253,952      $ 247,709      $ 243,034     $ 243,498      $ 15,397       6   $ 4,943       2

Outside data processing and other services

     49,265        48,699        50,396        48,568       42,592        6,673       16       566       1  

Net occupancy

     30,114        29,008        27,599        25,474       29,079        1,035       4       1,106       4  

Equipment

     24,880        26,580        25,950        24,872       25,545        (665     (3     (1,700     (6

Deposit and other insurance expense

     15,490        16,327        15,534        15,731       20,738        (5,248     (25     (837     (5

Professional services

     7,192        22,514        17,510        15,037       10,697        (3,505     (33     (15,322     (68

Marketing

     10,971        16,456        16,842        17,396       13,569        (2,598     (19     (5,485     (33

Amortization of intangibles

     10,320        11,647        11,431        11,940       11,531        (1,211     (11     (1,327     (11

OREO and foreclosure expense

     2,666        4,233        4,982        4,106       4,950        (2,284     (46     (1,567     (37

Loss (Gain) on early extinguishment of debt

     —           —           1,782        (2,580     —           —          —          —          —     

Other expense

     33,000        41,212        38,568        40,691       60,477        (27,477     (45     (8,212     (20
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

   $ 442,793      $ 470,628      $ 458,303      $ 444,269     $ 462,676      $ (19,883     (4 )%    $ (27,835     (6 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Number of employees (full-time equivalent), at period-end

     12,052        11,806        11,731        11,417       11,166        886       8     246       2

2013 First Quarter versus 2012 First Quarter

The $19.9 million, or 4%, decrease in total noninterest expense from the year-ago quarter reflected:

 

   

$27.5 million, or 45%, decrease in other expense, reflecting a $2.1 million, or 73%, decrease to $0.7 million in operating lease expense as the automobile lease portfolio continues to run off and is expected to be essentially zero by the end of the year. The year ago quarter included a $23.5 million addition to litigation reserves.

 

   

$5.2 million, or 25%, decrease in deposit and other insurance expense, reflecting lower insurance premiums.

 

   

$3.5 million, or 33%, decrease in professional services, reflecting a decline in legal and outside consultant expenses.

Partially offset by:

 

   

$15.4 million, or 6%, increase in personnel costs, reflecting an increase in the number of full-time equivalent employees as well as higher salaries and benefits.

 

   

$6.7 million, or 16%, increase in outside data processing and other services primarily related to continued IT infrastructure investments.

2013 First Quarter versus 2012 Fourth Quarter

The $27.8 million, or 6%, decrease in total noninterest expense from the prior quarter reflected:

 

   

$15.3 million, or 68%, decrease in professional costs, primarily reflecting the decline in regulatory-related expense.

 

   

$8.2 million, or 20%, decrease in other expenses due to lower litigation and travel expense.

 

   

$5.5 million, or 33%, decrease in the marketing, as the latest advertising campaign did not launch until late in the quarter.

 

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Partially offset by:

 

   

$4.9 million, or 2%, increase in personnel costs, reflecting approximately $8 million related to the annual payroll tax resets, partially offset by approximately $5 million in lower commission expense due to lower levels of capital markets and other customer-related activities.

Provision for Income Taxes

The provision for income taxes in the 2013 first quarter was $52.2 million. This compared with a provision for income taxes of $54.3 million in the 2012 fourth quarter and $52.2 million in the 2012 first quarter. All three quarters included the benefits from tax-exempt income, tax-advantaged investments, and general business credits. At March 31, 2013, we had a net federal deferred tax asset of $116.9 million and a net state deferred tax asset of $37.4 million. Based on both positive and negative evidence and our level of forecasted future taxable income, there was no impairment to the deferred tax asset at March 31, 2013. As of March 31, 2013 and December 31, 2012, there was no disallowed deferred tax asset for regulatory capital purposes.

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. We have appealed certain proposed adjustments resulting from the IRS examination of our 2006, 2007, 2008, and 2009 tax returns. We believe the tax positions taken related to such proposed adjustments are correct and supported by applicable statutes, regulations, and judicial authority, and intend to vigorously defend them. In 2011, we entered into discussions with the Appeals Division of the IRS for the 2006 and 2007 tax returns. It is possible the ultimate resolution of the proposed adjustments, if unfavorable, may be material to the results of operations in the period it occurs. Nevertheless, although no assurances can be given, we believe the resolution of these examinations will not, individually or in the aggregate, have a material adverse impact on our consolidated financial position. In the current quarter, the IRS began an examination of our 2010 and 2011 consolidated federal income tax returns. Various state and other jurisdictions remain open to examination, including Kentucky, Indiana, Michigan, Pennsylvania, West Virginia, and Illinois.

 

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RISK MANAGEMENT AND CAPITAL

Risk awareness, identification and assessment, reporting, and active management are key elements in overall risk management. We manage risk to an aggregate moderate-to-low risk profile through a control framework and by monitoring and responding to identified potential risks. Controls include, among others, effective segregation of duties, access, authorization and reconciliation procedures, as well as staff education and a disciplined assessment process.

We identify primary risks, and the sources of those risks, within each business unit. We utilize Risk and Control Self-Assessments (RCSA) to identify exposure risks. Through this RCSA process, we continually assess the effectiveness of controls associated with the identified risks, regularly monitor risk profiles and material exposure to losses, and identify stress events and scenarios to which we may be exposed. Our chief risk officer is responsible for ensuring that appropriate systems of controls are in place for managing and monitoring risk across the Company. Potential risk concerns are shared with the Risk Management Committee, Risk Oversight Committee, and the board of directors, as appropriate. Our internal audit department performs on-going independent reviews of the risk management process and ensures the adequacy of documentation. The results of these reviews are reported regularly to the audit committee and board of directors.

We believe that our primary risk exposures are credit, market, liquidity, operational, and compliance oriented. More information on risk can be found in the Risk Factors section included in Item 1A of our 2012 Form 10-K and subsequent filings with the SEC. Additionally, the MD&A included in our 2012 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2012 Form 10-K. Our definition, philosophy, and approach to risk management have not materially changed from the discussion presented in the 2012 Form 10-K.

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 significant credit risk associated with our available-for-sale and other investment and held-to-maturity securities portfolios (see Note 4 and Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements) . We engage with other financial counterparties for a variety of purposes including investing, asset and liability management, mortgage banking, and for trading activities. While there is credit risk associated with derivative activity, we believe this exposure is minimal.

We continue to focus on the identification, monitoring, and managing 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 additional 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 treatment strategies for delinquent or stressed borrowers.

Loan and Lease Credit Exposure Mix

At March 31, 2013, loans and leases totaled $41.3 billion, representing a $0.6 billion, or 1%, increase compared to $40.7 billion at December 31, 2012, primarily reflecting growth in the C&I and automobile portfolios, partially offset by a decline in the CRE portfolio. The C&I portfolio increase was spread across several segments and represented a continuation of the growth in high quality loans originated over recent quarters. The automobile portfolio increase primarily reflected a continued strong level of high quality originations.

At March 31, 2013, commercial loans and leases totaled $22.3 billion and represented 54% of our total credit exposure. Our commercial portfolio is diversified along product type, customer size, and geography, 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 expand our C&I portfolio, we have developed a “vertical” strategy to ensure that new products or lending types are embedded within the structured, centralized Commercial Lending area with designated experienced credit officers.

 

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CRE – CRE loans consist of loans for income-producing real estate properties, real estate investment trusts, and real estate developers. 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.

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, office, and warehouse project types. Generally, these loans are for construction projects that have been presold or preleased, 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 $19.0 billion at March 31, 2013 and represented 46% of our total loan and lease credit exposure. The consumer portfolio is primarily comprised of automobile, home equity loans and lines-of-credit, and residential mortgages (see Consumer Credit discussion) .

Automobile – Automobile loans are primarily comprised of loans made through automotive dealerships and include exposure in selected states outside of our primary banking markets. No state outside of our primary banking markets represented more than 5% of our total automobile portfolio at March 31, 2013.

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 of the line-of-credit. 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.

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 and we do not originate residential mortgages that allow negative amortization or allow the borrower multiple payment options. Residential mortgage loans include a complete full appraisal for collateral valuation.

Other consumer – Primarily consists of consumer loans not secured by real estate, including personal unsecured loans.

The table below provides the composition of our total loan and lease portfolio:

Table 8 - Loan and Lease Portfolio Composition

 

     2013     2012  

(dollar amounts in millions)

   March 31,     December 31,     September 30,     June 30,     March 31,  

Commercial: (1)

                         

Commercial and industrial

   $ 17,267        42   $ 16,971        42   $ 16,478        41   $ 16,322        41   $ 15,838        39

Commercial real estate:

                         

Construction

     574        1       648        2       541        1       591        1       597        1  

Commercial

     4,485        11       4,751        12       4,956        12       5,317        13       5,443        13  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial real estate

     5,059        12       5,399        14       5,497        13       5,908        14       6,040        14  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial

     22,326        54       22,370        56       21,975        54       22,230        55       21,878        53  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Consumer:

                         

Automobile

     5,036        12       4,634        11       4,276        11       3,808        10       4,787        12  

Home equity

     8,474        21       8,335        20       8,381        21       8,344        21       8,261        20  

Residential mortgage

     5,051        12       4,970        12       5,192        13       5,123        13       5,284        13  

Other consumer

     397        1       419        1       436        1       454        1       469        2  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer

     18,958        46       18,358        44       18,285        46       17,729        45       18,801        47  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans and leases

   $ 41,284        100   $ 40,728        100   $ 40,260        100   $ 39,959        100   $ 40,679        100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) As defined by regulatory guidance, there were no commercial loans outstanding that would be considered a concentration of lending to a particular industry or group of industries.

 

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As shown in the table above, our loan portfolio is diversified by consumer and commercial credit. We designate specific loan types, collateral types, and loan structures as part of our credit concentration policy. C&I lending by segment, specific limits for CRE primary project types, loans secured by residential real estate, shared national credit exposure, and unsecured lending represent examples of specifically tracked components of our concentration management process. Our concentration management process is approved by our board of directors and is one of the strategies utilized to ensure a high quality, well diversified portfolio that is consistent with our overall objective of maintaining an aggregate moderate-to-low risk profile.

The table below provides our total loan and lease portfolio segregated by the type of collateral securing the loan or lease:

Table 9 - Loan and Lease Portfolio by Collateral Type (1)

 

     2013     2012  

(dollar amounts in millions)

   March 31,     December 31,     September 30,     June 30,     March 31,  

Secured loans:

                         

Real estate—commercial

   $ 9,041        22   $ 9,128        22   $ 9,278        23   $ 9,398        23   $ 9,326        24

Real estate—consumer

     13,525        33       13,305        33       13,573        33       13,467        33       13,470        34  

Vehicles

     6,928        17       6,659        16       6,096        15       5,650        14       6,623        16  

Receivables/Inventory

     5,383        13       5,178        13       5,046        13       5,026        13       4,749        12  

Machinery/Equipment

     2,815        7       2,749        7       2,639        7       2,759        7       2,536        6  

Securities/Deposits

     840        2       826        2       717        2       789        2       733        2  

Other

     1,015        2       1,090        3       1,110        3       1,043        3       983        2  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total secured loans and leases

     39,547        96       38,935        96       38,459        96       38,132        95       38,420        96  

Unsecured loans and leases

     1,737        4       1,793        4       1,801        4       1,827        5       1,738        4  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans and leases

   $ 41,284        100   $ 40,728        100   $ 40,260        100   $ 39,959        100   $ 40,158        100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Loans acquired in the FDIC-assisted acquisition of Fidelity Bank are reflected in the above table effective June 30, 2012.

Commercial Credit

Refer to the “Commercial Credit” section of our 2012 Form 10-K for our commercial credit underwriting and on-going credit management processes.

C&I PORTFOLIO

While some C&I borrowers have been challenged by the continued weakness in the economy, problem loans have trended downward, reflecting a combination of proactive risk identification and effective workout strategies implemented by the SAD. Nevertheless, we continue to proactively identify borrowers that may be facing financial difficulty to assess all potential solutions.

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 nonowner occupied, require that at least 50% of the space of the project be preleased. 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.

In 2010, we segregated our CRE portfolio into core and noncore segments. We believe segregating noncore CRE from core CRE improved our ability to understand the nature, performance prospects, and problem resolution opportunities of these segments, thus allowing us to continue to deal proactively with any emerging credit issues. We have not subsequently originated any noncore CRE loans.

A CRE loan is generally considered core when the borrower is an experienced, well-capitalized developer in our Midwest footprint, and has either an established meaningful relationship with us that generated an acceptable return on capital or demonstrates the prospect of becoming one. The core CRE portfolio was $3.7 billion at March 31, 2013, representing 74% of total CRE loans. The performance of the core portfolio has met our expectations based on the consistency of the asset quality metrics within the portfolio. Based on our extensive project level assessment process, including forward-looking collateral valuations, we continue to believe the credit quality of the core portfolio is stable. Loans are not reclassified between the core and noncore segments based on performance.

 

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Credit quality data regarding the ACL and NALs, segregated by core CRE loans and noncore CRE loans, is presented in the following table:

Table 10 - Commercial Real Estate - Core vs. Noncore Portfolios

 

     March 31, 2013  
     Ending                                Nonaccrual  

(dollar amounts in millions)

   Balance      Prior NCOs      ACL $      ACL%     Credit Mark (1)     Loans  

Total core

   $ 3,744      $ 30      $ 87        2.32     3.10   $ 48  

Noncore—SAD (2)

     567        125        127        22.40       36.42       61  

Noncore—Other

     748        17        58        7.75       9.80       2  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total noncore

     1,315        142        185        14.07       22.44       63  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total commercial real estate

   $ 5,059      $ 172      $ 272        5.38     8.49   $ 111  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     December 31, 2012  
     Ending                                Nonaccrual  

(dollar amounts in millions)

   Balance      Prior NCOs      ACL $      ACL%     Credit Mark (1)     Loans  

Total core

   $ 3,937      $ 21      $ 100        2.54     3.06   $ 41  

Noncore—SAD (2)

     597        145        129        21.61       36.93       82  

Noncore—Other

     865        18        61        7.05       8.95       4  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total noncore

     1,462        163        190        13.00       21.72       86  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total commercial real estate

   $ 5,399      $ 184      $ 290        5.37     8.49   $ 127  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(1)  

Calculated as (Prior NCOs + ACL $) / (Ending Balance + Prior NCOs).

(2)  

Noncore loans managed by SAD, the area responsible for managing loans and relationships designated as Classified Loans.

As shown in the above table, the ending balance of the CRE portfolio at March 31, 2013, declined $0.3 billion, or 6%, compared with December 31, 2012. The decline in the noncore segment primarily reflected amortization and payoffs as we actively focus on the noncore portfolio to reduce our overall CRE exposure. This reduction demonstrates our continued commitment to achieving a materially lower risk profile in the CRE portfolio, consistent with our overall objective of maintaining an aggregate moderate-to-low risk profile. The decline in the core segment primarily reflected continued payoffs, partially offset by originations. We continue to support our core developer customers as appropriate, however, new core originations are balanced against internal concentration limits and increased competition, particularly pricing, for high quality developers and projects.

Also, as shown above, substantial reserves for the noncore portfolio have been established. At March 31, 2013, the ACL related to the noncore portfolio was 14.07%. The combination of the existing ACL and prior NCOs represents the total credit actions taken on each segment of the portfolio. From this data, we calculate a credit mark that provides a consistent measurement of the cumulative credit actions taken against a specific portfolio segment. The 36.42% credit mark associated with the SAD-managed noncore portfolio is an indicator of the proactive portfolio management strategy employed for this portfolio.

Consumer Credit

Refer to the “Consumer Credit” section of our 2012 Form 10-K for our consumer credit underwriting and on-going credit management processes.

AUTOMOBILE PORTFOLIO

Our strategy in the automobile portfolio continued 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 strategy and operational capabilities significantly mitigate these risks.

 

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We have continued to consistently execute our value proposition and take advantage of available market opportunities. Importantly, we have maintained our high credit quality standard while expanding the portfolio. We have developed and implemented a loan securitization strategy to ensure we remain within our established portfolio concentration limits.

RESIDENTIAL REAL ESTATE SECURED PORTFOLIOS

The properties securing our residential mortgage and home equity portfolios are primarily located within our geographic footprint. The continued stress on home prices has caused the performance in these portfolios to remain weaker than historical levels. 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. We continue to evaluate all of our policies and processes associated with managing these portfolios. Our loss mitigation and foreclosure activities are consolidated in one location under common management. This structure allows 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  
     Secured by first-lien     Secured by junior-lien        
     03/31/13     12/31/12     03/31/13     12/31/12     03/31/13     12/31/12  

Ending balance

   $ 4,645      $ 4,380      $ 3,829      $ 3,955      $ 5,051      $ 4,970   

Portfolio weighted average LTV ratio (1)

     71     71     81     81     76     76

Portfolio weighted average FICO score (2)

     754       755       738       741       736       738  
     Home Equity     Residential Mortgage (3)  
     Secured by first-lien     Secured by junior-lien        
     Three Months Ended March 31,  
     2013     2012     2013     2012     2013     2012  

Originations

   $ 548      $ 427      $ 106      $ 147      $ 319      $ 202   

Origination weighted average LTV ratio (1)

     66     71     81     81     75     78

Origination weighted average FICO score (2)

     778       772       751       757       759       755  

 

(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

Our home equity portfolio (loans and lines-of-credit) consists of both first-lien and junior-lien mortgage loans with underwriting criteria based on minimum credit scores, debt-to-income ratios, and LTV ratios. We offer closed-end home equity loans which are generally fixed-rate with principal and interest payments, and variable-rate interest-only home equity lines-of-credit which do not require payment of principal during the 10-year revolving period of the line-of-credit. Applications are underwritten centrally in conjunction with an automated underwriting system.

Given the low interest rate environment over the past several years, many borrowers have utilized the line-of-credit home equity product as the primary source of financing their home versus residential mortgages. The proportion of the home equity portfolio secured by a first-lien has increased significantly over the past three years, positively impacting the portfolio’s risk profile. At March 31, 2013, 55% of our total home equity portfolio was secured by first-lien mortgages. The first-lien position, combined with continued high average FICO scores, significantly reduces the PD associated with these loans.

Within the home equity line-of-credit 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 2007, the standard product was a 10-year draw period with a balloon payment, while subsequent originations convert to a 20-year amortizing loan structure. After the 10-year draw period, the borrower must reapply to extend the existing structure or begin repaying the debt in a traditional term structure.

 

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The principal and interest payment associated with the term structure will be higher than the interest-only payment, resulting in “maturity” risk. Our maturity risk can be segregated into two distinct segments: (1) home equity lines-of-credit underwritten with a balloon payment at maturity 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 maturity risk is embedded in the portfolio which we address with proactive contact strategies beginning one year prior to maturity. 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 maturity date:

Table 12 - Maturity Schedule of Home Equity Line-of-Credit Portfolio

 

     March 31, 2013  

(dollar amounts in millions)

   1 year or less      1 to 2 years      2 to 3 years      3 to 4 years      More than
4 years
     Total  

Secured by first-lien

   $ 46      $ 63      $ 19      $ —         $ 2,204      $ 2,332  

Secured by junior-lien

     236        259        196        143        2,377        3,211  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity line-of-credit

   $ 282      $ 322      $ 215      $ 143      $ 4,581      $ 5,543  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The amounts in the above table maturing in four years or less primarily consist of balloon payment structures and represent the most significant maturity risk. The amounts maturing in more than four years primarily consist of home equity lines-of-credit with a 20-year amortization period after the 10-year draw period.

Historically, less than 30% of our home equity lines-of-credit that are one year or less from maturity actually reach the maturity date as borrowers apply to re-establish the revolving period under current underwriting standards. We anticipate this percentage will decline in future periods as our proactive approach to managing maturity risk continues to evolve.

Residential Mortgages Portfolio

At March 31, 2013, 50% of our total residential mortgage portfolio were ARMs. These ARMs primarily consist of a fixed-rate of interest for the first 3 to 5 years, and then adjust annually. At March 31, 2013, ARM loans that were expected to have rates reset through 2015 totaled $1.4 billion. These loans scheduled to reset are primarily associated with loans originated subsequent to 2007, and as such, are not subject to the most significant declines in underlying property value . Given the quality of our borrowers, the relatively low current interest rates, and the results of our continued analysis (including possible impacts of changes in interest rates), we believe that we have a relatively limited exposure to ARM reset risk. Nonetheless, we have taken actions to mitigate our risk exposure. We initiate borrower contact at least six months prior to the interest rate resetting, and have been successful in converting many ARMs to fixed-rate loans through this process. Given the relatively low current interest rates, many fixed-rate products currently offer a better interest rate to our ARM borrowers.

Several government programs continued to impact the residential mortgage portfolio, including various refinance programs such as HAMP and HARP, which positively affected the availability of credit for the industry. During the three-month period ended March 31, 2013, we closed $211 million in HARP residential mortgages and $1 million in HAMP residential mortgages. The HARP residential mortgage loans are considered current and are either part of our residential mortgage portfolio or serviced for others. The HAMP refinancings are associated with residential mortgages that are serviced for others. 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 (see Operational Risk discussion).

Credit Quality

(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)

We believe the most meaningful way to assess overall credit quality performance is through an analysis of credit quality 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 in the analysis of our credit quality performance.

Credit quality performance in the 2013 first quarter, reflected overall continued improvement. NALs and NCOs declined 7% and 26%, respectively, compared to the prior quarter. Commercial criticized and commercial classified loans also declined reflecting the continued improvement in the commercial portfolio. The ACL to total loans ratio declined to 1.91% and our ACL coverage ratios remained at appropriate levels. Our ACL as a percentage of NALs remained strong at 207%.

 

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NPAs, NALs, AND TDRs

(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)

NPAs and NALs

NPAs consist of (1) NALs, which represent loans and leases no longer accruing interest, (2) impaired loans held for sale, (3) OREO properties, and (4) 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 consumer loan is placed on nonaccrual status.

C&I and CRE loans are placed on nonaccrual status at 90-days past due. With the exception of residential mortgage loans guaranteed by government organizations which continue to accrue interest, residential mortgage loans are placed on nonaccrual status at 150-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.

When interest accruals are suspended, accrued interest income is reversed with current year accruals charged to earnings 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 is returned to accrual status.

 

 

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The following table reflects period-end NALs and NPAs detail for each of the last five quarters:

Table 13 - Nonaccrual Loans and Leases and Nonperforming Assets

 

     2013     2012  

(dollar amounts in thousands)

   March 31,     December 31,     September 30,     June 30,     March 31,  

Nonaccrual loans and leases:

          

Commercial and industrial

   $ 80,928     $ 90,705     $ 109,452     $ 133,678     $ 142,492  

Commercial real estate

     110,803       127,128       148,986       219,417       205,105  

Automobile

     6,770       7,823       11,814       —         —    

Residential mortgage

     118,405       122,452       123,140       75,048       74,114  

Home equity

     63,405       59,525       51,654       46,023       45,847  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonaccrual loans and leases (1)

     380,311       407,633       445,046       474,166       467,558  

Other real estate owned, net

          

Residential

     19,538       21,378       23,640       21,499       31,850  

Commercial

     5,601       6,719       30,566       17,109       16,897  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other real estate owned, net

     25,139       28,097       54,206       38,608       48,747  

Other nonperforming assets (2)

     10,045       10,045       10,476       10,476       10,772  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 415,495     $ 445,775     $ 509,728     $ 523,250     $ 527,077  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nonaccrual loans as a % of total loans and leases

     0.92     1.00     1.11     1.19     1.15

Nonperforming assets ratio (3)

     1.01       1.09       1.26       1.31       1.29  

(NPA+90days)/(Loan+OREO) (4)

     1.48       1.59       1.75       1.76       1.68  

 

(1) Nonaccrual loans and leases related to Chapter 7 bankruptcy loans were $59.9 million, $60.1 million, and $63.0 million at March 31, 2013, December 31, 2012, and September 30, 2012, respectively.
(2) Other nonperforming assets represent an investment security backed by a municipal bond.
(3) This ratio is calculated as nonperforming assets divided by the sum of loans and leases, other nonperforming assets, and net other real estate.
(4) This ratio is calculated as the sum of nonperforming assets and total accruing loans and leases past due 90 days or more divided by the sum of loans and leases and net other real estate.

The $30.3 million, or 7%, decline in NPAs compared with December 31, 2012, primarily reflected:

 

   

$16.3 million, or 13%, decline in CRE NALs, reflecting both NCO activity and problem credit resolutions, including borrower payments and payoffs partially resulting from successful workout strategies implemented by our SAD. Although we anticipate some degree of quarter-to-quarter volatility in our NAL levels, we expect that the overall trend will continue to be lower.

 

   

$9.8 million, or 11%, decline in C&I NALs, reflecting problem credit resolutions, including payoffs partially resulting from successful workout strategies implemented by our SAD. The decline was associated with loans throughout our footprint, with no specific industry concentration.

 

   

$4.0 million, or 3%, decrease in residential mortgage NALs, primarily due to successful workouts of several larger problem loans as well as a lower level of inflows compared to prior quarters. The NAL balances have been written down to collateral value, less anticipated selling costs which substantially limits any significant future risk of additional loss on these loans.

Partially offset by:

 

   

$3.9 million, or 7%, increase in home equity NALs, primarily reflecting lower NCOs as we continue to work with troubled borrowers to take advantage of the current low interest-rate environment and the recent stabilization of home prices. The NAL balances have been written down to collateral value, less anticipated selling costs which substantially limits any significant future risk of additional loss on these loans, and make a modification more likely for borrowers with consistent cash flow.

 

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TDR Loans

(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)

TDRs are modified loans in which a concession is provided to a borrower experiencing financial difficulties. 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. TDRs primarily reflect our loss mitigation efforts to proactively work with borrowers having difficulty making their payments.

The table below presents our accruing and nonaccruing TDRs at period-end for each of the past five quarters:

Table 14 - Accruing and Nonaccruing Troubled Debt Restructured Loans

 

     2013      2012  

(dollar amounts in thousands)

   March 31,      December 31,      September 30,      June 30,      March 31,  

Troubled debt restructured loans—accruing:

              

Commercial and industrial

   $ 90,642      $ 76,586      $ 55,809      $ 57,008      $ 53,795  

Commercial real estate

     192,167        208,901        222,155        202,190        231,923  

Automobile

     34,379        35,784        33,719        34,460        35,521  

Home equity

     162,087        110,581        92,763        66,997        59,270  

Residential mortgage

     288,041        290,011        280,890        298,967        294,836  

Other consumer

     2,514        2,544        2,644        3,038        4,233  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructured loans—accruing

     769,830        724,407        687,980        662,660        679,578  

Troubled debt restructured loans—nonaccruing:

              

Commercial and industrial

     14,970        19,268        28,859        35,535        26,886  

Commercial real estate

     26,588        32,548        20,284        55,022        39,606  

Automobile

     6,770        7,823        11,814        —           —     

Home equity

     11,235        6,951        7,756        374        334  

Residential mortgage

     84,317   &nb