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, 2013

Commission File Number 1-34073

 

 

Huntington Bancshares Incorporated

 

 

 

Maryland   31-0724920
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

41 South High Street, Columbus, Ohio 43287

Registrant’s telephone number (614) 480-8300

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.     x   Yes     ¨   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x   Yes     ¨   No

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

 

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

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

There were 830,517,677 shares of Registrant’s common stock ($0.01 par value) outstanding on October 31, 2013.

 

 

 


Table of Contents

HUNTINGTON BANCSHARES INCORPORATED

INDEX

 

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements (Unaudited)

  

Condensed Consolidated Balance Sheets at September 30, 2013 and December 31, 2012

     67   

Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2013 and 2012

     68   

Condensed Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2013 and 2012

     69   

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2013 and 2012

     70   

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012

     71   

Notes to Unaudited Condensed Consolidated Financial Statements

     72   

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

  

Executive Overview

     6   

Discussion of Results of Operations

     9   

Risk Management and Capital:

     25   

Credit Risk

     25   

Market Risk

     40   

Liquidity Risk

     42   

Operational Risk

     46   

Compliance Risk

     47   

Capital

     47   

Fair Value

     51   

Business Segment Discussion

     52   

Additional Disclosures

     65   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     143   

Item 4. Controls and Procedures

     143   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     143   

Item 1A. Risk Factors

     143   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     143   

Item 6. Exhibits

     144   

Signatures

     146   

 

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Table of Contents

Glossary of Acronyms and Terms

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

 

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

 

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LGD    Loss-Given-Default
LTV    Loan to Value
MBS    Mortgage-Backed Security
MD&A    Management’s Discussion and Analysis of Financial Condition and Results of Operations
MSA    Metropolitan Statistical Area
MSR    Mortgage Servicing Rights
NALs    Nonaccrual Loans
NCO    Net Charge-off
NIM    Net interest margin
NPAs    Nonperforming Assets
NPR    Notice of Proposed Rulemaking
N.R.    Not relevant. Denominator of calculation is a gain in the current period compared with a loss in the prior period, or vice-versa.
OCC    Office of the Comptroller of the Currency
OCI    Other Comprehensive Income (Loss)
OCR    Optimal Customer Relationship
OLEM    Other Loans Especially Mentioned
OREO    Other Real Estate Owned
OTTI    Other-Than-Temporary Impairment
PD    Probability-Of-Default
Plan    Huntington Bancshares Retirement Plan
Problem Loans    Includes nonaccrual loans and leases (Table 18), troubled debt restructured loans (Table 19), accruing loans and leases past due 90 days or more (aging analysis section of Footnote 3), and Criticized commercial loans (credit quality indicators section of Footnote 3).
REIT    Real Estate Investment Trust
ROC    Risk Oversight Committee
SAD    Special Assets Division
SBA    Small Business Administration
SEC    Securities and Exchange Commission
SERP    Supplemental Executive Retirement Plan
SRIP    Supplemental Retirement Income Plan
TDR    Troubled Debt Restructured Loan
U.S. Treasury    U.S. Department of the Treasury
UCS    Uniform Classification System
UPB    Unpaid Principal Balance
USDA    U.S. Department of Agriculture
VA    U.S. Department of Veteran Affairs
VIE    Variable Interest Entity
WGH    Wealth Advisors, Government Finance, and Home Lending

 

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Table of Contents

PART I. FINANCIAL INFORMATION

When we refer to “we,” “our,” and “us” in this report, we mean Huntington Bancshares Incorporated and our consolidated subsidiaries, unless the context indicates that we refer only to the parent company, Huntington Bancshares Incorporated. When we refer to the “Bank” in this report, we mean our only bank subsidiary, The Huntington National Bank, and its subsidiaries.

 

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

INTRODUCTION

We are a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through the Bank, we have 147 years of serving the financial needs of our customers. Through our subsidiaries, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, customized insurance service programs, and other financial products and services. Our over 700 banking offices are located in Indiana, Kentucky, Michigan, Ohio, Pennsylvania, and West Virginia. Selected financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office in Columbus, Ohio and a limited purpose office located in the Cayman Islands and another limited purpose office located in Hong Kong. Our foreign banking activities, in total or with any individual country, are not significant.

This MD&A provides information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows. The MD&A included in our 2012 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2012 Form 10-K. This MD&A should also be read in conjunction with the financial statements, notes and other information contained in this report.

Our discussion is divided into key segments:

 

   

Executive Overview —Provides a summary of our current financial performance and business overview, including our thoughts on the impact of the economy, legislative and regulatory initiatives, and recent industry developments. This section also provides our outlook regarding our expectations for the next several quarters.

 

   

Discussion of Results of Operations —Reviews financial performance from a consolidated Company perspective. It also includes a Significant Items section that summarizes key issues helpful for understanding performance trends. Key consolidated average balance sheet and income statement trends are also discussed in this section.

 

   

Risk Management and Capital —Discusses credit, market, liquidity, operational, and compliance risks, including how these are managed, as well as performance trends. It also includes a discussion of liquidity policies, how we obtain funding, and related performance. In addition, there is a discussion of guarantees and / or commitments made for items such as standby letters of credit and commitments to sell loans, and a discussion that reviews the adequacy of capital, including regulatory capital requirements.

 

   

Business Segment Discussion —Provides an overview of financial performance for each of our major business segments and provides additional discussion of trends underlying consolidated financial performance.

 

   

Additional Disclosures —Provides comments on important matters including forward-looking statements, critical accounting policies and use of significant estimates, recent accounting pronouncements and developments, and acquisitions.

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

 

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EXECUTIVE OVERVIEW

Summary of 2013 Third Quarter Results

For the quarter, we reported net income of $178.5 million, or $0.20 per common share, compared with $150.7 million, or $0.17 per common share, in the prior quarter ( see Table 1 ).

Fully-taxable equivalent net interest income was $431.5 million for the quarter, unchanged from the prior quarter. The results reflected a $0.1 billion increase in average earning assets, as well as an additional day in the quarter. These were offset by a 4 basis point decrease in the net interest margin. The primary items affecting the net interest margin were a 4 basis point negative impact from the mix and yield of earning assets, a 3 basis point negative impact of the $750 million of debt issued during the quarter, and a 3 basis point positive impact from lower cost of deposits.

The provision for credit losses decreased $13.3 million, or 54%, from the prior quarter. This quarter, we introduced an enhanced allowance methodology, which incorporates an enhanced commercial risk rating system. The combination of the enhanced methodology and continued improvement in overall asset quality resulted in a reduction in the ACL to loans ratio of 1.72%, compared to 1.86% in the prior quarter. The ACL as a percentage of period-end NALs increased 6 percentage points to 220%. NALs declined by $30.4 million, or 8%, to $333.1 million, or 0.78% of total loans. The decreases primarily reflected meaningful improvement in both C&I and CRE NALs.

Noninterest income increased $1.8 million, or 1%, from the prior quarter. The increase reflected the $8.0 million, or 31%, increase in other noninterest income, primarily related to fees associated with commercial loan activity, and the $4.9 million, or 7%, increase in service charges on deposit accounts, resulting from household and commercial relationship growth. These were offset by a $10.0 million, or 30%, decrease in mortgage banking income due to lower origination volume, and the $3.0 million, or 15%, decrease in brokerage income due to typical seasonal trends.

Noninterest expense decreased $22.5 million, or 5%, from the prior quarter. The decrease reflected the $34.5 million, or 13%, decrease in personnel costs, which included a significant item of $33.9 million from the pension curtailment gain and $6.6 million of branch consolidation and severance expense. These were partially offset by a $7.9 million, or 29%, increase in net occupancy, and a $3.2 million, or 13%, increase in equipment, which combined included a significant item of $9.5 million for branch consolidation and facilities optimization related costs. In addition, outside services included a significant item of $0.5 million for branch consolidation and facilities optimization related costs.

The tangible common equity to tangible asset ratio increased to 9.02% from 8.78% at the end of the prior quarter, resulting primarily from earnings retention. Our Tier 1 common risk-based capital ratio at quarter end was 10.85%, up from 10.71% at the end of the prior quarter. The regulatory Tier 1 risk-based capital ratio at September 30, 2013 was 12.36%, up from 12.24% at June 30, 2013. All capital ratios were impacted by the repurchase of 2.0 million common shares over the quarter at an average price per share of $8.18.

Business Overview

General

Our general business objectives are: (1) grow net interest income and fee income, (2) increase cross-sell and share-of-wallet across all business segments, (3) improve efficiency ratio, (4) continue to strengthen risk management, including sustained improvement in credit metrics, and (5) maintain strong capital and liquidity positions.

Our third-quarter results demonstrated that our unique products and services are driving robust organic customer acquisition across our commercial and consumer customer base, while delivering stable returns to shareholders. Through our disciplined investments in fee-income businesses in conjunction with prudent expense management, we have been able to deliver modest positive operating leverage for the first nine months of the year.

During the quarter, we successfully launched our consumer credit card product. The third quarter was also a time of continuing household growth, particularly within our in-store branches, and marked a return to stability for our commercial real estate loan portfolio. Our performance benefited from ongoing improvement within our core Midwestern economies. We also made progress in managing expenses, including one-time savings attributable to pension curtailment, rightsizing of some investments, and the consolidation of 22 branch locations.

Economy

While we are optimistic about continuing indicators of economic improvement supporting our performance for the next several quarters, we must face the headwinds related to the yield curve, regulatory environment, and ongoing uncertainty in Washington.

 

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Legislative and Regulatory

Regulatory reforms continue to be issued, which impose additional restrictions on current business practices. Recent items affecting us include the Federal Reserve’s Capital Plan Review and the recently issued final Basel III capital rule.

Capital Plans Rule / Supervisory and Company-Run Stress Test Requirements – The Federal Reserve issued two interim final rules on September 24, 2013, that are intended to clarify how we should incorporate the Basel III regulatory capital reforms into our capital projections during the next cycle of capital plan submissions and stress tests. The planning horizon for the next capital planning and stress testing cycle encompasses the 2013 fourth quarter through the 2015 fourth quarter. Rules to implement the Basel III capital reforms in the United States were finalized in July 2013, and will be phased-in beginning in 2015 for us under the standardized approach. As such, the next CCAR cycle, which began October 1, 2013, overlaps with the implementation of the Basel III capital reforms based on the required 9-quarter capital projections. The interim final rules clarify that banking organizations with $50 billion or more in total consolidated assets, including us, must incorporate the revised capital framework into the capital planning projections and into the stress tests required under the Dodd-Frank Act using the transition paths established in the Basel III final rule. The rule also clarifies that for the upcoming cycle, capital adequacy at large banking organizations, including us, would continue to be assessed against a minimum 5 percent tier 1 common ratio calculated in the same manner as under previous stress tests and capital plan submissions, ensuring consistency with those previous exercises. The interim final rules became effective upon issuance, but the Federal Reserve will accept comments on the rules through November 25, 2013.

Basel III Capital rules for U.S. banking organizations – On July 2, 2013, the Federal Reserve voted to adopt final Basel III capital rules for U.S. Banking organizations. The final rules establish an integrated regulatory capital framework and will implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. Under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. Consistent with the international Basel framework, the final rule includes a new minimum ratio of common equity tier 1 capital (Tier I Common) to risk-weighted assets and a Tier 1 Common capital conservation buffer of 2.5% of risk-weighted assets that will apply to all supervised financial institutions. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets and includes a minimum leverage ratio of 4% for all banking organizations. These new minimum capital ratios will become effective for us on January 1, 2015, and will be fully phased-in on January 1, 2019.

Following are the Basel III regulatory capital levels that we must satisfy to avoid limitations on capital distributions and discretionary bonus payments during the applicable transition period, from January 1, 2015 until January 1, 2019:

 

     Basel III Regulatory Capital Levels  
     January 1,     January 1,     January 1,     January 1,     January 1,  
     2015     2016     2017     2018     2019  

Tier 1 Common

     4.5     5.125     5.75     6.375     7.0

Tier 1 risk-based capital ratio

     6.0     6.625     7.25     7.875     8.5

Total risk-based capital ratio

     8.0     8.625     9.25     9.875     10.5

The final rule emphasizes Tier 1 Common capital, the most loss-absorbing form of capital, and implements strict eligibility criteria for regulatory capital instruments. The final rule also improves the methodology for calculating risk-weighted assets to enhance risk sensitivity. Banks and regulators use risk weighting to assign different levels of risk to different classes of assets.

We have evaluated the impact of the Basel III final rule on our regulatory capital ratios and estimate a reduction of approximately 60 basis points to our Basel I Tier I Common risk-based capital ratio based on our June 30, 2013 balance sheet composition. The estimate is based on management’s current interpretation, expectations, and understanding of the final U.S. Basel III rules. We anticipate that our capital ratios, on a Basel III basis, will continue to exceed the well capitalized minimum capital requirements. We are evaluating options to mitigate the capital impact of the final rule prior to its effective implementation date.

Approximately $50.0 million of our Tier 1 risk-based capital of $6.0 billion at September 30, 2013 consisted of the outstanding Class C preferred securities of our REIT subsidiary, Huntington Preferred Capital, Inc. (HPCI). Based on our review of the Basel III final rule, it is likely that when Basel III becomes effective, the HPCI Class C preferred securities will no longer constitute Tier 1 capital for us or the Bank. In the event we determine that a “regulatory capital event” has occurred, based on an opinion of counsel rendered by a law firm experienced in such matters, HPCI would have the right to redeem the outstanding Class C preferred securities. In the event HPCI redeems the Class C preferred securities, holders of such securities will be entitled to receive the redemption price of $25.00 per share plus accrued and unpaid dividends on such shares. The redemption price may differ from the redemption date market price of the Class C preferred securities. There can be no assurance as to if or when HPCI would redeem the Class C preferred securities.

 

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Table of Contents

Expectations

Net interest income is expected to modestly grow over the next several quarters. We anticipate an increase in earning assets as total loans modestly grow and investment securities increase in preparation for the new liquidity rules. However, those benefits to net interest income are expected to be partially offset by continued modest downward pressure on NIM until the short end of the yield curve begins to move higher. Full-year 2013 NIM is not expected to fall below the mid 3.30%’s. While we are maintaining a disciplined approach to loan pricing, asset yields remain under pressure, and that is partially offset by the continued deposit repricing and mix shift.

The C&I portfolio is expected to see growth consistent with an anticipated increase in customer activity. Our C&I loan pipeline remains robust with much of this reflecting the positive impact from our investments in specialized commercial verticals, focused OCR sales process, and continued support of middle market and small business lending. Automobile loan originations remain strong, and we currently do not anticipate any automobile securitizations in the near future. Residential mortgages, home equity, and CRE loan balances are expected to increase modestly.

We anticipate the increase in total loans will outpace growth in total deposits. This reflects our continued focus on the overall cost of funds, as well as the continued shift towards low- and no-cost demand deposits and money market deposit accounts.

Noninterest income, when compared to recent levels, is expected to be relatively flat, excluding the impact of any automobile loan sales, any net MSR activity, and typical first quarter seasonality.

Expenses, excluding the $17 million of Significant Items, are expected to modestly increase due to higher depreciation, personnel, occupancy, and equipment expense related to our continued modest pace of investments. We continue to evaluate additional cost saving opportunities, and an additional $6 million of branch consolidation expense is expected in the 2013 fourth quarter from previously announced actions. We remain committed to posting positive operating leverage for the 2013 full year.

NPAs are expected to show continued improvement. This quarter, NCOs were at the high end of our expected normalized range of 35 to 55 basis points. The level of provision for credit losses was below our long-term expectation, and we continue to expect some quarterly volatility.

The effective tax rate for 2013 is expected to be in the range of 25% to 27%, primarily reflecting the impacts of tax-exempt income, tax-advantaged investments, and general business credits.

 

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DISCUSSION OF RESULTS OF OPERATIONS

This section provides a review of financial performance from a consolidated perspective. It also includes a “Significant Items” section that summarizes key issues important for a complete understanding of performance trends. Key Unaudited Condensed Consolidated Balance Sheet and Unaudited Condensed Statement of Income trends are discussed. All earnings per share data are reported on a diluted basis. For additional insight on financial performance, please read this section in conjunction with the “Business Segment Discussion.”

 

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Table of Contents

Table 1—Selected Quarterly Income Statement Data (1)

 

       2013     2012  

(dollar amounts in thousands, except per share amounts)

   Third     Second     First     Fourth     Third  

Interest income

   $ 462,912      $ 462,582     $ 465,319     $ 478,995     $ 483,787  

Interest expense

     38,060       37,645       41,149       44,940       53,489  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     424,852       424,937       424,170       434,055       430,298  

Provision for credit losses

     11,400       24,722       29,592       39,458       37,004  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     413,452       400,215       394,578       394,597       393,294  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     72,918       68,009       60,883       68,083       67,806  

Mortgage banking income

     23,621       33,659       45,248       61,711       44,614  

Trust services

     30,470       30,666       31,160       31,388       29,689  

Electronic banking

     24,282       23,345       20,713       21,011       22,135  

Brokerage income

     16,532       19,546       17,995       17,415       16,526  

Insurance income

     17,269       17,187       19,252       17,268       17,792  

Gain on sale of loans

     5,063       3,348       2,616       20,690       6,591  

Bank owned life insurance income

     13,740       15,421       13,442       13,767       14,371  

Capital markets fees

     12,825       12,229       7,834       12,694       11,596  

Securities gains (losses)

     98       (410     (509     863       4,169  

Other income

     33,685       25,655       33,575       32,761       25,778  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     250,503       248,655       252,209       297,651       261,067  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Personnel costs

     229,326       263,862       258,895       253,952       247,709  

Outside data processing and other services

     49,313       49,898       49,265       48,699       50,396  

Net occupancy

     35,591       27,656       30,114       29,008       27,599  

Equipment

     28,191       24,947       24,880       26,580       25,950  

Deposit and other insurance expense

     11,155       13,460       15,490       16,327       15,534  

Professional services

     12,487       9,341       7,192       22,514       17,510  

Marketing

     12,271       14,239       10,971       16,456       16,842  

Amortization of intangibles

     10,362       10,362       10,320       11,647       11,431  

OREO and foreclosure expense

     2,053       (271     2,666       4,233       4,982  

Loss (Gain) on early extinguishment of debt

     —          —          —          —          1,782  

Other expense

     32,587       32,371       33,000       41,212       38,568  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     423,336       445,865       442,793       470,628       458,303  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     240,619       203,005       203,994       221,620       196,058  

Provision for income taxes

     62,132       52,354       52,214       54,341       28,291  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 178,487      $ 150,651     $ 151,780     $ 167,279     $ 167,767  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends on preferred shares

     7,967       7,967       7,970       7,973       7,983  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to common shares

   $ 170,520      $ 142,684     $ 143,810     $ 159,306     $ 159,784  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares—basic

     830,398       834,730       841,103       847,220       857,871  

Average common shares—diluted

     841,025       843,840       848,708       853,306       863,588  

Net income per common share—basic

   $ 0.21      $ 0.17     $ 0.17     $ 0.19     $ 0.19  

Net income per common share—diluted

     0.20       0.17       0.17       0.19       0.19  

Cash dividends declared per common share

     0.05       0.05       0.04       0.04       0.04  

Return on average total assets

     1.27     1.08     1.10     1.19     1.19

Return on average common shareholders’ equity

     12.3       10.4       10.7       11.6       11.9  

Return on average tangible common shareholders’ equity (2)

     14.1       12.0       12.4       13.5       13.9  

Net interest margin (3)

     3.34       3.38       3.42       3.45       3.38  

Efficiency ratio (4)

     60.6       64.0       63.3       62.3       64.5  

Effective tax rate

     25.8       25.8       25.6       24.5       14.4  

Revenue—FTE

          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   $ 424,852      $ 424,937     $ 424,170     $ 434,055     $ 430,298  

FTE adjustment

     6,634       6,587       5,923       5,470       5,254  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (3)

     431,486       431,524       430,093       439,525       435,552  

Noninterest income

     250,503       248,655       252,209       297,651       261,067  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue (3)

   $ 681,989      $ 680,179     $ 682,302     $ 737,176     $ 696,619  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  

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

(2)  

Net income excluding expense for amortization of intangibles for the period divided by average tangible common shareholders’ equity. Average tangible common shareholders’ equity equals average total common shareholders’ equity less average intangible assets and goodwill. Expense for amortization of intangibles and average intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate.

(3)  

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

(4)  

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

 

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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)

   2013     2012     Amount     Percent  

Interest income

   $ 1,390,813     $ 1,451,268     $ (60,455     (4 )% 

Interest expense

     116,854       174,799       (57,945     (33
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     1,273,959       1,276,469       (2,510     —     

Provision for credit losses

     65,714       107,930       (42,216     (39
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     1,208,245       1,168,539       39,706       3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     201,810       194,096       7,714       4  

Mortgage banking income

     102,528       129,381       (26,853     (21

Trust services

     92,296       90,509       1,787       2  

Electronic banking

     68,340       61,279       7,061       12  

Brokerage income

     54,073       54,811       (738     (1

Insurance income

     53,708       54,051       (343     (1

Gain on sale of loans

     11,027       37,492       (26,465     (71

Bank owned life insurance income

     42,603       42,275       328       1  

Capital markets fees

     32,888       34,652       (1,764     (5

Securities gains (losses)

     (821     3,906       (4,727     (121

Other income

     92,915       97,754       (4,839     (5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     751,367       800,206       (48,839     (6
  

 

 

   

 

 

   

 

 

   

 

 

 

Personnel costs

     752,083       734,241       17,842       2  

Outside data processing and other services

     148,476       141,556       6,920       5  

Net occupancy

     93,361       82,152       11,209       14  

Equipment

     78,018       76,367       1,651       2  

Deposit and other insurance expense

     40,105       52,003       (11,898     (23

Professional services

     29,020       43,244       (14,224     (33

Marketing

     37,481       47,807       (10,326     (22

Amortization of intangibles

     31,044       34,902       (3,858     (11

OREO and foreclosure expense

     4,448       14,038       (9,590     (68

Gain on early extinguishment of debt

     —          (798     798       (100

Other expense

     97,958       139,736       (41,778     (30
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     1,311,994       1,365,248       (53,254     (4
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     647,618       603,497       44,121       7  

Provision for income taxes

     166,700       129,754       36,946       28  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 480,918     $ 473,743     $ 7,175       2
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared on preferred shares

     23,904       24,016       (112     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to common shares

   $ 457,014     $ 449,727     $ 7,287       2
  

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares—basic

     835,410       861,543       (26,133     (3 )% 

Average common shares—diluted

     844,524       866,768       (22,244     (3

Per common share

        

Net income per common share—basic

   $ 0.55     $ 0.52     $ 0.03       6

Net income per common share—diluted

     0.54       0.52       0.02       4  

Cash dividends declared

     0.14       0.12       0.02       17  

Revenue—FTE

        

Net interest income

   $ 1,273,959     $ 1,276,469     $ (2,510     —  

FTE adjustment

     19,144       14,936       4,208       28  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (2)

     1,293,103       1,291,405       1,698       —     

Noninterest income

     751,367       800,206       (48,839     (6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue (2)

   $ 2,044,470     $ 2,091,611     $ (47,141     (2 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Comparisons for presented periods are impacted by a number of factors. Refer to the “Significant Items” for additional discussion regarding these key factors.
(2) On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.

 

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Significant Items

Definition of Significant Items

From time-to-time, revenue, expenses, or taxes are impacted by items judged by us to be outside of ordinary banking activities and / or by items that, while they may be associated with ordinary banking activities, are so unusually large that their outsized impact is believed by us at that time to be infrequent or short-term in nature. We refer to such items as Significant Items. Most often, these Significant Items result from factors originating outside the company; e.g., regulatory actions / assessments, windfall gains, changes in accounting principles, one-time tax assessments / refunds, litigation actions, etc. In other cases, they may result from our decisions associated with significant corporate actions outside of the ordinary course of business; e.g., merger / restructuring charges, recapitalization actions, goodwill impairment, etc.

Even though certain revenue and expense items are naturally subject to more volatility than others due to changes in market and economic environment conditions, as a general rule volatility alone does not define a Significant Item. For example, changes in the provision for credit losses, gains / losses from investment activities, asset valuation writedowns, etc., reflect ordinary banking activities and are, therefore, typically excluded from consideration as a Significant Item.

We believe the disclosure of Significant Items provides a better understanding of our performance and trends to ascertain which of such items, if any, to include or exclude from an analysis of our performance; i.e., within the context of determining how that performance differed from expectations, as well as how, if at all, to adjust estimates of future performance accordingly. To this end, we adopted a practice of listing Significant Items in our external disclosure documents; e.g., earnings press releases, investor presentations, Forms 10-Q and 10-K.

Significant Items for any particular period are not intended to be a complete list of items that may materially impact current or future period performance.

Significant Items Influencing Financial Performance Comparisons

Earnings comparisons were impacted by the Significant Items summarized below:

 

1. Pension Curtailment Gain. During the 2013 third quarter, a $33.9 million pension curtailment gain was recorded in personnel costs. This resulted in a positive impact of $0.03 per common share for both the quarterly and year-to-date basis.

 

2. Franchise Repositioning Related Expense. During the 2013 third quarter, $16.6 million of franchise repositioning related expense was recorded. This resulted in a negative impact of $0.01 per common share for both the quarterly and year-to-date basis.

 

3. Litigation Reserve. During the 2012 first quarter, $23.5 million of additions to litigation reserves were recorded as other noninterest expense. This resulted in a negative impact of $0.02 per common share in 2012 for both the quarterly and year-to-date basis.

 

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

 

5. State deferred tax asset valuation allowance adjustment. During the 2012 third quarter, a valuation allowance of $19.5 million (net of tax) was released for the portion of the deferred tax asset and state net operating loss carryforwards expected to be realized. This resulted in a positive impact of $0.02 per common share for both the quarterly and year-to-date basis.

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

 

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Table 3—Significant Items Influencing Earnings Performance Comparison (1)

 

     Three Months Ended  
     September 30, 2013     June 30, 2013     September 30, 2012  

(dollar amounts in thousands, except per share amounts)

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

Net income

   $ 178,487       $ 150,651        $ 167,767     

Earnings per share, after-tax

     $ 0.20        $ 0.17        $ 0.19  

Change from prior quarter—$

       0.03          —             0.02  

Change from prior quarter—%

       18        —          12

Change from year-ago—$

     $ 0.01        $ —           $ 0.03  

Change from year-ago—%

       5        —          19

Pension curtailment gain

     33,926       0.03       —           —          —           —     

Franchise repositioning related expense

     (16,552     (0.01     —           —          —           —     

 

(1)  

Pretax unless otherwise noted.

(2)  

After-tax.

 

     Nine Months Ended  
     September 30, 2013     September 30, 2012  

(dollar amounts in thousands)

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

Net income

   $ 480,918       $ 473,743    

Earnings per share, after-tax

     $ 0.54       $ 0.52  

Change from a year-ago—$

       0.02         0.07  

Change from a year-ago—%

       4       16

Significant Items - favorable (unfavorable) impact:

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

Pension curtailment gain

   $ 33,926     $ 0.03     $ —        $ —     

Franchise repositioning related expense

     (16,552     (0.01     —          —     

State deferred tax asset valuation allowance adjustment (2)

     —          —          19,513       0.02  

Bargain purchase gain

     —          —          11,409       0.01  

Litigation reserves addition

     —          —          (23,500     (0.02

 

(1)  

Pretax unless otherwise noted.

(2)  

After-tax.

Net Interest Income / Average Balance Sheet

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

 

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Table 4—Consolidated Quarterly Average Balance Sheets

 

     Average Balances     Change  
     2013     2012     3Q13 vs. 3Q12  

(dollar amounts in millions)

   Third     Second     First     Fourth     Third     Amount     Percent  

Assets:

              

Interest-bearing deposits in banks

   $ 54     $ 84     $ 72     $ 73     $ 82     $ (28     (34 )% 

Loans held for sale

     379       678       709       840       1,829       (1,450     (79

Securities:

              

Available-for-sale and other securities:

              

Taxable

     6,040       6,728       6,964       7,131       8,014       (1,974     (25

Tax-exempt

     565       591       549       492       423       142       34  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     6,605       7,319       7,513       7,623       8,437       (1,832     (22

Trading account securities

     76       84       85       97       66       10       15  

Held-to-maturity securities—taxable

     2,139       1,711       1,717       1,652       796       1,343       169  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     8,820       9,114       9,315       9,372       9,299       (479     (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (1)

              

Commercial:

              

Commercial and industrial

     17,032       17,033       16,954       16,507       16,343       689       4  

Commercial real estate:

              

Construction

     565       586       598       576       569       (4     (1

Commercial

     4,345       4,429       4,694       4,897       5,153       (808     (16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     4,910       5,015       5,292       5,473       5,722       (812     (14
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     21,942       22,048       22,246       21,980       22,065       (123     (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Automobile

     6,075       5,283       4,833       4,486       4,065       2,010       49  

Home equity

     8,341       8,263       8,395       8,345       8,369       (28     —    

Residential mortgage

     5,256       5,225       4,978       5,155       5,177       79       2  

Other consumer

     380       461       412       431       444       (64     (14
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     20,052       19,232       18,618       18,417       18,055       1,997       11  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     41,994       41,280       40,864       40,397       40,120       1,874       5  

Allowance for loan and lease losses

     (717     (746     (772     (783     (855     138       (16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans and leases

     41,277       40,534       40,092       39,614       39,265       2,012       5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     51,247       51,156       50,960       50,682       51,330       (83     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and due from banks

     944       940       904       1,459       960       (16     (2

Intangible assets

     552       563       571       581       597       (45     (8

All other assets

     3,889       3,976       4,065       4,115       4,106       (217     (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 55,915     $ 55,889     $ 55,728     $ 56,054     $ 56,138     $ (223     —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Shareholders’ Equity:

              

Deposits:

              

Demand deposits—noninterest-bearing

   $ 13,088     $ 12,879     $ 12,165     $ 13,121     $ 12,329     $ 759       6

Demand deposits—interest-bearing

     5,763       5,927       5,977       5,843       5,814       (51     (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     18,851       18,806       18,142       18,964       18,143       708       4  

Money market deposits

     15,739       15,069       15,045       14,749       14,515       1,224       8  

Savings and other domestic deposits

     5,007       5,115       5,083       4,960       4,975       32       1  

Core certificates of deposit

     4,176       4,778       5,346       5,637       6,131       (1,955     (32
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     43,773       43,768       43,616       44,310       43,764       9       —    

Other domestic time deposits of $250,000 or more

     268       324       360       359       300       (32     (11

Brokered deposits and negotiable CDs

     1,553       1,779       1,697       1,756       1,878       (325     (17

Deposits in foreign offices

     376       316       340       342       356       20       6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     45,970       46,187       46,013       46,767       46,298       (328     (1

Short-term borrowings

     710       701       762       1,012       1,329       (619     (47

Federal Home Loan Bank advances

     549       757       686       42       107       442       413  

Subordinated notes and other long-term debt

     1,753       1,292       1,348       1,374       1,638       115       7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     35,894       36,058       36,644       36,074       37,043       (1,149     (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

All other liabilities

     1,054       1,064       1,085       1,017       1,035       19       2  

Shareholders’ equity

     5,879       5,888       5,834       5,842       5,731       148       3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 55,915     $ 55,889     $ 55,728     $ 56,054     $ 56,138     $ (223     —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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Table of Contents

Table 5—Consolidated Quarterly Net Interest Margin Analysis

 

     Average Rates (2)  

Fully-taxable equivalent basis (1)

   2013     2012  
   Third     Second     First     Fourth     Third  

Assets

          

Interest-bearing deposits in banks

     0.07     0.27     0.16     0.28     0.21

Loans held for sale

     3.89       3.39       3.22       3.18       3.18  

Securities:

          

Available-for-sale and other securities:

          

Taxable

     2.34       2.29       2.31       2.32       2.29  

Tax-exempt

     4.04       3.94       3.96       4.03       4.15  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     2.48       2.42       2.43       2.43       2.39  

Trading account securities

     0.23       0.60       0.50       1.01       1.07  

Held-to-maturity securities—taxable

     2.29       2.29       2.29       2.24       2.81  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     2.41       2.38       2.39       2.38       2.41  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (3)

          

Commercial:

          

Commercial and industrial

     3.68       3.75       3.83       3.88       3.90  

Commercial real estate:

          

Construction

     3.91       3.93       4.05       4.13       3.84  

Commercial

     4.10       4.13       4.00       4.20       3.85  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     4.08       4.09       4.01       4.19       3.85  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     3.77       3.83       3.87       3.96       3.89  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

          

Automobile

     3.80       3.96       4.28       4.52       4.87  

Home equity

     4.10       4.16       4.20       4.24       4.27  

Residential mortgage

     3.81       3.82       3.97       4.07       4.02  

Other consumer

     6.98       6.66       7.05       7.16       7.16  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     3.99       4.07       4.22       4.33       4.40  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     3.87       3.95       4.03       4.13       4.12  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     3.64     3.68     3.75     3.80     3.79
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

          

Deposits:

          

Demand deposits—noninterest-bearing

     —       —       —       —       —  

Demand deposits—interest-bearing

     0.04       0.04       0.04       0.05       0.07  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     0.01       0.01       0.01       0.02       0.02  

Money market deposits

     0.26       0.24       0.23       0.27       0.33  

Savings and other domestic deposits

     0.25       0.27       0.30       0.33       0.37  

Core certificates of deposit

     1.05       1.13       1.19       1.21       1.25  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     0.32       0.34       0.37       0.41       0.47  

Other domestic time deposits of $250,000 or more

     0.44       0.50       0.52       0.61       0.68  

Brokered deposits and negotiable CDs

     0.55       0.62       0.67       0.71       0.71  

Deposits in foreign offices

     0.14       0.14       0.17       0.18       0.18  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     0.33       0.36       0.38       0.42       0.48  

Short-term borrowings

     0.09       0.10       0.12       0.14       0.16  

Federal Home Loan Bank advances

     0.14       0.14       0.18       1.20       0.50  

Subordinated notes and other long-term debt

     2.29       2.35       2.54       2.55       2.91  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     0.42     0.42     0.45     0.50     0.58
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest rate spread

     3.20     3.26     3.30     3.30     3.21

Impact of noninterest-bearing funds on margin

     0.14       0.12       0.12       0.15       0.17  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin

     3.34     3.38     3.42     3.45     3.38
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 6—Average Loans/Leases and Deposits

 

     Third Quarter      Second Quarter      3Q13 vs 3Q12     3Q13 vs 2Q13  

(dollar amounts in millions)

   2013      2012      2013      Amount     Percent     Amount     Percent  

Loans/Leases:

                 

Commercial and industrial

   $ 17,032      $ 16,343      $ 17,033      $ 689       4   $ (1     (0 )% 

Commercial real estate

     4,910        5,722        5,015        (812     (14     (105     (2
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     21,942        22,065        22,048        (123     (1     (106     (0

Automobile

     6,075        4,065        5,283        2,010       49       792       15  

Home equity

     8,341        8,369        8,263        (28     (0     78       1  

Residential mortgage

     5,256        5,177        5,225        79       2       31       1  

Other loans

     380        444        461        (64     (14     (81     (18
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     20,052        18,055        19,232        1,997       11       820       4  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

   $ 41,994      $ 40,120      $ 41,280      $ 1,874       5   $ 714       2
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Deposits:

                 

Demand deposits—noninterest-bearing

   $ 13,088      $ 12,329      $ 12,879      $ 759       6   $ 209       2

Demand deposits—interest-bearing

     5,763        5,814        5,927        (51     (1     (164     (3
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     18,851        18,143        18,806        708       4       45       0  

Money market deposits

     15,739        14,515        15,069        1,224       8       670       4  

Savings and other domestic time deposits

     5,007        4,975        5,115        32       1       (108     (2

Core certificates of deposit

     4,176        6,131        4,778        (1,955     (32     (602     (13
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     43,773        43,764        43,768        9       0       5       0  

Other deposits

     2,197        2,534        2,419        (337     (13     (222     (9
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

   $ 45,970      $ 46,298      $ 46,187      $ (328     (1 )%    $ (217     (0 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

2013 Third Quarter versus 2012 Third Quarter

Fully-taxable equivalent net interest income decreased $4.1 million, or 1%, from the year-ago quarter. This reflected a 4 basis point decrease in the FTE net interest margin to 3.34% as average earning assets were essentially unchanged with 5% loan growth offset by the planned reduction in investment securities. The primary items impacting the decrease in the NIM were:

 

   

16 basis point negative impact from the mix and yield of earning assets primarily reflecting a decrease in consumer loan yields.

Partially offset by:

 

   

15 basis point positive impact from the mix and yield of deposits reflecting the strategic focus on changing the funding sources from higher rate time deposits to no cost demand deposits and low cost money market deposits.

Average earning assets decreased $0.1 billion, or less than 1% from the year-ago quarter, driven by:

 

   

$1.5 billion, or 79%, decrease in loans held for sale, reflecting the impact of our intended securitization of automobile loans in the 2012 fourth quarter.

 

   

$0.8 billion, or 14%, decrease in average CRE loans. This decrease reflected continued runoff of the noncore portfolio and a slight decrease of the core portfolio as acceptable returns for new core originations were balanced against internal concentration limits and increased competition for projects sponsored by high quality developers.

 

   

$0.5 billion, or 5%, decrease in securities.

Partially offset by:

 

   

$2.0 billion, or 49%, increase in average on balance sheet automobile loans, as originations remained strong and our investments in the Northeast and upper Midwest continued to grow as planned.

 

   

$0.7 billion, or 4%, increase in average C&I loans and leases. This reflected the continued growth within the middle market healthcare vertical, equipment finance, and dealer floorplan.

 

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Average noninterest bearing deposits increased $0.8 billion, or 6%, while average interest-bearing liabilities decreased $1.1 billion, or 3%, from the 2012 third quarter, primarily reflecting:

 

   

$2.0 billion, or 32%, decrease in average core certificates of deposit due to the strategic focus on changing the funding sources to no cost demand deposits and low cost money markets deposits.

Partially offset by:

 

   

$1.2 billion, or 8%, increase in money market deposits reflecting the strategic focus on increased share of wallet and the customer’s, both consumer and commercial, preference for increased liquidity.

2013 Third Quarter versus 2013 Second Quarter

Compared to the 2013 second quarter, fully-taxable equivalent net interest income was unchanged, reflecting a $0.1 billion increase in average earnings assets, partially offset by a 4 basis point decrease in NIM. The primary items affecting the NIM were a 4 basis point negative impact from the mix and yield of earning assets and a 3 basis point negative impact of the $750.0 million of long-term debt issued during the quarter, partially offset by the 3 basis point benefit from lower cost deposits and increased equity.

 

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Table 7—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)

  2013     2012     Amount     Percent     2013     2012  

Assets:

           

Interest-bearing deposits in banks

  $ 70     $ 102     $ (32     (31 )%      0.18     0.20

Loans held for sale

    588       1,170       (582     (50     3.47       3.43  

Securities:

           

Available-for-sale and other securities:

           

Taxable

    6,574       8,156       (1,582     (19     2.31       2.34  

Tax-exempt

    568       405       163       40       3.98       4.18  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

    7,142       8,561       (1,419     (17     2.45       2.42  

Trading account securities

    82       57       25       44       0.45       1.42  

Held-to-maturity securities—taxable

    1,857       680       1,177       173       2.29       2.91  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

    9,081       9,298       (217     (2     2.39       2.45  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (3)

           

Commercial:

           

Commercial and industrial

    17,007       15,756       1,251       8       3.75       3.97  

Commercial real estate:

           

Construction

    583       584       (1     —         3.96       3.78  

Commercial

    4,488       5,299       (811     (15     4.08       3.87  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

    5,071       5,883       (812     (14     4.06       3.86  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    22,078       21,639       439       2       3.82       3.94  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

           

Automobile

    5,402       4,540       862       19       3.99       4.80  

Home equity

    8,299       8,305       (6     —         4.15       4.29  

Residential mortgage

    5,154       5,201       (47     (1     3.86       4.11  

Other consumer

    451       463       (12     (3     6.82       7.35  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

    19,306       18,509       797       4       4.09       4.44  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

    41,384       40,148       1,236       3       3.95       4.17  
         

 

 

   

 

 

 

Allowance for loan and lease losses

    (745     (908     163       (18    
 

 

 

   

 

 

   

 

 

   

 

 

     

Net loans and leases

    40,639       39,240       1,399       4      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

    51,123       50,718       405       1       3.69     3.86
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and due from banks

    930       967       (37     (4    

Intangible assets

    562       606       (44     (7    

All other assets

    3,974       4,163       (189     (5    
 

 

 

   

 

 

   

 

 

   

 

 

     

Total assets

  $ 55,844     $ 55,546     $ 298       1    
 

 

 

   

 

 

   

 

 

   

 

 

     

Liabilities and Shareholders’ Equity:

           

Deposits:

           

Demand deposits—noninterest-bearing

  $ 12,714     $ 11,890     $ 824       7     —       —  

Demand deposits—interest-bearing

    5,888       5,800       88       2       0.04       0.07  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

    18,602       17,690       912       5       0.01       0.02  

Money market deposits

    15,287       13,616       1,671       12       0.24       0.30  

Savings and other domestic deposits

    5,068       4,924       144       3       0.27       0.40  

Core certificates of deposit

    4,761       6,418       (1,657     (26     1.13       1.41  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

    43,718       42,648       1,070       3       0.35       0.50  

Other domestic time deposits of $250,000 or more

    317       315       2       1       0.49       0.67  

Brokered deposits and negotiable CDs

    1,676       1,535       141       9       0.62       0.74  

Deposits in foreign offices

    344       381       (37     (10     0.15       0.18  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

    46,055       44,879       1,176       3       0.36       0.51  

Short-term borrowings

    724       1,410       (686     (49     0.11       0.16  

Federal Home Loan Bank advances

    663       383       280       73       0.15       0.24  

Subordinated notes and other long-term debt

    1,467       2,179       (712     (33     2.39       2.81  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

    36,195       36,961       (766     (2     0.43       0.63  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

All other liabilities

    1,068       1,081       (13     (1    

Shareholders’ equity

    5,867       5,614       253       5      
 

 

 

   

 

 

   

 

 

   

 

 

     

Total liabilities and shareholders’ equity

  $ 55,844     $ 55,546     $ 298       1    
 

 

 

   

 

 

   

 

 

   

 

 

     

Net interest rate spread

            3.26       3.23  

Impact of noninterest-bearing funds on margin

            0.12       0.17  
         

 

 

   

 

 

 

Net interest margin

            3.38     3.40
         

 

 

   

 

 

 

 

(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.

 

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Table of Contents

2013 First Nine Months versus 2012 First Nine Months

Fully-taxable equivalent net interest income for the first nine-month period of 2013 was unchanged from the comparable year-ago period. This reflected the benefit of a $0.4 billion, or 1%, increase in average total earning assets. The fully-taxable equivalent net interest margin decreased to 3.38% from 3.40%. The increase in average earning assets reflected:

 

   

$1.2 billion, or 3%, increase in average total loans and leases.

Partially offset by:

 

   

$0.6 billion, or 50%, decrease in loans held for sale.

 

   

The following table details the change in our reported loans and deposits:

Table 8—Average Loans/Leases and Deposits— 2013 First Nine Months vs. 2012 First Nine Months

 

     Nine Months Ended September 30,      Change  

(dollar amounts in millions)

   2013      2012      Amount     Percent  

Loans/Leases:

          

Commercial and industrial

   $ 17,007      $ 15,756      $ 1,251       8

Commercial real estate

     5,071        5,883        (812     (14
  

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial

     22,078        21,639        439       2  

Automobile

     5,402        4,540        862       19  

Home equity

     8,299        8,305        (6     —    

Residential mortgage

     5,154        5,201        (47     (1

Other consumer

     451        463        (12     (3
  

 

 

    

 

 

    

 

 

   

 

 

 

Total consumer

     19,306        18,509        797       4  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total loans and leases

   $ 41,384      $ 40,148      $ 1,236       3
  

 

 

    

 

 

    

 

 

   

 

 

 

Deposits:

          

Demand deposits—noninterest-bearing

   $ 12,714      $ 11,890      $ 824       7

Demand deposits—interest-bearing

     5,888        5,800        88       2  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total demand deposits

     18,602        17,690        912       5  

Money market deposits

     15,287        13,616        1,671       12  

Savings and other domestic deposits

     5,068        4,924        144       3  

Core certificates of deposit

     4,761        6,418        (1,657     (26
  

 

 

    

 

 

    

 

 

   

 

 

 

Total core deposits

     43,718        42,648        1,070       3  

Other deposits

     2,337        2,231        106       5  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total deposits

   $ 46,055      $ 44,879      $ 1,176       3
  

 

 

    

 

 

    

 

 

   

 

 

 

The $1.2 billion, or 3%, increase in average total loans and leases primarily reflected:

 

   

$1.3 billion, or 8%, increase in the average C&I portfolio, primarily reflecting a combination of factors, including growth across multiple business lines including the healthcare vertical, dealer floorplan, and equipment finance.

 

   

$0.9 billion, or 19%, increase in the average automobile portfolio as originations remained strong.

Partially offset by:

 

   

$0.8 billion, or 14%, decline in the average CRE loans. This reflected continued runoff of the noncore and core portfolios as we balanced acceptable returns for new core origination against internal concentration limits and increased competition, particularly pricing, for high quality developers and projects.

 

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Table of Contents

The $1.2 billion, or 3%, increase in average total deposits reflected:

 

   

$1.7 billion, or 12%, increase in money market deposits.

 

   

$0.9 billion, or 5%, increase in total demand deposits.

Partially offset by:

 

   

$1.7 billion, or 26%, decline in core certificates of deposit.

 

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Table of Contents

Provision for Credit Losses

(This section should be read in conjunction with the Credit Risk section.)

The provision for credit losses is the expense necessary to maintain the ALLL and the AULC at levels appropriate to absorb our estimate of inherent credit losses in the loan and lease portfolio and the portfolio of unfunded loan commitments and letters-of-credit.

The provision for credit losses for the 2013 third quarter declined $13.3 million, or 54%, from the prior quarter and declined $25.6 million, or 69%, from the year-ago quarter. The 2013 third quarter included the implementation of enhancements to our commercial allowance for loan and lease losses (ALLL) model. In addition, as a result of a review of the existing consumer portfolios, the current quarter includes $13.1 million of Chapter 7 bankruptcy-related losses that were not identified in the 2012 third quarter implementation of the OCC’s regulatory guidance. We will finalize this review during the 2013 fourth quarter. The provision for credit losses for the first nine-month period of 2013 declined $42.2 million, or 39%, compared with the first nine-month period of 2012. The current quarter’s provision for credit losses was $44.3 million less than total NCOs, and the provision for credit losses for the first nine-month period of 2013 was $76.5 million less than total NCOs for the same period. (See Credit Quality discussion). Given the absolute low level of the provision for credit losses and the uncertain and uneven nature of the economic recovery, some degree of volatility on a quarter-to-quarter basis is expected.

Noninterest Income

(This section should be read in conjunction with Significant Item 4.)

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

Table 9—Noninterest Income

 

     2013     2012      3Q13 vs 3Q12     3Q13 vs 2Q13  

(dollar amounts in thousands)

   Third      Second     First     Fourth      Third      Amount     Percent     Amount     Percent  

Service charges on deposit accounts

   $ 72,918      $ 68,009     $ 60,883     $ 68,083      $ 67,806      $ 5,112       8   $ 4,909       7

Mortgage banking income

     23,621        33,659       45,248       61,711        44,614        (20,993     (47     (10,038     (30

Trust services

     30,470        30,666       31,160       31,388        29,689        781       3       (196     (1

Electronic banking

     24,282        23,345       20,713       21,011        22,135        2,147       10       937       4  

Brokerage income

     16,532        19,546       17,995       17,415        16,526        6       0       (3,014     (15

Insurance income

     17,269        17,187       19,252       17,268        17,792        (523     (3     82       0  

Gain on sale of loans

     5,063        3,348       2,616       20,690        6,591        (1,528     (23     1,715       51  

Bank owned life insurance income

     13,740        15,421       13,442       13,767        14,371        (631     (4     (1,681     (11

Capital markets fees

     12,825        12,229       7,834       12,694        11,596        1,229       11       596       5  

Securities gains (losses)

     98        (410     (509     863        4,169        (4,071     (98     508       N.M.  

Other income

     33,685        25,655       33,575       32,761        25,778        7,907       31       8,030       31  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 250,503      $ 248,655     $ 252,209     $ 297,651      $ 261,067      $ (10,564     (4 )%    $ 1,848       1
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

2013 Third Quarter versus 2012 Third Quarter

In the 2013 third quarter, noninterest income decreased $10.6 million, or 4%, from the year ago quarter, primarily reflecting:

 

   

$21.0 million, or 47%, decrease in mortgage banking income primarily driven by lower gain on sale margin and a higher percentage of originations held on balance sheet.

 

   

$4.1 million, or 98%, decrease in security gains as the year ago quarter had certain securities designated as available-for-sale that were sold and the proceeds from those sales were reinvested into the held-to-maturity portfolio.

Partially offset by:

 

   

$7.9 million, or 31%, increase in other noninterest income primarily related to fees associated with commercial loan activity.

 

   

$5.1 million, or 8%, increase in service charges on deposit accounts reflecting 9% household and 7% commercial relationship growth and changing customer account utilization patterns.

 

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2013 Third Quarter versus 2013 Second Quarter

Compared to the 2013 second quarter, noninterest income increased $1.8 million, or 1%, reflecting similar activity within other noninterest income and service charges on deposit accounts, which increased $8.0 million, or 31%, and $4.9 million, or 7%, respectively. These were partially offset by the $10.0 million, or 30%, decrease in mortgage banking income on 5% lower origination volume with tighter gain on sale margin and a $3.0 million, or 15%, decrease in brokerage income due to typical seasonal trends.

2013 First Nine Months versus 2012 First Nine Months

Noninterest income for the first nine-month period of 2013 decreased $48.8 million, or 6%, from the comparable year-ago period.

Table 10—Noninterest Income—2013 First Nine Months vs. 2012 First Nine Months

 

     Nine Months Ended September 30,      Change  

(dollar amounts in thousands)

   2013     2012      Amount     Percent  

Service charges on deposit accounts

   $ 201,810     $ 194,096      $ 7,714       4

Mortgage banking income

     102,528       129,381        (26,853     (21

Trust services

     92,296       90,509        1,787       2  

Electronic banking

     68,340       61,279        7,061       12  

Brokerage income

     54,073       54,811        (738     (1

Insurance income

     53,708       54,051        (343     (1

Gain on sale of loans

     11,027       37,492        (26,465     (71

Bank owned life insurance income

     42,603       42,275        328       1  

Capital markets fees

     32,888       34,652        (1,764     (5

Securities gains (losses)

     (821     3,906        (4,727     N.M.  

Other income

     92,915       97,754        (4,839     (5
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest income

   $ 751,367     $ 800,206      $ (48,839     (6 )% 
  

 

 

   

 

 

    

 

 

   

 

 

 

N.M.—Not relevant, as numerator of calculation is a loss in current period compared with gain in prior period.

The $48.8 million, or 6%, decrease in total noninterest income reflected:

 

   

$26.9 million, or 21%, decrease in mortgage banking income. This primarily reflected a $31.5 million, or 31%, decrease in origination and secondary marketing income.

 

   

$26.5 million, or 71%, decrease in gain on sale of loans, primarily related to the year-ago period’s automobile loan securitization.

 

   

$4.8 million, or 5%, decrease in other noninterest income, primarily related to the prior year’s $11.4 million bargain purchase gain from the FDIC-assisted Fidelity Bank acquisition and due to automobile operating lease portfolio run off.

Partially offset by:

 

   

$7.7 million, or 4%, increase in service charges on deposit accounts.

 

   

$7.1 million, or 12%, increase in electronic banking income, primarily reflecting increased debit card usage.

 

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Noninterest Expense

(This section should be read in conjunction with Significant Item 1,2,and 3.)

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

Table 11—Noninterest Expense

 

     2013      2012      3Q13 vs 3Q12     3Q13 vs 2Q13  

(dollar amounts in thousands)

   Third      Second     First      Fourth      Third      Amount     Percent     Amount     Percent  

Personnel costs

   $ 229,326      $ 263,862     $ 258,895      $ 253,952      $ 247,709      $ (18,383     (7 )%    $ (34,536     (13 )%

Outside data processing and other services

     49,313        49,898       49,265        48,699        50,396        (1,083     (2     (585     (1

Net occupancy

     35,591        27,656       30,114        29,008        27,599        7,992       29       7,935       29  

Equipment

     28,191        24,947       24,880        26,580        25,950        2,241       9       3,244       13  

Deposit and other insurance expense

     11,155        13,460       15,490        16,327        15,534        (4,379     (28     (2,305     (17

Professional services

     12,487        9,341       7,192        22,514        17,510