UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported): May 28, 2014

 

 

Huntington Bancshares Incorporated

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   1-34073   31-0724920

(State or other jurisdiction

of incorporation)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

 

41 South High Street, Columbus, Ohio   43287
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: 614-480-8300

Not Applicable

Former name or former address, if changed since last report

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 


Item 8.01 Other Events.

During the 2014 first quarter, Huntington Bancshares Incorporated (Huntington) reorganized our business segments to drive our ongoing growth and leverage the knowledge of our highly experienced team. Huntington now has five major business segments: Retail and Business Banking, Commercial Banking, Automobile Finance and Commercial Real Estate (AFCRE), Regional Banking and The Huntington Private Client Group (RBHPCG), and Home Lending. A Treasury / Other function includes our insurance brokerage business, along with technology and operations, other unallocated assets, liabilities, revenue, and expense.

Also during the 2014 first quarter, Huntington elected to early adopt ASU 2014-01 – Investments (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. The amendments in ASU 2014-01 permit entities to make an accounting policy election to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity recognizes the net investment performance in the income statement as a component of income tax expense (benefit).

Huntington is filing this Current Report on Form 8-K to update its Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the Securities and Exchange Commission (the “SEC”) on February 14, 2014 (the “2013 Form 10-K”), to reflect the reorganized business segment results and present the revised financial statements and supplemental data resulting from the adoption of ASU 2014-01. Similarly, Part II, Item 6. Selected Financial Data and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations have been retrospectively adjusted to conform to the current presentation.

Except as specifically noted in the filing, this Current Report on Form 8-K does not reflect events or developments that occurred after February 14, 2014, and does not modify or update the disclosures in any significant way other than as described above and set forth in the exhibits hereto. Without limiting the foregoing, this filing does not purport to update or amend the information contained in 2013 Form 10-K for any information, uncertainties, transactions, risks, events or trends occurring, or known to management. More current information is contained in the Company’s Form 10-Q for the three months ended March 31, 2014 and other filings with the SEC. The information in this Current Report on Form 8-K should be read in conjunction with the 2013 Form 10-K filed by Huntington with the SEC on February 14, 2014. Revisions to the 2013 Form 10-K included in this Current Report on Form 8-K as noted above supersede the corresponding portions of the 2012 Form 10-K.

Item 9.01. Financial Statements and Exhibits.

The exhibits referenced below are filed as part of this report.

 

12.1    Ratio of Earnings to Fixed Charges
12.2    Ratio of Earnings to Fixed Charges and Preferred Dividends
23.1    Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm
99.1    Selected Financial Data, Management’s Discussion and Analysis, and Consolidated Financial Statements and Notes thereto recast for the business segment reorganization and adoption of ASU 2014-01 for the fiscal years ended December 31, 2013, 2012, and 2011 (which replaces and supersedes Part II, Item 6, 7, and 8, respectively, of the 2013 Form 10-K filed on February 14, 2014).
 101    The following material from Huntington’s Form 10-K Report for the year ended December 31, 2013, formatted in XBRL: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Income, (3), Consolidated Statements of Comprehensive Income, (4) Consolidated Statements of Changes in Shareholders’ Equity, (5) Consolidated Statements of Cash Flows, and (6) the Notes to the Consolidated Financial Statements.

 

2


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

    Huntington Bancshares Incorporated
May 28, 2014     By:  

/s/ Howell D. McCullough III

    Name:   Howell D. McCullough III
    Title:   Chief Financial Officer

 

3

Exhibit 12.1

Ratio of Earnings to Fixed Charges

 

     Twelve Months Ended December 31,  

(dollar amounts in thousands of dollars)

   2013     2012     2011     2010     2009  

Earnings:

          

Income (loss) before income taxes

   $ 868,756      $ 833,581      $ 718,928      $ 364,113      $ (3,665,071
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Add: Fixed charges, excluding interest on deposits

     57,027        74,379        97,035        102,969        155,269   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings available for fixed charges, excluding interest on deposits

     925,783        907,960        815,963        467,082        (3,509,802

Add: Interest on deposits

     116,241        162,167        260,051        439,049        674,101   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings available for fixed charges, including interest on deposits

     1,042,024        1,070,127        1,076,014        906,131        (2,835,701
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fixed Charges:

          

Interest expense, excluding interest on deposits

     39,788        57,572        81,004        87,537        139,754   

Interest factor in net rental expense

     17,239        16,807        16,031        15,432        15,515   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed charges, excluding interest on deposits

     57,027        74,379        97,035        102,969        155,269   

Add: Interest on deposits

     116,241        162,167        260,051        439,049        674,101   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed charges, including interest on deposits

   $ 173,268      $ 236,546      $ 357,086      $ 542,018      $ 829,370   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratio of Earnings to Fixed Charges

          

Excluding interest on deposits

     16.23     12.21     8.41     4.54     (22.60 )x 

Including interest on deposits

     6.01     4.52     3.01     1.67     (3.42 )x 

Exhibit 12.2

Ratio of Earnings to Fixed Charges and Preferred Stock Dividends

 

     Twelve Months Ended December 31,  

(dollar amounts in thousands of dollars)

   2013     2012     2011     2010     2009  

Earnings:

          

Income (loss) before income taxes

   $ 868,756      $ 833,581      $ 718,928      $ 364,113      $ (3,665,071
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Add: Fixed charges, excluding interest on deposits and preferred stock dividends

     57,027        74,379        97,035        102,969        155,269   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings available for fixed charges, excluding interest on deposits

     925,783        907,960        815,963        467,082        (3,509,802

Add: Interest on deposits

     116,241        162,167        260,051        439,049        674,101   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings available for fixed charges, including interest on deposits

     1,042,024        1,070,127        1,076,014        906,131        (2,835,701
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fixed Charges:

          

Interest expense, excluding interest on deposits

     39,788        57,572        81,004        87,537        139,754   

Interest factor in net rental expense

     17,239        16,807        16,031        15,432        15,515   

Preferred stock dividends

     31,869        31,989        30,813        172,032        174,756   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed charges, excluding interest on deposits

     88,896        106,368        127,848        275,001        330,025   

Add: Interest on deposits

     116,241        162,167        260,051        439,049        674,101   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed charges, including interest on deposits

   $ 205,137      $ 268,535      $ 387,899      $ 714,050      $ 1,004,126   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratio of Earnings to Fixed Charges and Preferred Stock Dividends

          

Excluding interest on deposits

     10.41     8.54     6.38     1.70     (10.63 )x 

Including interest on deposits

     5.08     3.99     2.77     1.27     (2.82 )x 

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following Registration Statements of Huntington Bancshares Incorporated and subsidiaries (the “Company”) of our reports dated February 14, 2014 (except for Note 28, as to which the date is May 28, 2014), relating to the consolidated financial statements of the Company (which report expresses an unqualified opinion on the consolidated financial statements and includes an explanatory paragraph relating to the retrospective adjustment for a change in the accounting for qualified affordable housing projects to reflect the requirements of Financial Accounting Standards Board Accounting Standard Update 2014-01, Investments (Topic 323)—Investments – Equity Method and Joint Ventures, and a change in the composition of the Company’s reportable segments), and the effectiveness of the Company’s internal control over financial reporting, appearing in this current report on Form 8-K of the Company.

Form S-3ASR No. 333-156700 pertaining to Huntington Bancshares Incorporated automatic shelf registration of common stock, preferred stock, and debt securities dated January 13, 2009;

Form S-8 No. 33-10546 pertaining to Huntington Bancshares Incorporated Deferred Compensation Plan for Directors Post-Effective Amendment No. 2 dated January 28, 1991;

Form S-8 No. 33-41774 pertaining to Huntington Bancshares Incorporated Deferred Compensation Plan for Huntington Bancshares Incorporated Directors dated July 19, 1991;

Form S-8 No. 33-44208 pertaining to Huntington Supplemental Executive Stock Purchase and Tax Savings Plan and Trust Post-Effective Amendment No. 1 dated April 1, 1998;

Form S-8 No. 333-75032 pertaining to Huntington Bancshares Incorporated Employee Stock Incentive Plan dated December 13, 2001;

Form S-8 No. 333-113639 pertaining to the UNB Corp. 1987 Stock Option and Performance Unit Plan, UNB Corp. 1997 Stock Option Plan and BancFirst Ohio Corp. 1997 Omnibus Stock Incentive Plan Post-Effective Amendment No. 1 on Form S-8 to Form S-4 dated March 16, 2004;

Form S-8 No. 333-126256 pertaining to Huntington Bancshares Incorporated 2004 Stock and Long-Term Incentive Plan as filed on June 30, 2005;

Form S-8 No. 333-61074 pertaining to Huntington Bancshares Incorporated 2001 Stock and Long-Term Incentive Plan Post-Effective Amendment No. 1 dated June 30, 2005;

Form S-8 No. 333-136692 pertaining to Huntington Bancshares Incorporated Executive Deferred Compensation Plan dated August 17, 2006;

Form S-8POS No. 333-140897 pertaining to Sky Financial Group, Inc. 2002 Stock Option and Stock Appreciation Rights Plan, as amended; Sky Financial Group Inc. 1998 Stock Option Plan for Employees; Second Restatement of the Sky Financial Group, Inc. Amended and Restated 1998 Stock Option Plan for Directors; Century Financial Corporation Stock Option Plan; Amended and Restated Mid Am, Inc. 1997 Stock Option Plan; and Citizens Bancshares, Inc. Non-Statutory Sock Option and Stock Appreciation Rights Plan dated July 2, 2007;

Form S-8 No. 333-144403 pertaining to Huntington Bancshares Incorporated 2007 Stock and Long-Term Incentive Plan; Sky Financial Group, Inc. Profit Sharing, 401(k) and ESOP Plan, as amended; Sky Financial Group, Inc. Non-Qualified Retirement Plan, as amended; Sky Financial Group, Inc. Non-Qualified Retirement Plan II, as amended; and Inducement Grant dated July 6, 2007;

Form S-8 No. 333-153573 pertaining to the Huntington Investment and Tax Savings Plan dated September 18, 2008;


Form S-8 No. 333-158335 pertaining to the Huntington Supplemental Stock Purchase and Tax Savings Plan and Trust dated March 31, 2009;

Form S-8 No. 333-161779 pertaining to the Huntington Bancshares Incorporated Deferred Compensation Plan and Trust for Huntington Bancshares Incorporated Directors dated September 8, 2009;

Form S-8 No. 333-161780 pertaining Huntington Bancshares Incorporated Amended and Restated 2007 Stock and Long-Term Incentive Plan dated September 8, 2009;

Form S-8 No. 333-161782 pertaining to Inducement Grants dated September 8, 2009;

Form S-8 No. 333-168824 pertaining Huntington Bancshares Incorporated Second Amended and Restated 2007 Stock and Long-Term Incentive Plan dated August 13, 2010;

Form S-11 (no file number) filed with the Office of the Comptroller of the Currency in connection with the potential future issuance of Class C or Class D preferred securities of Huntington National Bank on May 18, 2001;

Form S-8 No. 333-173831 pertaining to the Huntington Supplemental Stock Purchase and Tax Savings Plan and Trust dated May 2, 2011;

Form S-4 No. 333-178205 pertaining to Registration of Floating Rate Series B Non-Cumulative Perpetual Preferred Stock and related Depositary Shares (each representing a 1/40th interest in a share of Floating Rate Series B Non-Cumulative Perpetual Preferred Stock) dated November 29, 2011;

Form S-8 No. 333-183325 pertaining to the Huntington Bancshares Incorporated 2012 Long-Term Incentive Plan, dated August 15, 2012;

Form S-8 No. 333-187725 pertaining to the issuance of common stock under the Huntington Investment and Tax Savings Plan, dated April 4, 2013;

Form S-3ASR No. 333-19078 pertaining to Huntington Bancshares Incorporated automatic shelf registration statement for Common Stock, Preferred Stock, Depositary Shares, Senior Debt Securities, Subordinated Debt Securities, Warrants, Purchase Contracts for Securities Guarantees, and Units, dated July 22, 2013;

Form S-4 No. 333-192600 pertaining to the Camco Financial Corporation merger and Proxy Statement/Prospectus, dated January 8, 2014; and

Form S-8 POS No. 333- 192600 pertaining to Camco Financial Corporation 2013 Equity Plan, Camco Financial Corporation 2010 Equity Plan, 2002 Equity Incentive Plan, Westwood Homestead Financial 1997 Stock Option Plan, Employment Agreement, effective as of December 31, 2008, by and among Camco Financial Corporation, Advantage Bank and James E. Huston, dated March 5, 2014.

 

LOGO

Columbus, Ohio

May 28, 2014

Exhibit 99.1

Item 6: Selected Financial Data

Table 1 - Selected Financial Data (1)

 

     Year Ended December 31,  

(dollar amounts in thousands, except per share amounts)

   2013     2012     2011     2010     2009  

Interest income

   $ 1,860,637     $ 1,930,263     $ 1,970,226     $ 2,145,392     $ 2,238,142  

Interest expense

     156,029       219,739       341,056       526,587       813,855  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     1,704,608       1,710,524       1,629,170       1,618,805       1,424,287  

Provision for credit losses

     90,045       147,388       174,059       634,547       2,074,671  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     1,614,563       1,563,136       1,455,111       984,258       (650,384

Noninterest income

     1,012,196       1,106,321       992,317       1,053,660       1,018,756  

Noninterest expense:

          

Goodwill impairment

     —          —          —          —          2,606,944  

Other noninterest expense

     1,758,003       1,835,876       1,728,500       1,673,805       1,426,499  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     1,758,003       1,835,876       1,728,500       1,673,805       4,033,443  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     868,756       833,581       718,928       364,113       (3,665,071

Provision (benefit) for income taxes

     227,474       202,291       172,555       57,465       (573,739
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 641,282     $ 631,290     $ 546,373     $ 306,648     $ (3,091,332
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends on preferred shares

     31,869       31,989       30,813       172,032       174,756  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) applicable to common shares

   $ 609,413     $ 599,301     $ 515,560     $ 134,616     $ (3,266,088
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share - basic

   $ 0.73     $ 0.70     $ 0.60     $ 0.19     $ (6.13

Net income (loss) per common share - diluted

     0.72       0.69       0.59       0.18       (6.13

Cash dividends declared per common share

     0.19       0.16       0.10       0.04       0.04  

Balance sheet highlights

          

Total assets (period end)

   $ 59,467,174     $ 56,141,474     $ 54,448,673     $ 53,813,903     $ 51,554,625  

Total long-term debt (period end) (2)

     2,458,272       1,364,834       3,097,857       3,813,827       3,802,670  

Total shareholders’ equity (period end)

     6,090,153       5,778,500       5,416,121       4,974,803       5,335,962  

Average long-term debt (2)

     2,372,765       2,273,140       3,275,913       3,953,177       5,558,001  

Average shareholders’ equity

     5,914,914       5,671,455       5,237,541       5,482,502       5,787,401  

Average total assets

     56,299,313       55,673,599       53,750,054       52,574,231       52,440,268  

Key ratios and statistics

          

Margin analysis - as a % of average earnings assets

          

Interest income (3)

     3.66 %     3.85 %     4.09 %     4.55 %     4.88

Interest expense

     0.30       0.44       0.71       1.11       1.77  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin (3)

     3.36 %     3.41 %     3.38 %     3.44 %     3.11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Return on average total assets

     1.14 %     1.13 %     1.02 %     0.58 %     (5.89 )% 

Return on average common shareholders’ equity

     11.0       11.3       10.6       3.5       (80.8

Return on average tangible common shareholders’ equity (4), (8)

     12.7       13.3       12.8       5.4       (22.3

Efficiency ratio (5)

     62.6       63.2       63.5       60.1       55.1  

Dividend payout ratio

     26.0       22.9       16.7       21.1       N.R.  

Average shareholders’ equity to average assets

     10.51       10.19       9.74       10.43       11.04  

Effective tax rate (benefit)

     26.2       24.3       24.0       15.8       15.7  

Tier 1 common risk-based capital ratio (period end) (8), (9)

     10.90       10.48       10.00       9.29       6.76  

Tangible common equity to tangible assets (period end) (6), (8)

     8.82       8.74       8.30       7.55       5.92  

Tangible equity to tangible assets (period end) (7), (8)

     9.47       9.44       9.01       8.23       9.24  

Tier 1 leverage ratio (period end) (10)

     10.67       10.36       10.28       9.41       10.09  

Tier 1 risk-based capital ratio (period end) (10)

     12.28       12.02       12.11       11.55       12.15  

Total risk-based capital ratio (period end) (10)

     14.57       14.50       14.77       14.46       14.55  

Other data

          

Full-time equivalent employees (average)

     11,964       11,494       11,398       11,038       10,384  

Domestic banking offices (period end)

     711       705       668       620       611  

N.R. - Not relevant, as denominator of calculation is a loss in prior period compared with income in current period.

 

1


(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)   Includes FHLB advances, subordinated notes, and other long-term debt. At December 31, 2013, FHLB advances excludes $1.8 billion of advances that are short-term in nature.
(3)   On an FTE basis assuming a 35% tax rate.
(4)   Net income (loss) less expense excluding amortization of intangibles for the period divided by average tangible shareholders’ equity. Average tangible shareholders’ equity equals average total 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.
(5)   Noninterest expense less amortization of intangibles divided by the sum of FTE net interest income and noninterest income excluding securities gains.
(6)   Tangible common equity (total common equity less goodwill and other intangible assets) divided by tangible assets (total assets less goodwill and other intangible assets). Other intangible assets are net of deferred tax, and calculated assuming a 35% tax rate.
(7)   Tangible equity (total equity less goodwill and other intangible assets) divided by tangible assets (total assets less goodwill and other intangible assets). Other intangible assets are net of deferred tax, and calculated assuming a 35% tax rate.
(8)   Tier 1 common equity, tangible 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.
(9)   In accordance with applicable regulatory reporting guidance, we are not required to retrospectively update historical filings for newly adopted accounting principles. Therefore, Tier 1 capital, Tier 1 common equity, and risk-weighted assets have not been updated for the adoption of ASU 2014-01.
(10)   In accordance with applicable regulatory reporting guidance, we are not required to retrospectively update historical filings for newly adopted accounting principles. Therefore, regulatory capital data has not been updated for the adoption of ASU 2014-01.

 

2


Item 7: 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 148 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, insurance service programs, and other financial products and services. Our 695 branches are located in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. 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.

The following 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 should be read in conjunction with the Consolidated Financial Statements, Notes to Consolidated Financial Statements, 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 2014 expectations.

 

    Discussion of Results of Operations - Reviews financial performance from a consolidated 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 risks, and compliance 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.

 

    Results for the Fourth Quarter - Provides a discussion of results for the 2013 fourth quarter compared with the 2012 fourth quarter.

 

    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.

EXECUTIVE OVERVIEW

2013 Financial Performance Review

In 2013, we reported net income of $641.3 million, or $0.72 per common share, relatively unchanged from the prior year. This resulted in a 1.14% return on average assets and a 12.7% return on average tangible common equity. In addition, we grew our base of consumer and business customers while our efficiency ratio decreased to 62.6% in 2013 from 63.2% in 2012. Results from our strategic business investments and OCR sales approach continued in 2013. (Also, see Significant Items Influencing Financial Performance Comparisons within the Discussion of Results of Operations.)

Fully-taxable equivalent net interest income was $1.7 billion in 2013, an increase of $1.0 million, or less than 1%, compared with 2012. This reflected the impact of 4% loan growth, offset by a 5 basis point decline in the net interest margin to 3.36%, as well as a 7% reduction in other earning assets, the majority of which were loans held for sale. The loan growth reflected an increase in average C&I loans due to continued growth within the middle market healthcare vertical, equipment finance, and dealer floorplan loans. Also, our average automobile loans increased, as the growth in originations remained strong and we kept these loans on our balance sheet instead of selling them through securitizations. As expected, our CRE portfolio declined, reflecting continued runoff as acceptable returns for new originations were balanced against internal concentration limits and increased competition for projects sponsored by high quality developers. Average loans held-for-sale decreased, reflecting the impact of automobile securitizations completed in 2012 and no such securitizations in 2013.

 

3


Noninterest income was $1.0 billion in 2013, a 9% decrease compared with 2012. Mortgage banking income was down $64.2 million due to a reduction in volume, lower gain on sale margin, and a higher percentage of originations held on the balance sheet. In addition, gains on sale of loans were down $40.0 million due to no auto securitizations in 2013. Service charges increased $9.6 million in 2013 despite a decrease of approximately $28 million due to a change that we made in February 2013 on posting order for our consumer transaction accounts.

Noninterest expense was $1.8 billion in 2013, a 4% decrease compared with 2012. The decrease was primarily due to lower marketing, deposit and other insurance, professional services and other expense as we actively managed the pace and size of investment. Other expense declined due to lower mortgage repurchase and warranty, and OREO and foreclosure expenses. This was partially offset by franchise repositioning expense related significant items included in net occupancy ($12.1 million), personnel costs ($6.7 million), equipment ($2.4 million), outside data processing and other services ($1.4 million), and other expense ($1.0 million). The increase in personnel costs primarily related to the increase in the number of average full-time equivalent employees was partially offset by a significant item of $33.9 million from the pension curtailment gain.

Most credit quality related metrics in 2013 reflected continued improvement. NALs declined $85.6 million, or 21%, from 2012 to $322.1 million, or 0.75% of total loans and leases. NPAs declined $93.6 million, or 21%, compared to a year-ago to $352.2 million, or 0.82% of total loans and leases, OREO, and other NPAs. The decreases primarily reflected meaningful improvement in both CRE and C&I NALs. The provision for credit losses decreased $57.3 million, or 39%, from 2012 due to the continued decline in classified, criticized, and nonaccrual loans and included the implementation of enhancements to our ALLL model. NCOs decreased $153.8 million, or 45%, from the prior year to $188.7 million. NCOs were an annualized 0.45% of average loans and leases in the current year compared to 0.85% in 2012. Within the consumer portfolio, NCOs related to Chapter 7 bankruptcy loans amounted to $22.8 million in 2013 and $34.6 million in 2012. The ACL as a percentage of total loans and leases decreased to 1.65% from 1.99% a year ago, while the ACL as a percentage of period-end total NALs increased to 221% from 199%.

The tangible common equity to tangible assets ratio at December 31, 2013, was 8.82%, up 8 basis points from a year ago. Our Tier 1 common risk-based capital ratio at year end was 10.90%, up from 10.48% at the end of 2012. The regulatory Tier 1 risk-based capital ratio at December 31, 2013, was 12.28%, up from 12.02% at December 31, 2012. The increase in the regulatory Tier 1 risk-based capital ratio reflected the increase in retained earnings, partially offset by the redemption of $50 million of qualifying REIT preferred securities in the 2013 fourth quarter, and growth in risk-weighted assets. All capital ratios were impacted by the repurchase of 17 million common shares over the last four quarters, none of which were repurchased during the 2013 fourth quarter. We have the ability to repurchase up to $136 million additional shares of common stock through the first quarter of 2014. We intend to continue disciplined repurchase activity consistent with our annual capital plan, our capital return objectives, and market conditions.

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 improvements in credit metrics, and (5) maintain strong capital and liquidity positions.

In 2013, we grew our base of consumer and business customers, while achieving positive operating leverage. Our performance in the second half of 2013 demonstrates strong business momentum, positioning us well for 2014. Highlights of our financial strength in 2013 include a strong balance sheet, ongoing deposit growth and quality loan growth in commercial and auto lending. Our deposit and lending growth is the result of focused execution and key strategic investments made over the last four years. We have done all of this while decreasing expenses by 4 percent, year over year, as the result of disciplined expense management.

We continue to face strong competition from other banks and financial service firms in our markets. To address these challenges, the cornerstone of our strategy has been to invest in the franchise in order to grow our market share and share-of-wallet. In this regard, our OCR methodology continued to deliver success in 2013. Consumer checking account households grew by 96 thousand households, or 8%, over the last year. Commercial relationships grew at a rate of 6% and have increased by 9 thousand commercial customers since 2012. Our “Fair Play” philosophy, combined with continued OCR success, positively impacted results in 2013.

Economy

The environment in 2013 was different than we thought it would be when we started the year, as the economic, interest rate, and political environments were more challenging. Currently, we are seeing good momentum going into 2014, as customers seem to have a slightly better mindset as the political environment seems to be less of an issue and the general economic outlook is more positive as evidenced by the following:

 

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    Although slower than the national growth rate of 1.74%, aggregate employment growth in our footprint states remained positive at 0.89% over the 12 month period ended October 2013.

 

    According to the Philadelphia FRB Coincident Economic Activity Index, Michigan, Indiana, and Ohio outperformed the nation in the economic recovery to date and prospects for growth over the next six months appear positive.

 

    Industrial vacancy rates have shown declining trends in our large footprint MSAs.

 

    Consistent with long-term trends, housing prices have been rising broadly across our footprint over 2013 and have tended to be more stable than the national average.

Legislative and Regulatory

A comprehensive discussion of legislative and regulatory matters affecting us can be found in the Regulatory Matters section included in Item 1 of this Form 10-K.

2014 Expectations

Net interest income is expected to moderately increase. We anticipate an increase in earning assets as total loans moderately grow and investment securities remain near current levels. However, those benefits to net interest income are expected to be mostly offset by continued downward pressure on NIM. While we are maintaining a disciplined approach to loan pricing, asset yields remain under pressure but the continued opportunity of deposit repricing remains, albeit closer to current levels.

The C&I portfolio is expected to grow consistent with the 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, automotive dealer relationships, 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 modestly outpace growth in total deposits. This reflects our continued focus on the overall cost of funds, through the issuance of long-term debt, as well as the continued shift towards low- and no-cost demand deposits and money market deposit accounts.

Noninterest income, excluding the impact of any net MSR activity, is expected to be slightly lower than recent levels, due to the anticipated decline in mortgage banking revenues and the continued refinement of products under our Fair Play philosophy.

Noninterest expense, excluding the net $10 million of benefit from Significant Items we experienced in 2013, is expected to remain around current levels. We are committed to delivering positive operating leverage for the 2014 full year.

NPAs are expected to show continued improvement. This year, NCOs represented the mid-point 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 moderate quarterly volatility.

The effective tax rate for 2014 is expected to be in the range of 25% to 28%, primarily reflecting the impacts of tax-exempt income, tax-advantaged investments, and general business credits.

 

5


Table 2 - Selected Annual Income Statements (1)

 

    Year Ended December 31,  
          Change from 2012           Change from 2011        

(dollar amounts in thousands, except per share amounts)

  2013     Amount     Percent     2012     Amount     Percent     2011  

Interest income

  $ 1,860,637     $ (69,626     (4 )%    $ 1,930,263     $ (39,963     (2 )%   $ 1,970,226  

Interest expense

    156,029       (63,710     (29     219,739       (121,317     (36     341,056  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    1,704,608       (5,916     —          1,710,524       81,354       5       1,629,170  

Provision for credit losses

    90,045       (57,343     (39     147,388       (26,671     (15     174,059  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

    1,614,563       51,427       3       1,563,136       108,025       7       1,455,111  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

    271,802       9,623       4       262,179       18,672       8       243,507  

Mortgage banking income

    126,855       (64,237     (34     191,092       107,684       129       83,408  

Trust services

    123,007       1,110       1       121,897       2,515       2       119,382  

Electronic banking

    92,591       10,301       13       82,290       (29,407     (26     111,697  

Insurance income

    69,264       (2,055     (3     71,319       1,849       3       69,470  

Brokerage income

    69,189       (3,037     (4     72,226       (8,141     (10     80,367  

Bank owned life insurance income

    56,419       377       1       56,042       (6,294     (10     62,336  

Capital markets fees

    45,220       (2,940     (6     48,160       11,620       32       36,540  

Gain on sale of loans

    18,171       (40,011     (69     58,182       26,238       82       31,944  

Securities gains (losses)

    418       (4,351     (91     4,769       8,450       N.R.       (3,681

Other income

    139,260       1,095       1       138,165       (19,182     (12     157,347  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

    1,012,196       (94,125     (9     1,106,321       114,004       11       992,317  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Personnel costs

    1,001,637       13,444       1       988,193       95,659       11       892,534  

Outside data processing and other services

    199,547       9,292       5       190,255       1,081       1       189,174  

Net occupancy

    125,344       14,184       13       111,160       2,031       2       109,129  

Equipment

    106,793       3,846       4       102,947       10,403       11       92,544  

Marketing

    51,185       (13,078     (20     64,263       (1,297     (2     65,560  

Deposit and other insurance expense

    50,161       (18,169     (27     68,330       (9,362     (12     77,692  

Amortization of intangibles

    41,364       (5,185     (11     46,549       (6,769     (13     53,318  

Professional services

    40,587       (25,171     (38     65,758       (2,858     (4     68,616  

Gain on early extinguishment of debt

    —          798       N.R       (798     8,899       (92     (9,697

Other expense

    141,385       (57,834     (29     199,219       9,589       5       189,630  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

    1,758,003       (77,873     (4     1,835,876       107,376       6       1,728,500  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    868,756       35,175       4       833,581       114,653       16       718,928  

Provision for income taxes

    227,474       25,183       12       202,291       29,736       17       172,555  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 641,282     $ 9,992         $ 631,290     $ 84,917       16 %   $ 546,373  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends on preferred shares

    31,869       (120     —          31,989       1,176       4       30,813  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to common shares

  $ 609,413     $ 10,112         $ 599,301     $ 83,741       16 %   $ 515,560  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares - basic

    834,205       (23,757     (3 )%      857,962       (5,729     (1 )%     863,691  

Average common shares - diluted (2)

    843,974       (19,428     (2     863,402       (4,222     —          867,624  

Per common share:

             

Net income - basic

  $ 0.73     $ 0.03         $ 0.70     $ 0.10       17 %   $ 0.60  

Net income - diluted

    0.72       0.03       4       0.69       0.10       17       0.59  

Cash dividends declared

    0.19       0.03       19       0.16       0.06       60       0.10  

Revenue - FTE

             

Net interest income

  $ 1,704,608     $ (5,916     —     $ 1,710,524     $ 81,354       5 %   $ 1,629,170  

FTE adjustment

    27,340       6,934       34       20,406       5,490       37       14,916  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (3)

    1,731,948       1,018       —          1,730,930       86,844       5       1,644,086  

Noninterest income

    1,012,196       (94,125     (9     1,106,321       114,004       11       992,317  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue (3)

  $ 2,744,144     $ (93,107     (3 )%    $ 2,837,251     $ 200,848       8 %   $ 2,636,403  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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”.
(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.

 

6


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 consolidated balance sheet and income statement trends are discussed. All earnings per share data is reported on a diluted basis. For additional insight on financial performance, please read this section in conjunction with the Business Segment Discussion.

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 among the three years ended December 31, 2013, 2012, and 2011 were impacted by a number of 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 2013.

 

2. Franchise Repositioning Related Expense. During 2013, $23.5 million of franchise repositioning related expense was recorded. This resulted in a negative impact of $0.02 per common share for 2013.

 

3. State deferred tax asset valuation allowance adjustment. During 2012, a valuation allowance of $21.3 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 2012. Additional information can be found in the Provision for Income Taxes section within this MD&A.

 

4. Bargain Purchase Gain. During 2012, an $11.2 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 2012.

 

5. Litigation Reserve. $23.5 million and $17.0 million of additions to litigation reserves were recorded as other noninterest expense in 2012 and 2011, respectively. This resulted in a negative impact of $0.02 per common share in 2012 and $0.01 per common share in 2011.

 

6. Visa ® . Prior to the Visa ® IPO occurring in March 2008, Visa ® was owned by its member banks, which included the Bank. As a result of this ownership, we received Class B shares of Visa ® stock at the time of the Visa ® IPO. In 2009, we sold these Visa ® stock shares, resulting in a $31.4 million pretax gain ($.04 per common share). This amount was recorded to noninterest income. In 2011, a $6.4 million derivative loss due to an increase in the liability associated with the sale of these shares was recorded to noninterest income.

 

7


7. Early Extinguishment of Debt. The positive impact relating to the early extinguishment of debt on our reported results was $9.7 million ($0.01 per common share) in 2011.

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 (1)

 

     2013     2012     2011  

(dollar amounts in thousands, except per share amounts)

   After-tax     EPS     After-tax     EPS     After-tax     EPS  

Net income - GAAP

   $ 641,282       $ 631,290       $ 546,373    

Earnings per share, after-tax

       0.72         0.69         0.59  

Significant items - favorable (unfavorable) impact:

   Earnings (2)     EPS
(3)(4)
    Earnings (2)     EPS
(3)(4)
    Earnings (2)     EPS
(3)(4)
 

Pension curtailment gain

   $ 33,926     $ 0.03     $ —        $ —        $ —        $ —     

Franchise repositioning related expense

     (23,461     (0.02     —          —          —          —     

State deferred tax asset valuation allowance adjustment (4)

     —          —          21,251       0.02       —          —     

Bargain purchase gain

     —          —          11,217       0.01       —          —     

Litigation reserves addition

     —          —          (23,500     (0.02     (17,028     (0.01

Visa ® -related derivative loss

     —          —          —          —          (6,385     —     

Gain on early extinguishment of debt

     —          —          —          —          9,697       0.01  

 

(1)   See Significant Items Influencing Financial Performance discussion.
(2)   Pretax unless otherwise noted.
(3)   Based upon the annual average outstanding diluted common shares.
(4)   After-tax.

Net Interest Income / Average Balance Sheet

Our primary source of revenue is net interest income, which is the difference between interest income from earning assets (primarily loans, securities, and direct financing leases), and interest expense of funding sources (primarily interest-bearing deposits and borrowings). Earning asset balances and related funding sources, as well as changes in the levels of interest rates, impact net interest income. The difference between the average yield on earning assets and the average rate paid for interest-bearing liabilities is the net interest spread. Noninterest-bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. The impact of the noninterest-bearing sources of funds, often referred to as “free” funds, is captured in the net interest margin, which is calculated as net interest income divided by average earning assets. Both the net interest margin and net interest spread are presented on a fully-taxable equivalent basis, which means that tax-free interest income has been adjusted to a pretax equivalent income, assuming a 35% tax rate.

The following table shows changes in fully-taxable equivalent interest income, interest expense, and net interest income due to volume and rate variances for major categories of earning assets and interest-bearing liabilities:

 

8


Table 4 - Change in Net Interest Income Due to Changes in Average Volume and Interest Rates (1)

 

     2013     2012  
     Increase (Decrease) From     Increase (Decrease) From  
     Previous Year Due To     Previous Year Due To  
Fully-taxable equivalent basis (2)          Yield/                 Yield/        

(dollar amounts in millions)

   Volume     Rate     Total     Volume     Rate     Total  

Loans and direct financing leases

   $ 66.1     $ (108.7   $ (42.6   $ 58.6     $ (105.6   $ (47.0

Investment securities

     (3.7     2.0       (1.7     1.9       (2.1     (0.2

Other earning assets

     (16.8     (1.7     (18.5     24.2       (11.5     12.7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income from earning assets

     45.6       (108.4     (62.8     84.7       (119.2     (34.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deposits

     1.0       (46.9     (45.9     (3.0     (94.8     (97.8

Short-term borrowings

     (0.7     (0.6     (1.3     (1.2     (0.3     (1.5

Federal Home Loan Bank advances

     0.8       (0.5     0.3       0.8       (0.8     —     

Subordinated notes and other long-term debt, including capital securities

     (8.3     (8.6     (16.9     (32.0     10.0       (22.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense of interest-bearing liabilities

     (7.2     (56.6     (63.8     (35.4     (85.9     (121.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   $ 52.8     $ (51.8   $ 1.0     $ 120.1     $ (33.3   $ 86.8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)   The change in interest rates due to both rate and volume has been allocated between the factors in proportion to the relationship of the absolute dollar amounts of the change in each.
(2)   Calculated assuming a 35% tax rate.

 

9


Table 5 - Consolidated Average Balance Sheet and Net Interest Margin Analysis

 

     Average Balances  
Fully-taxable equivalent basis (1)          Change from 2012           Change from 2011        

(dollar amounts in millions)

   2013     Amount     Percent     2012     Amount     Percent     2011  

Assets

              

Interest-bearing deposits in banks

   $ 70     $ (25     (26 )%   $ 95     $ (38     (29 )%   $ 133  

Federal funds sold and securities purchased under resale agreement

     —          —          —          —          (5     (100     5  

Loans held for sale

     521       (566     (52     1,087       799       277       288  

Available-for-sale and other securities:

              

Taxable

     6,383       (1,515     (19     7,898       (473     (6     8,371  

Tax-exempt

     563       136       32       427       (1     —          428  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     6,946       (1,379     (17     8,325       (474     (5     8,799  

Trading account securities

     80       13       19       67       (40     (37     107  

Held-to-maturity securities - taxable

     2,155       1,230       133       925       550       147       375  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     9,181       (136     (1     9,317       36       —          9,281  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (3)

              

Commercial:

              

Commercial and industrial

     17,174       1,230       8       15,944       2,347       17       13,597  

Commercial real estate:

              

Construction

     580       (2     —          582       (10     (2     592  

Commercial

     4,449       (749     (14     5,198       (415     (7     5,613  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     5,029       (751     (13     5,780       (425     (7     6,205  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     22,203       479       2       21,724       1,922       10       19,802  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

              

Automobile loans and leases

     5,679       1,153       25       4,526       (1,351     (23     5,877  

Home equity

     8,310       (5     —          8,315       375       5       7,940  

Residential mortgage

     5,198       8       —          5,190       473       10       4,717  

Other consumer

     436       (19     (4     455       (76     (14     531  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     19,623       1,137       6       18,486       (579     (3     19,065  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     41,826       1,616       4       40,210       1,343       3       38,867  

Allowance for loan and lease losses

     (725     151       (17     (876     233       (21     (1,109
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans and leases

     41,101       1,767       4       39,334       1,576       4       37,758  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     51,598       889       2       50,709       2,135       4       48,574  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and due from banks

     908       (182     (17     1,090       (346     (24     1,436  

Intangible assets

     557       (43     (7     600       (45     (7     645  

All other assets

     3,961       (190     (5     4,151       (53     (1     4,204  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 56,299     $ 625       1 %   $ 55,674     $ 1,924       4 %   $ 53,750  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

              

Deposits:

              

Demand deposits - noninterest-bearing

   $ 12,871     $ 671       6 %   $ 12,200     $ 3,547       41 %   $ 8,653  

Demand deposits - interest-bearing

     5,855       44       1       5,811       294       5       5,517  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     18,726       715       4       18,011       3,841       27       14,170  

Money market deposits

     15,675       1,774       13       13,901       579       4       13,322  

Savings and other domestic deposits

     5,029       96       2       4,933       198       4       4,735  

Core certificates of deposit

     4,549       (1,672     (27     6,221       (1,481     (19     7,702  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     43,979       913       2       43,066       3,137       8       39,929  

Other domestic time deposits of $250,000 or more

     306       (20     (6     326       (139     (30     465  

Brokered time deposits and negotiable CDs

     1,606       16       1       1,590       168       12       1,422  

Deposits in foreign offices

     346       (26     (7     372       (17     (4     389  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     46,237       883       2       45,354       3,149       7       42,205  

Short-term borrowings

     700       (610     (47     1,310       (745     (36     2,055  

Federal Home Loan Bank advances

     711       413       139       298       187       168       111  

Subordinated notes and other long-term debt

     1,662       (314     (16     1,976       (1,189     (38     3,165  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     36,439       (299     (1     36,738       (2,145     (6     38,883  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

All other liabilities

     1,074       9       1       1,065       89       9       976  

Shareholders’ equity

     5,915       244       4       5,671       433       8       5,238  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 56,299     $ 625       1 %   $ 55,674     $ 1,924       4 %   $ 53,750  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Continued

 

10


Table 6 - Consolidated Average Balance Sheet and Net Interest Margin Analysis (Continued)

 

     Interest Income / Expense      Average Rate (2)  
Fully-taxable equivalent basis (1)                                        

(dollar amounts in millions)

   2013      2012      2011      2013     2012     2011  

Assets

               

Interest-bearing deposits in banks

   $ 0.1      $ 0.2      $ 0.1        0.15 %     0.21 %     0.11 %

Federal funds sold and securities purchased under resale agreement

     —           —           —           —          0.29       0.09  

Loans held for sale

     18.9        36.8        12.3        3.63       3.38       4.27  

Available-for-sale and other securities:

               

Taxable

     148.6        184.3        208.0        2.33       2.33       2.48  

Tax-exempt

     25.7        17.7        18.3        4.56       4.14       4.28  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     174.2        202.0        226.3        2.51       2.43       2.57  

Trading account securities

     0.4        0.9        1.5        0.44       1.27       1.37  

Held-to-maturity securities - taxable

     50.2        24.1        11.2        2.33       2.60       2.99  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total securities

     224.8        226.9        239.0        2.45       2.43       2.57  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Loans and leases: (3)

               

Commercial:

               

Commercial and industrial

     643.7        639.5        585.6        3.75       4.01       4.31  

Commercial real estate:

               

Construction

     23.4        22.9        23.0        4.04       3.93       3.88  

Commercial

     182.6        208.6        222.7        4.11       4.01       3.97  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Commercial real estate

     206.1        231.5        245.7        4.10       4.00       3.96  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total commercial

     849.8        871.0        831.3        3.83       4.01       4.20  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Consumer:

               

Automobile loans and leases

     221.5        214.1        293.2        3.90       4.73       4.99  

Home equity

     345.4        355.9        355.0        4.16       4.28       4.47  

Residential mortgage

     199.6        212.7        213.6        3.84       4.10       4.53  

Other consumer

     27.9        33.3        40.6        6.41       7.31       7.63  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total consumer

     794.4        815.9        902.4        4.05       4.41       4.73  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total loans and leases

     1,644.2        1,686.8        1,733.7        3.93       4.19       4.46  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total earning assets

   $ 1,888.0      $ 1,950.7      $ 1,985.1        3.66 %     3.85 %     4.09 %
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

               

Deposits:

               

Demand deposits - noninterest-bearing

   $ —         $ —         $ —           —   %     —   %     —   %

Demand deposits - interest-bearing

     2.5        3.6        5.1        0.04       0.06       0.09  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total demand deposits

     2.5        3.6        5.1        0.01       0.02       0.04  

Money market deposits

     38.8        40.2        54.3        0.25       0.29       0.41  

Savings and other domestic deposits

     13.3        18.9        32.7        0.26       0.38       0.69  

Core certificates of deposit

     50.5        85.0        150.0        1.11       1.37       1.95  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total core deposits

     105.2        147.7        242.2        0.34       0.48       0.77  

Other domestic time deposits of $250,000 or more

     1.4        2.1        4.5        0.47       0.66       0.97  

Brokered time deposits and negotiable CDs

     9.1        11.7        12.5        0.57       0.74       0.88  

Deposits in foreign offices

     0.5        0.7        0.9        0.15       0.18       0.23  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total deposits

     116.2        162.2        260.1        0.35       0.49       0.78  

Short-term borrowings

     0.7        2.0        3.5        0.10       0.16       0.17  

Federal Home Loan Bank advances

     1.1        0.8        0.8        0.15       0.28       0.74  

Subordinated notes and other long-term debt

     38.0        54.7        76.7        2.29       2.77       2.42  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     156.0        219.7        341.1        0.43       0.60       0.88  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income

   $ 1,731.9      $ 1,730.9      $ 1,644.1         
  

 

 

    

 

 

    

 

 

        

Net interest rate spread

              3.23       3.25       3.21  

Impact of noninterest-bearing funds on margin

              0.13       0.16       0.18  
           

 

 

   

 

 

   

 

 

 

Net interest margin

              3.36 %     3.41 %     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 fees.
(3)   For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans.

2013 vs. 2012

Fully-taxable equivalent net interest income for 2013 increased $1.0 million, or less than 1%, from 2012. This reflected the impact of 4% loan growth, a 5 basis point decrease in the NIM to 3.36%, as well as a 7% reduction in other earnings assets, the majority of which were loans held for sale. The primary items impacting the decrease in the NIM were:

 

11


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

 

    3 basis point decrease in the benefit to the margin of non-interest bearing funds, reflecting lower interest rates on total interest bearing liabilities from the prior year.

Partially offset by:

 

    14 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.

 

    3 basis point positive impact from noncore funding primarily reflecting lower debt costs.

Average earning assets increased $0.9 billion, or 2%, from the prior year, driven by:

 

    $1.2 billion, or 8%, increase in average C&I loans and leases. This reflected the continued growth within the middle market healthcare vertical, equipment finance, and dealer floorplan.

 

    $1.2 billion, or 25%, increase in average on balance sheet automobile loans, as the growth in originations, while below industry levels, remained strong and our investments in the Northeast and upper Midwest continued to grow as planned.

Partially offset by:

 

    $0.8 billion, or 13%, decrease in average CRE loans, as acceptable returns for new originations were balanced against internal concentration limits and increased competition for projects sponsored by high quality developers.

 

    $0.6 billion, or 52%, decrease in loans held-for-sale reflecting the impact of automobile loan securitizations completed in 2012.

While there was minimal impact on the full-year average balance sheet, $1.9 billion of net investment securities were purchased during the 2013 fourth quarter. Our investment securities portfolio is evaluated under established asset/liability management objectives. Additionally, $0.6 billion of direct purchase municipal instruments were reclassified on December 31, 2013 from C&I loans to available-for-sale securities.

Average noninterest bearing deposits increased $0.7 billion, or 6%, while average interest-bearing liabilities decreased $0.3 billion, or 1%, from 2012, primarily reflecting:

 

    $1.7 billion, or 27%, 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 market deposits.

 

    $0.6 billion, or 47%, decrease in short-term borrowings due to a focused effort to reduce collateralized deposits.

Partially offset by:

 

    $1.8 billion, or 13%, increase in money market deposits reflecting the strategic focus on customer growth and increased share of wallet among both consumer and commercial customers.

While there was minimal impact on the full-year average balance sheet, average subordinated notes and other long-term debt reflect the issuance of $0.5 billion and $0.8 billion of long-term debt in the 2013 fourth quarter and the 2013 third quarter, respectively.

2012 vs. 2011

Fully-taxable equivalent net interest income for 2012 increased $86.8 million, or 5%, from 2011. This reflected the favorable impact of a $2.1 billion, or 4%, increase in average earning assets, partially offset by a 3 basis point decline in the net interest margin.

 

12


The increase in average earning assets reflected:

 

    $1.9 billion, or 10%, increase in average commercial loans and leases.

 

    $0.8 billion, or 277% increase in average loans held for sale.

Partially offset by:

 

    $0.6 billion, or 3% decrease in average consumer loans including a $1.4 billion, or 23%, decrease in automobile loans, reflecting $2.5 billion of automobile loans sold throughout the year.

The 3 basis point increase in the FTE net interest margin reflected:

 

    The positive impact of a 29 basis point decline in total deposit costs.

Partially offset by:

 

    24 basis point declines in the yield on earnings assets and a 2 basis point decrease related to non-deposit funding and other items.

The $3.1 billion, or 8%, increase in average total core deposits from the prior year reflected:

 

    $3.8 billion, or 27%, increase in total demand deposits.

 

    $0.6 billion, or 4%, increase in money market deposits.

Partially offset by:

 

    $1.5 billion, or 19%, decrease in core certificates of deposits.

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 in 2013 was $90.0 million, down $57.3 million, or 39%, from 2012, reflecting a $153.8 million, or 45%, decrease in NCOs. The provision for credit losses in 2013 was $98.6 million less than total NCOs. In addition, as a result of a review of the existing consumer portfolios, 2013 also includes $22.8 million of Chapter 7 bankruptcy-related losses that were not identified in the 2012 third quarter implementation of the OCC’s regulatory guidance. (see Credit Quality discussion)

Noninterest Income

(This section should be read in conjunction with Significant Items 4 and 6.)

The following table reflects noninterest income for the past three years:

Table 7 - Noninterest Income

 

     Twelve Months Ended December 31,  
            Change from 2012            Change from 2011        

(dollar amounts in thousands)

   2013      Amount     Percent     2012      Amount     Percent     2011  

Service charges on deposit accounts

   $ 271,802      $ 9,623       4 %   $ 262,179      $ 18,672       8 %   $ 243,507  

Mortgage banking income

     126,855        (64,237     (34     191,092        107,684       129       83,408  

Trust services

     123,007        1,110       1       121,897        2,515       2       119,382  

Electronic banking

     92,591        10,301       13       82,290        (29,407     (26     111,697  

Insurance income

     69,264        (2,055     (3     71,319        1,849       3       69,470  

Brokerage income

     69,189        (3,037     (4     72,226        (8,141     (10     80,367  

Bank owned life insurance income

     56,419        377       1       56,042        (6,294     (10     62,336  

Capital markets fees

     45,220        (2,940     (6     48,160        11,620       32       36,540  

Gain on sale of loans

     18,171        (40,011     (69     58,182        26,238       82       31,944  

Securities gains (losses)

     418        (4,351     (91     4,769        8,450       N.R.       (3,681

Other income

     139,260        1,095       1       138,165        (19,182     (12     157,347  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 1,012,196      $ (94,125     (9 )%   $ 1,106,321      $ 114,004       11 %   $ 992,317  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

N.R. - Not relevant, as denominator of calculation is a loss in prior period compared with income in current period.

 

13


2013 vs. 2012

Noninterest income decreased $94.1 million, or 9%, from the prior year, primarily reflecting:

 

    $64.2 million, or 34%, decrease in mortgage banking income primarily driven by 9% reduction in volume, lower gain on sale margin, and a higher percentage of originations held on the balance sheet.

 

    $40.0 million, or 69%, decrease in gain on sale of loans as no auto loan securitizations occurred in 2013 compared to $2.3 billion of auto loan securitizations in 2012.

 

    $4.4 million, or 91%, decrease in securities gains as the prior year 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:

 

    $10.3 million, or 13%, increase in electronic banking income due to continued consumer household growth.

 

    $9.6 million, or 4%, increase in service charges on deposit accounts reflecting 8% consumer household and 6% commercial relationship growth and changing customer usage patterns. This more than offset the approximately $28.0 million negative impact of the February 2013 implementation of a new posting order for consumer transaction accounts.

 

    $1.1 million, or 1%, increase in other income. In accordance with ASC 323-740, the low income housing tax credit investment amortization expense is now presented as a component of provision for income taxes. Previously, the amortization expense was included in other income. This change resulted in higher other income. In addition, there was an increase in fees associated with commercial loan activity. These increases were partially offset by an $11.2 million bargain purchase gain associated with the FDIC-assisted Fidelity Bank acquisition in the prior year.

2012 vs. 2011

Noninterest income increased $114.0 million, or 11%, from the prior year, primarily reflecting:

 

    $107.7 million, or 129%, increase in mortgage banking income. This primarily reflected a $78.6 million increase in origination and secondary marketing income. Additionally, we recorded a $14.3 million net trading gain related to MSR hedging in 2012 compared to a net trading loss related to MSR hedging of $11.9 million in 2011.

 

    $26.2 million, or 82%, increase in gain on sale of loans.

 

    $18.7 million, or 8%, increase in service charges on deposits, due to continued strong customer growth.

 

    $11.6 million, or 32%, increase in capital market fees primarily reflecting strong customer demand for derivatives and other risk management products.

Partially offset by:

 

    $29.4 million, or 26%, decrease in electronic banking income related to implementing the lower debit card interchange fee structure mandated in the Durbin Amendment of the Dodd-Frank Act.

 

    $19.2 million, or 12%, decrease in other income. In accordance with ASC 323-740, the low income housing tax credit investment amortization expense is now presented as a component of provision for income taxes. Previously the amortization expense was included in other income. This change resulted in lower other income. In addition, there was a decrease in automobile operating leases income, partially offset by the bargain purchase gain from the Fidelity Bank acquisition.

 

14


Noninterest Expense

(This section should be read in conjunction with Significant Items 1, 2, 5, and 7.)

The following table reflects noninterest expense for the past three years:

Table 8 - Noninterest Expense

 

     Twelve Months Ended December 31,  
            Change from 2012           Change from 2011        

(dollar amounts in thousands)

   2013      Amount     Percent     2012     Amount     Percent     2011  

Personnel costs

   $ 1,001,637      $ 13,444       1 %   $ 988,193     $ 95,659       11 %   $ 892,534  

Outside data processing and other services

     199,547        9,292       5       190,255       1,081       1       189,174  

Net occupancy

     125,344        14,184       13       111,160       2,031       2       109,129  

Equipment

     106,793        3,846       4       102,947       10,403       11       92,544  

Marketing

     51,185        (13,078     (20     64,263       (1,297     (2     65,560  

Deposit and other insurance expense

     50,161        (18,169     (27     68,330       (9,362     (12     77,692  

Amortization of intangibles

     41,364        (5,185     (11     46,549       (6,769     (13     53,318  

Professional services

     40,587        (25,171     (38     65,758       (2,858     (4     68,616  

Gain on early extinguishment of debt

     —           798       (100     (798     8,899       (92     (9,697

Other expense

     141,385        (57,834     (29     199,219       9,589       5       189,630  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

   $ 1,758,003      $ (77,873     (4 )%   $ 1,835,876     $ 107,376       6 %   $ 1,728,500  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Number of employees (average full-time equivalent)

     11,964        470       4     11,494       96       1     11,398  

2013 vs. 2012

Noninterest expense decreased $77.9 million, or 4%, from 2012, and primarily reflected:

 

    $57.8 million, or 29%, decline in other expense, reflecting a reduction in litigation expense, mortgage repurchases and warranty expense, OREO and foreclosure costs, and reduction in operating lease expense.

 

    $25.2 million, or 38%, decrease in professional services, reflecting a decrease in outside consultant expenses and legal services, primarily collections.

 

    $18.2 million, or 27%, decrease in deposit and other insurance expense due to lower insurance premiums.

 

    $13.1 million, or 20%, decrease in marketing, primarily reflecting lower levels of advertising, and reduced promotional offers.

 

    $5.2 million, or 11%, decrease due to the continued amortization of core deposit intangibles.

Partially offset by:

 

    $14.2 million, or 13%, increase in net occupancy expense, reflecting $12.1 million of franchise repositioning expense related to branch consolidation and facilities optimization.

 

    $13.4 million, or 1%, increase in personnel costs, primarily reflecting the $38.8 million increase in salaries due to a 4% increase in the number of average full-time equivalent employees as employee count increased mainly in technology and consumer areas and $6.7 million of franchise repositioning expense related to branch consolidation and severance expenses. This was partially offset by the $33.9 million one-time, non-cash gain related to the pension curtailment.

 

    $9.3 million, or 5%, increase in outside data processing as we continue to invest in technology supporting our products, services, and our Continuous Improvement initiatives.

 

    $3.9 million, or 4%, increase in equipment, including $2.4 million of branch consolidation and facilities optimization related expenses.

 

15


2012 vs. 2011

Noninterest expense increased $107.4 million, or 6%, from 2011 and primarily reflected:

 

    $95.7 million, or 11%, increase in personnel costs, primarily reflecting an increase in bonuses, commissions, and full-time equivalent employees, as well as increased salaries and benefits.

 

    $10.4 million, or 11%, increase in equipment, primarily reflecting the impact of depreciation from our in-store branch expansions and other technology investments.

 

    $9.3 million, or 5%, increase in other expense primarily reflecting higher litigation reserves, increased sponsorships and public relations expense, and an increase in the provision for mortgage representations and warranties.

Partially offset by:

 

    $9.4 million, or 12%, decline in deposit and other insurance expense.

Provision for Income Taxes

(This section should be read in conjunction with Significant Item 3, and Note 17 of the Notes to Consolidated Financial Statements.)

2013 versus 2012

The provision for income taxes was $227.5 million for 2013 compared with a provision for income taxes of $202.3 million in 2012. Both years included the benefits from tax-exempt income, tax-advantaged investments, and general business credits. In 2013, a $6.0 million reduction in the 2013 provision for state income taxes, net of federal, was recorded for the portion of state deferred tax assets and state net operating loss carryforwards that are more likely than not to be realized, compared to a $21.3 million reduction in 2012. At December 31, 2013, we had a net federal and state deferred tax asset of $130.6 million. Based on both positive and negative evidence and our level of forecasted future taxable income, we determined no impairment existed to the net federal and state deferred tax asset at December 31, 2013. For regulatory capital purposes, there was no disallowed net deferred tax asset at December 31, 2013 and December 31, 2012.

We file income tax returns with the IRS and various state, city, and foreign jurisdictions. Federal income tax audits have been completed for tax years through 2009. In the first quarter of 2013, the IRS began an examination of our 2010 and 2011 consolidated federal income tax returns. We have appealed certain proposed adjustments resulting from the IRS examination of our 2006, 2007, 2008, 2009, and 2010 tax returns. We believe the tax positions taken related to such proposed adjustments are correct and supported by applicable statutes, regulations, and judicial authority, and intend to vigorously defend them. It is possible the ultimate resolution of the proposed adjustments, if unfavorable, may be material to the results of operations in the period it occurs. Nevertheless, although no assurances can be given, we believe the resolution of these examinations will not, individually or in the aggregate, have a material adverse impact on our consolidated financial position. Various state and other jurisdictions remain open to examination, including Kentucky, Indiana, Michigan, Pennsylvania, West Virginia and Illinois.

On September 13, 2013, the IRS released final tangible property regulations under Sections 162(a) and 263(a) of the IRC and proposed regulations under Section 168 of the IRC. These regulations generally apply to taxable years beginning on or after January 1, 2014 and will affect all taxpayers that acquire, produce, or improve tangible property. Based upon preliminary analysis, we do not expect that the adoption of these regulations will have a material impact on the Company’s Consolidated Financial Statements.

2012 versus 2011

The provision for income taxes was $202.3 million for 2012 compared with a provision of $172.6 million in 2011. Both years included the benefits from tax-exempt income, tax-advantaged investments, and general business credits. In 2012, a $21.3 million reduction in the 2012 provision for state income taxes, net of federal, was recorded for the portion of state deferred tax assets and state net operating loss carryforwards that are more likely than not to be realized.

RISK MANAGEMENT AND CAPITAL

A comprehensive discussion of risk management and capital matters affecting us can be found in the Risk Governance section included in Item 1A and the Regulatory Matters section of Item 1 of this Form 10-K.

Some of the more significant processes used to manage and control credit, market, liquidity, operational, and compliance risks are described in the following paragraphs.

 

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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 AFS and HTM securities portfolio (see Note 4 and Note 5 of the Notes to Consolidated Financial Statements) . We engage with other financial counterparties for a variety of purposes including investing, asset and liability management, mortgage banking, and trading activities. While there is credit risk associated with derivative activity, we believe this exposure is minimal.

We continue to focus on the identification, monitoring, and managing of our credit risk. In addition to the traditional credit risk mitigation strategies of credit policies and processes, market risk management activities, and portfolio diversification, we use additional quantitative measurement capabilities utilizing external data sources, enhanced use of modeling technology, and internal stress testing processes. Our portfolio management resources demonstrate our commitment to maintaining an aggregate moderate-to-low risk profile. In our efforts to continue to identify risk mitigation techniques, we have focused on product design features, origination policies, and treatment strategies for delinquent or stressed borrowers.

The maximum level of credit exposure to individual credit borrowers is limited by policy guidelines based on the perceived risk of each borrower or related group of borrowers. All authority to grant commitments is delegated through the independent credit administration function and is closely monitored and regularly updated. Concentration risk is managed through limits on loan type, geography, industry, and loan quality factors. We focus predominantly on extending credit to retail and commercial customers with existing or expandable relationships within our primary banking markets, although we will consider lending opportunities outside our primary markets if we believe the associated risks are acceptable and aligned with strategic initiatives. Although we offer a broad set of products, we continue to develop new lending products and opportunities. Each of these new products and opportunities goes through a rigorous development and approval process prior to implementation to ensure our overall objective of maintaining an aggregate moderate-to-low risk portfolio profile.

The checks and balances in the credit process and the independence of the credit administration and risk management functions are designed to appropriately assess and sanction the level of credit risk being accepted, facilitate the early recognition of credit problems when they occur, and to provide for effective problem asset management and resolution. For example, we do not extend additional credit to delinquent borrowers except in certain circumstances that substantially improve our overall repayment or collateral coverage position. To that end, we continue to expand resources in our risk management areas.

Although credit quality improved significantly in 2013, there remained a degree of economic stress that continued to negatively impact us and the financial services industry as a whole. We continued to experience higher than historical levels of delinquencies and NCOs in our residential secured Consumer loan portfolios. The performance metrics associated with the residential mortgage, and home equity portfolios continued to be the most significantly impacted portfolios as real estate prices remain lower than pre-2008 levels, and the unemployment rate remains high.

Loan and Lease Credit Exposure Mix

At December 31, 2013, our loans and leases totaled $43.1 billion, representing a $2.4 billion, or 6%, increase compared to $40.7 billion at December 31, 2012. The majority of the portfolio growth occurred in the Automobile portfolio, with C&I and Residential showing modest growth. Huntington remained committed to the high quality origination strategy in the automobile portfolio. The CRE portfolio declined as a result of continued runoff as acceptable returns for new originations were balanced against internal concentration limits and increased competition for projects sponsored by high quality developers.

Total commercial loans were $22.4 billion at December 31, 2013, and represented 52% of our total loan and lease credit exposure. Our commercial loan 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 result of the credit decision process, which focuses on cash flow from operations of the business to repay the debt. The operation, sale, rental, or refinancing of the real estate is not considered the primary repayment source for these types of loans. As we have expanded our C&I portfolio, we have developed a series of “verticals” to ensure that new products or lending types are embedded within a structured, centralized Commercial Lending area with designated experienced credit officers.

 

17


CRE – CRE loans consist of loans to developers and REITs supporting income-producing or for-sale commercial real estate properties. We mitigate our risk on these loans by requiring collateral values that exceed the loan amount and underwriting the loan with projected cash flow in excess of the debt service requirement. These loans are made to finance properties such as apartment buildings, office and industrial buildings, and retail shopping centers, and are repaid through cash flows related to the operation, sale, or refinance of the property.

Construction CRE – Construction CRE loans are loans to developers, companies, or individuals used for the construction of a commercial or residential property for which repayment will be generated by the sale or permanent financing of the property. Our construction CRE portfolio primarily consists of retail, multi family, office, and warehouse project types. Generally, these loans are for construction projects that have been presold or preleased, or have secured permanent financing, as well as loans to real estate companies with significant equity invested in each project. These loans are underwritten and managed by a specialized real estate lending group that actively monitors the construction phase and manages the loan disbursements according to the predetermined construction schedule.

Total consumer loans and leases were $20.7 billion at December 31, 2013, and represented 48% of our total loan and lease credit exposure. The consumer portfolio is comprised primarily of automobile, home equity loans and lines-of-credit, and residential mortgages (see Consumer Credit discussion) .

Automobile – Automobile loans are primarily comprised of loans made through automotive dealerships and include exposure in selected states outside of our primary banking markets. The exposure outside of our primary banking markets represents 19% of the total exposure, with no individual state representing more than 5%. Applications are underwritten utilizing an automated underwriting system that applies consistent policies and processes across the portfolio.

Home equity – Home equity lending includes both home equity loans and lines-of-credit. This type of lending, which is secured by a first-lien or junior-lien on the borrower’s residence, allows customers to borrow against the equity in their home or refinance existing mortgage debt. Products include closed-end loans which are generally fixed-rate with principal and interest payments, and variable-rate, interest-only lines-of-credit which do not require payment of principal during the 10-year revolving period. The home equity line of credit product converts to a 20 year amortizing structure at the end of the revolving period. Applications are underwritten centrally in conjunction with an automated underwriting system. The home equity underwriting criteria is based on minimum credit scores, debt-to-income ratios, and LTV ratios, with current collateral valuations.

Residential mortgage – Residential mortgage loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15-year to 30-year term, and in most cases, are extended to borrowers to finance their primary residence. Applications are underwritten centrally using consistent credit policies and processes. All residential mortgage loan decisions utilize a full appraisal for collateral valuation. Huntington has not originated residential mortgages that allow negative amortization or allow the borrower multiple payment options.

Other consumer loans/leases – Primarily consists of consumer loans not secured by real estate, including personal unsecured loans. We introduced a consumer credit card product during 2013, utilizing a centralized underwriting system and focusing on existing Huntington customers.

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

Table 9 - Loan and Lease Portfolio Composition

 

     At December 31,  

(dollar amounts in millions)

   2013     2012     2011     2010     2009  

Commercial: (1)

                         

Commercial and industrial

   $ 17,594        41 %   $ 16,971        42 %   $ 14,699        38 %   $ 13,063        34 %   $ 12,888        35 %

Commercial real estate:

                         

Construction

     557        1       648        2       580        1       650        2       1,469        4  

Commercial

     4,293        10       4,751        12       5,246        13       6,001        16       6,220        17  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial real estate

     4,850        11       5,399        14       5,826        14       6,651        18       7,689        21  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial

     22,444        52       22,370        56       20,525        52       19,714        52       20,577        56  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Consumer:

                         

Automobile (2)

     6,639        15       4,634        11       4,458        11       5,614        15       3,390        9  

Home equity

     8,336        19       8,335        20       8,215        21       7,713        20       7,563        21  

Residential mortgage

     5,321        12       4,970        12       5,228        13       4,500        12       4,510        12  

Other consumer

     380        2       419        1       498        3       566        1       751        2  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer

     20,676        48       18,358        44       18,399        48       18,393        48       16,214        44  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans and leases

   $ 43,120        100 %   $ 40,728        100 %   $ 38,924        100 %   $ 38,107        100 %   $ 36,791        100 %
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) As defined by regulatory guidance, there were no commercial loans outstanding that would be considered a concentration of lending to a particular industry or group of industries.
(2) 2011 included a decrease of $1.3 billion resulting from the transfer of automobile loans to loans held for a sale reflecting an automobile securitization transaction completed in 2012. 2010 included an increase of $0.5 billion resulting from the adoption of a new accounting standard to consolidate a previously off-balance sheet automobile loan securitization transaction.

 

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

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

Table 10 - Total Loan and Lease Portfolio by Collateral Type

 

     At December 31,  

(dollar amounts in millions)

   2013     2012     2011     2010     2009  

Secured loans:

                         

Real estate - commercial

   $ 8,622        20 %   $ 9,128        22 %   $ 9,557        25 %   $ 10,389        27 %   $ 11,286        31 %

Real estate - consumer

     13,657        32       13,305        33       13,444        35       12,214        32       12,176        33  

Vehicles

     8,989        21       6,659        16       6,021        15       7,134        19       4,600        13  

Receivables/Inventory

     5,534        13       5,178        13       4,450        11       3,763        10       3,582        10  

Machinery/Equipment

     2,738        6       2,749        7       1,994        5       1,766        5       1,772        5  

Securities/Deposits

     786        2       826        2       800        2       734        2       1,145        3  

Other

     1,016        2       1,090        3       1,018        3       990        2       1,124        2  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total secured loans and leases

     41,342        96       38,935        96       37,284        96       36,990        97       35,685        97  

Unsecured loans and leases

     1,778        4       1,793        4       1,640        4       1,117        3       1,106        3  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans and leases

   $ 43,120        100 %   $ 40,728        100 %   $ 38,924        100 %   $ 38,107        100 %   $ 36,791        100 %
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Commercial Credit

The primary factors considered in commercial credit approvals are the financial strength of the borrower, assessment of the borrower’s management capabilities, cash flows from operations, industry sector trends, type and sufficiency of collateral, type of exposure, transaction structure, and the general economic outlook. While these are the primary factors considered, there are a number of other factors that may be considered in the decision process. We utilize a centralized preview and senior loan approval committee, led by our chief credit officer. The risk rating (see next paragraph) and complexity of the credit determines the threshold for approval of the senior loan committee with a minimum credit exposure of $10.0 million. For loans not requiring senior loan committee approval, with the exception of small business loans, credit officers who understand each local region and are experienced in the industries and loan structures of the requested credit exposure are involved in all loan decisions and have the primary credit authority. For small business loans, we utilize a centralized loan approval process for standard products and structures. In this centralized decision environment, certain individuals who understand each local region may make credit-extension decisions to preserve our commitment to the communities we operate in. In addition to disciplined and consistent judgmental factors, a sophisticated credit scoring process is used as a primary evaluation tool in the determination of approving a loan within the centralized loan approval process.

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. 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

 

19


monitoring event. There is also extensive macro portfolio management analysis on an on-going basis. 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 for credit losses (ACL) amount for the commercial portfolio. A centralized portfolio management team monitors and reports on the performance of the entire commercial portfolio, including small business loans, to provide consistent oversight.

In addition to the initial credit analysis conducted during the approval process, 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.

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, assuming such information is available. Our assessment of the guarantor’s credit strength, or lack thereof, is reflected in our risk ratings for such loans, which is directly tied to, and an integral component of, our ACL methodology. When a loan goes to impaired status, viable guarantor support is considered in the determination of a credit loss.

If our assessment of the guarantor’s credit strength yields an inherent capacity to perform, we will seek repayment from the guarantor as part of the collection process and have done so successfully. However, we do not formally track the repayment success from guarantors.

Substantially all loans categorized as Classified (see Note 3 of Notes to Consolidated Financial Statements) are managed by our Special Assets Department (SAD). The SAD group 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 appropriateness of the allowance, the accrual status, and the ultimate collectability of the Classified loan portfolio.

C&I PORTFOLIO

The C&I portfolio is comprised of loans to businesses where the source of repayment is associated with the on-going operations of the business. Generally, the loans are secured with the financing of the borrower’s assets, such as equipment, accounts receivable, and/or inventory. In many cases, the loans are secured by real estate, although the operation, sale, or refinancing of the real estate is not a primary source of repayment for the loan. For loans secured by real estate, appropriate appraisals are obtained at origination and updated on an as needed basis in compliance with regulatory requirements.

There were no commercial loan segments considered an industry or geographic concentration of lending. Currently, higher-risk segments of the C&I portfolio include loans to borrowers supporting the home building industry, contractors, and leveraged lending. We manage the risks inherent in this portfolio through origination policies, a defined loan concentration policy with established 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.

The C&I portfolio continues to have strong origination activity as evidenced by the growth over the past 12 months. The credit quality of the portfolio continues to improve as we maintain focus on high quality originations. Problem loans have trended downward, reflecting a combination of proactive risk identification and effective workout strategies implemented by the SAD. We continue to maintain a proactive approach to identifying borrowers that may be facing financial difficulty in order to maximize the potential solutions.

CRE PORTFOLIO

We manage the risks inherent in this portfolio specific to CRE lending, focusing on the quality of the developer and the specifics associated with each project. Generally, we: (1) limit our loans to 80% of the appraised value of the commercial real estate at origination, (2) require net operating cash flows to be 125% of required interest and principal payments, and (3) if the commercial real estate is nonowner occupied, require that at least 50% of the space of the project be preleased. We actively monitor both geographic and project-type concentrations and performance metrics of all CRE loan types, with a focus on loans identified as higher risk based on the risk rating methodology. Both macro-level and loan-level stress-test scenarios based on existing and forecast market conditions are part of the on-going portfolio management process for the CRE portfolio.

 

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Dedicated real estate professionals originated the majority of the portfolio, with the remainder obtained from prior bank acquisitions. Appraisals are obtained from approved vendors, and are reviewed by an internal appraisal review group comprised of certified appraisers to ensure the quality of the valuation used in the underwriting process. The portfolio is diversified by project type and loan size, and this diversification represents a significant portion of the credit risk management strategies employed for this portfolio. Subsequent to the origination of the loan, the Credit Review group performs testing to provide an independent review and assessment of the quality of the underwriting and/or risk of new loan originations.

Appraisal values are obtained in conjunction with all originations and renewals, and on an as needed basis, in compliance with regulatory requirements. We continue to perform on-going portfolio level reviews within the CRE portfolio. These reviews generate action plans based on occupancy levels or sales volume associated with the projects being reviewed. Property values are updated using appraisals on a regular basis to ensure appropriate decisions regarding the on-going management of the portfolio reflect the changing market conditions. This highly individualized process requires working closely with all of our borrowers, as well as an in-depth knowledge of CRE project lending and the market environment.

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. Consumer credit decisions are generally made in a centralized environment utilizing decision models. Importantly, certain individuals who understand each local region have the authority to make credit extension decisions to preserve our focus on the local communities we operate in. Each credit extension is assigned a specific PD and LGD. The PD is generally based on the borrower’s most recent credit bureau score (FICO), which we update quarterly, while the LGD is related to the type of collateral and the LTV ratio associated with the credit extension.

In consumer lending, credit risk is managed from a segment (i.e., loan type, collateral position, geography, etc.) and vintage performance analysis. All portfolio segments are continuously monitored for changes in delinquency trends and other asset quality indicators. 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 ALLL amount for our consumer loan portfolio. The independent risk management group has a consumer process review component to ensure the effectiveness and efficiency of the consumer credit processes.

Collection action is initiated as needed through a centrally managed collection and recovery function. The collection group employs a series of collection methodologies designed to maintain a high level of effectiveness while maximizing efficiency. In addition to the consumer loan portfolio, the collection group is responsible for collection activity on all sold and securitized consumer loans and leases. Collection practices include a single contact point for the majority of the residential real estate secured portfolios.

During a 2013 review of our consumer portfolios, we identified additional loans associated with borrowers who had filed Chapter 7 bankruptcy and had not reaffirmed their debt, thus meeting the definition of collateral dependent per OCC regulatory guidance. These loans were not identified in the 2012 third quarter implementation of the OCC’s regulatory guidance. The bankruptcy court’s discharge of the borrower’s debt is considered a concession when the discharged debt is not reaffirmed, and as such, the loan is placed on nonaccrual status, and written down to collateral value, less anticipated selling costs. As a result of the review of our existing consumer portfolios, additional NCOs of $22.8 million were recorded in 2013. The majority of the NCO impact was in the home equity portfolio and relates to junior-lien loans that meet the regulatory guidance.

AUTOMOBILE PORTFOLIO

Our strategy in the automobile portfolio continued to focus on high quality borrowers as measured by both FICO and internal custom scores, combined with appropriate LTVs, terms, and profitability. Our strategy and operational capabilities allow us to appropriately manage the origination quality across the entire portfolio, including our newer markets. Although increased origination volume and entering new markets can be associated with increased risk levels, we believe our disciplined strategy and operational processes significantly mitigate these risks.

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

RESIDENTIAL REAL ESTATE SECURED PORTFOLIOS

The properties securing our residential mortgage and home equity portfolios are primarily located within our geographic footprint. While home prices have clearly rebounded from the 2009-2010 levels, they remain below the peak, causing the performance in these portfolios to remain weaker than historical levels. The residential-secured portfolio originations continue to be of high quality, with

 

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the majority of the negative credit impact coming from loans originated in 2006 and earlier. We continue to evaluate all of our policies and processes associated with managing these portfolios. Our portfolio management strategies associated with our Home Savers group are consolidated in one location under common management. This structure allows us to focus on effectively helping our customers with appropriate solutions for their specific circumstances.

Table 11 - Selected Home Equity and Residential Mortgage Portfolio Data

 

     Home Equity     Residential Mortgage  
     Secured by first-lien     Secured by junior-lien        

(dollar amounts in millions)

   12/31/13     12/31/12     12/31/13     12/31/12     12/31/13     12/31/12  

Ending balance

   $ 4,842     $ 4,380     $ 3,494     $ 3,955     $ 5,321     $ 4,970  

Portfolio weighted average LTV ratio (1)

     71     71     81     81     74     76

Portfolio weighted average FICO score (2)

     758       755       741       741       743       738  
     Home Equity     Residential Mortgage (3)  
     Secured by first-lien     Secured by junior-lien        
     Year Ended December 31,  
     2013     2012     2013     2012     2013     2012  

Originations

   $ 1,745     $ 1,665     $ 529     $ 559     $ 1,625     $ 1,019  

Origination weighted average LTV ratio (1)

     69     72     81     80     79     84

Origination weighted average FICO score (2)

     771       771       756       756       757       754  

 

(1) The LTV ratios for home equity loans and home equity lines-of-credit are cumulative and reflect the balance of any senior loans. LTV ratios reflect collateral values at the time of loan origination.
(2) Portfolio weighted average FICO scores reflect currently updated customer credit scores whereas origination weighted average FICO scores reflect the customer credit scores at the time of loan origination.
(3) Represents only owned-portfolio originations.

Home Equity Portfolio

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

Given the low interest rate environment over the past several years, many borrowers have utilized the line-of-credit home equity product as the primary source of financing their home versus residential mortgages. The proportion of the home equity portfolio secured by a first-lien has increased significantly over the past three years, positively impacting the portfolio’s risk profile. At December 31, 2013, $4.8 billion or 58% of our total home equity portfolio was secured by first-lien mortgages compared to 52% in the prior year. The first-lien position, combined with continued high average FICO scores, significantly reduces the credit risk associated with these loans.

We focus on high quality borrowers primarily located within our footprint. Further, 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. The combination of high quality borrowers as measured by financial condition and FICO score, as well as the concentration of first-lien position loans, provides a high degree of confidence regarding the performance of the 2009-2013 originations. Because we focus on developing complete relationships with our customers, many of our home equity borrowers utilize other products and services. Also, the majority of our home equity line-of-credit borrowers consistently pay in excess of the required minimum payment each month.

We believe we have underwritten credit conservatively within this portfolio. However, home price volatility has decreased the value of the collateral for this portfolio and has 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 focus of our Home Saver group.

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 obtain a property valuation for every loan or line-of-credit as part of the origination process, and the valuation is reviewed by a real estate professional in conjunction with the credit underwriting

 

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process. The type of property valuation obtained is based on credit parameters, and a majority of these valuations are based on complete walkthrough appraisals. We believe an AVM estimate with a signed property inspection is an appropriate valuation source for a portion of our home equity lending activities. This valuation policy, along with our other credit policies, are re-evaluated on an on-going basis with the intent of ensuring complete independence in the requesting and reviewing of real estate valuations associated with loan decisions. We update values as appropriate, and in compliance with applicable regulations, particularly 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 and industry actions . In addition to origination policy adjustments, we take actions, as necessary, to manage the risk profile of this portfolio. We believe our Credit Risk Management systems allow for effective portfolio analysis and segmentation to identify the highest risk exposures in the portfolio. Our disclosures regarding lien position and FICO distribution are examples of segmentation analysis.

Although the collateral value assessment is an important component of the overall credit risk analysis, there are very few instances of available equity in junior-lien default situations. Further, effective in 2012, any junior-lien loan associated with a nonaccruing first-lien loan is also placed on nonaccrual status.

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

The principal and interest payment associated with the term structure will be higher than the interest-only payment, resulting in “maturity” risk. Our maturity risk can be segregated into two distinct segments: (1) home equity lines-of-credit underwritten with a balloon payment at maturity and (2) home equity lines-of-credit with an automatic conversion to a 20-year amortizing loan. We manage this risk based on both the actual maturity date of the line-of-credit structure and at the end of the 10-year draw period. This maturity risk is embedded in the portfolio which we address with proactive contact strategies beginning one year prior to maturity. In certain circumstances, our Home Saver group is able to provide payment and structure relief to borrowers experiencing significant financial hardship associated with the payment adjustment.

The table below summarizes our home equity line-of-credit portfolio by maturity date:

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

 

     December 31, 2013  
                                 More than         

(dollar amounts in millions)

   1 Year or Less      1 to 2 years      2 to 3 years      3 to 4 years      4 years      Total  

Secured by first-lien

   $ 52      $ 29      $ —        $ —        $ 2,383      $ 2,464  

Secured by junior-lien

     229        216        130        112        2,301        2,988  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity line-of-credit

   $ 281      $ 245      $ 130      $ 112      $ 4,684      $ 5,452  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

Historically, less than 30% of our home equity lines-of-credit that are one year or less from maturity actually reach the maturity date, and we anticipate this percentage will decline in future periods as our proactive approach to managing maturity risk continues to evolve.

Residential Mortgages 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. We have incorporated regulatory requirements and guidance into our underwriting process, and will continue to evaluate the impact of the QM requirements impact on the industry.

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.

 

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Generally, our practice is to sell a significant portion of our fixed-rate originations in the secondary market. As such, at December 31, 2013, 46% of our total residential mortgage portfolio were ARMs. These ARMs primarily consist of a fixed-rate of interest for the first 3 to 5 years, and then adjust annually. At December 31, 2013, ARM loans that were expected to have rates reset through 2016 totaled $1.5 billion. These loans scheduled to reset are primarily associated with loans originated subsequent to 2007, and as such, are not subject to the most significant declines in underlying property value. Given the quality of our borrowers, the relatively low current interest rates, and the results of our continued analysis (including possible impacts of changes in interest rates), we believe that we have a relatively limited exposure to ARM reset risk. Nonetheless, we have taken actions to mitigate our risk exposure. We initiate borrower contact at least six months prior to the interest rate resetting and have been successful in converting many ARMs to fixed-rate loans through this process. Given the relatively low current interest rates, many fixed-rate products currently offer a better interest rate to our ARM borrowers. We are subject to repurchase risk associated with residential mortgage loans sold in the secondary market. An appropriate level of reserve for representations and warranties related to residential mortgage loans sold has been established to address this repurchase risk inherent in the portfolio (see Operational Risk discussion).

Several government programs continued to impact the residential mortgage portfolio, including various refinance programs such as HAMP and HARP, which positively affected the availability of credit for the industry. During the year ended December 31, 2013, we closed $600 million in HARP residential mortgages and $6.0 million in HAMP residential mortgages. The HARP residential mortgage loans are considered current and are either part of our residential mortgage portfolio or serviced for others. The HAMP refinancings are associated with residential mortgages that are serviced for others.

Credit Quality

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

We believe the most meaningful way to assess overall credit quality performance is through an analysis of credit quality performance ratios. This approach forms the basis of most of the discussion in the sections immediately following: NPAs and NALs, TDRs, ACL, and NCOs. In addition, we utilize delinquency rates, risk distribution and migration patterns, and product segmentation in the analysis of our credit quality performance.

Our overall credit quality performance returned to normalized, pre-recession levels. NALs declined 21% to $322.1 million, compared to December 31, 2012, as both the C&I and CRE portfolio segments showed declines. NCOs decreased 45% compared to the prior year, as a result of significant declines in the C&I and CRE portfolios combined with significant recovery activity, and net reductions in the Residential and Home Equity portfolios. The Home Equity portfolio in particular was significantly impacted by the implementation of Chapter 7 bankruptcy regulatory accounting guidance, with an additional impact in 2013. Commercial classified loans declined, reflecting the continued improvement across the portfolio. The ACL to total loans ratio declined to 1.65%, but our coverage ratios as demonstrated by the ACL to NAL ratio of 221% remained strong.

NPAs, NALs, and TDRs

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

NPAs and NALs

NPAs consist of (1) NALs, which represent loans and leases no longer accruing interest, (2) impaired loans held for sale, (3) OREO properties, and (4) other NPAs. Any loan in our portfolio may be placed on nonaccrual status prior to the policies described below when collection of principal or interest is in doubt. Also, when a borrower with discharged non-reaffirmed debt in a Chapter 7 bankruptcy is identified and the loan is determined to be collateral dependent, the consumer loan is placed on nonaccrual status.

C&I and CRE loans are placed on nonaccrual status at 90-days past due, or when repayment of principal and interest is in doubt. With the exception of residential mortgage loans guaranteed by government organizations which continue to accrue interest, residential mortgage loans are placed on nonaccrual status at 150-days past due. First-lien home equity loans are placed on nonaccrual status at 150-days past due. Junior-lien home equity loans are placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien loan has been identified as nonaccrual. Automobile and other consumer loans are generally charged-off when the loan is 120-days past due.

When loans are placed on nonaccrual, 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 table reflects period-end NALs and NPAs detail for each of the last five years:

Table 13 - Nonaccrual Loans and Leases and Nonperforming Assets

 

     At December 31,  

(dollar amounts in thousands)

   2013     2012     2011     2010     2009  

Nonaccrual loans and leases:

          

Commercial and industrial

   $ 56,615     $ 90,705     $ 201,846     $ 346,720     $ 578,414  

Commercial real estate

     73,417       127,128       229,889       363,692       935,812  

Automobile

     6,303       7,823       —          —          —     

Residential mortgages

     119,532       122,452       68,658       45,010       362,630  

Home equity

     66,189       59,525       40,687       22,526       40,122  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonaccrual loans and leases (1)

     322,056       407,633       541,080       777,948       1,916,978  

Other real estate owned, net

          

Residential

     23,447       21,378       20,330       31,649       71,427  

Commercial

     4,217       6,719       18,094       35,155       68,717  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other real estate, net

     27,664       28,097       38,424       66,804       140,144  

Impaired loans held for sale (2)

     —          —          —          —          969  

Other nonperforming assets (3)

     2,440       10,045       10,772       —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 352,160     $ 445,775     $ 590,276     $ 844,752     $ 2,058,091  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nonaccrual loans as a    % of total loans and leases

     0.75 %     1.00 %     1.39 %     2.04 %     5.21 %

Nonperforming assets ratio (4)

     0.82       1.09       1.51       2.21       5.57  

Allowance for loan and lease losses as    % of:

          

Nonaccrual loans and leases

     201 %     189 %     178 %     161 %     77 %

Nonperforming assets

     184       173       163       148       72  

Allowance for credit losses as    % of:

          

Nonaccrual loans and leases

     221 %     199 %     187 %     166 %     80 %

Nonperforming assets

     202       182       172       153       74  

 

(1)   December 31, 2013 and 2012, includes $75.5 and $60.1 million, respectively, of Chapter 7 bankruptcy NALs.
(2)   Represents impaired loans obtained from the Sky Financial acquisition. Held for sale loans are carried at the lower of cost or fair value less costs to sell.
(3)   Other nonperforming assets includes certain impaired investment securities.
(4)   This ratio is calculated as nonperforming assets divided by the sum of loans and leases, impaired loans held for sale, net other real estate owned, and other nonperforming assets.

The $93.6 million, or 21%, decline in NPAs compared with December 31, 2012, primarily reflected:

 

    $53.7 million, or 42%, decline in CRE NALs, reflecting both NCO and problem credit resolutions, including borrower payments and payoffs partially resulting from successful workout strategies implemented by our commercial loan workout group.

 

    $34.1 million, or 38%, decline in C&I NALs, reflecting both NCO and problem credit resolutions, including payoffs partially resulting from successful workout strategies implemented by our commercial loan workout group. The decline was associated with loans throughout our footprint, with no specific industry concentration.

 

    $7.6 million, or 76%, decrease in other NPAs, reflecting the redemption by the issuer of a non-performing security.

Partially offset by:

 

    $6.7 million, or 11%, increase in home equity NALs, a function of the economic stresses still impacting a portion of our borrowers in the Home Equity portfolio.

Of the $130.0 million of CRE and C&I-related NALs at December 31, 2013, $50.3 million, or 39%, represented loans that were less than 30 days past due, demonstrating our continued commitment to proactive credit risk management.

 

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As discussed previously, residential mortgages are placed on nonaccrual status at 150-days past due, with the exception of residential mortgages guaranteed by government organizations which continue to accrue interest. First-lien home equity loans are placed on nonaccrual status at 150-days past due. Junior-lien home equity loans are placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien loan has been identified as nonaccrual.

The following table reflects period-end accruing loans and leases 90 days or more past due for each of the last five years:

Table 14 - Accruing Past Due Loans and Leases

 

     At December 31,  

(dollar amounts in thousands)

   2013     2012     2011     2010     2009  

Accruing loans and leases past due 90 days or more

          

Commercial and industrial (1)

   $ 14,562     $ 26,648     $ —        $ —        $ —     

Commercial real estate (1)

     39,142       56,660       —          —          —     

Automobile

     5,055       4,418       6,265       7,721       10,586  

Residential mortgage (excluding loans guaranteed by the U.S. government)

     2,469       2,718       45,198       53,983       78,915  

Home equity

     13,983       18,200       20,198       23,497       53,343  

Other loans and leases

     998       1,672       1,988       2,456       2,814  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total, excl. loans guaranteed by the U.S. government

     76,209       110,316       73,649       87,657       145,658  

Add: loans guaranteed by the U.S. government

     87,985       90,816       96,703       98,288       101,616  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total accruing loans and leases past due 90 days or more, including loans guaranteed by the U.S. government

   $ 164,194     $ 201,132     $ 170,352     $ 185,945     $ 247,274  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratios:

          

Excluding loans guaranteed by the U.S. government, as a percent of total loans and leases

     0.18 %     0.27 %     0.19 %     0.23 %     0.40 %

Guaranteed by the U.S. government, as a percent of total loans and leases

     0.20       0.22       0.25       0.26       0.28  

Including loans guaranteed by the U.S. government, as a percent of total loans and leases

     0.38       0.49       0.44       0.49       0.68  

 

(1)   2013 and 2012 amounts represent accruing purchased impaired loans related to the FDIC-assisted Fidelity Bank acquisition. Under the applicable accounting guidance (ASC 310-30), the loans were recorded at fair value upon acquisition and remain in accruing status.

TDR Loans

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

TDRs are modified loans in which a concession is provided to a borrower experiencing financial difficulties. TDRs can be classified as either accrual or nonaccrual loans. Nonaccrual TDRs are included in NALs whereas accruing TDRs are excluded from NALs, as it is probable that all contractual principal and interest due under the restructured terms will be collected. TDRs primarily reflect our loss mitigation efforts to proactively work with borrowers having difficulty making their payments.

 

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

Table 15 - Accruing and Nonaccruing Troubled Debt Restructured Loans

 

     December 31,  

(dollar amounts in thousands)

   2013      2012      2011      2010      2009  

Troubled debt restructured loans - accruing:

              

Commercial and industrial

   $ 83,857      $ 76,586      $ 54,007      $ 70,136      $ 59,215  

Commercial real estate

     204,668        208,901        249,968        152,496        97,834  

Automobile

     30,781        35,784        36,573        29,764        24,704  

Home equity

     188,266        110,581        52,224        37,257        25,357  

Residential mortgage

     305,059        290,011        309,678        328,411        229,470  

Other consumer

     1,041        2,544        6,108        9,565        2,810  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructured loans - accruing

     813,672        724,407        708,558        627,629        439,390  

Troubled debt restructured loans - nonaccruing:

              

Commercial and industrial

     7,291        19,268        48,553        15,275        37,849  

Commercial real estate

     23,981        32,548        21,968        18,187        70,609  

Automobile

     6,303        7,823        —           —           —     

Home equity

     20,715        6,951        369        —           —     

Residential mortgage

     82,879        84,515        26,089        5,789        4,988  

Other consumer

     —           113        113        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructured loans - nonaccruing

     141,169        151,218        97,092        39,251        113,446  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructured loans

   $ 954,841      $ 875,625      $ 805,650      $ 666,880      $ 552,836  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Our strategy is to structure commercial TDRs in a manner that avoids new concessions subsequent to the initial TDR terms. However, there are times when subsequent modifications are required, such as when the modified loan matures. Often the loans are performing in accordance with the TDR terms, and a new note is originated with similar modified terms. These loans are subjected to the normal underwriting standards and processes for other similar credit extensions, both new and existing. If the loan is not performing in accordance with the existing TDR terms, typically an individualized approach to repayment is established. In accordance with ASC 310-20-35, the refinanced note is evaluated to determine if it is considered a new loan or a continuation of the prior loan. A new loan is considered for removal from the TDR designation. A continuation of the prior note requires the continuation of the TDR designation, and because the refinanced note constitutes a new or amended debt instrument, it is included in our TDR activity table (below) as a new TDR and a restructured TDR removal during the period.

The types of concessions granted are consistent with those granted on new TDRs and include interest rate reductions, amortization or maturity date changes beyond what the collateral supports, and principal forgiveness based on the borrower’s specific needs at a point in time. Our policy does not limit the number of times a loan may be modified. A loan may be modified multiple times if it is considered to be in the best interest of both the borrower and us.

Loans are not automatically considered to be accruing TDRs upon the granting of a new concession. If the loan is in accruing status and no loss is expected based on the modified terms, the modified TDR remains in accruing status. For loans that are on nonaccrual status before the modification, collection of both principal and interest must not be in doubt, and the borrower must be able to exhibit sufficient cash flows for a six-month period of time to service the debt in order to return to accruing status. This six-month period could extend before or after the restructure date.

TDRs in the home equity and residential mortgage portfolio will continue to increase for a time as we continue to appropriately manage the portfolio. Any granted change in terms or conditions that are not readily available in the market for that borrower, requires the designation as a TDR.

 

27


The following table reflects TDR activity for each of the past three years:

Table 16 - Troubled Debt Restructured Loan Activity

 

(dollar amounts in thousands)

   2013     2012     2011  

TDRs, beginning of period

   $ 875,625     $ 805,650     $ 666,880  

New TDRs (1)

     611,556       597,425       583,439  

Payments

     (191,367     (191,035     (138,467

Charge-offs

     (29,897     (81,115     (37,341

Sales

     (11,164     (13,787     (54,715

Refinanced to non-TDR

     —         —         (40,091

Transfer to OREO

     (8,242     (21,709     (5,016

Restructured TDRs - accruing (2)

     (211,131     (153,583     (154,945

Restructured TDRs - nonaccruing (2)

     (26,772     (63,080     (47,659

Other

     (53,767     (3,141     33,565  
  

 

 

   

 

 

   

 

 

 

TDRs, end of period

   $ 954,841     $ 875,625     $ 805,650  
  

 

 

   

 

 

   

 

 

 

 

(1) 2013 includes a $46,031 thousand reduction of home equity TDRs incorrectly reflected as new TDRs in the 2013 first quarter. 2013 and 2012 includes $78.4 million and $79.5 million, respectively, of Chapter 7 bankruptcy loans.
(2) Represents existing TDRs that were reunderwritten with new terms providing a concession. A corresponding amount is included in the New TDRs amount above.

ACL

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

Our total credit reserve is comprised of two components, 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 (net of 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 multiplied 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 2013 was $90.0 million, compared with $147.4 million in 2012.

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 collateral value trends and portfolio diversification.

In 2013, we implemented an enhanced commercial risk rating system and ACL calculation process. In addition, we enhanced some of our qualitative assessments, specifically around the impact of the prevailing economic conditions. These enhancements had an immaterial impact on the overall credit reserve and the overall decline in the ACL was primarily due to an improvement in underlying credit quality across the portfolio. The portfolio level changes are more fully described below.

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 remain strong.

 

28


The following table reflects activity in the ALLL and AULC for each of the last five years:

Table 17 - Summary of Allowance for Credit Losses and Related Statistics

 

     Year Ended December 31,  

(dollar amounts in thousands)

   2013     2012     2011     2010     2009  

Allowance for loan and lease losses, beginning of year

   $ 769,075     $ 964,828     $ 1,249,008     $ 1,482,479     $ 900,227  

Loan and lease charge-offs

          

Commercial:

          

Commercial and industrial

     (45,904     (101,475     (134,385     (316,771     (525,262

Commercial real estate:

          

Construction

     (9,585     (12,131     (42,012     (116,428     (196,148

Commercial

     (59,927     (105,920     (140,747     (187,567     (500,534
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     (69,512     (118,051     (182,759     (303,995     (696,682
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     (115,416     (219,526     (317,144     (620,766     (1,221,944
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

          

Automobile

     (23,912     (26,070     (33,593     (46,308     (76,141

Home equity

     (98,184     (124,286     (109,427     (140,831     (110,400

Residential mortgage

     (34,236     (52,228     (65,069     (163,427     (111,899

Other consumer

     (34,568     (33,090     (32,520     (32,575     (40,993
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     (190,900     (235,674     (240,609     (383,141     (339,433
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

     (306,316     (455,200     (557,753     (1,003,907     (1,561,377
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries of loan and lease charge-offs

          

Commercial:

          

Commercial and industrial

     29,514       37,227       44,686       61,839       37,656  

Commercial real estate:

          

Construction

     3,227       4,090       10,488       7,420       3,442  

Commercial

     41,431       35,532       24,170       21,013       10,509  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial real estate

     44,658       39,622       34,658       28,433       13,951  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     74,172       76,849       79,344       90,272       51,607  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

          

Automobile

     13,375       16,628       18,526       19,736       19,809  

Home equity

     15,921       7,907       7,630       1,458       4,224  

Residential mortgage

     7,074       4,305       8,388       10,532       1,697  

Other consumer

     7,108       7,049       6,776       7,435       7,453  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     43,478       35,889       41,320       39,161       33,183  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     117,650       112,738       120,664       129,433       84,790  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loan and lease charge-offs

     (188,666     (342,462     (437,089     (874,474     (1,476,587
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for loan and lease losses

     67,797       155,193       167,730       641,299       2,069,931  

Allowance for assets sold and securitized or transferred to loans held for sale

     (336     (8,484     (14,821     (296     (11,092
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan and lease losses, end of year

     647,870       769,075       964,828       1,249,008       1,482,479  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for unfunded loan commitments, beginning of year

     40,651       48,456       42,127       48,879       44,139  

(Reduction in) Provision for unfunded loan commitments and letters of credit losses

     22,248       (7,805     6,329       (6,752     4,740  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for unfunded loan commitments, end of year

     62,899       40,651       48,456       42,127       48,879  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for credit losses, end of year

   $ 710,769     $ 809,726     $ 1,013,284     $ 1,291,135     $ 1,531,358  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


The table below reflects the allocation of our ACL among our various loan categories during each of the past five years:

Table 18 - Allocation of Allowances for Credit Losses (1)

 

    At December 31,  

(dollar amounts in thousands)

  2013     2012     2011     2010     2009  

Commercial:

                   

Commercial and industrial

  $ 265,801       41 %   $ 241,051       42 %   $ 275,367       38 %   $ 340,614       34 %   $ 492,205       35 %

Commercial real estate

    162,557       11       285,369       14       388,706       14       588,251       18       751,875       21  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    428,358       52       526,420       56       664,073       52       928,865       52       1,244,080       56  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

                   

Automobile

    31,053       15       34,979       11       38,282       11       49,488       15       57,951       9  

Home equity

    111,131       19       118,764       20       143,873       21       150,630       20       102,039       21  

Residential mortgage

    39,577       12       61,658       12       87,194       13       93,289       12       55,903       12  

Other loans

    37,751       2       27,254       1       31,406       3       26,736       1       22,506       2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

    219,512       48       242,655       44       300,755       48       320,143       48       238,399       44  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance for loan and lease losses

    647,870       100 %     769,075       100 %     964,828       100 %     1,249,008       100 %     1,482,479       100 %
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for unfunded loan commitments

    62,899         40,651         48,456         42,127         48,879    
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total allowance for credit losses

  $ 710,769       $ 809,726       $ 1,013,284       $ 1,291,135       $ 1,531,358    
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total allowance for loan and leases losses as    % of:

                   

Total loans and leases

      1.50       1.89       2.48       3.28       4.03

Nonaccrual loans and leases

      201         189         178         161         77  

Nonperforming assets

      184         173         163         148         72  

Total allowance for credit losses as    % of:

                   

Total loans and leases

      1.65       1.99       2.60       3.39       4.16

Nonaccrual loans and leases

      221         199         187         166         80  

Nonperforming assets

      202         182         172         153         74  

 

(1) Percentages represent the percentage of each loan and lease category to total loans and leases.

The C&I ACL increased $24.8 million compared with December 31, 2012, primarily due to the enhancements to the risk rating system and assumptions regarding the unfunded portion of loan commitments. The CRE ACL decreased $122.8 million compared with December 31, 2012, due to the impact of incorporating the current collateral value in the calculation of the expected loss in addition to a property type analysis. This provides a more specific assessment of the potential Loss Given Default. The current portfolio management practices focus on increasing borrower equity in the projects, and recent underwriting includes meaningfully lower LTV. The December 31, 2013, CRE ACL covers NALs by more than two times and represents 13 quarters of the average 4 quarter charge-off level. The decrease associated with the auto portfolio is based on the continued positive performance metrics and the high quality origination strategy. The home equity ALLL increased slightly as the junior-lien lien component remains the riskiest portion of the portfolio. The residential mortgage portfolio ALLL declined, consistent with the improving credit quality metrics. The ALLL for the other consumer portfolio is consistent with expectations given the increasing level of overdraft exposure. The reduction in the ACL, compared with December 31, 2012, is primarily a function of the decline in the CRE portfolio.

Compared with December 31, 2012, the AULC increased $22.2 million, primarily reflecting the impact of an enhanced assessment of the unfunded commercial exposure.

The ACL to total loans declined to 1.65% at December 31, 2013, compared to 1.99% at December 31, 2012. 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 loans with changes in credit metrics and aggressive action plans for these loans, combined with originating high quality new loans will contribute to continued improvement in our key credit quality metrics.

        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 over the past several years has had a significant impact on some of our borrowers as evidenced by the higher delinquencies and NCOs since late 2007. Recently, real estate values have begun to slowly rise from their 2007 levels in our primary markets.

Given the combination of these noted positive and negative 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.

NCOs

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. Additionally, discharged, collateral dependent non-reaffirmed debt in Chapter 7 bankruptcy filings will result in a charge-off to estimated collateral value, less anticipated selling costs at the time of the modification.

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 junior-lien home equity loans are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due and 120-days past due, respectively. Residential mortgages are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due.

 

30


The following table reflects NCO detail for each of the last five years:

Table 19 - Net Loan and Lease Charge-offs

 

     Year Ended December 31,  

(dollar amounts in thousands)

   2013     2012     2011     2010     2009  

Net charge-offs by loan and lease type

          

Commercial: