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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 September 30, 2011
Commission File Number 1-34073
Huntington Bancshares Incorporated
     
Maryland   31-0724920
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   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. þ Yes o 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). þ Yes o 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 þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
There were 864,074,883 shares of Registrant’s common stock ($0.01 par value) outstanding on September 30, 2011.
 
 

 

 


 

HUNTINGTON BANCSHARES INCORPORATED
INDEX
         
       
 
       
       
 
       
    76  
 
       
    77  
 
       
    78  
 
       
    79  
 
       
    80  
 
       
       
 
       
    7  
 
       
    10  
 
       
       
 
       
    29  
 
       
    48  
 
       
    50  
 
       
    54  
 
       
    55  
 
       
    55  
 
       
    59  
 
       
    73  
 
       
    142  
 
       
    142  
 
       
       
 
       
    142  
 
       
    142  
 
       
    142  
 
       
    144  
 
       
  Exhibit 12.1
  Exhibit 12.2
  Exhibit 31.1
  Exhibit 31.2
  Exhibit 32.1
  Exhibit 32.2
  EX-101 INSTANCE DOCUMENT
  EX-101 SCHEMA DOCUMENT
  EX-101 CALCULATION LINKBASE DOCUMENT
  EX-101 LABELS LINKBASE DOCUMENT
  EX-101 PRESENTATION LINKBASE DOCUMENT
  EX-101 DEFINITION LINKBASE DOCUMENT

 

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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:
     
2010 Form 10-K
  Annual Report on Form 10-K for the year ended December 31, 2010
ABL
  Asset Based Lending
ACL
  Allowance for Credit Losses
AFCRE
  Automobile Finance and Commercial Real Estate
ALCO
  Asset & Liability Management Committee
ALLL
  Allowance for Loan and Lease Losses
ARM
  Adjustable Rate Mortgage
ARRA
  American Recovery and Reinvestment Act of 2009
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
CDARS
  Certificate of Deposit Account Registry Service
CDO
  Collateralized Debt Obligations
CDs
  Certificates of Deposit
CFPB
  Bureau of Consumer Financial Protection
CMO
  Collateralized Mortgage Obligations
CPP
  Capital Purchase Program
CRE
  Commercial Real Estate
DDA
  Demand Deposit Account
DIF
  Deposit Insurance Fund
Dodd-Frank Act
  Dodd-Frank Wall Street Reform and Consumer Protection Act
EESA
  Emergency Economic Stabilization Act of 2008
EPS
  Earnings Per Share
ERISA
  Employee Retirement Income Security Act
EVE
  Economic Value of Equity
FASB
  Financial Accounting Standards Board
FDIC
  Federal Deposit Insurance Corporation
FDICIA
  Federal Deposit Insurance Corporation Improvement Act of 1991
FFIEC
  Federal Financial Institutions Examination Council
FHA
  Federal Housing Administration
FHFA
  Federal Housing Finance Agency
FHLB
  Federal Home Loan Bank
FHLMC
  Federal Home Loan Mortgage Corporation
FICA
  Federal Insurance Contributions Act
FICO
  Fair Isaac Corporation
FOMC
  Federal Open Market Committee
FNMA
  Federal National Mortgage Association
Franklin
  Franklin Credit Management Corporation
FRB
  Federal Reserve Bank
FSP
  Financial Stability Plan
FTE
  Fully-Taxable Equivalent

 

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FTP
  Funds Transfer Pricing
GAAP
  Generally Accepted Accounting Principles in the United States of America
GSIFI
  Globally Systemically Important Financial Institution
GSE
  Government Sponsored Enterprise
HASP
  Homeowner Affordability and Stability Plan
HCER Act
  Health Care and Education Reconciliation Act of 2010
IPO
  Initial Public Offering
IRS
  Internal Revenue Service
ISE
  Interest Sensitive Earnings
LIBOR
  London Interbank Offered Rate
LGD
  Loss-Given-Default
LTV
  Loan to Value
MD&A
  Management’s Discussion and Analysis of Financial Condition and Results of Operations
MRC
  Market Risk Committee
MSA
  Metropolitan Statistical Area
MSR
  Mortgage Servicing Rights
NALs
  Nonaccrual Loans
NAV
  Net Asset Value
NCO
  Net Charge-off
NPAs
  Nonperforming Assets
NSF / OD
  Nonsufficient Funds and Overdraft
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
Reg E
  Regulation E, of the Electronic Fund Transfer Act
REIT
  Real Estate Investment Trust
SAD
  Special Assets Division
SBA
  Small Business Administration
SEC
  Securities and Exchange Commission
SERP
  Supplemental Executive Retirement Plan
SIFIs
  Systemically Important Financial Institutions
Sky Financial
  Sky Financial Group, Inc.
SRIP
  Supplemental Retirement Income Plan
Sky Trust
  Sky Bank and Sky Trust, National Association
TAGP
  Transaction Account Guarantee Program
TARP
  Troubled Asset Relief Program
TARP Capital
  Series B Preferred Stock
TCE
  Tangible Common Equity
TDR
  Troubled Debt Restructured Loan
TLGP
  Temporary Liquidity Guarantee Program
Treasury
  U.S. Department of the Treasury

 

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UCS
  Uniform Classification System
Unizan
  Unizan Financial Corp.
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 145 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 600 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 2010 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2010 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 2011.
    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 2011 Third Quarter Results
For the quarter, we reported net income of $143.4 million, or $0.16 per common share, compared with $145.9 million, or $0.16 per common share, in the prior quarter ( see Table 1 ).
Fully-taxable equivalent net interest income was $410.1 million for the quarter, up $3.0 million, or 1%, from the prior quarter. The increase reflected the benefit of a 2% (6% annualized) increase in average earning assets, partially offset by a 6 basis point decline in the fully-taxable equivalent net interest margin to 3.34% from 3.40%.
The provision for credit losses in the 2011 third quarter was $43.6 million, up $7.8 million, or 22%, from the prior quarter. This reflected the combination of strong loan growth and the expectation of a weaker and prolonged economic recovery. These were partially offset by the benefits of an end-of-period decline of 8% in nonaccrual loans and a 4% decline in total Criticized commercial loans.
Total noninterest income increased $2.8 million, or 1%, from the prior quarter. This included an increase in other income of $15.1 million, or 33%, reflecting a $15.5 million gain on sale from the automobile securitization and a $2.8 million increase in market-related gains and capital markets income, which was partially offset by a $5.8 million decline in SBA servicing income. Service charges on deposit accounts and electronic banking income increased $4.5 million, or 7%, and $1.0 million, or 3%, respectively, primarily driven by new account growth. These benefits were partially offset by an $11.0 million decline in mortgage banking income, primarily driven by a negative $13.9 million linked quarter change in the net MSR valuation, the majority of which occurred over the last two weeks of the quarter.
Noninterest expense increased $10.7 million, or 2%. Personnel costs increased $8.3 million, or 4%, due to higher salary, severance, and healthcare costs. Outside data processing and other services increased $5.7 million, or 13%, primarily due to costs associated with a conversion to a new debit card processor.
The period end ACL as a percentage of total loans and leases decreased to 2.71% from 2.84%. However, the ACL as a percentage of period end NALs increased to 187% from 181%. Net charge-offs were $90.6 million, or an annualized 0.92% of average total loans and leases, down 7% from $97.5 million, or 1.01%, in the prior quarter. Credit quality continued its expected improvement. Even so, many of these performance metrics remain elevated compared with historical performance. We expect to see continued declines in nonaccrual loans and net charge-offs going forward.
Business Overview
General
Our general business objectives are: (1) grow revenue and profitability, (2) improve cross-sell and share-of-wallet across all business segments, (3) grow key fee businesses (existing and new), (4) improve credit quality, including lower NCOs and NALs, (5) reduce noncore CRE exposure, and (6) continue to improve our overall management of risk.
Throughout last year, and continuing into this year, we are taking advantage of what we view as an opportunity to make significant investments in strategic initiatives to position us for more profitable and sustainable long-term growth. This includes implementing our “Fair Play” banking philosophy, value proposition for our consumer customers, increasing share-of-wallet, investing in expanding existing business, and launching new businesses.
Our emphasis on cross-sell, coupled with customers increasingly being attracted by the benefits offered through our “Fair Play” banking philosophy is having a positive effect. The number of consumer checking account households grew at a 10.8% annualized rate for the first three quarters of 2011. These new households are not just focused around single service. We have been able to continue to grow our share of wallet with new and existing customers. Almost 73% of our consumer customers now have four or more products or services. On the commercial side, we also saw an increase with commercial relationships growing for the first nine months at an 8.6% annualized rate.
Economy
Wavering business and consumer confidence, U.S. debt and fiscal uncertainties, and slow economic growth remain challenges to the operating environment. Consumer sentiment has dropped to the lowest level since the recessionary period in 2008. Elevated housing inventories continue to present a near-term drag; however housing affordability is near record highs on historically low mortgage rates and lower home prices.

 

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Legislative and Regulatory
Regulatory reforms continue to be adopted which impose additional restrictions on current business practices. Recent actions affecting us included the Federal Reserve’s maturity extension program, and the rules and regulations that have been issued pursuant to the Dodd-Frank Act.
Federal Reserve Maturity Extension Program — Under the maturity extension program announced on September 21, 2011, the Federal Reserve intends to sell $400 billion of shorter-term Treasury securities by the end of 2012 and use the proceeds to buy longer-term securities. This will extend the average maturity of the securities in the Federal Reserve’s portfolio. By reducing the supply of longer-term securities in the market, it is the FOMC’s intention to put downward pressure on longer-term interest rates, including rates on financial assets that investors consider to be close substitutes for longer-term Treasury securities. Further, it is their objective that the reduction in longer-term interest rates, in turn, will contribute to a broad easing in financial market conditions that will provide additional stimulus to support the economic recovery. We do not anticipate that this recent announcement will have a material impact on our current securities portfolio or future investment strategy. However, it could cause our net interest margin to drop modestly.
Resolution Plan — The FRB and FDIC issued final regulations as required by section 165 of the Dodd-Frank Act regarding resolution plans, also referred to as “living wills.” Insured depository institutions with $50 billion or more in total assets must submit to the FDIC a plan whereby the institution can be resolved by the FDIC, in the event of failure, in a manner that ensures depositors will receive access to insured funds within the required timeframes and generally ensures an orderly liquidation of the institution. Additionally, bank holding companies with assets of $50 billion or more are required to submit to the FRB and the FDIC a plan that, in the event of material financial distress or failure, establishes the rapid and orderly liquidation of the company under the bankruptcy code and in a way that would not pose systemic risk to the financial system of the United States. The regulations allow for a tier approach for complying with the requirements based on materiality of the institution. Currently, we are required to submit resolution plans as prescribed by December 31, 2013.
Durbin Amendment — The Durbin Amendment to the Dodd-Frank Act instructed the Federal Reserve to establish the rate merchants pay banks for electronic clearing of debit card transactions (i.e., the interchange rate). The Federal Reserve recently issued its final rule establishing standards for debit card interchange fees and prohibiting network exclusivity arrangements and routing restrictions. The final rule establishes standards for assessing whether debit card interchange fees received by debit card issuers are reasonable and proportional to the costs incurred by issuers for electronic debit transactions. Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction will be the sum of 21 cents per transaction, 1 cent fraud prevention adjustment, and 5 basis points multiplied by the value of the transaction. This provision regarding debit card interchange fees became effective on October 1, 2011. Based on the final rule, we expect our 2011 fourth quarter electronic banking income to decline from the 2011 third quarter level by approximately 50%, or $16 million.
Recent Industry Developments
Recent industry events and related supervisory guidance brought about by the continued weak housing market have caused us to evaluate certain aspects of our mortgage operations. This included a review of our foreclosure documentation, MSR valuation, and representation and warranty reserve level. Additionally, we are evaluating potential impacts from recent announcements of the enhanced Home Affordable Refinance Program (HARP) and by PMI Mortgage Insurance Co. (PMI).
Foreclosure Documentation — On June 30, 2011, the OCC issued OCC Bulletin 2011-29 clarifying their expectations for the oversight and management of mortgage foreclosure activities by national banks and directing national banks to perform a self-assessment no later than September 30, 2011. We believe that, with the self-assessments we have performed and will continue to perform, we are in compliance with the OCC expectation for self-assessment.
Mortgage Servicing Rights — MSR fair values are estimated based on residential mortgage servicing revenue in excess of estimated market costs to service the underlying loans. Historically, the estimated market cost to service has been stable. Due to changes in the regulatory environment related to loan servicing and foreclosure activities, costs to service may potentially increase, however the potential impact on the market costs to service remains uncertain. Certain large residential mortgage loan servicers entered into consent orders with banking regulators in April 2011, which require the servicers to remedy deficiencies and unsafe or unsound practices and to enhance residential mortgage servicing and foreclosure processes. It is unclear what impact this may ultimately have on market costs to service.
Representation and Warranty Reserve —We primarily conduct our loan sale and securitization activity with FNMA and FHLMC. In connection with these and other sale and securitization transactions, we make representations and warranties that the loans meet certain criteria, such as collateral type and underwriting standards. We may be required to repurchase individual loans and / or indemnify these organizations against losses due to material breaches of these representations and warranties. At September 30, 2011, we had a reserve for such losses of $23.9 million, which is included in accrued expenses and other liabilities.

 

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Home Affordable Refinance Program — The FHFA has announced changes to the Home Affordable Refinance Program designed to attract more borrowers with FNMA and FHLMC backed mortgages that can benefit from refinancing their residential mortgage loans under current low interest rates. The new operational details are to be issued by November 15, 2011. We do not expect the impact to be material.
PMI Mortgage Insurance Co. (PMI) — On August 19, 2011, PMI informed its customers that it was required to stop writing new commitments and we stopped doing new business with PMI at that time. On October 24, 2011, PMI informed all policyholders, insured parties, and servicers of loans insured by PMI that the Director of the Arizona Department of Insurance (Director) obtained an “Order Directing Full and Exclusive Possession and Control of Insurer” (the Order) with respect to PMI. Effective October 24, 2011, and pursuant to the Order, instead of a moratorium on claims payments, the Director instituted a partial claims payment plan. Claim payments will be made at 50%, with the remaining amount deferred as a policyholder claim. PMI has not been a significant provider of mortgage insurance for loans in our portfolio. We utilize a number of insurance providers, limiting our risk associated with any one provider. We do not expect the exposure associated with our owned residential mortgage portfolio to have a material impact on our results of operations or financial position.
Expectations
The lack of prospects for meaningful economic improvement, higher interest rates, and wider spreads between short-term and long-term interest rates for the foreseeable future is a challenge. For example, broad-based loan growth, as well as growth in certain fee income activities, is expected to be less than would otherwise be the case in an expanding economy, even though growth in certain portfolios and activities is anticipated. Further, a period of prolonged low interest rates is expected to put pressure on our net interest margin. This would reflect more compression in loan and investment securities yields relative to any declines in deposit and funding rates. In addition, deposit inflows over and above any reinvestment opportunities at appropriate risk adjusted spreads means we may elect to curtail deposit growth, typically an engine of revenue growth. These revenue headwinds are magnified by the continued fragility of business and consumer confidence that is expected to continue the postponement of borrowing and investment decisions. Nevertheless, our success in growing and deepening relationships presents us with an opportunity to selectively expand revenue, while maintaining disciplined loan and deposit pricing, as well as conservative credit underwriting.
Net interest income is expected to continue to show very modest improvement from the third quarter level. The momentum we are seeing in loan and low cost deposit growth is expected to continue, yet the benefits will be mostly offset by pressure on the net interest margin due to the expected continued mix shift to higher quality loans and lower securities reinvestment rates that reflect the low absolute level and shape of the yield curve. If the current interest rate environment, which has partially resulted from the Federal Reserve Maturity Extension Program “Operation Twist”, remains unchanged through 2012, it could cause our net interest margin to drop modestly below our long-term range of 3.30% to 3.75%. Our C&I portfolio is expected to continue to show meaningful growth with much of this reflecting the positive impact from strategic initiatives to expand our commercial lending expertise into areas like specialty banking, asset based lending, and equipment financing, in addition to our long-standing continued support of middle market and small business lending. For automobile loans, we expect to see strong growth from September 30, 2011 balances. Residential mortgages are expected to show modest growth, with CRE continuing to experience modest declines.
We again anticipate the increase in total core deposits to match that of loans, reflecting continued growth in consumer households and commercial relationships. Further, we expect the shift toward low and no cost demand deposits and money market accounts will continue.
Noninterest income is expected to show a modest decline in the 2011 fourth quarter, primarily due to an anticipated 50%, or $16 million, decline in electronic banking income from the third quarter, given the newly mandated lower interchange fee structure implemented October 1, 2011. We expect to see continued growth of service charge income commensurate with customer growth and increased product penetration. Mortgage banking income should increase as the third quarter’s sizable MSR impairment is not expected to repeat. We also anticipate continued growth in the contribution from other key fee income activities including capital markets, treasury management services, and brokerage, reflecting the impact of our cross-sell and product penetration initiatives throughout the company as well as the positive impact from strategic initiatives.
Expense levels are expected to modestly decline in coming quarters though strategic actions like the current debit card conversion may cause short-term fluctuations.
Nonaccrual loans and net charge-offs are expected to continue to decline. Provision for credit losses should remain near current levels, yet there could be some volatility given the uncertain and uneven nature of the economic recovery.
We anticipate the effective tax rate for the foreseeable future to be in the range of 24% to 27%.

 

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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 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)
                                         
    2011     2010  
(dollar amounts in thousands, except per share amounts)   Third     Second     First     Fourth     Third  
Interest income
  $ 490,996     $ 492,137     $ 501,877     $ 528,291     $ 534,669  
Interest expense
    84,518       88,800       97,547       112,997       124,707  
 
                             
Net interest income
    406,478       403,337       404,330       415,294       409,962  
Provision for credit losses
    43,586       35,797       49,385       86,973       119,160  
 
                             
Net interest income after provision for credit losses
    362,892       367,540       354,945       328,321       290,802  
 
                             
Service charges on deposit accounts
    65,184       60,675       54,324       55,810       65,932  
Mortgage banking income
    12,791       23,835       22,684       53,169       52,045  
Trust services
    29,473       30,392       30,742       29,394       26,997  
Electronic banking
    32,714       31,728       28,786       28,900       28,090  
Insurance income
    17,220       16,399       17,945       19,678       19,801  
Brokerage income
    20,349       20,819       20,511       16,953       16,575  
Bank owned life insurance income
    15,644       17,602       14,819       16,113       14,091  
Automobile operating lease income
    5,890       7,307       8,847       10,463       11,356  
Securities gains (losses)
    (1,350 )     1,507       40       (103 )     (296 )
Other income
    60,644       45,503       38,247       33,843       32,552  
 
                             
Total noninterest income
    258,559       255,767       236,945       264,220       267,143  
 
                             
Personnel costs
    226,835       218,570       219,028       212,184       208,272  
Outside data processing and other services
    49,602       43,889       40,282       40,943       38,553  
Net occupancy
    26,967       26,885       28,436       26,670       26,718  
Deposit and other insurance expense
    17,492       23,823       17,896       23,320       23,406  
Professional services
    20,281       20,080       13,465       21,021       20,672  
Equipment
    22,262       21,921       22,477       22,060       21,651  
Marketing
    22,251       20,102       16,895       16,168       20,921  
Amortization of intangibles
    13,387       13,386       13,370       15,046       15,145  
OREO and foreclosure expense
    4,668       4,398       3,931       10,502       12,047  
Automobile operating lease expense
    4,386       5,434       6,836       8,142       9,159  
Other expense
    30,987       29,921       48,083       38,537       30,765  
 
                             
Total noninterest expense
    439,118       428,409       430,699       434,593       427,309  
 
                             
Income before income taxes
    182,333       194,898       161,191       157,948       130,636  
Provision for income taxes
    38,942       48,980       34,745       35,048       29,690  
 
                             
Net income
  $ 143,391     $ 145,918     $ 126,446     $ 122,900     $ 100,946  
 
                             
Dividends on preferred shares
    7,703       7,704       7,703       83,754       29,495  
 
                             
Net income applicable to common shares
  $ 135,688     $ 138,214     $ 118,743     $ 39,146     $ 71,451  
 
                             
Average common shares — basic
    863,911       863,358       863,359       757,924       716,911  
Average common shares — diluted (2)
    867,633       867,469       867,237       760,582       719,567  
 
Net income per common share — basic
  $ 0.16     $ 0.16     $ 0.14     $ 0.05     $ 0.10  
Net income per common share — diluted
    0.16       0.16       0.14       0.05       0.10  
Cash dividends declared per common share
    0.04       0.01       0.01       0.01       0.01  
 
Return on average total assets
    1.05 %     1.11 %     0.96 %     0.90 %     0.76 %
Return on average common shareholders’ equity
    10.8       11.6       10.3       3.8       7.4  
Return on average tangible common shareholders’ equity (3)
    13.0       13.3       12.7       5.6       10.0  
Net interest margin (4)
    3.34       3.40       3.42       3.37       3.45  
Efficiency ratio (5)
    63.5       62.7       64.7       61.4       60.6  
Effective tax rate
    21.4       25.1       21.6       22.2       22.7  
Revenue — FTE
                                       
 
                             
Net interest income
  $ 406,478     $ 403,337     $ 404,330     $ 415,294     $ 409,962  
FTE adjustment
    3,658       3,834       3,945       3,708       2,631  
 
                             
Net interest income (4)
    410,136       407,171       408,275       419,002       412,593  
Noninterest income
    258,559       255,767       236,945       264,220       267,143  
 
                             
Total revenue (4)
  $ 668,695     $ 662,938     $ 645,220     $ 683,222     $ 679,736  
 
                             
     
(1)   Comparisons for presented periods are impacted by a number of factors. Refer to Significant Items.
 
(2)   For periods presented prior to their repurchase, the impact of the convertible preferred stock issued in 2008 and the warrants issued to the U.S. Department of the Treasury in 2008 related to Huntington’s participation in the voluntary Capital Purchase Program was excluded from the diluted share calculation because the result was more than basic earnings per common share (anti-dilutive) for those periods. The convertible preferred stock and warrants were repurchased in December 2010 and January 2011, respectively.

 

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(3)   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.
 
(4)   On a fully-taxable equivalent (FTE) basis assuming a 35% tax rate.
 
(5)   Noninterest expense less amortization of intangibles and goodwill impairment divided by the sum of FTE net interest income and noninterest income excluding securities gains (losses).

 

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Table 2 — Selected Year to Date Income Statement Data(1)
                                 
    Nine Months Ended September 30,     Change  
(dollar amounts in thousands, except per share amounts)   2011     2010     Amount     Percent  
Interest income
  $ 1,485,010     $ 1,617,101     $ (132,091 )     (8 )%
Interest expense
    270,865       413,590       (142,725 )     (35 )
 
                       
Net interest income
    1,214,145       1,203,511       10,634       1  
Provision for credit losses
    128,768       547,574       (418,806 )     (76 )
 
                       
Net interest income after provision for credit losses
    1,085,377       655,937       429,440       65  
 
                       
Service charges on deposit accounts
    180,183       211,205       (31,022 )     (15 )
Mortgage banking income
    59,310       122,613       (63,303 )     (52 )
Trust services
    90,607       83,161       7,446       9  
Electronic banking
    93,228       81,334       11,894       15  
Insurance income
    51,564       56,735       (5,171 )     (9 )
Brokerage income
    61,679       51,901       9,778       19  
Bank owned life insurance income
    48,065       44,953       3,112       7  
Automobile operating lease income
    22,044       35,501       (13,457 )     (38 )
Securities gains (losses)
    197       (171 )     368       N.R.  
Other income
    144,394       90,406       53,988       60  
 
                       
Total noninterest income
    751,271       777,638       (26,367 )     (3 )
 
                       
Personnel costs
    664,433       586,789       77,644       13  
Outside data processing and other services
    133,773       118,305       15,468       13  
Net occupancy
    82,288       81,192       1,096       1  
Deposit and other insurance expense
    59,211       74,228       (15,017 )     (20 )
Professional services
    53,826       67,757       (13,931 )     (21 )
Equipment
    66,660       63,860       2,800       4  
Marketing
    59,248       49,756       9,492       19  
Amortization of intangibles
    40,143       45,432       (5,289 )     (12 )
OREO and foreclosure expense
    12,997       28,547       (15,550 )     (54 )
Automobile operating lease expense
    16,656       28,892       (12,236 )     (42 )
Other expense
    108,991       94,455       14,536       15  
 
                       
Total noninterest expense
    1,298,226       1,239,213       59,013       5  
 
                       
Income before income taxes
    538,422       194,362       344,060       177  
Provision for income taxes
    122,667       4,915       117,752       2,396  
 
                       
Net income
  $ 415,755     $ 189,447     $ 226,308       119 %
 
                       
Dividends declared on preferred shares
    23,110       88,278       (65,168 )     (74 )
 
                       
Net income applicable to common shares
  $ 392,645     $ 101,169     $ 291,476       288 %
 
                       
Average common shares — basic
    863,542       716,604       146,938       21 %
Average common shares — diluted (2)
    867,446       719,182       148,264       21  
Per common share
                               
Net income per common share — basic
  $ 0.45     $ 0.14     $ 0.31       221 %
Net income per common share — diluted
    0.45       0.14       0.31       221  
Cash dividends declared
    0.06       0.03       0.03       100  
Return on average total assets
    1.04 %     0.49 %     0.55 %     112 %
Return on average common shareholders’ equity
    10.9       3.6       7.3       203  
Return on average tangible common shareholders’ equity (3)
    13.2       5.6       7.6       136  
Net interest margin (4)
    3.39       3.46       (0.07 )     (2 )
Efficiency ratio (5)
    63.6       60.0       3.6       6  
Effective tax rate
    22.8       2.5       20.3       812  
Revenue — FTE
                               
Net interest income
  $ 1,214,145     $ 1,203,511     $ 10,634       1 %
FTE adjustment
    11,437       7,369       4,068       55  
 
                       
Net interest income (4)
    1,225,582       1,210,880       14,702       1  
Noninterest income
    751,271       777,638       (26,367 )     (3 )
 
                         
Total revenue (4)
  $ 1,976,853     $ 1,988,518     $ (11,665 )     (1) %
 
                       
     
N.R.   - Not relevant, as denominator of calculation is a loss in prior period compared with income in current period.
 
(1)   Comparisons for presented periods are impacted by a number of factors. Refer to Significant Items.

 

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(2)   For all periods presented, the impact of the convertible preferred stock issued in 2008 and the warrants issued to the U.S. Department of the Treasury in 2008 related to Huntington’s participation in the voluntary Capital Purchase Program was excluded from the diluted share calculation because the result was more than basic earnings per common share (anti-dilutive) for the periods. The convertible preferred stock and warrants were repurchased in December 2010 and January 2011, respectively.
 
(3)   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.
 
(4)   On a fully-taxable equivalent (FTE) basis assuming a 35% tax rate.
 
(5)   Noninterest expense less amortization of intangibles and goodwill impairment divided by the sum of FTE net interest income and noninterest income excluding securities gains (losses).
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 out 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 2011 first quarter, $17.0 million of additions to litigation reserves were recorded as other noninterest expense. This resulted in a negative impact of $0.01 per common share.
  2.   Franklin Relationship. Our relationship with Franklin was acquired in the Sky Financial acquisition in 2007. Significant events relating to this relationship following the acquisition, and the impacts of those events on our reported results were as follows:
    On March 31, 2009, we restructured our relationship with Franklin. During the 2010 first quarter, a $38.2 million ($0.05 per common share) net tax benefit was recognized, primarily reflecting the increase in the net deferred tax asset relating to the assets acquired from the March 31, 2009 restructuring.
 
    During the 2010 second quarter, the remaining portfolio of Franklin-related loans ($333.0 million of residential mortgages, and $64.7 million of home equity loans) was transferred to loans held for sale. At the time of the transfer, the loans were marked to the lower of cost or fair value, less costs to sell, of $323.4 million, resulting in $75.5 million of charge-offs, and the provision for credit losses commensurately increased $75.5 million ($0.07 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 3 — Significant Items Influencing Earnings Performance Comparison
                                                 
    Three Months Ended  
(dollar amounts in thousands, except per   September 30, 2011     June 30, 2011     September 30, 2010  
share amounts)   After-tax     EPS     After-tax     EPS     After-tax     EPS  
Net income
  $ 143,391             $ 145,918             $ 100,946          
Earnings per share, after-tax
          $ 0.16             $ 0.16             $ 0.10  
Change from prior quarter — $
                          0.02               0.07  
Change from prior quarter — %
            %             14.3 %             233.3 %
 
                                               
Change from year-ago — $
          $ 0.06             $ 0.13             $ 0.43  
Change from year-ago — %
            60 %             433 %             N.R. %
                                 
    Nine Months Ended  
    September 30, 2011     September 30, 2010  
(dollar amounts in thousands)   After-tax     EPS     After-tax     EPS  
Net income
  $ 415,755             $ 189,447          
Earnings per share, after-tax
          $ 0.45             $ 0.14  
Change from a year-ago — $
            0.31               6.22  
Change from a year-ago — %
            221 %             N.R. %
                                 
Significant Items - favorable (unfavorable) impact:   Earnings (1)     EPS     Earnings (1)     EPS  
 
                               
Franklin-related loans transferred to held for sale
  $     $     $ (75,500 )   $ (0.07 )
Net tax benefit recognized (2)
                38,222       0.05  
Litigation reserves addition
    (17,028 )     (0.01 )            
     
N.R.   - Not relevant, as denominator of calculation is a loss in prior period compared with income in current period.
 
(1)   Pretax unless otherwise noted.
 
(2)   After-tax.
Pretax, Pre-provision Income Trends
One non-GAAP performance measurement that we believe is useful in analyzing our underlying performance trends is pretax, pre-provision income. This is the level of pretax earnings adjusted to exclude the impact of: (a) provision expense, (b) investment securities gains/losses, which are excluded because securities market valuations may become particularly volatile in times of economic stress, (c) amortization of intangibles expense, which is excluded because the return on tangible common equity is a key measurement we use to gauge performance trends, and (d) certain other items identified by us (see Significant Items) that we believe may distort our underlying performance trends.

 

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The following table reflects pretax, pre-provision income for each of the past five quarters:
Table 4 — Pretax, Pre-provision Income (1)
                                         
    2011     2010  
(dollar amounts in thousands)   Third     Second     First     Fourth     Third  
 
Income before income taxes
  $ 182,333     $ 194,898     $ 161,191     $ 157,948     $ 130,636  
Add: Provision for credit losses
    43,586       35,797       49,385       86,973       119,160  
Less: Securities gains (losses)
    (1,350 )     1,507       40       (103 )     (296 )
Add: Amortization of intangibles
    13,387       13,386       13,370       15,046       15,145  
Less: Litigation reserves addition
                (17,028 )            
 
                             
 
                                       
Total pretax, pre-provision income
  $ 240,656     $ 242,574     $ 240,934     $ 260,070     $ 265,237  
 
                             
Change in total pretax, pre-provision income:
                                       
Prior quarter change — amount
  $ (1,918 )   $ 1,640     $ (19,136 )   $ (5,167 )   $ (5,237 )
Prior quarter change — percent
    (1) %     1 %     (7) %     (2) %     (2) %
     
(1)   Pretax, pre-provision income is a non-GAAP financial measure. Any ratio utilizing this financial measure is also non-GAAP. This financial measure has been included as it is considered to be an important metric with which to analyze and evaluate our results of operations and financial strength. Other companies may calculate this financial measure differently.
Pretax, pre-provision income was $240.7 million in the 2011 third quarter, down $1.9 million, or 1%, from the prior quarter. As discussed in the sections that follow, the decrease primarily reflected the negative impact from a lower net interest margin percentage and higher noninterest expense as compared to the prior quarter.
Net Interest Income / Average Balance Sheet
The following table details the change in our average loans / leases and deposits:
Table 5 — Average Loans/Leases and Deposits
                                                         
    Third Quarter     Second Quarter     3Q11 vs 3Q10     3Q11 vs 2Q11  
(dollar amounts in millions)   2011     2010     2011     Amount     Percent     Amount     Percent  
Loans/Leases
                                                       
Commercial and industrial
  $ 13,664     $ 12,393     $ 13,370     $ 1,271       10 %   $ 294       2 %
Commercial real estate
    6,111       7,073       6,233       (962 )     (14 )     (122 )     (2 )
 
                                         
Total commercial
    19,775       19,466       19,603       309       2       172       1  
Automobile
    6,211       5,140       5,954       1,071       21       257       4  
Home equity
    8,002       7,567       7,874       435       6       128       2  
Residential mortgage
    4,788       4,389       4,566       399       9       222       5  
Other loans
    521       653       538       (132 )     (20 )     (17 )     (3 )
 
                                         
Total consumer
    19,522       17,749       18,932       1,773       10       590       3  
 
                                         
Total loans and leases
  $ 39,297     $ 37,215     $ 38,535     $ 2,082       6 %   $ 762       2 %
 
                                         
Deposits
                                                       
Demand deposits — noninterest-bearing
  $ 8,719     $ 6,768     $ 7,806     $ 1,951       29 %   $ 913       12 %
Demand deposits — interest-bearing
    5,573       5,319       5,565       254       5       8        
Money market deposits
    13,321       12,336       12,879       985       8       442       3  
Savings and other domestic time deposits
    4,752       4,639       4,778       113       2       (26 )     (1 )
Core certificates of deposit
    7,592       8,948       8,079       (1,356 )     (15 )     (487 )     (6 )
 
                                         
Total core deposits
    39,957       38,010       39,107       1,947       5       850       2  
Other deposits
    2,321       2,636       2,147       (315 )     (12 )     174       8  
 
                                         
Total deposits
  $ 42,278     $ 40,646     $ 41,254     $ 1,632       4 %   $ 1,024       2 %
 
                                         

 

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2011 Third Quarter versus 2010 Third Quarter
Fully-taxable equivalent net interest income decreased $2.5 million, or 1%, from the year-ago quarter. This reflected the benefit of a $1.3 billion, or 3%, increase in average total earning assets partially offset by an 11 basis point decline in the net interest margin. The increase in average earning assets reflected:
    $2.1 billion, or 6%, increase in average total loans and leases.
Partially offset by:
    $0.3 billion, or 3%, decrease in average total available-for-sale and other securities and held-to-maturity securities.
    $0.4 billion, or 64%, decrease in average loans held for sale.
The 11 basis point decline in the net interest margin reflected a reduction in derivatives income, lower loan and securities yields, partially offset by the positive impacts of increases in low cost deposits and improved deposit pricing.
The $2.1 billion, or 6%, increase in average total loans and leases primarily reflected:
    $1.3 billion, or 10%, growth in the average C&I portfolio reflected a combination of factors. This included the benefits from our strategic initiatives including a focus on large corporate, asset based lending, and equipment finance. In addition, we continued to see growth in more traditional middle-market, business banking, and automobile floorplan loans. This growth was evident despite line utilization rates that remained well below historical norms.
    $1.1 billion, or 21%, increase in the average automobile portfolio. Automobile lending is a core competency and continues to be an area of targeted growth. The growth from the year-ago quarter exhibited further penetration within our historical geographic footprint, as well as the positive impacts of our expansion into Eastern Pennsylvania and five New England states. Origination quality remained high as measured by all of our internal quality metrics.
    $0.4 billion, or 9%, increase in average residential mortgages.
    $0.4 billion, or 6%, increase in average home equity loans.
Partially offset by:
    $1.0 billion, or 14%, decrease in the average CRE portfolio, reflecting the continued execution of our plan to reduce the total CRE exposure, primarily in the noncore CRE portfolio. This reduction is expected to continue, reflecting the combined impact of amortization, pay downs, refinancing, and restructures.
The $1.6 billion, or 4%, increase in average total deposits from the year-ago quarter reflected:
    $1.9 billion, or 5%, growth in average total core deposits. The drivers of this change were a $2.2 billion, or 18%, growth in average total demand deposits, and a $1.0 billion, or 8%, growth in average money market deposits. Partially offset by $1.4 billion, or 15%, decline in average core certificates of deposit.
Partially offset by:
    $0.3 billion, or 44%, decline in average other domestic deposits of $250,000 or more, reflecting a strategy of reducing such noncore funding.
2011 Third Quarter versus 2011 Second Quarter
FTE net interest income increased $3.0 million, or 1%, from the 2011 second quarter. This reflected a $0.8 billion, or 2%, increase in average earning assets partially offset by a 6 basis point decline in the FTE net interest margin. The increase in average earning assets reflected:
    $0.8 billion, or 2%, increase in average total loans and leases.
The 6 basis point decline in the net interest margin reflected a reduction in derivatives income and lower loan yields, partially offset by the positive impact of increases in low cost deposits and improved deposit pricing.

 

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The $0.8 billion, or 2% (8% annualized), increase in average total loans and leases reflected:
    $0.3 billion, or 2% (9% annualized), growth in the average C&I portfolio. The growth in the C&I portfolio during the third quarter came from several business lines including large corporate, equipment finance, business banking, and middle market. C&I utilization rates were little changed from the end of the prior quarter.
    $0.3 billion, or 4% (17% annualized), growth in the average automobile portfolio. In September, the bank completed a $1.0 billion securitization of automobile loans. We continued to originate very high quality loans with attractive returns. We focus on larger, multi-franchised, well-capitalized dealers that are rarely reliant on the success of one franchise to generate profitability. While the used car market remained very strong, we increased our originations of new vehicle loans, which reflected a reduced level of manufacturer captive finance company incentive programs due to lower new vehicle inventory levels in the market.
    $0.2 billion, or 5% (19% annualized), growth in residential mortgages as the bank experienced the continuation of a year-long trend of customer preferences shifting to shorter-term and variable rate mortgages.
Partially offset by:
    $0.1 billion, or 2% (8% annualized), decline in the average CRE portfolio, primarily as a result of our on-going strategy to reduce our exposure to the commercial real estate market. We were successful in reducing exposure across virtually all of the CRE project types that we actively manage via our concentration management process. The decline in the noncore CRE portfolio accounted for the vast majority of the decline in the total CRE portfolio. The noncore CRE portfolio declines reflected paydowns, refinancing, and NCOs. The core CRE portfolio continued to exhibit high quality characteristics with minimal downgrade or NCO activity.
The $1.0 billion, or 2% (10% annualized), increase in average total deposits from the 2011 second quarter reflected:
    $0.9 billion, or 7% (28% annualized), increase in total demand deposits. This was driven primarily by growth in commercial and consumer noninterest-bearing demand deposits. Commercial demand deposit growth reflected, in part, temporary deposits from several large relationships.
    $0.4 billion, or 3% (14% annualized), increase in average money market deposits.
Partially offset by:
    $0.5 billion, or 6% (24% annualized), decrease in core certificates of deposits.
Tables 6 and 7 reflect quarterly average balance sheets and rates earned and paid on interest-earning assets and interest-bearing liabilities.

 

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Table 6 — Consolidated Quarterly Average Balance Sheets
                                                         
    Average Balances     Change  
    2011     2010     3Q11 vs. 3Q10  
(dollar amounts in millions)   Third     Second     First     Fourth     Third     Amount     Percent  
Assets
                                                       
Interest-bearing deposits in banks
  $ 164     $ 131     $ 130     $ 218     $ 282     $ (118 )     (42) %
Trading account securities
    92       112       144       297       110       (18 )     (16 )
Federal funds sold and securities purchased under resale agreement
          21                                
Loans held for sale
    237       181       420       779       663       (426 )     (64 )
Available-for-sale and other securities:
                                                       
Taxable
    7,902       8,428       9,108       9,747       8,876       (974 )     (11 )
Tax-exempt
    421       436       445       449       365       56       15  
 
                                         
Total available-for-sale and other securities
    8,323       8,864       9,553       10,196       9,241       (918 )     (10 )
Held-to-maturity securities — taxable
    665       174                         665        
Loans and leases: (1)
                                                       
Commercial:
                                                       
Commercial and industrial
    13,664       13,370       13,121       12,767       12,393       1,271       10  
Commercial real estate:
                                                       
Construction
    670       554       611       716       989       (319 )     (32 )
Commercial
    5,441       5,679       5,913       6,082       6,084       (643 )     (11 )
 
                                         
Commercial real estate
    6,111       6,233       6,524       6,798       7,073       (962 )     (14 )
 
                                         
Total commercial
    19,775       19,603       19,645       19,565       19,466       309       2  
 
                                         
Consumer:
                                                       
Automobile
    6,211       5,954       5,701       5,520       5,140       1,071       21  
Home equity
    8,002       7,874       7,728       7,709       7,567       435       6  
Residential mortgage
    4,788       4,566       4,465       4,430       4,389       399       9  
Other consumer
    521       538       559       576       653       (132 )     (20 )
 
                                         
Total consumer
    19,522       18,932       18,453       18,235       17,749       1,773       10  
 
                                         
Total loans and leases
    39,297       38,535       38,098       37,800       37,215       2,082       6  
Allowance for loan and lease losses
    (1,066 )     (1,128 )     (1,231 )     (1,323 )     (1,384 )     318       (23 )
 
                                         
Net loans and leases
    38,231       37,407       36,867       36,477       35,831       2,400       7  
 
                                         
Total earning assets
    48,778       48,018       48,345       49,290       47,511       1,267       3  
 
                                         
Cash and due from banks
    1,700       1,068       1,299       1,187       1,618       82       5  
Intangible assets
    639       652       665       679       695       (56 )     (8 )
All other assets
    4,142       4,160       4,291       4,313       4,277       (135 )     (3 )
 
                                         
Total assets
  $ 54,193     $ 52,770     $ 53,369     $ 54,146     $ 52,717     $ 1,476       3 %
 
                                         
Liabilities and Shareholders’ Equity
                                                       
Deposits:
                                                       
Demand deposits — noninterest-bearing
  $ 8,719     $ 7,806     $ 7,333     $ 7,188     $ 6,768     $ 1,951       29 %
Demand deposits — interest-bearing
    5,573       5,565       5,357       5,317       5,319       254       5  
Money market deposits
    13,321       12,879       13,492       13,158       12,336       985       8  
Savings and other domestic deposits
    4,752       4,778       4,701       4,640       4,639       113       2  
Core certificates of deposit
    7,592       8,079       8,391       8,646       8,948       (1,356 )     (15 )
 
                                         
Total core deposits
    39,957       39,107       39,274       38,949       38,010       1,947       5  
Other domestic time deposits of $250,000 or more
    387       467       606       737       690       (303 )     (44 )
Brokered deposits and negotiable CDs
    1,533       1,333       1,410       1,575       1,495       38       3  
Deposits in foreign offices
    401       347       374       443       451       (50 )     (11 )
 
                                         
Total deposits
    42,278       41,254       41,664       41,704       40,646       1,632       4  
Short-term borrowings
    2,251       2,112       2,134       2,134       1,739       512       29  
Federal Home Loan Bank advances
    285       97       30       112       188       97       52  
Subordinated notes and other long-term debt
    3,030       3,249       3,525       3,558       3,672       (642 )     (17 )
 
                                         
Total interest-bearing liabilities
    39,125       38,906       40,020       40,320       39,477       (352 )     (1 )
 
                                         
All other liabilities
    1,017       913       994       993       952       65       7  
Shareholders’ equity
    5,332       5,145       5,022       5,645       5,520       (188 )     (3 )
 
                                         
Total liabilities and shareholders’ equity
  $ 54,193     $ 52,770     $ 53,369     $ 54,146     $ 52,717     $ 1,476       3 %
 
                                         
     
(1)   For purposes of this analysis, NALs are reflected in the average balances of loans.

 

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Table 7 — Consolidated Quarterly Net Interest Margin Analysis
                                         
    Average Rates (2)  
    2011     2010  
Fully-taxable equivalent basis (1)   Third     Second     First     Fourth     Third  
Assets
                                       
Interest-bearing deposits in banks
    0.04 %     0.22 %     0.11 %     0.63 %     0.21 %
Trading account securities
    1.41       1.59       1.37       1.98       1.20  
Federal funds sold and securities purchased under resale agreement
          0.09                    
Loans held for sale
    4.46       4.97       4.08       4.01       5.75  
Available-for-sale and other securities:
                                       
Taxable
    2.43       2.59       2.53       2.42       2.77  
Tax-exempt
    4.17       4.02       4.70       4.59       4.70  
 
                             
Total available-for-sale and other securities
    2.52       2.66       2.63       2.52       2.84  
Held-to-maturity securities — taxable
    3.04       2.96                    
Loans and leases: (3)
                                       
Commercial:
                                       
Commercial and industrial
    4.13       4.31       4.57       4.94       5.14  
Commercial real estate:
                                       
Construction
    3.87       3.37       3.36       3.07       2.83  
Commercial
    3.91       3.90       3.93       3.92       3.91  
 
                             
Commercial real estate
    3.91       3.84       3.88       3.83       3.76  
 
                             
Total commercial
    4.06       4.16       4.34       4.56       4.64  
 
                             
Consumer:
                                       
Automobile
    4.89       5.06       5.22       5.46       5.79  
Home equity
    4.45       4.49       4.54       4.64       4.74  
Residential mortgage
    4.47       4.62       4.76       4.82       4.97  
Other consumer
    7.57       7.76       7.85       7.92       7.10  
 
                             
Total consumer
    4.68       4.79       4.90       5.04       5.19  
 
                             
Total loans and leases
    4.37       4.47       4.61       4.79       4.90  
 
                             
Total earning assets
    4.02 %     4.14 %     4.24 %     4.29 %     4.49 %
 
                             
Liabilities
                                       
Deposits:
                                       
Demand deposits — noninterest-bearing
    %     %     %     %     %
Demand deposits — interest-bearing
    0.10       0.09       0.09       0.13       0.17  
Money market deposits
    0.41       0.40       0.50       0.77       0.86  
Savings and other domestic deposits
    0.69       0.74       0.81       0.90       0.99  
Core certificates of deposit
    1.95       2.04       2.07       2.11       2.31  
 
                             
Total core deposits
    0.77       0.82       0.89       1.05       1.18  
Other domestic time deposits of $250,000 or more
    0.93       1.01       1.08       1.21       1.28  
Brokered deposits and negotiable CDs
    0.77       0.89       1.11       1.53       2.21  
Deposits in foreign offices
    0.26       0.26       0.20       0.17       0.22  
 
                             
Total deposits
    0.77       0.82       0.90       1.06       1.21  
Short-term borrowings
    0.16       0.16       0.18       0.20       0.22  
Federal Home Loan Bank advances
    0.32       0.88       2.98       0.95       1.25  
Subordinated notes and other long-term debt
    2.43       2.39       2.34       2.15       2.15  
 
                             
Total interest-bearing liabilities
    0.86 %     0.91 %     0.99 %     1.11 %     1.25 %
 
                             
Net interest rate spread
    3.11 %     3.19 %     3.21 %     3.16 %     3.24 %
Impact of noninterest-bearing funds on margin
    0.23       0.21       0.21       0.21       0.21  
 
                             
 
Net interest margin
    3.34 %     3.40 %     3.42 %     3.37 %     3.45 %
 
                             
     
(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 8 — Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis
                                                 
    YTD Average Balances     YTD Average Rates (2)  
Fully-taxable equivalent basis (1)   Nine Months Ended September 30,     Change     Nine Months Ended September 30,  
(dollar amounts in millions)   2011     2010     Amount     Percent     2011     2010  
Assets
                                               
Interest-bearing deposits in banks
  $ 141     $ 313     $ (172 )     (55) %     0.12 %     0.20 %
Trading account securities
    116       111       5       5       1.46       1.68  
Federal funds sold and securities purchased under resale agreement
    7             7             0.09        
Loans held for sale
    279       445       (166 )     (37 )     4.39       5.36  
Available-for-sale and other securities:
                                               
Taxable
    8,475       8,428       47       1       2.52       2.85  
Tax-exempt
    434       399       35       9       4.30       4.56  
 
                                   
Total available-for-sale and other securities
    8,909       8,827       82       1       2.61       2.93  
Total held-to-maturity securities
    282             282             3.00        
Loans and leases: (3)
                                               
Commercial:
                                               
Commercial and industrial
    13,387       12,317       1,070       9       4.33       5.35  
Commercial real estate:
                                               
Construction
    612       1,224       (612 )     (50 )     3.55       2.69  
Commercial
    5,676       6,145       (469 )     (8 )     3.91       3.73  
 
                                   
Commercial real estate
    6,288       7,369       (1,081 )     (15 )     3.88       3.56  
 
                                   
Total commercial
    19,675       19,686       (11 )           4.19       4.68  
 
                                   
Consumer:
                                               
Automobile
    5,958       4,678       1,280       27       5.05       6.27  
Home equity
    7,869       7,550       319       4       4.49       5.20  
Residential mortgage
    4,607       4,491       116       3       4.61       4.85  
Other consumer
    539       690       (151 )     (22 )     7.73       6.98  
 
                                   
Total consumer
    18,973       17,409       1,564       9       4.79       5.46  
 
                                   
Total loans and leases
    38,648       37,095       1,553       4       4.48       5.05  
 
                                             
Allowance for loan and lease losses
    (1,141 )     (1,466 )     325       (22 )                
 
                                   
Net loans and leases
    37,507       35,629       1,878       5                  
 
                                   
Total earning assets
    48,382       46,791       1,591       3       4.14 %     4.64 %
 
                                   
Cash and due from banks
    1,358       1,629       (271 )     (17 )                
Intangible assets
    652       709       (57 )     (8 )                
All other assets
    4,196       4,381       (185 )     (4 )                
 
                                       
Total assets
  $ 53,447     $ 52,044     $ 1,403       3 %                
 
                                       
 
                                               
Liabilities and Shareholders’ Equity
                                               
Deposits:
                                               
Demand deposits — noninterest-bearing
  $ 7,958     $ 6,748     $ 1,210       18 %     %     %
Demand deposits — interest-bearing
    5,499       5,667       (168 )     (3 )     0.10       0.20  
Money market deposits
    13,230       11,267       1,963       17       0.44       0.92  
Savings and other domestic deposits
    4,744       4,643       101       2       0.75       1.08  
Core certificates of deposit
    8,017       9,371       (1,354 )     (14 )     2.02       2.65  
 
                                   
Total core deposits
    39,448       37,696       1,752       5       0.83       1.34  
Other domestic time deposits of $250,000 or more
    486       683       (197 )     (29 )     1.02       1.36  
Brokered deposits and negotiable CDs
    1,426       1,613       (187 )     (12 )     0.92       2.43  
Deposits in foreign offices
    374       421       (47 )     (11 )     0.24       0.20  
 
                                   
Total deposits
    41,734       40,413       1,321       3       0.83       1.38  
Short-term borrowings
    2,166       1,214       952       78       0.17       0.21  
Federal Home Loan Bank advances
    138       193       (55 )     (28 )     0.64       1.94  
Subordinated notes and other long-term debt
    3,266       3,855       (589 )     (15 )     2.38       2.15  
 
                                   
Total interest-bearing liabilities
    39,346       38,927       419       1       0.92       1.42  
 
                                   
All other liabilities
    975       941       34       4                  
Shareholders’ equity
    5,168       5,428       (260 )     (5 )                
 
                                       
Total liabilities and shareholders’ equity
  $ 53,447     $ 52,044     $ 1,403       3 %                
 
                                       
Net interest rate spread
                                    3.17       3.22  
Impact of noninterest-bearing funds on margin
                                    0.22       0.24  
 
                                           
Net interest margin
                                    3.39 %     3.46 %
 
                                           

 

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(1)   FTE yields are calculated assuming a 35% tax rate.
 
(2)   Loan, lease, and deposit average rates include the impact of applicable derivatives, non-deferrable fees, and amortized deferred fees.
 
(3)   For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans.
2011 First Nine Months versus 2010 First Nine Months
Fully-taxable equivalent net interest income for the nine-month period of 2011 increased $14.7 million, or 1%, from the comparable year-ago period. This reflected the benefit of a 3% increase in average total earning assets partially offset by a decrease in the net interest margin to 3.39% from 3.46%. The increase in average earning assets reflected a combination of factors including:
    $1.6 billion, or 4%, increase in average total loans and leases.
    $0.4 billion, or 4%, increase in average total available-for-sale and other and held-to-maturity securities.
The 7 basis point decrease in the net interest margin reflected reduction in derivatives income, lower loan and securities yields, partially offset by the positive impact of increases in low cost deposits and improved deposit pricing.
The following table details the change in our reported loans and deposits:
Table 9 — Average Loans/Leases and Deposits — 2011 First Nine Months vs. 2010 First Nine Months
                                 
    Nine Months Ended September 30,     Change  
(dollar amounts in millions)   2011     2010     Amount     Percent  
Loans/Leases
                               
Commercial and industrial
  $ 13,387     $ 12,317     $ 1,070       9 %
Commercial real estate
    6,288       7,369       (1,081 )     (15 )
 
                       
Total commercial
    19,675       19,686       (11 )      
Automobile
    5,958       4,678       1,280       27  
Home equity
    7,869       7,550       319       4  
Residential mortgage
    4,607       4,491       116       3  
Other consumer
    539       690       (151 )     (22 )
 
                       
Total consumer
    18,973       17,409       1,564       9  
 
                       
Total loans and leases
  $ 38,648     $ 37,095     $ 1,553       4 %
 
                       
 
                               
Deposits
                               
Demand deposits — noninterest-bearing
  $ 7,958     $ 6,748     $ 1,210       18 %
Demand deposits — interest-bearing
    5,499       5,667       (168 )     (3 )
Money market deposits
    13,230       11,267       1,963       17  
Savings and other domestic deposits
    4,744       4,643       101       2  
Core certificates of deposit
    8,017       9,371       (1,354 )     (14 )
 
                       
Total core deposits
    39,448       37,696       1,752       5  
Other deposits
    2,286       2,717       (431 )     (16 )
 
                         
Total deposits
  $ 41,734     $ 40,413     $ 1,321       3 %
 
                       
The $1.6 billion, or 4%, increase in average total loans and leases primarily reflected:
    $1.3 billion, or 27%, increase in the average automobile portfolio. Automobile lending is a core competency and continued area of growth. The growth from the year-ago period exhibited further penetration within our historical geographic footprint, as well as the positive impact of our expansion into Eastern Pennsylvania and selected New England states. Origination quality remained high.
    $1.1 billion, or 9%, increase in the average C&I portfolio. Growth from the year-ago period reflected the benefits from our strategic initiatives including large corporate, asset based lending, business banking, automobile floor plan lending, and equipment finance. Traditional middle-market loans continued to grow despite line utilization rates that remain well below historical norms.
    $0.3 billion, or 4%, increase in the average home equity portfolio, reflecting higher originations and continued slower runoff.

 

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Partially offset by:
    $1.1 billion, or 15%, decrease in the average CRE portfolio reflecting the continued execution of our plan to reduce the CRE exposure, primarily in the noncore CRE portfolio. This reduction is expected to continue through 2011, reflecting normal amortization, paydowns, and refinancing.
The $1.3 billion, or 3%, increase in average total deposits reflected:
    $1.8 billion, or 5%, growth in average total core deposits. The drivers of this change were a $2.0 billion, or 17%, growth in average money market deposits, and a $1.2 billion, or 18%, growth in average noninterest-bearing demand deposits. These increases were partially offset by a $1.4 billion, or 14%, decline in average core certificates of deposit.
Partially offset by:
    $0.4 billion, or 16%, decline in other deposits including a $0.2 billion, or 29%, decrease in other domestic time deposits of $250,000 or more, and a $0.2 billion, or 12%, decline in average brokered deposits and negotiable CDs, reflecting a strategy of reducing such noncore funding.

 

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Provision for Credit Losses
(This section should be read in conjunction with Significant Item 2 and 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 2011 third quarter was $43.6 million, an increase of $7.8 million, or 22%, from the prior quarter, reflecting the combination of strong loan growth and the expectation of a weaker and prolonged economic recovery. These factors were partially offset by a combination of lower NCOs and commercial Criticized loans. The reduction in commercial Criticized loans reflected the resolution of problem credits for which reserves had been previously established. The current quarter’s provision for credit losses was $47.0 million less than total NCOs.
Compared to the year-ago quarter, provision for credit losses declined $75.6 million, or 63%. The provision for credit losses for the first nine-month period of 2011 was $128.8 million, down $418.8 million, or 76%, from the year-ago period. These declines reflected the combination of lower NCOs and commercial Criticized loans as noted above. The provision for credit losses for the first nine-month period of 2011 was $224.4 million less than total NCOs (see Credit Quality discussion).
Noninterest Income
The following table reflects noninterest income for each of the past five quarters:
Table 10 — Noninterest Income
                                                                           
    2011     2010       3Q11 vs 3Q10     3Q11 vs 2Q11  
(dollar amounts in thousands)   Third     Second     First     Fourth     Third       Amount     Percent     Amount     Percent  
Service charges on deposit accounts
  $ 65,184     $ 60,675     $ 54,324     $ 55,810     $ 65,932       $ (748 )     (1 )%   $ 4,509       7 %
Mortgage banking income
    12,791       23,835       22,684       53,169       52,045         (39,254 )     (75 )     (11,044 )     (46 )
Trust services
    29,473       30,392       30,742       29,394       26,997         2,476       9       (919 )     (3 )
Electronic banking
    32,714       31,728       28,786       28,900       28,090         4,624       16       986       3  
Insurance income
    17,220       16,399       17,945       19,678       19,801         (2,581 )     (13 )     821       5  
Brokerage income
    20,349       20,819       20,511       16,953       16,575         3,774       23       (470 )     (2 )
Bank owned life insurance income
    15,644       17,602       14,819       16,113       14,091         1,553       11       (1,958 )     (11 )
Automobile operating lease income
    5,890       7,307       8,847       10,463       11,356         (5,466 )     (48 )     (1,417 )     (19 )
Securities gains (losses)
    (1,350 )     1,507       40       (103 )     (296 )       (1,054 )     356       (2,857 )     (190 )
Other income
    60,644       45,503       38,247       33,843       32,552         28,092       86       15,141       33  
 
                                                       
Total noninterest income
  $ 258,559     $ 255,767     $ 236,945     $ 264,220     $ 267,143       $ (8,584 )     (3 )%   $ 2,792       1 %
 
                                                       
2011 Third Quarter versus 2010 Third Quarter
The $8.6 million, or 3%, decrease in total noninterest income from the year-ago quarter reflected:
    $39.3 million, or 75%, decrease in mortgage banking income. This primarily reflected a $21.4 million decrease in net MSR activity and a $20.2 million, or 56%, decrease in origination and secondary marketing income, as originations decreased 41% from the year-ago quarter.
    $5.5 million, or 48%, decline in automobile operating lease income reflecting the impact of a declining portfolio as a result of having exited that business in 2008.
Partially offset by:
    $28.1 million, or 86%, increase in other income, of which $15.5 million related to the automobile loan securitization. Also contributing to the growth were increases totaling $6.4 million from the sale of interest rate protection products and capital markets activities.
    $4.6 million, or 16%, increase in electronic banking income, reflecting an increase in debit card transaction volume and new account growth.
    $3.8 million, or 23%, increase in brokerage income, primarily reflecting increased sales of investment products.

 

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2011 Third Quarter versus 2011 Second Quarter
The $2.8 million, or 1%, increase in total noninterest income from the prior quarter reflected:
    $15.1 million, or 33%, increase in other income, reflecting a $15.5 million automobile loan securitization gain on sale, $2.8 million higher market-related gains and capital markets income; partially offset by a $5.8 million reduction in SBA-related servicing income.
    $4.5 million, or 7%, increase in service charges on deposit accounts, primarily reflecting an increase in personal services charges, mostly due to strong customer growth.
Partially offset by:
    $11.0 million, or 46%, decline in mortgage banking income reflecting a $13.9 million decrease in net MSR activity, partially offset by a $4.1 million, or 36%, increase in origination and secondary marketing income.
    $1.4 million securities loss in the current period compared with a $1.5 million securities gain in the second quarter.
2011 First Nine Months versus 2010 First Nine Months
Noninterest income for the first nine-month period of 2011 decreased $26.4 million, or 3%, from the comparable year-ago period.
Table 11 — Noninterest Income — 2011 First Nine Months vs. 2010 First Nine Months
                                 
    Nine Months Ended September 30,     Change  
(dollar amounts in thousands)   2011     2010     Amount     Percent  
Service charges on deposit accounts
  $ 180,183     $ 211,205     $ (31,022 )     (15) %
Mortgage banking income
    59,310       122,613       (63,303 )     (52 )
Trust services
    90,607       83,161       7,446       9  
Electronic banking
    93,228       81,334       11,894       15  
Insurance income
    51,564       56,735       (5,171 )     (9 )
Brokerage income
    61,679       51,901       9,778       19  
Bank owned life insurance income
    48,065       44,953       3,112       7  
Automobile operating lease income
    22,044       35,501       (13,457 )     (38 )
Securities gains (losses)
    197       (171 )     368       N.R.  
Other income
    144,394       90,406       53,988       60  
 
                       
 
Total noninterest income
  $ 751,271     $ 777,638     $ (26,367 )     (3) %
 
                       
     
N.R.   - Not relevant, as denominator of calculation is a loss in prior period compared with income in current period.
The $26.4 million, or 3%, decrease in total noninterest income reflected:
    $63.3 million, or 52%, decrease in mortgage banking income. This primarily reflected a $46.2 million decrease in net MSR activity and a $22.2 million, or 32%, decrease in origination and secondary marketing income, as originations decreased 23% from the year-ago period.
    $31.0 million, or 15%, decline in service charges on deposit accounts, reflecting lower personal service charges due to the implementation of the amendment to Reg E and our “Fair Play” consumer banking initiatives.
    $13.5 million, or 38%, decline in automobile operating lease income reflecting the impact of a declining portfolio as a result of having exited that business in 2008.
Partially offset by:
    $54.0 million, or 60%, increase in other income, of which $19.3 million was associated with SBA-related loan fees and gains from SBA loan sales, and a $15.5 million automobile loan securitization gain on sale. Also contributing to the growth were increases totaling $13.4 million from the sale of interest rate protection products and capital markets activities.
    $11.9 million, or 15%, increase in electronic banking income, reflecting an increase in debit card transaction volume and new account growth.

 

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    $9.8 million, or 19%, increase in brokerage income, primarily reflecting increased sales of investment products.
    $7.4 million, or 9%, increase in trust services income, due to a $0.8 billion increase in assets under management. This increase reflected improved market values and net growth in accounts.
      For additional information regarding noninterest income, see the Legislative and Regulatory section located within the Executive Overview.
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 12 — Noninterest Expense
                                                                           
    2011     2010       3Q11 vs 3Q10     3Q11 vs 2Q11  
(dollar amounts in thousands)   Third     Second     First     Fourth     Third       Amount     Percent     Amount     Percent  
 
                                                                         
Personnel costs
  $ 226,835     $ 218,570     $ 219,028     $ 212,184     $ 208,272       $ 18,563       9 %   $ 8,265       4 %
Outside data processing and other services
    49,602       43,889       40,282       40,943       38,553         11,049       29       5,713       13  
Net occupancy
    26,967       26,885       28,436       26,670       26,718         249       1       82        
Deposit and other insurance expense
    17,492       23,823       17,896       23,320       23,406         (5,914 )     (25 )     (6,331 )     (27 )
Professional services
    20,281       20,080       13,465       21,021       20,672         (391 )     (2 )     201       1  
Equipment
    22,262       21,921       22,477       22,060       21,651         611       3       341       2  
Marketing
    22,251       20,102       16,895       16,168       20,921         1,330       6       2,149       11  
Amortization of intangibles
    13,387       13,386       13,370       15,046       15,145         (1,758 )     (12 )     1        
OREO and foreclosure expense
    4,668       4,398       3,931       10,502       12,047         (7,379 )     (61 )     270       6  
Automobile operating lease expense
    4,386       5,434       6,836       8,142       9,159         (4,773 )     (52 )     (1,048 )     (19 )
Other expense
    30,987       29,921       48,083       38,537       30,765         222       1       1,066       4  
 
                                                       
Total noninterest expense
  $ 439,118     $ 428,409     $ 430,699     $ 434,593     $ 427,309       $ 11,809       3 %   $ 10,709       2 %
 
                                                       
Number of employees (full-time equivalent), at period-end
    11,473       11,457       11,319       11,341       11,279         194       2 %     16       %
2011 Third Quarter versus 2010 Third Quarter
The $11.8 million, or 3%, increase in total noninterest expense from the year-ago quarter reflected:
    $18.6 million, or 9%, increase in personnel costs, primarily reflecting a 2% increase in full-time equivalent staff in support of strategic initiatives, as well as higher benefit-related expenses, including $4.2 million of healthcare related costs.
    $11.0 million, or 29%, increase in outside data processing and other service, reflecting the costs associated with the conversion to a new debit card processor and outside services supporting increased regulations.
Partially offset by:
    $7.4 million, or 61%, decrease in OREO and foreclosure expense.
    $5.9 million, or 25%, decline in deposit and other insurance expenses.
    $4.8 million, or 52%, decline in automobile operating lease expense as that portfolio continued to run-off having exited that business in 2008.
2011 Third Quarter versus 2011 Second Quarter
The $10.7 million, or 2%, increase in total noninterest expense from the prior quarter reflected:
    $8.3 million, or 4%, increase in personnel costs, primarily reflecting higher salaries, severance, and healthcare costs.
    $5.7 million, or 13%, increase in outside data processing and other services, reflecting the costs associated with the conversion to a new debit card processor and the implementation of strategic initiatives.

 

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Partially offset by:
    $6.3 million, or 27%, decline in deposit and other insurance expenses.
2011 First Nine Months versus 2010 First Nine Months
Noninterest expense for the first nine-month period of 2011 increased $59.0 million, or 5%, from the comparable year-ago period.
Table 13 — Noninterest Expense — 2011 First Nine Months vs. 2010 First Nine Months
                                 
    Nine Months Ended September 30,     Change  
(dollar amounts in thousands)   2011     2010     Amount     Percent  
Personnel costs
  $ 664,433     $ 586,789     $ 77,644       13 %
Outside data processing and other services
    133,773       118,305       15,468       13  
Net occupancy
    82,288       81,192       1,096       1  
Deposit and other insurance expense
    59,211       74,228       (15,017 )     (20 )
Professional services
    53,826       67,757       (13,931 )     (21 )
Equipment
    66,660       63,860       2,800       4  
Marketing
    59,248       49,756       9,492       19  
Amortization of intangibles
    40,143       45,432       (5,289 )     (12 )
OREO and foreclosure expense
    12,997       28,547       (15,550 )     (54 )
Automobile operating lease expense
    16,656       28,892       (12,236 )     (42 )
Other expense
    108,991       94,455       14,536       15  
 
                       
Total noninterest expense
  $ 1,298,226     $ 1,239,213     $ 59,013       5 %
 
                       
The $59.0 million, or 5%, increase in total noninterest expense reflected:
    $77.6 million, or 13%, increase in personnel costs, primarily reflecting an increase in full-time equivalent staff in support of strategic initiatives, as well as higher benefit related expenses, including the reinstatement of our 401(k) plan matching contribution in May of 2010.
    $15.5 million, or 13%, increase in outside data processing and other service, reflecting the costs associated with the conversion to a new debit card processor and the implementation of strategic initiatives.
    $14.5 million, or 15%, increase in other expense, primarily reflecting the 2011 first quarter $17.0 million addition to litigation reserves (see Significant Items).
    $9.5 million, or 19%, increase in marketing expense, reflecting higher advertising costs.
Partially offset by:
    $15.6 million, or 54%, decline in OREO and foreclosure expenses as OREO balances declined 69% in the current period.
    $15.0 million, or 20%, decrease in deposit and other insurance expenses.
    $13.9 million, or 21%, decrease in professional services, reflecting lower legal costs, as collection activities declined, and consulting expenses.
    $12.2 million, or 42%, decline in automobile operating lease expense as that portfolio continued to run-off having exited that business in 2008.

 

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Provision for Income Taxes
(This section should be read in conjunction with Significant Item 2.)
The provision for income taxes in the 2011 third quarter was $38.9 million. This compared with a provision for income taxes of $49.0 million in the 2011 second quarter and a provision for income taxes of $29.7 million in the 2010 third quarter. All three quarters included the benefits from tax-exempt income, tax-advantaged investments, and general business credits. At September 30, 2011, we had a net deferred tax asset of $364.2 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 September 30, 2011. The total disallowed deferred tax asset for regulatory capital purposes decreased to $19.4 million at September 30, 2011 compared to the total disallowed deferred tax asset of $48.2 million at June 30, 2011.
The IRS completed audits of our consolidated federal income tax returns for tax years through 2007. In the third quarter 2011, the IRS began its examination of our 2008 and 2009 consolidated federal income tax returns. The IRS, various states, and other jurisdictions remain open to examination, including Kentucky, Indiana, Michigan, Pennsylvania, West Virginia and Illinois. The IRS has proposed adjustments to our previously filed tax returns. We believe our tax positions related to such proposed adjustments are correct and supported by applicable statutes, regulations, and judicial authority, and intend to vigorously defend them. 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. However, although no assurance 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.

 

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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. 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 2010 Form 10-K and subsequent filings with the SEC. Additionally, the MD&A included in our 2010 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2010 Form 10-K. Our definition, philosophy, and approach to risk management have not materially changed from the discussion presented in the 2010 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 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. Given the current level of global financial issues, we believe it is important to provide clarity around our exposure in this specific area. While there is credit risk associated with derivative activity, we believe this exposure is minimal. The significant change in the economic conditions and the resulting changes in borrower behavior over the past several years resulted in our continuing 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 added more quantitative measurement capabilities utilizing external data sources, enhanced use of modeling technology, and internal stress testing processes. The continued expansion of our portfolio management resources demonstrates our commitment to maintaining an aggregate moderate-to-low risk profile.
Loan and Lease Credit Exposure Mix
At September 30, 2011, our loans and leases totaled $39.0 billion, representing a $0.9 billion, or 2%, increase compared to $38.1 billion at December 31, 2010, primarily reflecting growth in the C&I, residential mortgage, and home equity portfolios. The automobile portfolio was little changed reflecting the 2011 third quarter automobile securitization (see Automobile Portfolio discussion). The CRE portfolio continued to decline reflecting our planned strategy to reduce our CRE exposure.
At September 30, 2011, commercial loans and leases totaled $19.9 billion, and represented 51% of our total credit exposure. Our commercial portfolio is diversified along product type, customer size, and geography within our footprint 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 function 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 look to grow our C&I portfolio, we have further developed our ABL capabilities by adding experienced ABL professionals to take advantage of market opportunities resulting in better leveraging of the manufacturing base in our primary markets. Also, our Equipment Finance area is targeting larger equipment financings in the manufacturing sector in addition to our core products. We also expanded our large corporate banking group with sufficient resources to ensure we appropriately recognize and manage the risks associated with these types of lending.
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 individuals, companies, or developers 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, residential (land, single family, and condominiums), office, and warehouse product 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.

 

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Total consumer loans and leases were $19.1 billion at September 30, 2011, and represented 49% of our total loan and lease credit exposure. The consumer portfolio was primarily diversified among home equity loans and lines-of-credit, residential mortgages, and automobile loans and leases (see Consumer Credit discussion) .
Automobile — Automobile loans and leases 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 3% of our total automobile portfolio at September 30, 2011.
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 second-lien on the borrower’s residence, allows customers to borrow against the equity in their home. Given the current low interest rate environment, many borrowers have utilized the line-of-credit home equity product as the primary source of financing their home. As a result, 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. The credit risk profile is substantially reduced when we hold a first-lien position. During the first nine-month period of 2011, more than 65% of our home equity portfolio originations were secured by a first-lien mortgage. The first-lien position combined with continued high average FICO scores significantly reduces the PD associated with these loans. The combination provides a strong base when assessing the expected future performance of this portfolio. Real estate market values at the time of origination directly affect the amount of credit extended and, in the event of default, subsequent changes in these values impact the severity of losses. We actively manage the extension of credit and the amount of credit extended through a combination of criteria including financial position, debt-to-income policies and LTV policy limits.
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. Generally, our practice is to sell a significant portion of our fixed-rate originations in the secondary market. As such, the majority of the loans in our portfolio are ARMs. These ARMs primarily consist of a fixed-rate of interest for the first 3 to 5 years, and then adjust annually. These loans comprised approximately 53% of our total residential mortgage loan portfolio at September 30, 2011. We are subject to repurchase risk associated with residential mortgage loans sold in the secondary market. This activity has increased recently reflecting the overall market conditions and GSE activity and an appropriate level of allowance has been established to address the repurchase risk inherent in the portfolio (refer to the Operational Risk section for additional discussion).
Other consumer — This portfolio primarily consists of consumer loans not secured by real estate or automobiles, including personal unsecured loans.
Table 14 — Loan and Lease Portfolio Composition
                                                                                 
    2011     2010  
(dollar amounts in millions)   September 30,     June 30,     March 31,     December 31,     September 30,  
Commercial: (1)
                                                                               
Commercial and industrial
  $ 13,939       36 %   $ 13,544       34 %   $ 13,299       35 %   $ 13,063       34 %   $ 12,425       33 %
Commercial real estate:
                                                                               
Construction
    520       1       591       2       587       2       650       2       738       2  
Commercial
    5,414       14       5,573       14       5,711       15       6,001       16       6,174       16  
 
                                                           
Total commercial real estate
    5,934       15       6,164       16       6,298       17       6,651       18       6,912       18  
 
                                                           
Total commercial
    19,873       51       19,708       50       19,597       52       19,714       52       19,337       51  
 
                                                           
Consumer:
                                                                               
Automobile
    5,558       14       6,190       16       5,802       15       5,614       15       5,385       14  
Home equity
    8,079       21       7,952       20       7,784       20       7,713       20       7,690       21  
Residential mortgage
    4,986       13       4,751       12       4,517       12       4,500       12       4,511       12  
Other consumer
    516       1       525       2       546       1       566       1       578       2  
 
                                                           
Total consumer
    19,139       49       19,418       50       18,649       48       18,393       48       18,164       49  
 
                                                           
Total loans and leases
  $ 39,012       100 %   $ 39,126       100 %   $ 38,246       100 %   $ 38,107       100 %   $ 37,501       100 %
 
                                                           
     
(1)   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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The table below provides our total loan and lease portfolio segregated by the type of collateral securing the loan or lease:
Table 15 — Loan and Lease Portfolio by Collateral Type
                                                                                 
    2011     2010  
(dollar amounts in millions)   September 30,     June 30,     March 31,     December 31,     September 30,  
Secured loans:
                                                                               
Real estate — commercial
  $ 9,554       24 %   $ 9,781       25 %   $ 9,931       26 %   $ 10,389       27 %   $ 10,516       28 %
Real estate — consumer
    13,065       33       12,703       32       12,300       32       12,214       32       12,201       33  
Vehicles
    6,898       18       7,594       19       7,333       19       7,134       19       6,652       18  
Receivables/Inventory
    4,297       11       4,171       11       3,819       10       3,763       10       3,524       9  
Machinery/Equipment
    1,864       5       1,784       5       1,787       5       1,766       5       1,763       5  
Securities/Deposits
    805       2       802       2       778       2       734       2       730       2  
Other
    1,103       3       1,095       3       1,139       3       990       2       1,097       2  
 
                                                           
Total secured loans and leases
    37,586       96       37,930       97       37,087       97       36,990       97       36,483       97  
Unsecured loans and leases
    1,426       4       1,196       3       1,159       3       1,117       3       1,018       3  
 
                                                           
 
                                                                               
Total loans and leases
  $ 39,012       100 %   $ 39,126       100 %   $ 38,246       100 %   $ 38,107       100 %   $ 37,501       100 %
 
                                                           
Commercial Credit
In commercial lending, on-going credit management is dependent on the type and nature of the loan. We monitor all significant exposures on an on-going basis. All commercial credit extensions are assigned internal risk ratings reflecting the borrower’s PD and LGD (severity of loss). This two-dimensional rating methodology provides granularity in the portfolio management process. The PD is rated and applied at the borrower level. The LGD is rated and applied based on the specific type of credit extension and the quality and lien position associated with the underlying collateral. The internal risk ratings are assessed at origination and updated at each periodic monitoring event. There is also extensive macro portfolio management analysis on an on-going basis. As an example, the retail properties class of the CRE portfolio and manufacturing loans within the C&I portfolio have each received more frequent evaluation at the individual loan level given the weak environment and our portfolio composition. We continually review and adjust our risk-rating criteria based on actual experience, which provides us with the current risk level in the portfolio and is the basis for determining an appropriate allowance amount for this portfolio.
Our Credit Review group performs testing to provide an independent review and assessment of the quality and / or risk of new loan originations. This group is part of our Risk Management area, and conducts portfolio reviews on a risk-based cycle to evaluate individual loans, validate risk ratings, as well as test the consistency of credit processes. Similarly, to provide consistent oversight, a centralized portfolio management team monitors and reports on the performance of small business loans, which are included within the commercial loan portfolio.
Our standardized loan grading system considers many components that directly correlate to loan quality and likelihood of repayment, one of which is guarantor support. On an annual basis, or more frequently if warranted, we consider, among other things, the guarantor’s reputation and creditworthiness, along with various key financial metrics such as liquidity and net worth. Our assessment of the guarantor’s credit strength is reflected in our risk ratings for such loans. The risk rating is directly tied to, and an integral component of, our allowance for loan loss methodology. When our assessment of the guarantor’s credit strength demonstrates an inherent capacity to perform, we will seek repayment from the guarantor as part of the collection process and have successfully negotiated repayment from guarantors as part of our overall credit risk management process. When a loan goes to impaired status, viable guarantor support is considered in the determination of the recognition of a loan loss.
Substantially all loans categorized as Classified (see Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements) are managed by our SAD. The SAD is a specialized group of credit professionals that handle the day-to-day management of workouts, commercial recoveries, and problem loan sales. Its responsibilities include developing and implementing action plans, assessing risk ratings, and determining the adequacy of the allowance, the accrual status, and the ultimate collectability of the Classified loan portfolio.
Our commercial portfolio is diversified by product type, customer size, and geography throughout our footprint. No outstanding commercial loans and leases comprised an industry or geographic concentration of lending. Certain segments of our commercial portfolio are discussed in further detail below.

 

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C&I PORTFOLIO
We manage the risks inherent in this portfolio through origination policies, concentration limits, on-going loan level reviews and portfolio level reviews, recourse requirements, and continuous portfolio risk management activities. Our origination policies for this portfolio include loan product-type specific policies such as LTV and debt service coverage ratios, as applicable.
While C&I borrowers have been challenged by the weak economy, problem loans have trended downward, reflecting a combination of proactive risk identification as well as some relative improvement in the economic conditions. Nevertheless, some borrowers may no longer have sufficient capital to withstand the extended stress. As a result, these borrowers may not be able to comply with the original terms of their credit agreements. We continue to focus attention on the portfolio management process to proactively identify borrowers that may be facing financial difficulty and to assess all potential solutions. The impact of the economic environment is further evidenced by the level of line-of-credit activity, as borrowers continued to maintain relatively low utilization percentages.
As shown in the following table, C&I loans and leases totaled $13.9 billion at September 30, 2011:
Table 16 — Commercial and Industrial Loans and Leases by Class
                                 
    September 30, 2011  
    Commitments     Loans Outstanding  
(dollar amounts in millions)   Amount     Percent     Amount     Percent  
Class:
                               
Owner occupied
  $ 4,390       21 %   $ 3,978       29 %
Other commercial and industrial
    17,020       79       9,961       71  
 
                       
 
                               
Total
  $ 21,410       100 %   $ 13,939       100 %
 
                       
The difference in the composition between the commitments and loans and leases outstanding in the other commercial and industrial class results from a significant amount of working capital lines-of-credit and businesses have reduced these borrowings. The funding percentage associated with the lines-of-credit has been a significant indicator of credit quality. Generally, borrowers that fully utilize their line-of-credit consistently, over time, have a higher risk profile. The overall funding rate on the commercial lines-of-credit has declined compared to pre-2008 levels as borrowers have limited their borrowing and focused on maintaining high liquidity and reducing debt. Line-of-credit utilization is one of many credit risk factors we utilize in assessing the credit risk portfolio of individual borrowers and the overall portfolio.
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, (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. Additionally, we established a limit to our CRE exposure of no more than our amount of Tier 1 Capital plus the ACL. We have been actively reducing our CRE exposure during the past three years, and our CRE exposure was below this established limit at September 30, 2011.
Each CRE loan is classified as either core or noncore. We separated the CRE portfolio into these categories in order to provide more clarity around our portfolio management strategies and to provide an additional level of transparency. We believe segregating the noncore CRE from core CRE improves our ability to understand the nature, performance prospects, and problem resolution opportunities, thus allowing us to continue to deal proactively with any emerging credit issues.
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 generates an acceptable return on capital or demonstrates the prospect of becoming one. The core CRE portfolio was $3.9 billion at September 30, 2011, representing 65% of total CRE loans. The performance of the core portfolio 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.
A CRE loan is generally considered noncore based on the lack of a substantive relationship outside of the loan product, with no immediate prospects for meeting the core relationship criteria. The noncore CRE portfolio declined from $2.6 billion at December 31, 2010, to $2.1 billion at September 30, 2011, and represented 35% of total CRE loans. Of the loans in the noncore portfolio at September 30, 2011, 66% were categorized as Pass, 95% had guarantors, 99% were secured, and 95% were located within our geographic footprint. However, it is within the noncore portfolio where most of the credit quality challenges exist. For example, $0.2 billion, or 11%, of related outstanding balances, are classified as NALs. SAD administered $0.9 billion, or 44%, of total noncore CRE loans at September 30, 2011. We expect to exit the majority of noncore CRE relationships over time through normal repayments and refinancings, possible sales should economically attractive opportunities arise, or the reclassification to a core CRE relationship if it expands to meet the core criteria.

 

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The table below provides a segregation of the CRE portfolio as of September 30, 2011:
Table 17 — Core Commercial Real Estate Loans by Property Type and Property Location
                                                                                 
    September 30, 2011  
                                                    West                    
(dollar amounts in millions)   Ohio     Michigan     Pennsylvania     Indiana     Kentucky     Florida     Virginia     Other     Total     %  
Core portfolio:
                                                                               
Retail properties
  $ 505     $ 64     $ 69     $ 84     $ 9     $ 39     $ 29     $ 363     $ 1,162       20 %
Office
    337       105       93       17       11             39       56       658       11  
Multi family
    217       91       66       35       28       1       27       56       521       9  
Industrial and warehouse
    222       66       21       49       3       2       5       82       450       8  
Other commercial real estate
    701       121       37       38             19       53       111       1,080       18  
 
                                                           
Total core portfolio
    1,982       447       286       223       51       61       153       668       3,871       65  
Total noncore portfolio
    1,149       350       123       173       28       100       40       100       2,063       35  
 
                                                           
 
                                                                               
Total
  $ 3,131     $ 797     $ 409     $ 396     $ 79     $ 161     $ 193     $ 768     $ 5,934       100 %
 
                                                           
Credit quality data regarding the ACL and NALs, segregated by core CRE loans and noncore CRE loans, is presented in the following table:
Table 18 — Commercial Real Estate — Core vs. Noncore Portfolios
                                                 
    September 30, 2011  
    Ending                                     Nonaccrual  
(dollar amounts in millions)   Balance     Prior NCOs     ACL $     ACL %     Credit Mark (1)     Loans  
Total core
  $ 3,871     $ 16     $ 122       3.15 %     3.55 %   $ 25  
 
                                               
Noncore — SAD (2)
    910       286       213       23.41       41.72       202  
Noncore — Other
    1,153       14       89       7.72       8.83       30  
 
                                   
Total noncore
    2,063       300       302       14.64       25.48       232  
 
                                   
Total commercial real estate
  $ 5,934     $ 316     $ 424       7.15 %     11.84 %   $ 257  
 
                                   
                                                 
    December 31, 2010  
Total core
  $ 4,042     $ 5     $ 160       3.96 %     4.08 %   $ 16  
 
                                               
Noncore — SAD (2)
    1,400       379       329       23.50       39.80       307  
Noncore — Other
    1,209       5       105       8.68       9.06       41  
 
                                   
Total noncore
    2,609       384       434       16.63       27.33       348  
 
                                   
Total commercial real estate
  $ 6,651     $ 389     $ 594       8.93 %     13.96 %   $ 364  
 
                                   
     
(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 September 30, 2011, declined $0.7 billion, or 11%, compared with December 31, 2010. Of this decline, 68% occurred in the noncore segment of the portfolio administered by the SAD, and was a result of payoffs and NCOs 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. We anticipate further significant declines in the noncore segment, consistent with our strategy to continue to reduce our overall CRE exposure. The reduction in the core segment is a result of normal portfolio attrition combined with limited origination activity. We will continue to support our core developer customers as appropriate, however, we do not believe that significant additional CRE activity is appropriate given our current exposure in CRE lending and the current economic conditions.

 

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Also as shown above, substantial reserves for the noncore portfolio have been established. At September 30, 2011, the ACL related to the noncore portfolio was 14.64%, and 23.41% related to the SAD managed noncore portfolio. 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 41.72% Credit Mark associated with the SAD-managed noncore portfolio is an indicator of the aggressive portfolio management strategy employed for this portfolio.
Retail Properties
Our portfolio of total CRE loans secured by retail properties totaled $1.6 billion, or approximately 4%, of total loans and leases, at September 30, 2011. Loans within this portfolio segment declined $0.1 billion, or 6%, from $1.8 billion at December 31, 2010. Credit approval in this portfolio segment is generally dependent on preleasing requirements, and net operating income from the project must cover debt service by specified percentages when the loan is fully funded.
The weakness of the economic environment in our geographic regions continued to impact the projects that secure the loans in this portfolio class. Lower occupancy rates, reduced rental rates, and the expectation these levels will remain stressed for the foreseeable future may adversely affect some of our borrowers’ ability to repay these loans. We have increased the level of credit risk management activity on this portfolio segment, and we analyze our retail property loans in detail by combining property type, geographic location, and other data, to assess and manage our credit risks. We review the majority of this portfolio segment on a monthly basis.
Consumer Credit
Consumer credit approvals are based on, among other factors, the financial strength and payment history of the borrower, type of exposure, and the transaction structure. We make extensive use of portfolio assessment models to continuously monitor the quality of the portfolio, which may result in changes to future origination strategies. The on-going analysis and review process results in a determination of an appropriate allowance for our consumer loan and lease portfolio.
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 a reasonable level of 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 the expansion into new markets can be associated with increased risk levels, we believe our strategy and operational capabilities significantly mitigate these risks.
We have continued to consistently execute our value proposition while taking advantage of market opportunities that allow us to grow our automobile loan portfolio. The significant growth in the portfolio over the past two years was accomplished while maintaining our consistently high credit quality metrics. As we further execute our strategies and take advantage of these opportunities, we are developing alternative plans to address any growth in excess of our established portfolio concentration limits, including both securitizations and loan sales.
During the 2011 third quarter, we transferred automobile loans totaling $1.0 billion to a trust in a securitization transaction. The securitization qualified for sale accounting. As a result of this transaction, we recognized a $15.5 million gain on sale which is reflected in other noninterest income and recorded a $16.0 million servicing asset which is reflected in accrued income and other assets.
RESIDENTIAL-SECURED PORTFOLIOS
The properties securing our residential mortgage and home equity portfolios are primarily located within our footprint. The continued stress on home prices has caused the performance in these portfolios to remain weaker than historical levels. We continue to evaluate all of our policies and processes associated with managing these portfolios to provide as much clarity as possible.
In the 2011 first quarter, we accelerated the timing of charge-off recognition in our residential mortgage portfolio. In addition, we established an immediate charge-off process regardless of the delinquency status for short sale situations. Both of these policy changes resulted in accelerated recognition of residential mortgage charge-offs totaling $6.8 million in the 2011 first quarter. Further, in the 2011 second quarter, we implemented a policy change regarding the placement of loans on nonaccrual status in both our home equity and residential mortgage portfolios. This policy change resulted in accelerated placement of loans on nonaccrual status totaling $6.7 million in the home equity portfolio and $8.0 million in the residential mortgage portfolio.

 

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Table 19 — Selected Home Equity and Residential Mortgage
Portfolio Data

(dollar amounts in millions)
                                                 
    Home Equity     Residential Mortgage  
    Secured by first-lien     Secured by second-lien        
    09/30/11     12/31/10     09/30/11     12/31/10     09/30/11     12/31/10  
Ending balance
  $ 3,589     $ 3,041     $ 4,490     $ 4,672     $ 4,986     $ 4,500  
Portfolio weighted average LTV ratio (1)
    71 %     70 %     80 %     80 %     78 %     77 %
Portfolio weighted average FICO score (2)
    749       745       734       733       731       721  
                                                 
    Home Equity     Residential Mortgage (3)  
    Secured by first-lien     Secured by second-lien        
    Nine Months Ended September 30,  
    2011     2010     2011     2010     2011     2010  
Originations
  $ 1,392     $ 922     $ 630     $ 523     $ 1,102     $ 1,179  
Origination weighted average LTV ratio (1)
    71 %     69 %     82 %     79 %     84 %     81 %
Origination weighted average FICO score (2)
    768       767       759       756       758       760  
     
(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 second-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.
At September 30, 2011, approximately 44% of our home equity portfolio was secured by first-lien mortgages. The credit risk profile is substantially reduced when we hold a first-lien position. During the first nine-month period of 2011, more than 65% of our home equity portfolio originations were secured by a first-lien mortgage. We focus on high quality borrowers primarily located within our footprint. The majority of our home equity line-of-credit borrowers consistently pay more than the minimum payment required in any given month. Additionally, since we focus on developing complete relationships with our customers, many of our home equity borrowers are utilizing other products and services. The combination of high quality borrowers as measured by financial condition, FICO score, and the lien position status provide a high degree of confidence regarding the performance of the 2009-2011 originations.
Within the home equity line-of-credit portfolio, the standard product is a 10-year interest-only draw period with a balloon payment and represents a majority of the line-of-credit portfolio at September 30, 2011. As previously discussed, a significant portion of recent originations are secured by first-liens on the property as high quality borrowers take advantage of the low variable-rates available with a line-of-credit. If the current 30-year fixed-rate declines substantially from its already low level, we would anticipate some portion of these first-lien line-of-credit borrowers to refinance to a more traditional mortgage at a fixed-rate.
We believe we have underwritten credit conservatively within this portfolio. We have not originated home equity loans or lines-of-credit with an LTV at origination greater than 100%, except for infrequent situations with high quality borrowers. However, continued declines in housing prices have decreased the value of the collateral for this portfolio and have caused a portion of the portfolio to have an LTV greater than 100%. These higher LTV ratios are directly correlated with borrower payment patterns and are a particular focus of our Loss Mitigation and Home Saver groups.

 

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We obtain a property valuation for every loan or line-of-credit. The type of property valuation obtained is based on a series of credit parameters, and ranges from an AVM to a complete walkthrough appraisal. While we believe an AVM estimate is an appropriate valuation source for a portion of our home equity lending activities, we continue to re-evaluate all of our policies on an on-going basis, specifically related to the December 2010 FFIEC guidelines regarding property valuation. The intent of these guidelines is to ensure complete independence in the requesting and review of real estate valuations associated with loan decisions. We are committed to appropriate valuations for all of our real estate lending, and do not anticipate significant impacts to our loan decision process as a result of these guidelines. We update values as appropriate, and in compliance with applicable regulations, for loans identified as higher risk. Loans are identified as higher risk based on performance indicators and the updated values are utilized to facilitate our portfolio management processes, as well as our workout and loss mitigation functions.
We continue to make origination policy adjustments based on our assessment of an appropriate risk profile, as well as industry actions. In addition to origination policy adjustments, we take actions, as necessary, to manage the risk profile of this portfolio.
Residential Mortgage Portfolio
We focus on higher quality borrowers and underwrite all applications centrally. We do not originate residential mortgages that allow negative amortization or allow the borrower multiple payment options.
All residential mortgages are originated based on a completed full appraisal during the credit underwriting process. We update values on a regular basis in compliance with applicable regulations to facilitate our portfolio management, as well as our workout and loss mitigation functions.
A majority of the loans in our portfolio have adjustable rates. These ARMs comprised approximately 53% of our total residential mortgage loan portfolio at September 30, 2011. At September 30, 2011, ARM loans that were expected to have rates reset totaled $1.5 billion through 2014. 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 value. Given the quality of our borrowers and the relatively low current 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. Our ARM portfolio has performed substantially better than the fixed-rate portfolio in part due to this proactive management process. Additionally, when borrowers are experiencing payment difficulties, loans may be reunderwritten based on the borrower’s ability to repay the loan.
Several government actions were enacted that impacted the residential mortgage portfolio, including various refinance programs which positively affected the availability of credit for the industry. We are utilizing these programs to enhance our existing strategy of working closely with our customers.
Financial Institution Exposure Risk
In the normal course of business, we engage with other financial institutions for a variety of purposes resulting from ordinary banking activities such as payment processing, transactions entered into for risk management purposes (see Note 14 of the Notes to Unaudited Condensed Consolidated Financial Statements) , and for investment diversification. As a result, we are exposed to credit risk, or risk of loss, if the other financial institution fails to perform according to the terms of our contract or agreement.
Current European credit pressures have increased concerns about correlated adverse effects upon financial institutions. Specifically, there has been heightened emphasis on direct credit exposure to certain sovereigns, in particular, Greece, Ireland, Portugal, Spain and Italy, as well as to financial institutions headquartered in those countries. We conduct significant due diligence on each financial institution prior to approval as a counterparty. Our Treasury Credit Risk group within Credit Administration is responsible for the initial risk assessment as well as on-going monitoring. We actively manage the level of exposure to each financial institution, with regular assessment of the exposure limits by our Credit Policy and Strategy Committee. We believe our overall exposure to financial institution exposure risk, including direct credit exposure to any of these sovereigns and their banks, is not significant. Nonetheless, we minimize this risk through increased frequency and degree of monitoring of each contract or agreement as we manage the risk exposure on a real-time basis over the course of each day.
Credit Quality
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.

 

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Credit quality performance in the 2011 third quarter reflected a continued improvement in the levels of our NCOs, NALs, and commercial Criticized assets. Although the commercial Criticized asset levels continued to decline, there was an increase in new commercial Criticized asset inflows compared to the prior quarter. The inflow of new commercial Criticized assets was across all business segments and included one large relationship. We do not believe the increase in this current quarter’s commercial Criticized assets to be either an indication of a future increase in the overall level of commercial Criticized loans or a widespread deterioration in commercial credit performance. Also, our ACL coverage ratios improved compared to the prior quarter. Specifically, our ACL as a percentage of NALs improved to 187% at September 30, 2011 compared with 181% at June 30, 2011 and 166% at December 31, 2010.
NPAs, NALs, AND TDRs
NPAs and NALs
(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)
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.
C&I and CRE loans are placed on nonaccrual status at no greater than 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 and second-lien home equity loans are placed on nonaccrual status at 150-days past due and 120-days past due, respectively. Automobile and other consumer loans are not placed on nonaccrual status, but 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 20 — Nonaccrual Loans and Leases and Nonperforming Assets
                                         
    2011     2010  
(dollar amounts in thousands)   September 30,     June 30,     March 31,     December 31,     September 30,  
 
                                       
Nonaccrual loans and leases:
                                       
Commercial and industrial
  $ 209,632     $ 229,327     $ 260,397     $ 346,720     $ 398,353  
Commercial real estate
    257,086       291,500       305,793       363,692       478,754  
Residential mortgage
    61,129       59,853       44,812       45,010       82,984  
Home equity
    37,156       33,545       25,255       22,526       21,689  
 
                             
Total nonaccrual loans and leases
    565,003       614,225       636,257       777,948       981,780  
Other real estate owned, net
                                       
Residential
    18,588       20,803       28,668       31,649       65,775  
Commercial
    19,418       17,909       25,961       35,155       57,309  
 
                             
Total other real estate owned, net
    38,006       38,712       54,629       66,804       123,084  
Other nonperforming assets (1)
    10,972                          
 
                             
Total nonperforming assets
  $ 613,981     $ 652,937     $ 690,886     $ 844,752     $ 1,104,864  
 
                             
 
                                       
Nonaccrual loans as a % of total loans and leases
    1.45 %     1.57 %     1.66 %     2.04 %     2.62 %
Nonperforming assets ratio (2)
    1.57       1.67       1.80       2.21       2.94  
 
                                       
Nonperforming Franklin assets:
                                       
Residential mortgage
  $     $     $     $     $  
Home equity
                             
OREO
    534       883       5,971       9,477       15,330  
Impaired loans held for sale
                             
 
                             
Total nonperforming Franklin assets
  $ 534     $ 883     $ 5,971     $ 9,477     $ 15,330  
 
                             
     
(1)  
Other nonperforming assets represent an investment security backed by a municipal bond.
 
(2)  
This ratio is calculated as nonperforming assets divided by the sum of loans and leases, other nonperforming assets, and net other real estate.
The $39.0 million, or 6%, decline in NPAs compared with June 30, 2011, primarily reflected:
   
$34.4 million, or 12%, decline in CRE NALs, reflecting both NCO activity and problem credit resolutions, including borrower payments and payoffs. We continue to focus on early recognition of risks through our on-going portfolio management processes.
   
$19.7 million, or 9%, decline in C&I NALs, reflecting both NCO activity and problem credit resolutions, including payoffs. The decline was associated with loans throughout our footprint, with no specific industry concentration.
Partially offset by:
   
$11.0 million increase in other NPAs reflecting an investment security backed by a municipal bond.
   
$3.6 million, or 11%, increase in home equity NALs, primarily reflecting the current weak economic conditions and the continued decline of residential real estate property values. Home equity NALs have been written down to net realizable value, less anticipated selling costs, which substantially limits any significant future risk of loss.
As part of our loss mitigation process, we reunderwrite, modify, or restructure loans when borrowers are experiencing payment difficulties, based on the borrower’s ability to repay the loan.

 

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Compared with December 31, 2010, NPAs decreased $230.8 million, or 27%, primarily reflecting:
   
$137.1 million, or 40%, decline in C&I NALs, reflecting both NCO activity and problem credit resolutions, including payoffs. The decline was associated with loans throughout our footprint, with no specific geographic concentration. From an industry perspective, improvement in the manufacturing-related segment accounted for a significant portion of the decrease.
   
$106.6 million, or 29%, decline in CRE NALs, reflecting both NCO activity and problem credit resolutions, including borrower payments and payoffs. This decline was a direct result of our on-going proactive management of these credits by our SAD.
   
$28.8 million, or 43%, decrease in OREO properties, reflecting lower inflow levels combined with aggressive sales activities.
Partially offset by:
   
$16.1 million, or 36%, increase in residential mortgage NALs, reflecting the current weak economic conditions and the continued decline in residential real estate property values, as well as a change in our nonaccrual policy (see Consumer Credit section).
   
$14.6 million, or 65%, increase in home equity NALs, also reflecting the current weak economic conditions and the continued decline in residential real estate property values, as well as a change in our nonaccrual policy (see Consumer Credit section).
   
$11.0 million increase in other NPAs reflecting an investment security backed by a municipal bond.
NPA activity for each of the past five quarters was as follows:
Table 21- Nonperforming Asset Activity
                                         
    2011     2010  
(dollar amounts in thousands)   Third     Second     First     Fourth     Third  
 
                                       
Nonperforming assets, beginning of period
  $ 652,937     $ 690,886     $ 844,752     $ 1,104,864     $ 1,582,702  
New nonperforming assets
    153,626       210,255       192,044       237,802       278,388  
Franklin-related impact, net
    (349 )     (5,088 )     (3,506 )     (5,853 )     (251,412 )
Returns to accruing status
    (25,794 )     (68,429 )     (70,886 )     (100,051 )     (111,168 )
Loan and lease losses
    (79,992 )     (74,945 )     (128,730 )     (126,047 )     (151,013 )
Other real estate owned gains (losses)
    (242 )     388       1,492       (5,117 )     (5,302 )
Payments
    (76,510 )     (73,009 )     (87,041 )     (191,296 )     (210,612 )
Sales
    (9,695 )     (27,121 )     (57,239 )     (69,550 )     (26,719 )
 
                             
 
                                       
Nonperforming assets, end of period
  $ 613,981     $ 652,937     $ 690,886     $ 844,752     $ 1,104,864  
 
                             
As discussed previously, residential mortgage loans are placed on nonaccrual status at 150-days past due, with the exception of residential mortgage loans guaranteed by government organizations which continue to accrue interest, and first-lien and second-lien home equity loans and lines-of-credit are placed on nonaccrual status at 150-days past due and 120-days past due, respectively.

 

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The following table reflects period-end accruing loans and leases 90 days or more past due for each of the last five quarters:
Table 22 — Accruing Past Due Loans and Leases
                                         
    2011     2010  
(dollar amounts in thousands)   September 30,     June 30,     March 31,     December 31,     September 30,  
Accruing loans and leases past due 90 days or more:
                                       
Commercial and industrial
  $     $     $     $     $  
Residential mortgage (excluding loans guaranteed by the U.S. government)
    32,850       33,975       41,858       53,983       56,803  
Home equity
    20,420       17,451       24,130       23,497       27,160  
Other consumer
    7,755       6,227       7,578       10,177       11,423  
 
                             
Total, excl. loans guaranteed by the U.S. government
    61,025       57,653       73,566       87,657       95,386  
Add: loans guaranteed by the U.S. government
    84,413       76,979       94,440       98,288       94,249  
 
                             
Total accruing loans and leases past due 90 days or more, including loans guaranteed by the U.S. government
  $ 145,438     $ 134,632     $ 168,006     $ 185,945     $ 189,635  
 
                             
 
                                       
Ratios: (1)
                                       
 
                                       
Excluding loans guaranteed by the U.S. government, as a percent of total loans and leases
    0.16 %     0.15 %     0.19 %     0.23 %     0.25 %
 
                                       
Guaranteed by the U.S. government, as a percent of total loans and leases
    0.21       0.19       0.25       0.26       0.26  
 
                                       
Including loans guaranteed by the U.S. government, as a percent of total loans and leases
    0.37       0.34       0.44       0.49       0.51  
     
(1)  
Ratios are calculated as a percentage of related loans and leases.
Loans guaranteed by the U.S. government accrue interest at the rate guaranteed by the government agency. We are reimbursed from the government agency for reasonable expenses incurred in servicing loans. The FHA reimburses us for 66% of expenses, and the VA reimburses us at a maximum percentage of guarantee which is established for each individual loan. We have not experienced either material losses in excess of guarantees caps or significant delays or rejected claims from the related government entity.
The over 90-day delinquency ratio for total loans not guaranteed by a U.S. government agency was 0.16% at September 30, 2011, representing an 7 basis point decline compared with December 31, 2010. This decline reflected the sale of certain loans in this category.
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.

 

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The table below presents our accruing and nonaccruing TDRs at period-end for each of the past five quarters:
Table 23 — Accruing and Nonaccruing Troubled Debt Restructured Loans
                                         
    2011     2010  
(dollar amounts in thousands)   September 30,     June 30,     March 31,     December 31,     September 30,  
Troubled debt restructured loans — accruing:
                                       
 
Residential mortgage
  $ 304,365     $ 313,772     $ 333,492     $ 328,411     $ 304,356  
Other consumer (1)
    89,596       75,036       78,488       76,586       73,210  
Commercial
    321,598       240,126       206,462       222,632       157,971  
 
                             
 
Total troubled debt restructured loans — accruing
    715,559       628,934       618,442       627,629       535,537  
 
Troubled debt restructured loans — nonaccruing:
                                       
 
Residential mortgage
    20,877       14,378       8,523       5,789       10,581  
Other consumer (1)
    279       140       14              
Commercial
    74,264       77,745       37,858       33,462       33,236  
 
                             
Total troubled debt restructured loans — nonaccruing
    95,420       92,263       46,395       39,251       43,817  
 
                             
Total troubled debt restructured loans
  $ 810,979     $ 721,197     $ 664,837     $ 666,880     $ 579,354  
 
                             
     
(1)  
Includes automobile, home equity, and other consumer TDRs.
TDRs primarily reflect our loss mitigation efforts to proactively work with borrowers having difficulty making their payments. Within commercial accruing TDRs, $40.1 million of the increase from the prior quarter reflected a change based on clarifying language in the FASB’s ASU 2011-02 — Receivables (Topic 310), A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring , related to when a TDR designation is removed.
ACL
(This section should be read in conjunction with Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.)
We maintain two reserves, both of which in our judgment are appropriate to absorb credit losses inherent in our loan and lease portfolio: the ALLL and the AULC. Combined, these reserves comprise the total ACL. Our Credit Administration group is responsible for developing the methodology assumptions and estimates used in the calculation, as well as determining the appropriateness of the ACL. The ALLL represents the estimate of losses inherent in the loan portfolio at the reported date. Additions to the ALLL result from recording provision expense for loan losses or increased risk levels resulting from loan risk-rating downgrades, while reductions reflect charge-offs, recoveries, decreased risk levels resulting from loan risk-rating upgrades, or the sale of loans. The AULC is determined by applying the transaction reserve process to the unfunded portion of the loan exposures adjusted by an applicable funding expectation.
A provision for credit losses is recorded to adjust the ACL to the level we have determined to be appropriate to absorb credit losses inherent in our loan and lease portfolio. The provision for credit losses in the 2011 third quarter was $43.6 million, compared with $35.8 million in the prior quarter and $119.2 million in the year-ago quarter. (See Provision for Credit Losses discussion).
We regularly evaluate the appropriateness of the ACL by performing on-going evaluations of the loan and lease portfolio, including such factors as the differing economic risks associated with each loan category, the financial condition of specific borrowers, the level of delinquent loans, the value of any collateral and, where applicable, the existence of any guarantees or other documented support. We evaluate the impact of changes in interest rates and overall economic conditions on the ability of borrowers to meet their financial obligations when quantifying our exposure to credit losses and assessing the appropriateness of our ACL at each reporting date. In addition to general economic conditions and the other factors described above, we also consider the impact of declining residential real estate values and the diversification of CRE loans, particularly loans secured by retail properties.
Our ACL evaluation process includes the on-going assessment of credit quality metrics, and a comparison of certain ACL benchmarks to current performance. While the total ACL balance has declined in recent quarters, all of the relevant benchmarks improved as a result of the asset quality improvement. The coverage ratios of NALs, Criticized, and Classified loans have significantly improved in recent quarters despite the decline in the ACL level. For example, the ACL coverage ratio associated with NALs was 187% at September 30, 2011, compared with 166% at December 31, 2010 and 140% at September 30, 2010.

 

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The table below reflects activity in the ALLL and the AULC for each of the last five quarters:
Table 24 — Quarterly Allowance for Credit Losses Analysis
                                         
    2011     2010  
(dollar amounts in thousands)   Third     Second     First     Fourth     Third  
Allowance for loan and lease losses, beginning of period
  $ 1,071,126     $ 1,133,226     $ 1,249,008     $ 1,336,352     $ 1,402,160  
Loan and lease losses
    (115,899 )     (128,701 )     (199,007 )     (205,587 )     (221,144 )
Recoveries of loans previously charged-off
    25,344       31,167       33,924       33,336       36,630  
 
                             
Net loan and lease losses
    (90,555 )     (97,534 )     (165,083 )     (172,251 )     (184,514 )
 
                             
Provision for loan and lease losses
    45,867       36,948       49,301       84,907       118,788  
Allowance for assets sold
    (6,728 )     (1,514 )                 (82 )
 
                             
 
                                       
Allowance for loan and lease losses, end of period
  $ 1,019,710     $ 1,071,126     $ 1,133,226     $ 1,249,008     $ 1,336,352  
 
                             
 
                                       
Allowance for unfunded loan commitments and letters of credit, beginning of period
  $ 41,060     $ 42,211     $ 42,127     $ 40,061     $ 39,689  
 
                                       
Provision for (reduction in) unfunded loan commitments and letters of credit losses
    (2,281 )     (1,151 )     84       2,066       372  
 
                             
Allowance for unfunded loan commitments and letters of credit, end of period
  $ 38,779     $ 41,060     $ 42,211     $ 42,127     $ 40,061  
 
                             
Total allowance for credit losses, end of period
  $ 1,058,489     $ 1,112,186     $ 1,175,437     $ 1,291,135     $ 1,376,413  
 
                             
 
                                       
Allowance for loan and lease losses as % of:
                                       
 
Total loans and leases
    2.61 %     2.74 %     2.96 %     3.28 %     3.56 %
Nonaccrual loans and leases
    180       174       178       161       136  
Nonperforming assets
    166       164       164       148       121  
 
                                       
Total allowance for credit losses as % of:
                                       
 
Total loans and leases
    2.71 %     2.84 %     3.07 %     3.39 %     3.67 %
Nonaccrual loans and leases
    187       181       185       166       140  
Nonperforming assets
    172       170       170       153       125  
The table below reflects the allocation of our ACL among our various loan categories during each of the past five quarters:
Table 25 — Allocation of Allowance for Credit Losses (1)
                                                                                 
    2011     2010  
(dollar amounts in thousands)   September 30,     June 30,     March 31,     December 31,     September 30,  
 
                                                                               
Commercial
                                                                               
Commercial and industrial
  $ 285,254       36 %   $ 281,016       35 %   $ 299,564       35 %   $ 340,614       34 %   $ 353,431       33 %
Commercial real estate
    418,895       15       463,874       16       511,068       17       588,251       18       654,219       18  
 
                                                           
 
                                                                               
Total commercial
    704,149       51       744,890       51       810,632       52       928,865       52       1,007,650       51  
 
                                                           
 
                                                                               
Consumer
                                                                               
 
                                                                               
Automobile
    49,402       14       55,428       16       50,862       15       49,488       15       44,505       14  
 
                                                                               
Home equity
    139,616       21       146,444       20       149,370       20       150,630       20       154,323       21  
 
                                                                               
Residential mortgage
    98,974       13       98,992       12       96,741       12       93,289       12       93,407       12  
 
                                                                               
Other consumer
    27,569       1       25,372       1       25,621       1       26,736       1       36,467       2  
 
                                                           
 
                                                                               
Total consumer
    315,561       49       326,236       49       322,594       48       320,143       48       328,702       49  
 
                                                           
Total allowance for loan and lease losses
    1,019,710       100 %     1,071,126       100 %     1,133,226       100 %     1,249,008       100 %     1,336,352       100 %
 
                                                           
Allowance for unfunded loan commitments
    38,779               41,060               42,211               42,127               40,061          
 
                                                           
Total allowance for credit losses
  $ 1,058,489             $ 1,112,186             $ 1,175,437             $ 1,291,135             $ 1,376,413          
 
                                                           
     
(1)  
Percentages represent the percentage of each loan and lease category to total loans and leases.

 

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The reduction in the ALLL, compared with both June 30, 2011, and December 31, 2010, reflected declines in the ALLL in both the commercial and consumer portfolios.
The decline in the commercial-related ALLL reflected NCOs on loans with specific reserves, and an overall reduction in the level of commercial Criticized loans. Commercial Criticized loans are commercial loans rated as OLEM, Substandard, Doubtful, or Loss. As shown in the table below, commercial Criticized loans declined $88.1 million from June 30, 2011, and $783.4 million from December 31, 2010, reflecting significant upgrade and payment activity.
Table 26 — Criticized Commercial Loan Activity
                                         
    2011     2010  
(dollar amounts in thousands)   Third     Second     First     Fourth     Third  
 
                                       
Criticized commercial loans, beginning of period
  $ 2,379,150     $ 2,660,792     $ 3,074,481     $ 3,637,533     $ 4,106,602  
New additions / increases
    357,057       250,422       169,884       289,850       407,514  
Advances
    46,148       44,442       61,516       52,282       75,386  
Upgrades to Pass
    (252,388 )     (271,698 )     (238,518 )     (382,713 )     (391,316 )
Payments
    (180,845 )     (231,819 )     (294,564 )     (401,302 )     (408,698 )
Loan losses
    (58,035 )     (72,989 )     (112,008 )     (121,169 )     (151,955 )
 
                             
Criticized commercial loans, end of period
  $ 2,291,088     $ 2,379,150     $ 2,660,792     $ 3,074,481     $ 3,637,533  
 
                             
The decline in the consumer-related ALLL primarily reflected the impact of the 2011 third quarter automobile securitization (see Automobile Portfolio discussion) as well as a decrease in the home equity-related ALLL as a result of lower delinquency levels, partially offset by an increase in the mortgage-related ALLL as a result of increased residential mortgage-related balances.
The entire loan and lease portfolio has shown steadily improving credit quality trends throughout 2010 and 2011. The ACL to total loans declined to 2.71% at September 30, 2011 compared to 3.39% at December 31, 2010. We believe the decline in the ratio is appropriate given the continued improvement in the risk profile of our loan portfolio. Further, we believe that early identification of problem loans and aggressive action plans for these problem loans, combined with originating high quality new loans will contribute to continued improvement in our key credit quality metrics. However, the continued weakness in the residential real estate market and the overall economic conditions remained stressed, and additional risks emerged during the first nine-month period of 2011. These additional risks included the European banking sector stress, the continued budget issues in local governments, flat domestic economic growth, and the variety of policy proposals regarding job growth, debt management, and domestic tax policy. Continued high unemployment, among other factors, has slowed any significant recovery. In the near-term, we anticipate a continued high unemployment rate and the concern around the U.S. and local government budget issues will continue to negatively impact the financial condition of some of our retail and commercial borrowers. The pronounced downturn in the residential real estate market that began in early 2007 has resulted in significantly lower residential real estate values. We have significant exposure to loans secured by residential real estate and continue to be an active lender in our communities. The impact of the downturn in real estate values has had a significant impact on some of our borrowers as evidenced by the higher delinquencies and NCOs since late 2007. We do not anticipate any meaningful economic improvement in the near-term. All of these factors are impacting consumer confidence, as well as business investments and acquisitions. Given the combination of these noted factors, we believe that our ACL is appropriate and its coverage level is reflective of the quality of our portfolio and the current operating environment.

 

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The table below reflects activity in the ALLL and AULC for the first nine-month periods ended September 30, 2011 and 2010.
Table 27 — Year to Date Allowance for Credit Losses Analysis
                 
    Nine Months Ended September 30,  
(dollar amounts in thousands)   2011     2010  
 
               
Allowance for loan and lease losses, beginning of period
  $ 1,249,008     $ 1,482,479  
Loan and lease losses
    (443,607 )     (798,320 )
Recoveries of loans previously charged-off
    90,435       96,097  
 
           
Net loan and lease losses
    (353,172 )     (702,223 )
Provision for loan and lease losses
    132,116       556,392  
Allowance for assets sold
    (8,242 )     (296 )
 
           
 
               
Allowance for loan and lease losses, end of period
  $ 1,019,710     $ 1,336,352  
 
           
Allowance for unfunded loan commitments and letters of credit, beginning of period
  $ 42,127     $ 48,879  
Provision for (reduction in) unfunded loan commitments and letters of credit losses
    (3,348 )     (8,818 )
 
           
Allowance for unfunded loan commitments and letters of credit, end of period
  $ 38,779     $ 40,061  
 
           
 
               
Total allowance for credit losses
  $ 1,058,489     $ 1,376,413  
 
           
 
               
Allowance for loan and lease losses as % of:
               
Total loans and leases
    2.61 %     3.56 %
Nonaccrual loans and leases
    180       136  
Nonperforming assets
    166       121  
 
               
Total allowance for credit losses as % of:
               
Total loans and leases
    2.71 %     3.67 %
Nonaccrual loans and leases
    187       140  
Nonperforming assets
    172       125  
NCOs
(This section should be read in conjunction with Significant Item 2 and the Franklin-related Impacts section.)
Any loan in any portfolio may be charged-off prior to the policies described below if a loss confirming event has occurred. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency and that asset is the sole source of repayment.
C&I and CRE loans are either charged-off or written down to net realizable value at 90-days past due. Automobile loans and other consumer loans are charged-off at 120-days past due. First-lien and second-lien home equity loans are charged-off to the estimated fair value of the collateral at 150-days past due and 120-days past due, respectively. Residential mortgages are charged-off to the estimated fair value of the collateral at 150-days past due.

 

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The following table reflects NCO detail for each of the last five quarters:
Table 28 — Quarterly Net Charge-off Analysis
                                         
    2011     2010  
(dollar amounts in thousands)   Third     Second     First     Fourth     Third  
Net charge-offs by loan and lease type:
                                       
Commercial:
                                       
Commercial and industrial
  $ 17,891     $ 18,704     $ 42,191     $ 59,124     $ 62,241  
Commercial real estate:
                                       
Construction
    1,450       4,145       28,400       11,084       17,936  
Commercial
    22,990       23,450       39,283       33,787       45,725  
 
                             
Commercial real estate
    24,440       27,595       67,683       44,871       63,661  
 
                             
Total commercial
    42,331       46,299       109,874       103,995       125,902  
 
                             
Consumer:
                                       
Automobile
    3,863       2,255       4,712       7,035       5,570  
Home equity
    26,222       25,441       26,715       29,175       27,827  
Residential mortgage (1)
    11,562       16,455       18,932       26,775       18,961  
Other consumer
    6,577       7,084       4,850       5,271       6,254  
 
                             
Total consumer
    48,224       51,235       55,209       68,256       58,612  
 
                             
Total net charge-offs
  $ 90,555     $ 97,534     $ 165,083     $ 172,251     $ 184,514  
 
                             
 
                                       
Net charge-offs — annualized percentages:
                                       
Commercial:
                                       
Commercial and industrial
    0.52 %     0.56 %     1.29 %     1.85 %     2.01 %
Commercial real estate:
                                       
Construction
    0.87       2.99       18.59       6.19       7.25  
Commercial
    1.69       1.65       2.66       2.22       3.01  
 
                             
Commercial real estate
    1.60       1.77       4.15       2.64       3.60  
 
                             
Total commercial
    0.86       0.94       2.24       2.13       2.59  
 
                             
Consumer:
                                       
Automobile
    0.25       0.15       0.33       0.51       0.43  
Home equity
    1.31       1.29       1.38       1.51       1.47  
Residential mortgage (1)
    0.97       1.44       1.70       2.42       1.73  
Other consumer
    5.05       5.27       3.47       3.66       3.83  
 
                             
Total consumer
    0.99       1.08       1.20       1.50       1.32  
 
                             
Net charge-offs as a % of average loans
    0.92 %     1.01 %     1.73 %     1.82 %     1.98 %
 
                             
     
(1)  
The 2010 fourth quarter included net charge-offs of $16,389 thousand related to the sale of certain underperforming residential mortgage loans.
In assessing NCO trends, it is helpful to understand the process of how these loans are treated as they deteriorate over time. The ALLL established at origination is consistent with the level of risk associated with the original underwriting. As a part of our normal portfolio management process for commercial loans, the loan is periodically reviewed and the ALLL is increased or decreased as warranted. If the quality of a loan has deteriorated, it migrates to a lower quality risk rating, requiring a higher ALLL amount. Charge-offs, if necessary, are generally recognized in a period after the specific ALLL was established. If the previously established ALLL exceeds that needed to satisfactorily resolve the problem loan, a reduction in the overall level of the ALLL could be recognized. In summary, if loan quality deteriorates, the typical credit sequence would be periods of ALLL building, followed by periods of higher NCOs as the previously established ALLL is utilized. Additionally, an increase in the ALLL either precedes or is in conjunction with increases in NALs. When a loan is classified as NAL, it is evaluated for specific ALLL or charge-off. As a result, an increase in NALs does not necessarily result in an increase in the ALLL or an expectation of higher future NCOs.
Residential mortgage NCO annualized percentages generally are greater than those of the home equity portfolio. The NCO annualized percentage in the home equity portfolio is the result of a higher quality customer base as measured by FICO distribution and a substantial portion of the growth is represented by first-lien positions. Additionally, we accelerated the charge-off policy associated with the residential mortgage portfolio in 2010 which shortened the maximum timeframe to charge-off and, during 2011, have executed two NPL sales in the residential mortgage portfolio with resulting charge-offs.

 

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2011 Third Quarter versus 2011 Second Quarter
C&I NCOs declined $0.8 million, or 4%. CRE NCOs decreased $3.2 million, or 11%. These declines were evident across our geographic footprint and generally associated with small relationships. The performance of both portfolios was consistent with our expectations. Based on asset quality trends, we continue to anticipate this lower level of CRE NCOs in future quarters.
Automobile NCOs increased $1.6 million, or 71%. The current quarter’s performance was consistent with our expectations. The prior quarter’s NCOs were historically low reflecting a combination of low delinquency levels and a strong resale market for used vehicles.
Home equity NCOs increased $0.8 million, or 3%. Although the performance of this portfolio continues to be impacted by the weakened overall economy and the continued decline in home values, this slight increase was consistent with our expectations. We continue to manage the default rate through focused delinquency monitoring as essentially all defaults for second-lien home equity loans incur significant losses reflecting the reduction of equity associated with the collateral property.
Residential mortgage NCOs declined $4.9 million, or 30%, consistent with our expectations for a continued downward trend in this portfolio.

 

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The following table reflects NCO activity for the first nine-month periods ended September 30, 2011 and 2010:
Table 29 — Year to Date Net Charge-off Analysis
                 
    Nine Months Ended September 30,  
(dollar amounts in thousands)   2011     2010  
Net charge-offs by loan and lease type:
               
Commercial:
               
Commercial and industrial
  $ 78,786     $ 195,808  
Commercial real estate:
               
Construction
    33,995       97,924  
Commercial
    85,723       132,767  
 
           
Commercial real estate
    119,718       230,691  
 
           
 
               
Total commercial
    198,504       426,499  
 
           
Consumer:
               
Automobile
    10,830       19,537  
Home equity (1)
    78,378       110,198  
Residential mortgage (2)
    46,949       126,120  
Other loans
    18,511       19,869  
 
           
 
               
Total consumer
    154,668       275,724  
 
           
 
               
Total net charge-offs
  $ 353,172     $ 702,223  
 
           
 
               
Net charge-offs — annualized percentages:
               
Commercial:
               
Commercial and industrial
    0.78 %     2.12 %
Commercial real estate:
               
Construction
    7.41       10.67  
Commercial
    2.01       2.88  
 
           
Commercial real estate
    2.54       4.17  
 
           
 
               
Total commercial
    1.35       2.89  
 
           
Consumer:
               
Automobile
    0.24       0.56  
Home equity (1)
    1.33       1.95  
Residential mortgage (2)
    1.36       3.74  
Other loans
    4.58       3.84  
 
           
 
               
Total consumer
    1.09       2.11  
 
           
 
               
Net charge-offs as a % of average loans
    1.22 %     2.52 %
 
           
     
(1)  
The 2010 first nine-month period included net charge-offs totaling $14,678 thousand associated with the transfer of Franklin-related home equity loans to loans held for sale and $6,143 thousand of other Franklin-related net charge-offs.
 
(2)  
The 2010 first nine-month period included net charge-offs totaling $60,822 thousand associated with the transfer of Franklin-related residential mortgage loans to loans held for sale and $14,914 thousand of other Franklin-related net charge-offs.
2011 First Nine Months versus 2010 First Nine Months
C&I NCOs decreased $117.0 million, or 60%. CRE NCOs decreased $111.0 million, or 48%. These declines primarily reflected significant credit quality improvement in the underlying portfolio as well as our on-going proactive credit management practices.
Automobile NCOs decreased $8.7 million, or 45%, reflected our consistent high quality origination profile, as well as a stronger market for used automobiles. This focus on origination quality has been the primary driver for the improvement in this portfolio in the current period compared with the year-ago period.
Home equity NCOs declined $31.8 million, or 29%. The first nine-month period of 2010 included $20.7 million of Franklin-related NCOs compared with no Franklin-related NCOs in the current period. Excluding the Franklin-related impacts, home equity NCOs decreased $11.1 million compared with the first nine-month period of 2010. Although the performance of this portfolio continued to be impacted by the overall weak economic conditions and the continued decline of residential real estate property values, the performance was consistent with our expectations for the portfolio.

 

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Residential mortgage NCOs declined $79.2 million, or 63%. The first nine-month period of 2010 included $75.7 million of Franklin-related net charge-offs, and the first nine-month period of 2011 included Franklin-related net recoveries of $2.5 million. Excluding the Franklin impacts, residential mortgage NCOs decreased $1.0 million compared with the first nine-month period of 2010. Additionally, the first nine-month period of 2011 included $6.8 million of NCOs related to a change in loss recognition policy (see Consumer Credit section). Excluding these impacts, performance was consistent with our expectations for a continued downward trend in this portfolio.
Market Risk
Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, foreign exchange rates, equity prices, credit spreads, and expected lease residual values. We have identified two primary sources of market risk: interest rate risk and price risk.
Interest Rate Risk
OVERVIEW
Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (reprice risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a non-parallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR (basis risk).
INCOME SIMULATION AND ECONOMIC VALUE ANALYSIS
Interest rate risk measurement is performed monthly. Two broad approaches to modeling interest rate risk are employed: income simulation and economic value analysis. An income simulation analysis is used to measure the sensitivity of forecasted ISE to changes in market rates over a one-year time period. Although bank owned life insurance, automobile operating lease assets, and excess cash balances held at the Federal Reserve Bank are classified as noninterest-earning assets, and the net revenue from these assets is recorded in noninterest income and noninterest expense, these portfolios are included in the interest sensitivity analysis because they have attributes similar to interest-earning assets. EVE analysis is used to measure the sensitivity of the values of period-end assets and liabilities to changes in market interest rates. EVE analysis serves as a complement to ISE analysis as it provides risk exposure estimates for time periods beyond the one-year simulation period.
The models used for these measurements take into account prepayment speeds on mortgage loans, mortgage-backed securities, and consumer installment loans, as well as cash flows of other assets and liabilities. Balance sheet growth assumptions are also considered in the ISE analysis. The models include the effects of derivatives, such as interest rate swaps, caps, floors, and other types of interest rate options.
The baseline scenario for ISE analysis, with which all other scenarios are compared, is based on market interest rates implied by the prevailing yield curve as of the period-end. Alternative interest rate scenarios are then compared with the baseline scenario. These alternative interest rate scenarios include parallel rate shifts on both a gradual and an immediate basis, movements in interest rates that alter the shape of the yield curve (e.g., flatter or steeper yield curve), and no changes in current interest rates for the entire measurement period. Scenarios are also developed to measure short-term repricing risks, such as the impact of LIBOR-based interest rates rising or falling faster than the prime rate.
The simulations for evaluating short-term interest rate risk exposure are scenarios that model gradual +/-100 and +/-200 basis points parallel shifts in market interest rates over the next one-year period beyond the interest rate change implied by the current yield curve. We assumed market interest rates would not fall below 0% over the next one-year period for the scenarios that used the -100 and -200 basis points parallel shift in market interest rates. The table below shows the results of the scenarios as of September 30, 2011, and December 31, 2010. All of the positions were within the board of directors’ policy limits as of September 30, 2011.

 

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Table 30 — Interest Sensitive Earnings at Risk
                                 
    Interest Sensitive Earnings at Risk (%)  
Basis point change scenario
    -200       -100       +100       +200  
 
                       
Board policy limits
    -4.0 %     -2.0 %     -2.0 %     -4.0 %
 
                       
September 30, 2011
    -2.1       -1.3       1.1       2.2  
December 31, 2010
    -3.2       -1.8       0.3       0.0  
The ISE at risk reported as of September 30, 2011, for the +200 basis points scenario shows a significant change to an asset sensitive near-term interest rate risk position compared with December 31, 2010. The ALCO’s strategy is to be near-term asset-sensitive to a rising rate scenario. The primary factors contributing to this change are the 2011 first quarter termination of $4.5 billion of interest rate swaps maturing through June 2012, offset slightly by $1.8 billion of interest rate swaps executed in the 2011 second and third quarters, and the impact of lower interest rates on mortgage asset prepayments.
The following table shows the income sensitivity of select portfolios to changes in market interest rates. A portfolio with 100% sensitivity would indicate that interest income and expense will change with the same magnitude and direction as interest rates. A portfolio with 0% sensitivity is insensitive to changes in interest rates. For the +200 basis points scenario, total interest-sensitive income is 36.8% sensitive to changes in market interest rates, while total interest-sensitive expense is 40.2% sensitive to changes in market interest rates. However, net interest income at risk for the +200 basis points scenario has an asset-sensitive near-term interest rate risk position because of the larger base of total interest-sensitive income relative to total interest-sensitive expense.
Table 31 — Interest Income/Expense Sensitivity
                                         
    Percent of     Percent Change in Interest Income/Expense for a Given  
    Total Earning     Change in Interest Rates  
    Assets (1)     Over / (Under) Base Case Parallel Ramp  
Basis point change scenario
            -200       -100       +100       +200  
 
                               
Total loans
    80 %     -16.2 %     -25.3 %     37.9 %     39.4 %
Total investments and other earning assets
    20       -17.8       -22.1       32.5       30.2  
Total interest sensitive income
            -16.0       -24.0       36.1       36.8  
 
                             
Total interest-bearing deposits
    71       -11.5       -18.9       35.5       36.5  
Total borrowings
    11       -21.0       -37.6       62.7       66.0  
Total interest-sensitive expense
            -12.7       -21.2       38.9       40.2  
 
                             
     
(1)  
At September 30, 2011.
The primary simulations for EVE at risk assume immediate +/-100 and +/-200 basis points parallel shifts in market interest rates beyond the interest rate change implied by the current yield curve. The table below outlines the September 30, 2011, results compared with December 31, 2010. All of the positions were within the board of directors’ policy limits.
Table 32 — Economic Value of Equity at Risk
                                 
    Economic Value of Equity at Risk (%)  
Basis point change scenario
    -200       -100       +100       +200  
 
                       
Board policy limits
    -12.0 %     -5.0 %     -5.0 %     -12.0 %
 
                       
September 30, 2011
    -4.2       -0.7       -1.0       -3.3  
December 31, 2010
    -0.5       1.3       -4.0       -8.9  
The EVE at risk reported as of September 30, 2011, for the +200 basis points scenario shows a change to a lower long-term liability sensitive position compared with December 31, 2010. The primary factors contributing to this change are the impact of lower interest rates on mortgage asset prepayments, the growth in low-cost deposits, and the 2011 first quarter termination of $4.5 billion of interest rate swaps maturing through June 2012, offset slightly by $1.8 billion of interest rate swaps executed in the 2011 second and third quarters.
The following table shows the economic value sensitivity of select portfolios to changes in market interest rates. The change in economic value for each portfolio is measured as the percent change from the base economic value for that portfolio. For the +200 basis points scenario, total net tangible assets decreased in value 3.1% to changes in market interest rates, while total net tangible liabilities increased in value 3.1% to changes in market interest rates.

 

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Table 33 — Economic Value Sensitivity
                                         
    Percent of        
    Total Net     Percent Change in Economic Value for a Given  
    Tangible     Change in Interest Rates  
    Assets (1)     Over / (Under) Base Case Parallel Shocks  
Basis point change scenario
            -200       -100       +100       +200  
 
                               
Total loans
    71 %     0.9 %     0.8 %     -1.3 %     -2.6 %
Total investments and other earning assets
    18       2.0       2.0       -2.8       -5.9  
Total net tangible assets (2)
            1.1       1.0       -1.5       -3.1  
 
                             
Total deposits
    79       -2.1       -1.4       1.7       3.3  
Total borrowings
    9       -1.1       -0.8       0.8       1.6  
Total net tangible liabilities (3)
            -2.0       -1.3       1.6       3.1  
 
                             
     
(1)  
At September 30, 2011.
 
(2)  
Tangible assets excluding ALLL.
 
(3)  
Tangible liabilities excluding AULC.
MSRs
(This section should be read in conjunction with Note 6 of Notes to Unaudited Condensed Consolidated Financial Statements.)
At September 30, 2011, we had a total of $145.3 million of capitalized MSRs representing the right to service $16.1 billion in mortgage loans. Of this $145.3 million, $73.8 million was recorded using the fair value method, and $71.5 million was recorded using the amortization method.
MSR fair values are very sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be greatly reduced by prepayments. Prepayments usually increase when mortgage interest rates decline and decrease when mortgage interest rates rise. We have employed strategies to reduce the risk of MSR fair value changes or impairment to MSRs recorded using the amortization method. In addition, we engage a third party to provide valuation tools and assistance with our strategies with the objective to decrease the volatility from MSR fair value changes or impairment to MSRs recorded using the amortization method. However, volatile changes in interest rates can diminish the effectiveness of these hedges. We typically report MSR fair value adjustments net of hedge-related trading activity in the mortgage banking income category of noninterest income. Changes in fair value between reporting dates are recorded as an increase or a decrease in mortgage banking income. We report MSRs recorded using the amortization method at the lower of cost or fair value and these MSRs generally relate to loans originated with historically low interest rates, resulting in a lower probability of prepayments and, ultimately, impairment. MSR assets are included in other assets in the Unaudited Condensed Consolidated Financial Statements.
Price Risk
Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value and are subject to fair value accounting. We have price risk from trading securities, securities owned by our broker-dealer subsidiaries, foreign exchange positions, equity investments, investments in securities backed by mortgage loans, and marketable equity securities held by our insurance subsidiaries. We have established loss limits on the trading portfolio, on the amount of foreign exchange exposure that can be maintained, and on the amount of marketable equity securities that can be held by the insurance subsidiaries.
Liquidity Risk
Liquidity risk is the risk of loss due to the possibility that funds may not be available to satisfy current or future commitments resulting from external macro market issues, investor and customer perception of financial strength, and events unrelated to us, such as war, terrorism, or financial institution market specific issues. We manage liquidity risk at both the Bank and the parent company.

 

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Bank Liquidity and Sources of Liquidity
Our primary sources of funding for the Bank are retail and commercial core deposits. At September 30, 2011, these core deposits funded 74% of total assets. At September 30, 2011, total core deposits represented 94% of total deposits, an increase from 93% at December 31, 2010.
Core deposits are comprised of interest-bearing and noninterest-bearing demand deposits, money market deposits, savings and other domestic deposits, consumer certificates of deposit both over and under $250,000, and nonconsumer certificates of deposit less than $250,000. Noncore deposits consist of brokered money market deposits and certificates of deposit, foreign time deposits, and other domestic deposits of $250,000 or more comprised primarily of public fund certificates of deposit more than $250,000.
Core deposits may increase our need for liquidity as certificates of deposit mature or are withdrawn before maturity and as nonmaturity deposits, such as checking and savings account balances, are withdrawn.
Demand deposit overdrafts that have been reclassified as loan balances were $14.0 million, $13.1 million, and $13.1 million at September 30, 2011, December 31, 2010, and September 30, 2010, respectively.
Other domestic time deposits of $250,000 or more and brokered deposits and negotiable CDs totaled $2.0 billion, $2.2 billion, and $2.3 billion at September 30, 2011, December 31, 2010, and September 30, 2010, respectively.
The following tables reflect deposit composition and short-term borrowings detail for each of the past five quarters:
Table 34 — Deposit Composition
                                                                                 
    2011     2010  
(dollar amounts in millions)   September 30,     June 30,     March 31,     December 31,     September 30,  
By Type
                                                                               
Demand deposits - noninterest-bearing
  $ 9,502       22 %   $ 8,210       20 %   $ 7,597       18 %   $ 7,217       17 %   $ 6,926       17 %
Demand deposits — interest-bearing
    5,763       13       5,642       14       5,532       13       5,469       13       5,347       13  
Money market deposits
    13,759       32       12,643       31       13,105       32       13,410       32       12,679       31  
Savings and other domestic deposits
    4,711       11       4,752       11       4,762       12       4,643       11       4,613       11  
Core certificates of deposit
    7,084       16       7,936       19       8,208       20       8,525       20       8,765       21  
 
                                                           
Total core deposits
    40,819       94       39,183       95       39,204       95       39,264       93       38,330       93  
Other domestic deposits of $250,000 or more
    421       1       436       1       531       1       675       2       730       2  
Brokered deposits and negotiable CDs
    1,535       4       1,486       4       1,253       3       1,532       4       1,576       4  
Deposits in foreign offices
    445       1       297             378       1       383       1       436       1  
 
                                                           
 
                                                                               
Total deposits
  $ 43,220       100 %   $ 41,402       100 %   $ 41,366       100 %   $ 41,854       100 %   $ 41,072       100 %
 
                                                           
 
                                                                               
Total core deposits:
                                                                               
Commercial
  $ 15,526       38 %   $ 13,541       35 %   $ 12,785       33 %   $ 12,476       32 %   $ 12,262       32 %
Consumer
    25,293       62       25,642       65       26,419       67       26,788       68       26,068       68  
 
                                                           
 
                                                                               
Total core deposits
  $ 40,819       100 %   $ 39,183       100 %   $ 39,204       100 %   $ 39,264       100 %   $ 38,330       100 %
 
                                                           

 

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Table 35 — Federal Funds Purchased and Repurchase Agreements
                                         
    2011     2010  
(dollar amounts in millions)   September 30,     June 30,     March 31,     December 31,     September 30,  
Balance at period-end
                                       
Federal Funds purchased and securities sold under agreements to repurchase
  $ 2,201     $ 1,983     $ 2,017     $ 1,966     $ 1,773  
Other short-term borrowings
    24       40       34       75       86  
 
                                       
Weighted average interest rate at period-end
                                       
Federal Funds purchased and securities sold under agreements to repurchase
    0.16 %     0.15 %     0.17 %     0.19 %     0.22 %
Other short-term borrowings
    1.01       0.69       0.92       0.53       0.40  
 
                                       
Maximum amount outstanding at month-end during the period
                                       
Federal Funds purchased and securities sold under agreements to repurchase
  $ 2,431     $ 2,361     $ 2,091     $ 2,084     $ 1,773  
Other short-term borrowings
    53       50       86       108       99  
 
                                       
Average amount outstanding during the period
                                       
Federal Funds purchased and securities sold under agreements to repurchase
  $ 2,200     $ 2,067     $ 2,064     $ 2,045     $ 1,645  
Other short-term borrowings
    51       45       69       89       94  
 
                                       
Weighted average interest rate during the period
                                       
Federal Funds purchased and securities sold under agreements to repurchase
    0.16 %     0.15 %     0.17 %     0.19 %     0.21 %
Other short-term borrowings
    0.56       0.58       0.52       0.38       0.35  
To the extent we are unable to obtain sufficient liquidity through core deposits, we may meet our liquidity needs through sources of wholesale funding. These sources include other domestic time deposits of $250,000 or more, brokered deposits and negotiable CDs, deposits in foreign offices, short-term borrowings, FHLB advances, other long-term debt, and subordinated notes. At September 30, 2011, total wholesale funding was $7.6 billion, a decrease from $8.4 billion at December 31, 2010. There are no maturities of Bank obligations until 2012, when debt maturities of $664.9 million are payable.
The Bank also has access to the Federal Reserve’s discount window. These borrowings are secured by commercial loans and home equity lines-of-credit. The Bank is also a member of the FHLB, and as such, has access to advances from this facility. These advances are generally secured by residential mortgages, other mortgage-related loans, and available-for-sale securities. Information regarding amounts pledged, for the ability to borrow if necessary, and the unused borrowing capacity at both the Federal Reserve Bank and the FHLB, is outlined in the following table:
Table 36 — Federal Reserve and FHLB Borrowing Capacity
                 
    September 30,     December 31,  
(dollar amounts in billions)   2011     2010  
Loans and securities pledged:
               
Federal Reserve Bank
  $ 10.2     $ 9.7  
FHLB
    7.9       7.8  
 
           
Total loans and securities pledged
  $ 18.1     $ 17.5  
 
               
Total unused borrowing capacity at Federal Reserve Bank and FHLB
  $ 9.8     $ 8.8  
We can also obtain funding through other methods including: (1) purchasing federal funds, (2) selling securities under repurchase agreements, (3) the sale or maturity of investment securities, (4) the sale or securitization of loans, (5) the sale of national market certificates of deposit, (6) paydowns and/or securitization arising from the relatively shorter-term structure of our commercial loans and automobile loans, and (7) the issuance of common and preferred stock.
During the 2011 third quarter, Huntington transferred automobile loans totaling $1.0 billion to a trust in a securitization transaction. The securitization qualified for sale accounting. Net proceeds of $1.0 billion from the transaction will be used for general corporate purposes, including repayment of other long-term debt.
At September 30, 2011, we believe the Bank has sufficient liquidity to meet its cash flow obligations for the foreseeable future.

 

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Parent Company Liquidity
The parent company’s funding requirements consist primarily of dividends to shareholders, debt service, income taxes, operating expenses, funding of nonbank subsidiaries, repurchases of our stock, and acquisitions. The parent company obtains funding to meet obligations from interest received from the Bank, interest and dividends received from direct subsidiaries, net taxes collected from subsidiaries included in the federal consolidated tax return, fees for services provided to subsidiaries, and the issuance of debt securities.
At September 30, 2011, December 31, 2010, and September 30, 2010, the parent company had $0.7 billion, $0.6 billion and $0.9 billion, respectively, in cash and cash equivalents. The decrease from September 30, 2010, primarily reflected the repurchase of our TARP Capital in the 2010 fourth quarter, along with dividend payments on our common and preferred stock, partially offset by the net impact of the equity and debt public offerings. Appropriate limits and guidelines are in place to ensure the parent company has sufficient cash to meet operating expenses and other commitments over the next 12 months without relying on subsidiaries or capital markets for funding.
During the 2010 fourth quarter, we completed a public offering and sale of 146.0 million shares of common stock at a price of $6.30 per share, or $920.0 million in aggregate gross proceeds. Also during the 2010 fourth quarter, we completed the public offering and sale of $300.0 million aggregate principal amount of 7.00% Subordinated Notes due 2020. We used the net proceeds from these transactions to repurchase our TARP Capital. On January 19, 2011, we repurchased the warrant we had issued to the Treasury at an agreed upon purchase price of $49.1 million. The warrant had entitled the Treasury to purchase 23.6 million shares of common stock.
On October 20, 2011, we announced that the board of directors had declared a quarterly common stock cash dividend of $0.04 per common share. The dividend is payable on January 3, 2012, to shareholders of record on December 20, 2011. Based on the dividend increase to $0.04 per common share, cash demands required for common stock dividends are estimated to be approximately $34.6 million per quarter. Based on the current dividend, cash demands required for Series A Preferred Stock are estimated to be approximately $7.7 million per quarter.
Based on a regulatory dividend limitation, the Bank could not have declared and paid a dividend to the parent company at September 30, 2011, without regulatory approval. We do not anticipate that the Bank will need to request regulatory approval to pay dividends in the near future. To help meet any additional liquidity needs, we have an open-ended, automatic shelf registration statement filed and effective with the SEC, which permits us to issue an unspecified amount of debt or equity securities.
With the exception of the common and preferred dividends previously discussed, the parent company does not have any significant cash demands. There are no maturities of parent company obligations until 2013, when a debt maturity of $50.0 million is payable. It is our policy to keep operating cash on hand at the parent company to satisfy any cash demands for the next 12 months.
We sponsor a non-contributory defined benefit pension plan covering substantially all employees hired or rehired prior to January 1, 2010. The Plan provides benefits based upon length of service and compensation levels. Our policy is to contribute an annual amount that is at least equal to the minimum funding requirements. The Bank and other subsidiaries fund approximately 90% of pension contributions. There is no required minimum contribution for 2011, although we contributed $50 million in March 2011 and anticipate contributing an additional $40 million in the 2011 fourth quarter. Funding requirements are calculated annually as of the end of the year and are heavily dependent on the value of our pension plan assets and the interest rate used to discount plan obligations. To the extent that the low interest rate environment continues, including as a result of the Federal Reserve Maturity Extension Program “Operation Twist”, or the pension plan does not earn the expected asset return rates, annual pension contribution requirements in future years could increase and such increases could be significant. However, any additional pension contributions are not expected to significantly impact liquidity.
Considering the factors discussed above, and other analyses that we have performed, we believe the parent company has sufficient liquidity to meet its cash flow obligations for the foreseeable future.

 

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Off-Balance Sheet Arrangements
In the normal course of business, we enter into various off-balance sheet arrangements. These arrangements include financial guarantees contained in standby letters-of-credit issued by the Bank and commitments by the Bank to sell mortgage loans.
Standby letters-of-credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most of these arrangements mature within two years and are expected to expire without being drawn upon. Standby letters-of-credit are included in the determination of the amount of risk-based capital that the parent company and the Bank are required to hold.
Through our credit process, we monitor the credit risks of outstanding standby letters-of-credit. When it is probable that a standby letter of credit will be drawn and not repaid in full, losses are recognized in the provision for credit losses. At September 30, 2011, we had $0.5 billion of standby letters-of-credit outstanding, of which 80% were collateralized. Included in this $0.5 billion are letters-of-credit issued by the Bank that support securities that were issued by our customers and remarketed by The Huntington Investment Company, our broker-dealer subsidiary.
We enter into forward contracts relating to the mortgage banking business to hedge the exposures we have from commitments to extend new residential mortgage loans to our customers and from our mortgage loans held for sale. At September 30, 2011, December 31, 2010, and September 30, 2010, we had commitments to sell residential real estate loans of $673.5 million, $998.7 million, and $1,254.4 million, respectively. These contracts mature in less than one year.
We do not believe that off-balance sheet arrangements will have a material impact on our liquidity or capital resources.
Operational Risk
As with all companies, we are subject to operational risk. Operational risk is the risk of loss due to human error; inadequate or failed internal systems and controls; violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards; and external influences such as market conditions, fraudulent activities, disasters, and security risks. We continuously strive to strengthen our system of internal controls to ensure compliance with laws, rules, and regulations, and to improve the oversight of our operational risk.
To mitigate operational risks, we have established a senior management Operational Risk Committee and a senior management Legal, Regulatory, and Compliance Committee. The responsibilities of these committees, among other duties, include establishing and maintaining management information systems to monitor material risks and to identify potential concerns, risks, or trends that may have a significant impact and ensuring that recommendations are developed to address the identified issues. Both of these committees report any significant findings and recommendations to the Risk Management Committee. Additionally, potential concerns may be escalated to our Board Risk Oversight Committee, as appropriate.
The goal of this framework is to implement effective operational risk techniques and strategies, minimize operational and fraud losses, and enhance our overall performance.
Representation and Warranty Reserve
We primarily conduct our loan sale and securitization activity with FNMA and FHLMC. In connection with these and other securitization transactions, we make certain representations and warranties that the loans meet certain criteria, such as collateral type and underwriting standards. We may be required to repurchase individual loans and / or indemnify these organizations against losses due to a loan not meeting the established criteria. We have a reserve for such losses, which is included in accrued expenses and other liabilities. The reserves were estimated based on historical and expected repurchase activity, average loss rates, and current economic trends. The level of mortgage loan repurchase losses depends upon economic factors, investor demand strategies and other external conditions containing a level of uncertainty and risk that may change over the life of the underlying loans. We do not believe we have sufficient information to estimate the range of reasonably possible loss related to representation and warranty exposure.

 

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The table below reflects activity in the representations and warranties reserve:
Table 37 — Summary of Reserve for Representations and Warranties on Mortgage Loans Serviced for Others
                                         
    2011     2010  
(dollar amounts in thousands)   Third     Second     First     Fourth     Third  
Reserve for representations and warranties, beginning of period
  $ 24,496     $ 23,785     $ 20,170     $ 18,026     $ 10,519  
Assumed reserve for representations and warranties
                            7,000  
Reserve charges
    (3,340 )     (365 )     (270 )     (4,242 )     (1,787 )
Provision for representations and warranties
    2,697       1,076       3,885       6,386       2,294  
 
                             
 
                                       
Reserve for representations and warranties, end of period
  $ 23,853     $ 24,496     $ 23,785     $ 20,170     $ 18,026  
 
                             
Table 38 — Mortgage Loan Repurchase Statistics
                                         
    2011     2010  
(dollar amounts in thousands)   Third     Second     First     Fourth     Third  
Number of loans sold
    3,877       3,875       8,933       10,314       6,944  
 
Amount of loans sold (UPB)
  $ 529,722     $ 512,069     $ 1,313,994     $ 1,577,879     $ 1,043,024  
 
Number of loans repurchased
    43       36       15       71       118  
 
Amount of loans repurchased (UPB)
  $ 7,325     $ 4,755     $ 2,343     $ 13,198     $ 15,356  
 
Number of claims received
    96       130       118       105       108  
 
Successful dispute rate (1)
    27 %     49 %     86 %     21 %     36 %
 
Number of make whole payments
    38       8       6       44       19  
 
Amount of make whole payments
  $ 3,392     $ 445     $ 560     $ 3,835     $ 1,444  
     
(1)  
Successful disputes are a percent of close out requests. Process changes in 2011 significantly decreased close out requests inflating this ratio.
Process changes in 2011 increased the number of make whole payment request disputes and significantly decreased close outs of make whole requests. The related reserves were increased to account for the delay in close out requests.
Foreclosure Documentation
Compared to the high volume servicers, we service a relatively low volume of residential mortgage foreclosures, with approximately 4,100 foreclosure cases as of September 30, 2011, in states that require foreclosures to proceed through the courts. We have reviewed and are continuing to review our residential foreclosure process. We have not found any evidence suggesting that any foreclosure by the Bank should not have proceeded. We have and are strengthening our processes and controls to ensure that our foreclosure processes do not have the deficiencies identified in those institutions which are the subject of the consent orders between the high volume servicers and their respective federal regulators.
Compliance Risk
Financial institutions are subject to several laws, rules, and regulations emanating at both the federal and state levels. These broad-based mandates include, but are not limited to, expectations on anti-money laundering, lending limits, client privacy, fair lending, community reinvestment, and other important areas. Recently, the volume and complexity of regulatory changes have added to the overall compliance risk. We have invested in various resources to help ensure we meet expectations, and we have a team of compliance experts dedicated to ensuring our conformance. We require training for our colleagues for several broad-based laws and regulations. For example, all of our colleagues are expected to pass courses on anti-money laundering and customer privacy. Those colleagues who are engaged in lending activities must also take training related to flood disaster protection, equal credit opportunity, fair lending, and / or a variety of other courses related to the extension of credit. We set a high standard of expectation for adherence to compliance management and seek to continuously enhance our performance.
Capital
Capital is managed both at the Bank and on a consolidated basis. Capital levels are maintained based on regulatory capital requirements and the economic capital required to support credit, market, liquidity, and operational risks inherent in our business, and to provide the flexibility needed for future growth and new business opportunities. Shareholders’ equity totaled $5.4 billion at September 30, 2011, an increase of $0.4 billion, or 8%, from December 31, 2010, primarily reflecting an increase in retained earnings. We believe our current level of capital is adequate.

 

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TARP Capital
As discussed in our 2010 Form 10-K, we fully exited our TARP relationship during the 2011 first quarter by repurchasing for $49.1 million the ten-year warrant we had issued to the Treasury as part of the TARP. Refer to the 2010 Form 10-K for a complete discussion regarding the issuing and repayment of our TARP Capital.
Capital Adequacy
The following table presents risk-weighted assets and other financial data necessary to calculate certain financial ratios that we use to measure capital adequacy:
Table 39 — Capital Adequacy
                                         
    2011     2010  
(dollar amounts in millions)   September 30,     June 30,     March 31,     December 31,     September 30,  
Consolidated capital calculations:
                                       
 
                                       
Common shareholders’ equity
  $ 5,037     $ 4,890     $ 4,676     $ 4,618     $ 3,867  
Preferred shareholders’ equity
    363       363       363       363       1,700  
 
                             
Total shareholders’ equity
    5,400       5,253       5,039       4,981       5,567  
Goodwill
    (444 )     (444 )     (444 )     (444 )     (444 )
Other intangible assets
    (188 )     (202 )     (215 )     (229 )     (244 )
Other intangible assets deferred tax liability (1)
    66       71       75       80       85  
 
                             
Total tangible equity (2)
    4,834       4,678       4,455       4,388       4,964  
Preferred shareholders’ equity
    (363 )     (363 )     (363 )     (363 )     (1,700 )
 
                             
Total tangible common equity (2)
  $ 4,471     $ 4,315     $ 4,092     $ 4,025     $ 3,264  
 
                             
 
                                       
Total assets
  $ 54,979     $ 53,050     $ 52,949     $ 53,820     $ 53,247  
Goodwill
    (444 )     (444 )     (444 )     (444 )     (444 )
Other intangible assets
    (188 )     (202 )     (215 )     (229 )     (244 )
Other intangible assets deferred tax liability (1)
    66       71       75       80       85  
 
                             
 
                                       
Total tangible assets (2)
  $ 54,413     $ 52,475     $ 52,365     $ 53,227     $ 52,644  
 
                             
 
                                       
Tier 1 capital
  $ 5,488     $ 5,352     $ 5,179     $ 5,022     $ 5,480  
Preferred shareholders’ equity
    (363 )     (363 )     (363 )     (363 )     (1,700 )
Trust-preferred securities
    (565 )     (565 )     (570 )     (570 )     (570 )
REIT-preferred stock
    (50 )     (50 )     (50 )     (50 )     (50 )
 
                             
 
                                       
Tier 1 common equity (2)
  $ 4,510     $ 4,374     $ 4,196     $ 4,039     $ 3,160  
 
                             
 
                                       
Risk-weighted assets (RWA)
  $ 44,376     $ 44,080     $ 43,024     $ 43,471     $ 42,759  
 
                             
 
                                       
Tier 1 common equity / RWA ratio (2)
    10.17 %     9.92 %     9.75 %     9.29 %     7.39 %
 
                                       
Tangible equity / tangible asset ratio (2)
    8.88       8.91       8.51       8.24       9.43  
 
                                       
Tangible common equity / tangible asset ratio (2)
    8.22       8.22       7.81       7.56       6.20  
 
                                       
Tangible common equity / RWA ratio (2)
    10.08       9.79       9.51       9.26       7.63  
     
(1)  
Other intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate.
 
(2)  
Tangible equity, Tier 1 common equity, tangible common equity, and tangible assets are non-GAAP financial measures. Additionally, any ratios utilizing these financial measures are also non-GAAP. These financial measures have been included as they are considered to be critical metrics with which to analyze and evaluate financial condition and capital strength. Other companies may calculate these financial measures differently.
Capital continued to strengthen as period-end capital ratios improved compared to December 31, 2010. Our Tier 1 common risk-based ratio improved 88 basis points to 10.17% at September 30, 2011 compared to 9.29% at December 31, 2010. This increase primarily reflected the combination of an increase in retained earnings and a reduction in the disallowed tax deferred asset.
The Tier 1 common risk-based ratio is the metric that has gained prominence with regulators. The recent international banking Basel III accord sets this ratio minimum at 7.0% with an additional buffer of up to 2.5% for a GSIFI. While we are not a GSIFI, the Dodd-Frank Act requires that any bank with assets over $50.0 billion would be subject to additional scrutiny. U.S. regulators have identified such qualifying banks as SIFIs. With $55 billion in assets at September 30, 2011, we are at the lower range of the SIFI group. Although we do not know at this time how much, if any, our required buffer will be, we believe that our current period-end capital ratios are well positioned.

 

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Table of Contents

Regulatory Capital
Regulatory capital ratios are the primary metrics used by regulators in assessing the safety and soundness of banks. We intend to maintain both our and the Bank’s risk-based capital ratios at levels at which both would be considered Well-capitalized by regulators. The Bank is primarily supervised and regulated by the OCC, which establishes regulatory capital guidelines for banks similar to those established for bank holding companies by the Federal Reserve Board.
Regulatory capital primarily consists of Tier 1 capital and Tier 2 capital. The sum of Tier 1 capital and Tier 2 capital equals our total risk-based capital. The following table reflects changes and activity to the various components utilized in the calculation of our consolidated Tier 1, Tier 2, and total risk-based capital amounts during the first nine-month period of 2011.
Table 40 — Consolidated Regulatory Capital Activity
                                                 
    Tier 1 Capital  
    Common     Preferred             Disallowed     Disallowed     Total  
    Shareholders’     Shareholders’     Qualifying     Goodwill &     Other     Tier 1  
(dollar amounts in millions)   Equity (1)     Equity     Core Capital (2)     Intangible assets     Adjustments (net)     Capital  
 
                                               
Balance at December 31, 2010
  $ 4,815     $ 363     $ 620     $ (607 )   $ (169 )   $ 5,022  
 
                                               
Earnings
    416                               416  
Changes to disallowed adjustments
                      39       (13 )     26  
Dividends
    (75 )                             (75 )
Repurchase of TARP Capital warrant
    (49 )                             (49 )
Repurchase of qualifying trust preferred securities
                (5 )                 (5 )
Disallowance of deferred tax assets
                            142       142  
Other
    11                               11  
 
                                   
Balance at September 30, 2011
  $ 5,118     $ 363     $ 615     $