UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED September 30, 2012
Commission File Number 1-34073
Huntington Bancshares Incorporated
| Maryland | 31-0724920 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
41 South High Street, Columbus, Ohio 43287
Registrant’s telephone number (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | x | Accelerated filer | ¨ | |||
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
There were 855,485,376 shares of Registrant’s common stock ($0.01 par value) outstanding on September 30, 2012.
HUNTINGTON BANCSHARES INCORPORATED
2
Glossary of Acronyms and Terms
The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:
| 2011 Form 10-K | Annual Report on Form 10-K for the year ended December 31, 2011 | |
| ABL | Asset Based Lending | |
| ACL | Allowance for Credit Losses | |
| AFCRE | Automobile Finance and Commercial Real Estate | |
| ALCO | Asset & Liability Management Committee | |
| ALLL | Allowance for Loan and Lease Losses | |
| ARM | Adjustable Rate Mortgage | |
| ASC | Accounting Standards Codification | |
| ASU | Accounting Standards Update | |
| ATM | Automated Teller Machine | |
| AULC | Allowance for Unfunded Loan Commitments | |
| AVM | Automated Valuation Methodology | |
| C&I | Commercial and Industrial | |
| CapPR | Capital Plan Review | |
| CCAR | Comprehensive Capital Analysis and Review | |
| CDO | Collateralized Debt Obligations | |
| CDs | Certificates of Deposit | |
| CMO | Collateralized Mortgage Obligations | |
| CRE | Commercial Real Estate | |
| Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act | |
| EPS | Earnings Per Share | |
| EVE | Economic Value of Equity | |
| FASB | Financial Accounting Standards Board | |
| FDIC | Federal Deposit Insurance Corporation | |
| FHA | Federal Housing Administration | |
| FHLB | Federal Home Loan Bank | |
| FHLMC | Federal Home Loan Mortgage Corporation | |
| FICA | Federal Insurance Contributions Act | |
| FICO | Fair Isaac Corporation | |
| FNMA | Federal National Mortgage Association | |
| FRB | Federal Reserve Bank | |
| FTE | Fully-Taxable Equivalent | |
| FTP | Funds Transfer Pricing | |
| GAAP | Generally Accepted Accounting Principles in the United States of America | |
| HAMP | Home Affordable Modification Program | |
| HARP | Home Affordable Refinance Program | |
| IRS | Internal Revenue Service | |
| ISE | Interest Sensitive Earnings | |
| LIBOR | London Interbank Offered Rate | |
| LGD | Loss-Given-Default | |
| LTV | Loan to Value | |
| MD&A | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| MSA | Metropolitan Statistical Area |
3
| MSR | Mortgage Servicing Rights | |
| NALs | Nonaccrual Loans | |
| NCO | Net Charge-off | |
| NPAs | Nonperforming Assets | |
| NPR | Notice of Proposed Rulemaking | |
| N.R. | Not relevant. Denominator of calculation is a gain in the current period compared with a | |
| loss in the prior period, or vice-versa. | ||
| OCC | Office of the Comptroller of the Currency | |
| OCI | Other Comprehensive Income (Loss) | |
| OCR | Optimal Customer Relationship | |
| OLEM | Other Loans Especially Mentioned | |
| OREO | Other Real Estate Owned | |
| OTTI | Other-Than-Temporary Impairment | |
| PD | Probability-Of-Default | |
| Plan | Huntington Bancshares Retirement Plan | |
| Problem Loans | Includes nonaccrual loans and leases (Table 17), troubled debt restructured loans (Table 18), accruing loans and leases past due 90 days or more (aging analysis section of Footnote 3), and Criticized commercial loans (credit quality indicators section of Footnote 3). | |
| REIT | Real Estate Investment Trust | |
| ROC | Risk Oversight Committee | |
| SAD | Special Assets Division | |
| SBA | Small Business Administration | |
| SEC | Securities and Exchange Commission | |
| SERP | Supplemental Executive Retirement Plan | |
| SRIP | Supplemental Retirement Income Plan | |
| TDR | Troubled Debt Restructured Loan | |
| U.S. Treasury | U.S. Department of the Treasury | |
| UCS | Uniform Classification System | |
| UPB | Unpaid Principal Balance | |
| USDA | U.S. Department of Agriculture | |
| VA | U.S. Department of Veteran Affairs | |
| VIE | Variable Interest Entity | |
| WGH | Wealth Advisors, Government Finance, and Home Lending |
4
When we refer to “we,” “our,” and “us” in this report, we mean Huntington Bancshares Incorporated and our consolidated subsidiaries, unless the context indicates that we refer only to the parent company, Huntington Bancshares Incorporated. When we refer to the “Bank” in this report, we mean our only bank subsidiary, The Huntington National Bank, and its subsidiaries.
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
We are a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through the Bank, we have 145 years of servicing the financial needs of our customers. Through our subsidiaries, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, customized insurance service programs, and other financial products and services. Our over 690 banking offices are located in Indiana, Kentucky, Michigan, Ohio, Pennsylvania, and West Virginia. Selected financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office in Columbus, Ohio and a limited purpose office located in the Cayman Islands and another limited purpose office located in Hong Kong. Our foreign banking activities, in total or with any individual country, are not significant.
This MD&A provides information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows. The MD&A included in our 2011 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2011 Form 10-K. This MD&A should also be read in conjunction with the financial statements, notes and other information contained in this report.
Our discussion is divided into key segments:
| • | Executive Overview—Provides a summary of our current financial performance, and business overview, including our thoughts on the impact of the economy, legislative and regulatory initiatives, and recent industry developments. This section also provides our outlook regarding our expectations for the remainder of 2012. |
| • | Discussion of Results of Operations—Reviews financial performance from a consolidated Company perspective. It also includes a Significant Items section that summarizes key issues helpful for understanding performance trends. Key consolidated average balance sheet and income statement trends are also discussed in this section. |
| • | Risk Management and Capital—Discusses credit, market, liquidity, operational, and compliance risks, including how these are managed, as well as performance trends. It also includes a discussion of liquidity policies, how we obtain funding, and related performance. In addition, there is a discussion of guarantees and / or commitments made for items such as standby letters of credit and commitments to sell loans, and a discussion that reviews the adequacy of capital, including regulatory capital requirements. |
| • | Business Segment Discussion—Provides an overview of financial performance for each of our major business segments and provides additional discussion of trends underlying consolidated financial performance. |
| • | Additional Disclosures—Provides comments on important matters including forward-looking statements, critical accounting policies and use of significant estimates, recent accounting pronouncements and developments, and acquisitions. |
A reading of each section is important to understand fully the nature of our financial performance and prospects.
5
Summary of 2012 Third Quarter Results
For the quarter, we reported net income of $167.8 million, or $0.19 per common share, compared with $152.7 million, or $0.17 per common share, in the prior quarter (see Table 1).
Fully-taxable equivalent net interest income was $435.6 million for the quarter, up $0.8 million, or less than 1%, from the prior quarter. The increase reflected the benefit of a $0.3 billion, or 1%, increase in average earning assets, partially offset by a 4 basis point decrease in the fully-taxable equivalent net interest margin to 3.38% from 3.42%. The 4 basis point decrease in the net interest margin reflected the negative impact of a 10 basis point decline in the yield on earning assets, 6 basis points of which were related to the yield on loans. This was partially offset by the benefit of a 6 basis point reduction in total funding costs.
The provision for credit losses increased $0.5 million, or 1%, from the prior quarter. This reflected a $20.9 million, or 25%, increase in NCOs to $105.1 million, or an annualized 1.05% of average total loans and leases, from $84.2 million, or an annualized 0.82%, in the prior quarter. Of this quarter’s NCOs, $33.0 million related to regulatory guidance requiring loans discharged under Chapter 7 bankruptcy to be charged down to their collateral value. Approximately 90% of these borrowers continue to make payments as scheduled. Partially offsetting the increase in NCOs was significant improvement in asset quality trends, resulting in lower calculated reserves.
Total noninterest income increased $7.2 million, or 3%, from the prior quarter. This included a $6.3 million, or 16%, increase in mortgage banking income and a $3.8 million increase in securities gains. Gain on sale of loans increased $2.5 million, or 60%, due to the sale of $0.2 billion of automobile loans that we classified as held for sale at the end of the prior quarter. These positive impacts were partially offset by a $4.4 million, or 16%, decrease in other income as the prior quarter included a gain on the sale of affordable housing investments.
Noninterest expense increased $14.0 million, or 3%, from the prior quarter. This included a $4.7 million, or 2%, increase in personnel costs primarily reflecting higher healthcare costs and a $4.4 million increase in the cost associated with early extinguishment of trust preferred securities that were redeemed during the quarter. Noninterest expense included $4.5 million of expense related to the development of infrastructure and systems to support the Federal Reserve CCAR process.
The period-end ACL as a percentage of total loans and leases decreased to 2.09% from 2.28% in the prior quarter. The ACL as a percentage of period end NALs was essentially unchanged, decreasing 3 percentage points to 189%. NALs declined by $29.1 million, or 6%, to $445.0 million, or 1.11% of total loans, during the quarter despite a $63.0 million increase associated with the revised treatment of Chapter 7 bankruptcy consumer loans.
Our Tier 1 common risk-based capital ratio at September 30, 2012, was 10.27%, up from 10.08% at June 30, 2012, and our tangible common equity ratio increased to 8.74% from 8.41% over this same period. The regulatory Tier 1 risk-based capital ratio at September 30, 2012, was 11.87%, down from 11.93%, at June 30, 2012. This decline reflected the capital actions taken throughout the quarter and are discussed below.
Over the quarter, and consistent with planned capital actions, we redeemed $114.3 million of trust preferred securities and repurchased 3.7 million common shares at an average price of $6.68 per share. The weighted average coupon of the remaining $300 million of trust preferred securities is LIBOR + 1.02%. Reinvesting excess capital to grow the business organically remains our first priority. Importantly, through dividends and share repurchases, we have the flexibility, subject to market conditions, to return a meaningful amount of our earnings to the owners of the company.
Business Overview
General
Our general business objectives are: (1) grow net interest income and fee income, (2) increase cross-sell and share-of-wallet across all business segments, (3) improve efficiency ratio, (4) continue to strengthen risk management, including sustained improvement in credit metrics, and (5) maintain strong capital and liquidity positions.
The third quarter results clearly showed the continued benefit of the investment we have made over the preceding three years. Adding over 250,000 consumer households, a 27% increase, and 26,000 commercial relationships, or 21% increase, since the first quarter of 2010 has allowed us to grow quarterly total revenue by more than $59 million even with the negative impacts from the low absolute level of interest rates, the flat shape of the yield curve, and the reduction of over $25 million revenue per quarter due to the Durbin amendment and implementation of changes to Regulation E. Not only are we gaining customers, we are selling deeper with 76% of consumer checking account households and 33% of commercial relationships now with 4 or more products or services. Strategic investments have a maximum of two years to break even with many reaching that level in the first year. A portion of our strategic investments remain in the early stages, such as our strategy to build over 180 in-store full service branches. The in-store branches are on target with the estimated aggregate impact to operating income negligible next year and positive in 2014.
6
Economy
We continue to see positive trends within our Midwest markets relative to the broader United States. Nevertheless, broad based customer sentiment began to change late in the quarter. Customers have increased concerns, in the near term, regarding the U.S. economy as we approach the election and scheduled impacts of the Budget Control Act of 2011. We are optimistic that once permanent solutions are in place, the strength of the Midwest and the soundness of our strategy will continue to drive growth and improved profitability.
Generally, our footprint large metropolitan statistical areas (MSA) unemployment rates were below the national average as of July 2012. In addition, our footprint states have continued to be strong export states. For the three-month average ending July 2012, exports from our footprint states were 8.5% greater than the same period last year. By comparison, overall U.S. exports were 5.1% higher. Office vacancy rates in our footprint MSAs were above the national vacancy rate in the prior quarter, but have generally remained on declining trends.
While our footprint has clearly benefited from certain aspects of this recovery, the United States and global economies continue to experience elevated levels of volatility and uncertainty.
Legislative and Regulatory
Regulatory reforms continue to be adopted which impose additional restrictions on current business practices. Recent actions affecting us include the Federal Reserve BASEL III proposal and the capital plans rule.
BASEL III and the Dodd-Frank Act – In June 2012, the FRB, OCC, and FDIC (collectively, the Agencies) each issued Notices of Proposed Rulemaking (NPRs) that would revise and replace the Agencies’ current capital rules to align with the BASEL III capital standards and meet certain requirements of the Dodd-Frank Act. Certain requirements of the NPRs would establish more restrictive capital definitions, higher risk-weightings for certain asset classes, capital buffers and higher minimum capital ratios. The NPRs were in a comment period through October 22, 2012, and are subject to further modification by the Agencies. We are currently evaluating the impact of the NPRs on our regulatory capital ratios. We estimate a reduction of approximately 150 basis points to our BASEL I Tier I Common risk-based capital ratio based on our existing balance sheet composition, if the proposed NPRs are adopted as proposed. We anticipate that our capital ratios, on a BASEL III basis, would continue to exceed the well-capitalized minimum requirements. For additional discussion, please see BASEL III and the Dodd-Frank Act section within the Capital section.
Capital Plans Rule / Supervisory and Company-Run Stress Test Requirements– During 2011, we participated in the Federal Reserve’s Capital Plan Review (CapPR) process and made our capital plan submission in January 2012. On March 14, 2012, we announced that the Federal Reserve had completed its review of our capital plan submission and did not object to our proposed capital actions. The capital planning review process included reviews of our internal capital adequacy assessment process and our plans to make capital distributions, such as dividend payments or stock repurchases, as well as a stress test requirement designed to test our capital adequacy throughout times of economic and financial stress.
In October 2012, the Federal Reserve published two final rules with stress testing requirements for certain bank holding companies, state member banks, and savings and loan holding companies. The final rules implement sections 165(i)(1) and (i)(2) of the Dodd-Frank Act that require supervisory and company-run stress tests. The Federal Reserve will begin conducting supervisory stress tests under the final rules in the 2012 fourth quarter for the 19 bank holding companies that participated in the 2009 Supervisory Capital Assessment Program and subsequent Comprehensive Capital Analysis and Reviews. We were not included in this group of 19 bank holding companies.
Huntington will be subject to the Federal Reserve’s supervisory stress tests beginning in late 2013, however as in the prior year, we are subject to CapPR and will conduct internal stress testing as part of the completion of our annual Capital Plan. The Federal Reserve is expected to release the scenarios for this year’s supervisory and company-run stress tests no later than November 15, 2012. As required by the Dodd-Frank Act, the scenarios will describe hypothetical baseline, adverse, and severely adverse conditions, with paths for key macroeconomic and financial variables. We must submit our Capital Plan to the Federal Reserve no later than January 5, 2013.
In October 2012, the OCC issued its Annual Stress Test final rule. This final rule implements section 165(i) of the Dodd-Frank Act which requires certain companies to conduct annual stress tests pursuant to regulations prescribed by their respective primary financial regulatory agencies. The OCC has stipulated in its final rule that it will consult closely with the Federal Reserve to provide common stress scenarios for use at both the depository institution and holding company levels. The OCC has deferred the requirement for us to complete separate annual stress tests at the bank-level until next year. For additional discussion, please see Updates to Risk Factors within the Additional Disclosures section.
7
Expectations
For the next several quarters, average net interest income is expected to be relatively stable from the third quarter’s level as we anticipate an increase in total loans, excluding the impacts of any future loan securitizations. Those benefits to net interest income are expected to be mostly offset, however, by slight downward net interest margin pressure due to the anticipated competitive pressures on loan pricing, as well as reinvestment into lower rate securities, and declining positive impacts from deposit repricing. The C&I portfolio is expected to continue to show growth. Although, given the most recent trend, we are expecting near-term growth to be slower than the strong growth we experienced earlier this year. Our C&I sales pipeline remains robust with much of this reflecting the positive impact from our strategic initiatives, focused OCR sales process, and continued support of middle market and small business lending in the Midwest. We will continue to evaluate the use of automobile loan securitizations to limit total on-balance sheet exposure due to our expectation of continued strong levels of originations. On October 11, 2012, a $1.0 billion automobile loan securitization was completed and resulted in a gain of approximately $17 million. Residential mortgages and home equity loan balances are expected to be relatively stable in response to the proposed capital rules recently released by our regulators. CRE loans likely will experience declines from current levels.
Excluding potential future automobile loan securitizations, we anticipate the increase in total loans will modestly outpace growth in total deposits. This reflects our continued focus on our overall cost of funds and the continued shift towards low- and no-cost demand deposits and money market deposit accounts.
Noninterest income, excluding the impact of any automobile loan sales or security gains and any net MSR impact, is expected to be relatively stable at current levels. Continued growth in new customers and increased contribution from increased cross-sell are expected to be offset by a slowdown in mortgage banking activity.
Noninterest expense is expected to modestly increase above the 2012 third quarter level. For the full year, we continue to anticipate positive operating leverage and modest improvement in our expense efficiency ratio. Additional regulatory costs and expenses associated with strategic actions, including the planned opening of over 80 in-store branches this year, are expected to be partially offset by our focus on improving expense efficiencies throughout the company.
Credit quality is expected to experience improvement. The level of provision for credit losses in the first three quarters of the year was at the low end of our long-term expectation, and we expect some quarterly volatility given the absolute low level of the provision for credit losses and the uncertain and uneven nature of the economic recovery.
We anticipate the effective tax rate for the 2012 fourth quarter to approximate 24% to 26%, which includes permanent tax benefits primarily related to tax-exempt income, tax-advantaged investments, and general business credits.
8
DISCUSSION OF RESULTS OF OPERATIONS
This section provides a review of financial performance from a consolidated perspective. It also includes a “Significant Items” section that summarizes key issues important for a complete understanding of performance trends. Key Unaudited Condensed Consolidated Balance Sheet and Unaudited Condensed Statement of Income trends are discussed. All earnings per share data are reported on a diluted basis. For additional insight on financial performance, please read this section in conjunction with the “Business Segment Discussion.”
9
| Table 1 - Selected Quarterly Income Statement Data (1)
|
||||||||||||||||||||
| 2012 | 2011 | |||||||||||||||||||
| (dollar amounts in thousands, except per share amounts) |
Third | Second | First | Fourth | Third | |||||||||||||||
| Interest income |
$ | 483,787 | $ | 487,544 | $ | 479,937 | $ | 485,216 | $ | 490,996 | ||||||||||
| Interest expense |
53,489 | 58,582 | 62,728 | 70,191 | 84,518 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net interest income |
430,298 | 428,962 | 417,209 | 415,025 | 406,478 | |||||||||||||||
| Provision for credit losses |
37,004 | 36,520 | 34,406 | 45,291 | 43,586 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net interest income after provision for credit losses |
393,294 | 392,442 | 382,803 | 369,734 | 362,892 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Service charges on deposit accounts |
67,806 | 65,998 | 60,292 | 63,324 | 65,184 | |||||||||||||||
| Trust services |
29,689 | 29,914 | 30,906 | 28,775 | 29,473 | |||||||||||||||
| Electronic banking |
22,135 | 20,514 | 18,630 | 18,282 | 32,901 | |||||||||||||||
| Mortgage banking income |
44,614 | 38,349 | 46,418 | 24,098 | 12,791 | |||||||||||||||
| Brokerage income |
16,526 | 19,025 | 19,260 | 18,688 | 20,349 | |||||||||||||||
| Insurance income |
17,792 | 17,384 | 18,875 | 17,906 | 17,220 | |||||||||||||||
| Bank owned life insurance income |
14,371 | 13,967 | 13,937 | 14,271 | 15,644 | |||||||||||||||
| Capital markets fees |
11,805 | 13,455 | 9,982 | 9,811 | 11,256 | |||||||||||||||
| Gain on sale of loans |
6,591 | 4,131 | 26,770 | 2,884 | 19,097 | |||||||||||||||
| Automobile operating lease income |
2,146 | 2,877 | 3,775 | 4,727 | 5,890 | |||||||||||||||
| Securities gains (losses) |
4,169 | 350 | (613 | ) | (3,878 | ) | (1,350 | ) | ||||||||||||
| Other income |
23,423 | 27,855 | 37,088 | 30,464 | 30,104 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total noninterest income |
261,067 | 253,819 | 285,320 | 229,352 | 258,559 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Personnel costs |
247,709 | 243,034 | 243,498 | 228,101 | 226,835 | |||||||||||||||
| Outside data processing and other services |
49,880 | 48,149 | 42,058 | 53,422 | 49,602 | |||||||||||||||
| Net occupancy |
27,599 | 25,474 | 29,079 | 26,841 | 26,967 | |||||||||||||||
| Equipment |
25,950 | 24,872 | 25,545 | 25,884 | 22,262 | |||||||||||||||
| Deposit and other insurance expense |
15,534 | 15,731 | 20,738 | 18,481 | 17,492 | |||||||||||||||
| Marketing |
20,178 | 21,365 | 16,776 | 16,379 | 22,251 | |||||||||||||||
| Professional services |
18,024 | 15,458 | 11,230 | 16,769 | 20,281 | |||||||||||||||
| Amortization of intangibles |
11,431 | 11,940 | 11,531 | 13,175 | 13,387 | |||||||||||||||
| Automobile operating lease expense |
1,619 | 2,183 | 2,854 | 3,362 | 4,386 | |||||||||||||||
| OREO and foreclosure expense |
4,982 | 4,106 | 4,950 | 5,009 | 4,668 | |||||||||||||||
| Loss (Gain) on early extinguishment of debt |
1,782 | (2,580 | ) | — | (9,697 | ) | — | |||||||||||||
| Other expense |
33,615 | 34,537 | 54,417 | 32,548 | 30,987 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total noninterest expense |
458,303 | 444,269 | 462,676 | 430,274 | 439,118 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Income before income taxes |
196,058 | 201,992 | 205,447 | 168,812 | 182,333 | |||||||||||||||
| Provision for income taxes |
28,291 | 49,286 | 52,177 | 41,954 | 38,942 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net income |
$ | 167,767 | $ | 152,706 | $ | 153,270 | $ | 126,858 | $ | 143,391 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Dividends on preferred shares |
7,983 | 7,984 | 8,049 | 7,703 | 7,703 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net income applicable to common shares |
$ | 159,784 | $ | 144,722 | $ | 145,221 | $ | 119,155 | $ | 135,688 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Average common shares—basic |
857,871 | 862,261 | 864,499 | 864,136 | 863,911 | |||||||||||||||
| Average common shares—diluted |
863,588 | 867,551 | 869,164 | 868,156 | 867,633 | |||||||||||||||
| Net income per common share—basic |
$ | 0.19 | $ | 0.17 | $ | 0.17 | $ | 0.14 | $ | 0.16 | ||||||||||
| Net income per common share—diluted |
0.19 | 0.17 | 0.17 | 0.14 | 0.16 | |||||||||||||||
| Cash dividends declared per common share |
0.04 | 0.04 | 0.04 | 0.04 | 0.04 | |||||||||||||||
| Return on average total assets |
1.19 | % | 1.10 | % | 1.13 | % | 0.92 | % | 1.05 | % | ||||||||||
| Return on average common shareholders’ equity |
11.9 | 11.1 | 11.4 | 9.3 | 10.8 | |||||||||||||||
| Return on average tangible common shareholders’ equity (2) |
13.9 | 13.1 | 13.5 | 11.2 | 13.0 | |||||||||||||||
| Net interest margin (3) |
3.38 | 3.42 | 3.40 | 3.38 | 3.34 | |||||||||||||||
| Efficiency ratio (4) |
64.5 | 62.8 | 63.8 | 64.0 | 63.5 | |||||||||||||||
| Effective tax rate |
14.4 | 24.4 | 25.4 | 24.9 | 21.4 | |||||||||||||||
| Revenue—FTE |
||||||||||||||||||||
| Net interest income |
$ | 430,298 | $ | 428,962 | $ | 417,209 | $ | 415,025 | $ | 406,478 | ||||||||||
| FTE adjustment |
5,254 | 5,747 | 3,935 | 3,479 | 3,658 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net interest income (3) |
435,552 | 434,709 | 421,144 | 418,504 | 410,136 | |||||||||||||||
| Noninterest income |
261,067 | 253,819 | 285,320 | 229,352 | 258,559 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total revenue (3) |
$ | 696,619 | $ | 688,528 | $ | 706,464 | $ | 647,856 | $ | 668,695 | ||||||||||
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|
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|
|
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|||||||||||
| (1) | Comparisons for presented periods are impacted by a number of factors. Refer to Significant Items. |
10
| (2) | Net income excluding expense for amortization of intangibles for the period divided by average tangible common shareholders’ equity. Average tangible common shareholders’ equity equals average total common shareholders’ equity less average intangible assets and goodwill. Expense for amortization of intangibles and average intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate. |
| (3) | On a fully-taxable equivalent (FTE) basis assuming a 35% tax rate. |
| (4) | Noninterest expense less amortization of intangibles and goodwill impairment divided by the sum of FTE net interest income and noninterest income excluding securities gains (losses). |
11
| Table 2 - Selected Year to Date Income Statement Data(1)
|
||||||||||||||||
| Nine Months Ended September 30, |
Change | |||||||||||||||
| (dollar amounts in thousands, except per share amounts) |
2012 | 2011 | Amount | Percent | ||||||||||||
| Interest income |
$ | 1,451,268 | $ | 1,485,010 | $ | (33,742 | ) | (2 | )% | |||||||
| Interest expense |
174,799 | 270,865 | (96,066 | ) | (35 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net interest income |
1,276,469 | 1,214,145 | 62,324 | 5 | ||||||||||||
| Provision for credit losses |
107,930 | 128,768 | (20,838 | ) | (16 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net interest income after provision for credit losses |
1,168,539 | 1,085,377 | 83,162 | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Service charges on deposit accounts |
194,096 | 180,183 | 13,913 | 8 | ||||||||||||
| Trust services |
90,509 | 90,607 | (98 | ) | — | |||||||||||
| Electronic banking |
61,279 | 93,415 | (32,136 | ) | (34 | ) | ||||||||||
| Mortgage banking income |
129,381 | 59,310 | 70,071 | 118 | ||||||||||||
| Brokerage income |
54,811 | 61,679 | (6,868 | ) | (11 | ) | ||||||||||
| Insurance income |
54,051 | 51,564 | 2,487 | 5 | ||||||||||||
| Bank owned life insurance income |
42,275 | 48,065 | (5,790 | ) | (12 | ) | ||||||||||
| Capital markets fees |
35,242 | 26,729 | 8,513 | 32 | ||||||||||||
| Gain on sale of loans |
37,492 | 29,060 | 8,432 | 29 | ||||||||||||
| Automobile operating lease income |
8,798 | 22,044 | (13,246 | ) | (60 | ) | ||||||||||
| Securities gains (losses) |
3,906 | 197 | 3,709 | 1,883 | ||||||||||||
| Other income |
88,366 | 88,418 | (52 | ) | — | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total noninterest income |
800,206 | 751,271 | 48,935 | 7 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Personnel costs |
734,241 | 664,433 | 69,808 | 11 | ||||||||||||
| Outside data processing and other services |
140,087 | 133,773 | 6,314 | 5 | ||||||||||||
| Net occupancy |
82,152 | 82,288 | (136 | ) | — | |||||||||||
| Equipment |
76,367 | 66,660 | 9,707 | 15 | ||||||||||||
| Deposit and other insurance expense |
52,003 | 59,211 | (7,208 | ) | (12 | ) | ||||||||||
| Marketing |
58,319 | 59,248 | (929 | ) | (2 | ) | ||||||||||
| Professional services |
44,712 | 53,826 | (9,114 | ) | (17 | ) | ||||||||||
| Amortization of intangibles |
34,902 | 40,143 | (5,241 | ) | (13 | ) | ||||||||||
| Automobile operating lease expense |
6,656 | 16,656 | (10,000 | ) | (60 | ) | ||||||||||
| OREO and foreclosure expense |
14,038 | 12,997 | 1,041 | 8 | ||||||||||||
| Gain on early extinguishment of debt |
(798 | ) | — | (798 | ) | — | ||||||||||
| Other expense |
122,569 | 108,991 | 13,578 | 12 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total noninterest expense |
1,365,248 | 1,298,226 | 67,022 | 5 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Income before income taxes |
603,497 | 538,422 | 65,075 | 12 | ||||||||||||
| Provision for income taxes |
129,754 | 122,667 | 7,087 | 6 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income |
$ | 473,743 | $ | 415,755 | $ | 57,988 | 14 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Dividends declared on preferred shares |
24,016 | 23,110 | 906 | 4 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income applicable to common shares |
$ | 449,727 | $ | 392,645 | $ | 57,082 | 15 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Average common shares—basic |
861,543 | 863,542 | (1,999 | ) | — | % | ||||||||||
| Average common shares—diluted (2) |
866,768 | 867,446 | (678 | ) | — | |||||||||||
| Per common share |
||||||||||||||||
| Net income per common share - basic |
$ | 0.52 | $ | 0.45 | $ | 0.07 | 16 | % | ||||||||
| Net income per common share - diluted |
0.52 | 0.45 | 0.07 | 16 | ||||||||||||
| Cash dividends declared |
0.12 | 0.06 | 0.06 | 100 | ||||||||||||
| Return on average total assets |
1.14 | % | 1.04 | % | 0.10 | % | 10 | % | ||||||||
| Return on average common shareholders’ equity |
11.5 | 10.9 | 0.6 | 6 | ||||||||||||
| Return on average tangible common shareholders’ equity (3) |
13.5 | 13.2 | 0.3 | 2 | ||||||||||||
| Net interest margin (4) |
3.40 | 3.39 | 0.01 | — | ||||||||||||
| Efficiency ratio (5) |
63.7 | 63.6 | 0.1 | — | ||||||||||||
| Effective tax rate |
21.5 | 22.8 | (1.3 | ) | (6 | ) | ||||||||||
| Revenue—FTE |
||||||||||||||||
| Net interest income |
$ | 1,276,469 | $ | 1,214,145 | $ | 62,324 | 5 | % | ||||||||
| FTE adjustment |
14,936 | 11,437 | 3,499 | 31 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net interest income (4) |
1,291,405 | 1,225,582 | 65,823 | 5 | ||||||||||||
| Noninterest income |
800,206 | 751,271 | 48,935 | 7 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total revenue (4) |
$ | 2,091,611 | $ | 1,976,853 | $ | 114,758 | 6 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
12
| (1) | Comparisons for presented periods are impacted by a number of factors. Refer to Significant Items. |
| (2) | For all periods presented, the impact of the preferred stock issued in 2008 and the warrants issued to the U.S. Department of the Treasury in 2008 related to Huntington’s participation in the voluntary Capital Purchase Program was excluded from the diluted share calculation because the result was more than basic earnings per common share (anti-dilutive) for the periods. The preferred stock and warrants were repurchased in December 2010 and January 2011, respectively. |
| (3) | Net income excluding expense for amortization of intangibles for the period divided by average tangible common shareholders’ equity. Average tangible common shareholders’ equity equals average total common shareholders’ equity less average intangible assets and goodwill. Expense for amortization of intangibles and average intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate. |
| (4) | On a fully-taxable equivalent (FTE) basis assuming a 35% tax rate. |
| (5) | Noninterest expense less amortization of intangibles and goodwill impairment divided by the sum of FTE net interest income and noninterest income excluding securities gains (losses). |
Significant Items
Definition of Significant Items
From time-to-time, revenue, expenses, or taxes, are impacted by items judged by us to be outside of ordinary banking activities and / or by items that, while they may be associated with ordinary banking activities, are so unusually large that their outsized impact is believed by us at that time to be infrequent or short-term in nature. We refer to such items as Significant Items. Most often, these Significant Items result from factors originating outside the company; e.g., regulatory actions / assessments, windfall gains, changes in accounting principles, one-time tax assessments / refunds, litigation actions, etc. In other cases, they may result from our decisions associated with significant corporate actions outside of the ordinary course of business; e.g., merger / restructuring charges, recapitalization actions, goodwill impairment, etc.
Even though certain revenue and expense items are naturally subject to more volatility than others due to changes in market and economic environment conditions, as a general rule volatility alone does not define a Significant Item. For example, changes in the provision for credit losses, gains / losses from investment activities, asset valuation writedowns, etc., reflect ordinary banking activities and are, therefore, typically excluded from consideration as a Significant Item.
We believe the disclosure of Significant Items provides a better understanding of our performance and trends to ascertain which of such items, if any, to include or exclude from an analysis of our performance; i.e., within the context of determining how that performance differed from expectations, as well as how, if at all, to adjust estimates of future performance accordingly. To this end, we adopted a practice of listing Significant Items in our external disclosure documents; e.g., earnings press releases, investor presentations, Forms 10-Q and 10-K.
Significant Items for any particular period are not intended to be a complete list of items that may materially impact current or future period performance.
Significant Items Influencing Financial Performance Comparisons
Earnings comparisons were impacted by the Significant Items summarized below:
| 1. | Litigation Reserve. $23.5 million and $17.0 million of additions to litigation reserves were recorded as other noninterest expense in the first quarter of 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 for both the quarterly and year-to-date basis. |
| 2. | Bargain Purchase Gain. During the 2012 first quarter, an $11.4 million bargain purchase gain associated with the FDIC-assisted Fidelity Bank acquisition was recorded in noninterest income. This resulted in a positive impact of $0.01 per common share for both the quarterly and year-to-date basis. |
| 3. | State deferred tax asset valuation allowance adjustment. During the 2012 third quarter, a valuation allowance of $19.5 million (net of tax) was released for the portion of the deferred tax asset and state net operating loss carryforwards expected to be realized. This resulted in a positive impact of $0.02 per common share for both the quarterly and year-to-date basis. Additional information can be found in the ‘Provision for Income Taxes’ section within this MD&A. |
13
The following table reflects the earnings impact of the above-mentioned Significant Items for periods affected by this Results of Operations discussion:
Table 3 - Significant Items Influencing Earnings Performance Comparison
| Three Months Ended | ||||||||||||||||||||||||
| September 30, 2012 | June 30, 2012 | September 30, 2011 | ||||||||||||||||||||||
| (dollar amounts in thousands, except per share amounts) |
After-tax | EPS (2) | After-tax | EPS (2) | After-tax | EPS (2) | ||||||||||||||||||
| Net income |
$ | 167,767 | $ | 152,706 | $ | 143,391 | ||||||||||||||||||
| Earnings per share, after-tax |
$ | 0.19 | $ | 0.17 | $ | 0.16 | ||||||||||||||||||
| Change from prior quarter - $ |
0.02 | — | — | |||||||||||||||||||||
| Change from prior quarter - % |
12 | % | — | % | — | % | ||||||||||||||||||
| Change from year-ago - $ |
$ | 0.03 | $ | 0.01 | $ | 0.06 | ||||||||||||||||||
| Change from year-ago - % |
19 | % | 6 | % | 60 | % | ||||||||||||||||||
| Significant Items - favorable (unfavorable) impact: |
Earnings (1) | EPS (2) | Earnings (1) | EPS (2) | Earnings (1) | EPS (2) | ||||||||||||||||||
| State deferred tax asset valuation allowance adjustment (2) |
$ | 19,513 | $ | 0.02 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
| (1) | Pretax unless otherwise noted. |
| (2) | After-tax. |
| Nine Months Ended | ||||||||||||||||
| September 30, 2012 | September 30, 2011 | |||||||||||||||
| (dollar amounts in thousands) |
After-tax | EPS (2) | After-tax | EPS (2) | ||||||||||||
| Net income |
$ | 473,743 | $ | 415,755 | ||||||||||||
| Earnings per share, after-tax |
$ | 0.52 | $ | 0.45 | ||||||||||||
| Change from a year-ago - $ |
0.07 | 0.31 | ||||||||||||||
| Change from a year-ago - % |
16 | % | 221 | % | ||||||||||||
| Significant Items—favorable (unfavorable) impact: |
Earnings (1) | EPS (2) | Earnings (1) | EPS (2) | ||||||||||||
| State deferred tax asset valuation allowance adjustment (2) |
$ | 19,513 | $ | 0.02 | $ | — | $ | — | ||||||||
| Bargain purchase gain |
11,409 | 0.01 | — | — | ||||||||||||
| Litigation reserves addition |
(23,500 | ) | (0.02 | ) | (17,028 | ) | (0.01 | ) | ||||||||
| (1) | Pretax unless otherwise noted. |
| (2) | After-tax. |
Net Interest Income / Average Balance Sheet
The following tables detail the change in our average balance sheet and the net interest margin:
14
Table 4 - Consolidated Quarterly Average Balance Sheets
| Average Balances | Change | |||||||||||||||||||||||||||
| 2012 | 2011 | 3Q12 vs. 3Q11 | ||||||||||||||||||||||||||
| (dollar amounts in millions) |
Third | Second (2) | First | Fourth | Third | Amount | Percent | |||||||||||||||||||||
| Assets: |
||||||||||||||||||||||||||||
| Interest-bearing deposits in banks |
$ | 82 | $ | 124 | $ | 100 | $ | 107 | $ | 164 | $ | (82 | ) | (50 | )% | |||||||||||||
| Trading account securities |
66 | 54 | 50 | 81 | 92 | (26 | ) | (28 | ) | |||||||||||||||||||
| Loans held for sale |
1,829 | 410 | 1,265 | 316 | 237 | 1,592 | 672 | |||||||||||||||||||||
| Available-for-sale and other securities: |
||||||||||||||||||||||||||||
| Taxable |
8,014 | 8,285 | 8,171 | 8,065 | 7,902 | 112 | 1 | |||||||||||||||||||||
| Tax-exempt |
423 | 387 | 404 | 409 | 421 | 2 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total available-for-sale and other securities |
8,437 | 8,672 | 8,575 | 8,474 | 8,323 | 114 | 1 | |||||||||||||||||||||
| Held-to-maturity securities—taxable |
796 | 611 | 632 | 650 | 665 | 131 | 20 | |||||||||||||||||||||
| Loans and leases: (1) |
||||||||||||||||||||||||||||
| Commercial: |
||||||||||||||||||||||||||||
| Commercial and industrial |
16,343 | 16,094 | 14,824 | 14,219 | 13,664 | 2,679 | 20 | |||||||||||||||||||||
| Commercial real estate: |
||||||||||||||||||||||||||||
| Construction |
569 | 584 | 598 | 533 | 670 | (101 | ) | (15 | ) | |||||||||||||||||||
| Commercial |
5,153 | 5,491 | 5,254 | 5,425 | 5,441 | (288 | ) | (5 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Commercial real estate |
5,722 | 6,075 | 5,852 | 5,958 | 6,111 | (389 | ) | (6 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total commercial |
22,065 | 22,169 | 20,676 | 20,177 | 19,775 | 2,290 | 12 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Consumer: |
||||||||||||||||||||||||||||
| Automobile |
4,065 | 4,985 | 4,576 | 5,639 | 6,211 | (2,146 | ) | (35 | ) | |||||||||||||||||||
| Home equity |
8,369 | 8,310 | 8,234 | 8,149 | 8,002 | 367 | 5 | |||||||||||||||||||||
| Residential mortgage |
5,177 | 5,253 | 5,174 | 5,043 | 4,788 | 389 | 8 | |||||||||||||||||||||
| Other consumer |
444 | 462 | 485 | 511 | 521 | (77 | ) | (15 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total consumer |
18,055 | 19,010 | 18,469 | 19,342 | 19,522 | (1,467 | ) | (8 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total loans and leases |
40,120 | 41,179 | 39,145 | 39,519 | 39,297 | 823 | 2 | |||||||||||||||||||||
| Allowance for loan and lease losses |
(855 | ) | (908 | ) | (961 | ) | (1,014 | ) | (1,066 | ) | 211 | (20 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net loans and leases |
39,265 | 40,271 | 38,184 | 38,505 | 38,231 | 1,034 | 3 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total earning assets |
51,330 | 51,050 | 49,767 | 49,147 | 48,778 | 2,552 | 5 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Cash and due from banks |
960 | 928 | 1,012 | 1,671 | 1,700 | (740 | ) | (44 | ) | |||||||||||||||||||
| Intangible assets |
597 | 609 | 613 | 625 | 639 | (42 | ) | (7 | ) | |||||||||||||||||||
| All other assets |
4,106 | 4,158 | 4,225 | 4,221 | 4,142 | (36 | ) | (1 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total assets |
$ | 56,138 | $ | 55,837 | $ | 54,656 | $ | 54,650 | $ | 54,193 | $ | 1,945 | 4 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Liabilities and Shareholders’ Equity: |
||||||||||||||||||||||||||||
| Deposits: |
||||||||||||||||||||||||||||
| Demand deposits - noninterest-bearing |
$ | 12,329 | $ | 12,064 | $ | 11,273 | $ | 10,716 | $ | 8,719 | $ | 3,610 | 41 | % | ||||||||||||||
| Demand deposits - interest-bearing |
5,814 | 5,939 | 5,646 | 5,570 | 5,573 | 241 | 4 | |||||||||||||||||||||
| Money market deposits |
14,515 | 13,182 | 13,141 | 13,594 | 13,321 | 1,194 | 9 | |||||||||||||||||||||
| Savings and other domestic deposits |
4,975 | 4,978 | 4,817 | 4,706 | 4,752 | 223 | 5 | |||||||||||||||||||||
| Core certificates of deposit |
6,131 | 6,618 | 6,510 | 6,769 | 7,592 | (1,461 | ) | (19 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total core deposits |
43,764 | 42,781 | 41,387 | 41,355 | 39,957 | 3,807 | 10 | |||||||||||||||||||||
| Other domestic time deposits of $250,000 or more |
300 | 298 | 347 | 405 | 387 | (87 | ) | (22 | ) | |||||||||||||||||||
| Brokered deposits and negotiable CDs |
1,878 | 1,421 | 1,301 | 1,410 | 1,533 | 345 | 23 | |||||||||||||||||||||
| Deposits in foreign offices |
356 | 357 | 430 | 434 | 401 | (45 | ) | (11 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total deposits |
46,298 | 44,857 | 43,465 | 43,604 | 42,278 | 4,020 | 10 | |||||||||||||||||||||
| Short-term borrowings |
1,329 | 1,391 | 1,512 | 1,728 | 2,251 | (922 | ) | (41 | ) | |||||||||||||||||||
| Federal Home Loan Bank advances |
107 | 626 | 419 | 29 | 285 | (178 | ) | (62 | ) | |||||||||||||||||||
| Subordinated notes and other long-term debt |
1,638 | 2,251 | 2,652 | 2,866 | 3,030 | (1,392 | ) | (46 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total interest-bearing liabilities |
37,043 | 37,061 | 36,775 | 37,511 | 39,125 | (2,082 | ) | (5 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| All other liabilities |
1,035 | 1,094 | 1,116 | 978 | 1,017 | 18 | 2 | |||||||||||||||||||||
| Shareholders’ equity |
5,731 | 5,618 | 5,492 | 5,445 | 5,332 | 399 | 7 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total liabilities and shareholders’ equity |
$ | 56,138 | $ | 55,837 | $ | 54,656 | $ | 54,650 | $ | 54,193 | $ | 1,945 | 4 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| (1) | For purposes of this analysis, NALs are reflected in the average balances of loans. |
| (2) | The acquisition of Fidelity Bank on March 30, 2012, contributed to the increase in average loans and deposits |
15
Table 5 - Consolidated Quarterly Net Interest Margin Analysis
| Average Rates (2) | ||||||||||||||||||||
| Fully-taxable equivalent basis (1) |
2012 | 2011 | ||||||||||||||||||
| Third | Second | First | Fourth | Third | ||||||||||||||||
| Assets |
||||||||||||||||||||
| Interest-bearing deposits in banks |
0.21 | % | 0.31 | % | 0.05 | % | 0.06 | % | 0.04 | % | ||||||||||
| Trading account securities |
1.07 | 1.64 | 1.65 | 0.97 | 1.41 | |||||||||||||||
| Loans held for sale |
3.18 | 3.46 | 3.80 | 3.96 | 4.46 | |||||||||||||||
| Available-for-sale and other securities: |
||||||||||||||||||||
| Taxable |
2.29 | 2.33 | 2.39 | 2.37 | 2.43 | |||||||||||||||
| Tax-exempt |
4.15 | 4.23 | 4.17 | 4.22 | 4.17 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total available-for-sale and other securities |
2.39 | 2.41 | 2.47 | 2.46 | 2.52 | |||||||||||||||
| Held-to-maturity securities—taxable |
2.81 | 2.97 | 2.98 | 2.99 | 3.04 | |||||||||||||||
| Loans and leases: (3) |
||||||||||||||||||||
| Commercial: |
||||||||||||||||||||
| Commercial and industrial |
3.90 | 3.99 | 4.01 | 4.01 | 4.13 | |||||||||||||||
| Commercial real estate: |
||||||||||||||||||||
| Construction |
3.84 | 3.66 | 3.85 | 4.78 | 3.87 | |||||||||||||||
| Commercial |
3.85 | 3.93 | 3.82 | 3.91 | 3.91 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Commercial real estate |
3.85 | 3.89 | 3.82 | 3.99 | 3.91 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total commercial |
3.89 | 3.97 | 3.96 | 4.01 | 4.06 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Consumer: |
||||||||||||||||||||
| Automobile |
4.87 | 4.68 | 4.87 | 4.80 | 4.89 | |||||||||||||||
| Home equity |
4.27 | 4.30 | 4.30 | 4.41 | 4.45 | |||||||||||||||
| Residential mortgage |
4.02 | 4.14 | 4.17 | 4.30 | 4.47 | |||||||||||||||
| Other consumer |
7.16 | 7.42 | 7.47 | 7.32 | 7.57 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total consumer |
4.40 | 4.43 | 4.49 | 4.57 | 4.68 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total loans and leases |
4.12 | 4.18 | 4.21 | 4.28 | 4.37 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total earning assets |
3.79 | % | 3.89 | % | 3.91 | % | 3.95 | % | 4.02 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Liabilities |
||||||||||||||||||||
| Deposits: |
||||||||||||||||||||
| Demand deposits - noninterest-bearing |
— | % | — | % | — | % | — | % | — | % | ||||||||||
| Demand deposits - interest-bearing |
0.07 | 0.07 | 0.06 | 0.08 | 0.10 | |||||||||||||||
| Money market deposits |
0.33 | 0.30 | 0.26 | 0.32 | 0.41 | |||||||||||||||
| Savings and other domestic deposits |
0.37 | 0.39 | 0.45 | 0.52 | 0.69 | |||||||||||||||
| Core certificates of deposit |
1.25 | 1.38 | 1.60 | 1.69 | 1.95 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total core deposits |
0.47 | 0.50 | 0.54 | 0.61 | 0.77 | |||||||||||||||
| Other domestic time deposits of $250,000 or more |
0.68 | 0.66 | 0.68 | 0.78 | 0.93 | |||||||||||||||
| Brokered deposits and negotiable CDs |
0.71 | 0.75 | 0.79 | 0.77 | 0.77 | |||||||||||||||
| Deposits in foreign offices |
0.18 | 0.19 | 0.18 | 0.19 | 0.26 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total deposits |
0.48 | 0.51 | 0.55 | 0.61 | 0.77 | |||||||||||||||
| Short-term borrowings |
0.16 | 0.16 | 0.16 | 0.18 | 0.16 | |||||||||||||||
| Federal Home Loan Bank advances |
0.50 | 0.21 | 0.21 | 2.09 | 0.32 | |||||||||||||||
| Subordinated notes and other long-term debt |
2.91 | 2.83 | 2.74 | 2.56 | 2.43 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total interest-bearing liabilities |
0.58 | % | 0.63 | % | 0.68 | % | 0.74 | % | 0.86 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net interest rate spread |
3.15 | % | 3.18 | % | 3.15 | % | 3.15 | % | 3.11 | % | ||||||||||
| Impact of noninterest-bearing funds on margin |
0.22 | 0.25 | 0.25 | 0.23 | 0.22 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net interest margin |
3.38 | % | 3.42 | % | 3.40 | % | 3.38 | % | 3.34 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (1) | FTE yields are calculated assuming a 35% tax rate. |
| (2) | Loan and lease and deposit average rates include impact of applicable derivatives, non-deferrable fees, and amortized deferred fees. |
| (3) | For purposes of this analysis, NALs are reflected in the average balances of loans. |
16
Table 6 - Average Loans/Leases and Deposits
| Third Quarter | Second Quarter | 3Q12 vs 3Q11 | 3Q12 vs 2Q12 | |||||||||||||||||||||||||
| (dollar amounts in millions) |
2012 | 2011 | 2012 | Amount | Percent | Amount | Percent | |||||||||||||||||||||
| Loans/Leases: |
||||||||||||||||||||||||||||
| Commercial and industrial |
$ | 16,343 | $ | 13,664 | $ | 16,094 | $ | 2,679 | 20 | % | $ | 249 | 2 | % | ||||||||||||||
| Commercial real estate |
5,722 | 6,111 | 6,075 | (389 | ) | (6 | ) | (353 | ) | (6 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total commercial |
22,065 | 19,775 | 22,169 | 2,290 | 12 | (104 | ) | (0 | ) | |||||||||||||||||||
| Automobile |
4,065 | 6,211 | 4,985 | (2,146 | ) | (35 | ) | (920 | ) | (18 | ) | |||||||||||||||||
| Home equity |
8,369 | 8,002 | 8,310 | 367 | 5 | 59 | 1 | |||||||||||||||||||||
| Residential mortgage |
5,177 | 4,788 | 5,253 | 389 | 8 | (76 | ) | (1 | ) | |||||||||||||||||||
| Other loans |
444 | 521 | 462 | (77 | ) | (15 | ) | (18 | ) | (4 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total consumer |
18,055 | 19,522 | 19,010 | (1,467 | ) | (8 | ) | (955 | ) | (5 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total loans and leases |
$ | 40,120 | $ | 39,297 | $ | 41,179 | $ | 823 | 2 | % | $ | (1,059 | ) | (3 | )% | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Deposits: |
||||||||||||||||||||||||||||
| Demand deposits—noninterest-bearing |
$ | 12,329 | $ | 8,719 | $ | 12,064 | $ | 3,610 | 41 | % | $ | 265 | 2 | % | ||||||||||||||
| Demand deposits—interest-bearing |
5,814 | 5,573 | 5,939 | 241 | 4 | (125 | ) | (2 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total demand deposits |
18,143 | 14,292 | 18,003 | 3,851 | 27 | 140 | 1 | |||||||||||||||||||||
| Money market deposits |
14,515 | 13,321 | 13,182 | 1,194 | 9 | 1,333 | 10 | |||||||||||||||||||||
| Savings and other domestic time deposits |
4,975 | 4,752 | 4,978 | 223 | 5 | (3 | ) | (0 | ) | |||||||||||||||||||
| Core certificates of deposit |
6,131 | 7,592 | 6,618 | (1,461 | ) | (19 | ) | (487 | ) | (7 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total core deposits |
43,764 | 39,957 | 42,781 | 3,807 | 10 | 983 | 2 | |||||||||||||||||||||
| Other deposits |
2,534 | 2,321 | 2,076 | 213 | 9 | 458 | 22 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total deposits |
$ | 46,298 | $ | 42,278 | $ | 44,857 | $ | 4,020 | 10 | % | $ | 1,441 | 3 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
2012 Third Quarter versus 2011 Third Quarter
Fully-taxable equivalent net interest income increased $25.4 million, or 6%, from the year-ago quarter. This reflected a $2.6 billion, or 5%, increase in average total earning assets and a 4 basis point increase in the FTE net interest margin. The increase in average earning assets reflected:
| • | $0.8 billion, or 2%, increase in average total loans and leases. |
| • | $1.6 billion, 672%, increase in average loans held for sale, primarily reflecting a $1.3 billion reclassification to loans held for sale in the 2012 second quarter for a securitization that was completed in October 2012. |
The 4 basis point increase in the FTE net interest margin reflected the positive impact from the reduction in the cost of average total interest-bearing liabilities, partially offset by a negative impact from lower earning asset yields.
The $0.8 billion, or 2%, increase in average total loans and leases primarily reflected:
| • | $2.7 billion, or 20%, growth in the average C&I portfolio primarily reflecting a combination of factors, including growth across multiple business lines including middle market and equipment finance. |
Partially offset by:
| • | $2.1 billion, or 35%, decrease in the average automobile portfolio. This reflected the impact of our program of securitization and sale of such loans. Specifically, securitizations of $1.0 billion in the 2011 third quarter and $1.3 billion in the 2012 first quarter, as well as the reclassification to loans held for sale of $1.3 billion in the 2012 second quarter in preparation for a securitization that was completed in October 2012. |
The $4.0 billion, or 10%, increase in average total deposits from the year-ago quarter reflected:
| • | $3.8 billion, or 10%, growth in average total core deposits. The drivers of this change were a $3.6 billion, or 41%, growth in average noninterest-bearing demand deposits and more modest growth in money market deposits, partially offset by $1.5 billion, or 19%, decline in average core certificates of deposit. |
17
2012 Third Quarter versus 2012 Second Quarter
Fully-taxable equivalent net interest income increased $0.8 million, or less than 1%, from the 2012 second quarter. This reflected the benefit of a $0.3 billion, or 1%, increase in average earning assets partially offset by a 4 basis point decrease in the FTE net interest margin to 3.38%. The increase in average earnings assets reflected a $1.4 billion increase in average loans held for sale and a $0.2 billion increase in average C&I, partially offset by the $0.9 billion decrease in average automobile loans, reflecting the prior quarter’s reclassification of $1.3 billion of automobile loans into held for sale, and a $0.4 billion decrease in CRE loans. The primary items impacting the decrease in the net interest margin were:
| • | 6 basis point reduction related to the impact of the extended low rate environment on asset yields and mix. |
| • | 4 basis point reduction related to balance sheet management changes. |
Partially offset by:
| • | 6 basis point increase from the reduction in deposit rates and improvement in deposit mix. |
The $1.1 billion, or 3%, decrease in average total loans and leases from the 2012 second quarter reflected:
| • | $0.9 billion, or 18%, decrease in average automobile loans. The decline reflected the reclassification of $1.3 billion of automobile loans to loans held for sale at the end of the prior quarter in preparation of a securitization that was completed in October 2012. Automobile loan originations continued to be strong during the 2012 third quarter, exceeding $1.0 billion. |
| • | $0.4 billion, or 6%, decrease in average CRE loans, primarily reflecting the continued runoff of the noncore CRE portfolio, as well as a reduction in the core portfolio due to lower levels of new loan production. |
Partially offset by:
| • | $0.2 billion, or 2%, growth in average C&I loans. This reflected the continued growth across multiple business lines including middle market and equipment finance, although there was a relative slowing of growth late in the quarter as borrowers expressed increased concerns, in the near term, around the U.S. economy. |
The $1.0 billion, or 2%, increase in average total core deposits from the 2012 second quarter reflected:
| • | $1.3 billion, or 10%, increase in average money market deposits. |
| • | $0.3 billion, or 2%, increase in average noninterest-bearing demand deposits reflecting an improved deposit mix as a result of growing total number of households and consumer checking accounts. |
Partially offset by:
| • | $0.5 billion, or 7%, decrease in average core certificates of deposit primarily reflecting the continued focus on reducing the overall cost of deposits. |
Noncore funding sources displayed a significant mix shift due to the decision to replace maturing FHLB advances with brokered deposits, reflecting the following changes from the prior quarter:
| • | $0.5 billion, or 32%, increase in average brokered deposits and negotiable CDs. |
| • | $0.5 billion, or 83%, decrease in average FHLB advances. |
18
Table 7 - Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis
| YTD Average Balances | YTD Average Rates (2) | |||||||||||||||||||||||
| Fully-taxable equivalent basis (1) | Nine Months Ended September 30, | Change | Nine Months Ended September 30, | |||||||||||||||||||||
| (dollar amounts in millions) |
2012 | 2011 | Amount | Percent | 2012 | 2011 | ||||||||||||||||||
| Assets: |
||||||||||||||||||||||||
| Interest-bearing deposits in banks |
$ | 102 | $ | 141 | $ | (39 | ) | (28 | )% | 0.20 | % | 0.12 | % | |||||||||||
| Trading account securities |
57 | 116 | (59 | ) | (51 | ) | 1.42 | 1.46 | ||||||||||||||||
| Federal funds sold and securities purchased under resale agreement |
— | 7 | (7 | ) | (100 | ) | 0.29 | 0.09 | ||||||||||||||||
| Loans held for sale |
1,170 | 279 | 891 | 319 | 3.43 | 4.39 | ||||||||||||||||||
| Available-for-sale and other securities: |
||||||||||||||||||||||||
| Taxable |
8,156 | 8,475 | (319 | ) | (4 | ) | 2.34 | 2.52 | ||||||||||||||||
| Tax-exempt |
405 | 434 | (29 | ) | (7 | ) | 4.18 | 4.30 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total available-for-sale and other securities |
8,561 | 8,909 | (348 | ) | (4 | ) | 2.42 | 2.61 | ||||||||||||||||
| Held-to-maturity securities—taxable |
680 | 282 | 398 | 141 | 2.91 | 3.00 | ||||||||||||||||||
| Loans and leases: (3) |
||||||||||||||||||||||||
| Commercial: |
||||||||||||||||||||||||
| Commercial and industrial |
15,756 | 13,387 | 2,369 | 18 | 3.97 | 4.33 | ||||||||||||||||||
| Commercial real estate: |
||||||||||||||||||||||||
| Construction |
584 | 612 | (28 | ) | (5 | ) | 3.78 | 3.55 | ||||||||||||||||
| Commercial |
5,299 | 5,676 | (377 | ) | (7 | ) | 3.87 | 3.91 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Commercial real estate |
5,883 | 6,288 | (405 | ) | (6 | ) | 3.86 | 3.88 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total commercial |
21,639 | 19,675 | 1,964 | 10 | 3.94 | 4.19 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Consumer: |
||||||||||||||||||||||||
| Automobile |
4,540 | 5,958 | (1,418 | ) | (24 | ) | 4.80 | 5.05 | ||||||||||||||||
| Home equity |
8,305 | 7,869 | 436 | 6 | 4.29 | 4.49 | ||||||||||||||||||
| Residential mortgage |
5,201 | 4,607 | 594 | 13 | 4.11 | 4.61 | ||||||||||||||||||
| Other consumer |
463 | 539 | (76 | ) | (14 | ) | 7.35 | 7.73 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total consumer |
18,509 | 18,973 | (464 | ) | (2 | ) | 4.44 | 4.79 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total loans and leases |
40,148 | 38,648 | 1,500 | 4 | 4.17 | 4.48 | ||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Allowance for loan and lease losses |
(908 | ) | (1,141 | ) | 233 | (20 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net loans and leases |
39,240 | 37,507 | 1,733 | 5 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total earning assets |
50,718 | 48,382 | 2,336 | 5 | 3.86 | % | 4.14 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash and due from banks |
967 | 1,358 | (391 | ) | (29 | ) | ||||||||||||||||||
| Intangible assets |
606 | 652 | (46 | ) | (7 | ) | ||||||||||||||||||
| All other assets |
4,163 | 4,196 | (33 | ) | (1 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total assets |
$ | 55,546 | $ | 53,447 | $ | 2,099 | 4 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Liabilities and Shareholders’ Equity: |
||||||||||||||||||||||||
| Deposits: |
||||||||||||||||||||||||
| Demand deposits—noninterest-bearing |
$ | 11,890 | $ | 7,958 | $ | 3,932 | 49 | % | — | % | — | % | ||||||||||||
| Demand deposits—interest-bearing |
5,800 | 5,499 | 301 | 5 | 0.07 | 0.10 | ||||||||||||||||||
| Money market deposits |
13,616 | 13,230 | 386 | 3 | 0.30 | 0.44 | ||||||||||||||||||
| Savings and other domestic deposits |
4,924 | 4,744 | 180 | 4 | 0.40 | 0.75 | ||||||||||||||||||
| Core certificates of deposit |
6,418 | 8,017 | (1,599 | ) | (20 | ) | 1.41 | 2.02 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total core deposits |
42,648 | 39,448 | 3,200 | 8 | 0.50 | 0.83 | ||||||||||||||||||
| Other domestic time deposits of $250,000 or more |
315 | 486 | (171 | ) | (35 | ) | 0.67 | 1.02 | ||||||||||||||||
| Brokered deposits and negotiable CDs |
1,535 | 1,426 | 109 | 8 | 0.74 | 0.92 | ||||||||||||||||||
| Deposits in foreign offices |
381 | 374 | 7 | 2 | 0.18 | 0.24 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total deposits |
44,879 | 41,734 | 3,145 | 8 | 0.51 | 0.83 | ||||||||||||||||||
| Short-term borrowings |
1,410 | 2,166 | (756 | ) | (35 | ) | 0.16 | 0.17 | ||||||||||||||||
| Federal Home Loan Bank advances |
383 | 138 | 245 | 178 | 0.24 | 0.64 | ||||||||||||||||||
| Subordinated notes and other long-term debt |
2,179 | 3,266 | (1,087 | ) | (33 | ) | 2.81 | 2.38 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total interest-bearing liabilities |
36,961 | 39,346 | (2,385 | ) | (6 | ) | 0.63 | 0.92 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| All other liabilities |
1,081 | 975 | 106 | 11 | ||||||||||||||||||||
| Shareholders’ equity |
5,614 | 5,168 | 446 | 9 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total liabilities and shareholders’ equity |
$ | 55,546 | $ | 53,447 | $ | 2,099 | 4 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net interest rate spread |
3.16 | 3.17 | ||||||||||||||||||||||
| Impact of noninterest-bearing funds on margin |
0.24 | 0.22 | ||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Net interest margin |
3.40 | % | 3.39 | % | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
19
| (1) | FTE yields are calculated assuming a 35% tax rate. |
| (2) | Loan, lease, and deposit average rates include the impact of applicable derivatives, non-deferrable fees, and amortized deferred fees. |
| (3) | For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans. |
2012 First Nine Months versus 2011 First Nine Months
Fully-taxable equivalent net interest income for the first nine-month period of 2012 increased $65.8 million, or 5%, from the comparable year-ago period. This reflected the benefit of a 5% increase in average total earning assets. The fully-taxable equivalent net interest margin increased to 3.40% from 3.39%. The increase in average earning assets reflected a combination of factors including:
| • | $1.5 billion, or 4%, increase in average total loans and leases. |
| • | $0.9 billion, or 319%, increase in average loans held for sale, primarily reflecting reclassifications to loans held for sale in preparation for expected automobile securitizations. |
| • | $0.4 billion, or 141%, increase in average held-to-maturity securities. |
Partially offset by:
| • | $0.3 billion, or 4%, decline in average total available-for-sale and other securities. |
The following table details the change in our reported loans and deposits:
Table 8 - Average Loans/Leases and Deposits - 2012 First Nine Months vs. 2011 First Nine Months
| Nine Months Ended September 30, | Change | |||||||||||||||
| (dollar amounts in millions) |
2012 (1) | 2011 | Amount | Percent | ||||||||||||
| Loans/Leases: |
||||||||||||||||
| Commercial and industrial |
$ | 15,756 | $ | 13,387 | $ | 2,369 | 18 | % | ||||||||
| Commercial real estate |
5,883 | 6,288 | (405 | ) | (6 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total commercial |
21,639 | 19,675 | 1,964 | 10 | ||||||||||||
| Automobile |
4,540 | 5,958 | (1,418 | ) | (24 | ) | ||||||||||
| Home equity |
8,305 | 7,869 | 436 | 6 | ||||||||||||
| Residential mortgage |
5,201 | 4,607 | 594 | 13 | ||||||||||||
| Other consumer |
463 | 539 | (76 | ) | (14 | ) | ||||||||||
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|
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|
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| Total consumer |
18,509 | 18,973 | (464 | ) | (2 | ) | ||||||||||
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|
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| Total loans and leases |
$ | 40,148 | $ | 38,648 | $ | 1,500 | 4 | % | ||||||||
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|
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| Deposits: |
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| Demand deposits—noninterest-bearing |
$ | 11,890 | $ | 7,958 | $ | 3,932 | 49 | % | ||||||||
| Demand deposits—interest-bearing |
5,800 | 5,499 | 301 | 5 | ||||||||||||
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|
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| Total demand deposits |
17,690 | 13,457 | 4,233 | 31 | ||||||||||||
| Money market deposits |
13,616 | 13,230 | 386 | 3 | ||||||||||||
| Savings and other domestic deposits |
4,924 | 4,744 | 180 | 4 | ||||||||||||
| Core certificates of deposit |
6,418 | 8,017 | (1,599 | ) | (20 | ) | ||||||||||
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|
|||||||||
| Total core deposits |
42,648 | 39,448 | 3,200 | 8 | ||||||||||||
| Other deposits |
2,231 | 2,286 | (55 | ) | (2 | ) | ||||||||||
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|
|
|
|
|
|||||||||
| Total deposits |
$ | 44,879 | $ | 41,734 | $ | 3,145 | 8 | % | ||||||||
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|
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| (1) | The acquisition of Fidelity Bank on March 30, 2012, contributed to the increase in average loans and deposits. |
The $1.5 billion, or 4%, increase in average total loans and leases primarily reflected:
| • | $2.4 billion, or 18%, increase in the average C&I portfolio, primarily reflecting a combination of factors, including growth across multiple business lines including middle market and equipment finance as well as the impact of the Fidelity acquisition in March 2012. |
| • | $0.6 billion, or 13%, increase in the average residential mortgage portfolio, primarily reflecting a 31% increase in originations, as well as a lower percentage of mortgages sold in the secondary market. |
20
| • | $0.4 billion, or 6%, increase in the average home equity portfolio with 75% of new originations in 2012 in a first-lien position. |
Partially offset by:
| • | $1.4 billion, or 24%, decline in the average automobile portfolio. This reflected the impact of our continued program of the securitization and sale of such loans. Specifically, securitizations of $1.0 billion in the 2011 third quarter and $1.3 billion in the 2012 first quarter, as well as the reclassification to loans held for sale of $1.3 billion in the 2012 second quarter in preparation for a securitization that was completed in October 2012. |
| • | $0.4 billion, or 6%, decline in the average CRE portfolio, primarily reflecting the continued execution of our plan to reduce the total CRE exposure, primarily in the noncore CRE portfolio. Declines were partially offset by additions to the core CRE portfolio associated with the FDIC-assisted acquisition of Fidelity Bank. |
The $3.1 billion, or 8%, increase in average total deposits reflected:
| • | $3.9 billion, or 49%, increase in noninterest-bearing demand deposits reflecting an improved deposit mix as a result of growing total number of households and consumer checking accounts as well as our treasury management and OCR focus on growing commercial demand deposits. |
Partially offset by:
| • | $1.6 billion, or 20%, decline in core certificates of deposits, primarily reflecting our continued focus on reducing our overall costs of deposits. |
21
Provision for Credit Losses
(This section should be read in conjunction with the Credit Risk section.)
The provision for credit losses is the expense necessary to maintain the ALLL and the AULC at levels appropriate to absorb our estimate of inherent credit losses in the loan and lease portfolio and the portfolio of unfunded loan commitments and letters-of-credit.
The provision for credit losses for the 2012 third quarter increased $0.5 million, or 1%, from the prior quarter to $37.0 million from $36.5 million, however declined $6.6 million, or 15%, from the year-ago quarter. On a year-to-date basis, provision for credit losses for the first nine-month period of 2012 declined $20.8 million, or 16%, compared to year-ago period. The current quarter’s provision for credit losses was $68.1 million less than total NCOs and the provision for credit losses for the first nine-month period of 2012 was $164.4 million less than total NCOs. (See Credit Quality discussion).
Noninterest Income
(This section should be read in conjunction with Significant Item 2.)
The following table reflects noninterest income for each of the past five quarters:
Table 9 - Noninterest Income
| 2012 | 2011 | 3Q12 vs 3Q11 | 3Q12 vs 2Q12 | |||||||||||||||||||||||||||||||||
| (dollar amounts in thousands) |
Third | Second | First | Fourth | Third | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||
| Service charges on deposit accounts |
$ | 67,806 | $ | 65,998 | $ | 60,292 | $ | 63,324 | $ | 65,184 | $ | 2,622 | 4 | % | $ | 1,808 | 3 | % | ||||||||||||||||||
| Trust services |
29,689 | 29,914 | 30,906 | 28,775 | 29,473 | 216 | 1 | (225 | ) | (1 | ) | |||||||||||||||||||||||||
| Electronic banking |
22,135 | 20,514 | 18,630 | 18,282 | 32,901 | (10,766 | ) | (33 | ) | 1,621 | 8 | |||||||||||||||||||||||||
| Mortgage banking income |
44,614 | 38,349 | 46,418 | 24,098 | 12,791 | 31,823 | 249 | 6,265 | 16 | |||||||||||||||||||||||||||
| Brokerage income |
16,526 | 19,025 | 19,260 | 18,688 | 20,349 | (3,823 | ) | (19 | ) | (2,499 | ) | (13 | ) | |||||||||||||||||||||||
| Insurance income |
17,792 | 17,384 | 18,875 | 17,906 | 17,220 | 572 | 3 | 408 | 2 | |||||||||||||||||||||||||||
| Bank owned life insurance income |
14,371 | 13,967 | 13,937 | 14,271 | 15,644 | (1,273 | ) | (8 | ) | 404 | 3 | |||||||||||||||||||||||||
| Capital markets fees |
11,805 | 13,455 | 9,982 | 9,811 | 11,256 | 549 | 5 | (1,650 | ) | (12 | ) | |||||||||||||||||||||||||
| Gain on sale of loans |
6,591 | 4,131 | 26,770 | 2,884 | 19,097 | (12,506 | ) | (65 | ) | 2,460 | 60 | |||||||||||||||||||||||||
| Automobile operating lease income |
2,146 | 2,877 | 3,775 | 4,727 | 5,890 | (3,744 | ) | (64 | ) | (731 | ) | (25 | ) | |||||||||||||||||||||||
| Securities gains (losses) |
4,169 | 350 | (613 | ) | (3,878 | ) | (1,350 | ) | 5,519 | N.R. | 3,819 | 1,091 | ||||||||||||||||||||||||
| Other income |
23,423 | 27,855 | 37,088 | 30,464 | 30,104 | (6,681 | ) | (22 | ) | (4,432 | ) | (16 | ) | |||||||||||||||||||||||
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|
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| Total noninterest income |
$ | 261,067 | $ | 253,819 | $ | 285,320 | $ | 229,352 | $ | 258,559 | $ | 2,508 | 1 | % | $ | 7,248 | 3 | % | ||||||||||||||||||
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2012 Third Quarter versus 2011 Third Quarter
The $2.5 million, or 1%, increase in total noninterest income from the year-ago quarter reflected:
| • | $31.8 million, or 249%, increase in mortgage banking income. This primarily reflected a $25.2 million increase in origination and secondary marketing income. Additionally, we recorded a $4.1 million net trading loss related to MSR hedging in the current quarter compared to a net trading loss related to MSR hedging of $9.2 million in the year-ago quarter. |
| • | $5.5 million increase in securities gains. |
| • | $2.6 million, or 4%, increase in service charges on deposits, due to continued strong customer growth. |
Partially offset by:
| • | $12.5 million, or 65%, decrease in gain on sale of loans, as the year ago quarter included a $15.5 million automobile loan securitization gain. |
| • | $10.8 million, or 33%, 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. |
| • | $6.7 million, or 22%, decrease in other income, primarily related to the reimbursement of third party costs in the year-ago quarter. |
22
| • | $3.8 million, or 19%, decline in brokerage income primarily related to reduced sales of market-linked CDs given lower market interest rates. |
| • | $3.7 million, or 64%, decline in automobile operating lease income, reflecting the impact of a declining portfolio as a result of having exited that business in 2008. |
2012 Third Quarter versus 2012 Second Quarter
The $7.2 million, or 3%, increase in total noninterest income from the prior quarter reflected:
| • | $6.3 million, or 16%, increase in mortgage banking income. This primarily reflected a $10.7 million increase in origination and secondary marketing income. This increase was partially offset by as we recorded a $4.1 million net trading loss related to MSR hedging in the current quarter compared to a net trading gain related to MSR hedging of $0.8 million in the prior quarter. |
| • | $3.8 million increase in securities gains. Certain securities designated as available-for-sale were sold, and the proceeds from those sales were reinvested into the held-to-maturity portfolio. At quarter end, $1.6 billion, or 17%, of the investment portfolio was designated as held-to-maturity. |
| • | $2.5 million, or 60%, increase in gain on sale of loans, which included a $1.9 million gain on the sale of automobile loans in the current quarter. |
Partially offset by:
| • | $4.4 million decrease in other income, as the prior quarter included a gain on the sale of affordable housing investments. |
2012 First Nine Months versus 2011 First Nine Months
Noninterest income for the first nine-month period of 2012 increased $48.9 million, or 7%, from the comparable year-ago period.
Table 10 - Noninterest Income - 2012 First Nine Months vs. 2011 First Nine Months
| Nine Months Ended September 30, | Change | |||||||||||||||
| (dollar amounts in thousands) |
2012 | 2011 | Amount | Percent | ||||||||||||
| Service charges on deposit accounts |
$ | 194,096 | $ | 180,183 | $ | 13,913 | 8 | % | ||||||||
| Trust services |
90,509 | 90,607 | (98 | ) | — | |||||||||||
| Electronic banking |
61,279 | 93,415 | (32,136 | ) | (34 | ) | ||||||||||
| Mortgage banking income |
129,381 | 59,310 | 70,071 | 118 | ||||||||||||
| Brokerage income |
54,811 | 61,679 | (6,868 | ) | (11 | ) | ||||||||||
| Insurance income |
54,051 | 51,564 | 2,487 | 5 | ||||||||||||
| Bank owned life insurance income |
42,275 | 48,065 | (5,790 | ) | (12 | ) | ||||||||||
| Capital markets fees |
35,242 | 26,729 | 8,513 | 32 | ||||||||||||
| Gain on sale of loans |
37,492 | 29,060 | 8,432 | 29 | ||||||||||||
| Automobile operating lease income |
8,798 | 22,044 | (13,246 | ) | (60 | ) | ||||||||||
| Securities gains (losses) |
3,906 | 197 | 3,709 | 1,883 | ||||||||||||
| Other income |
88,366 | 88,418 | (52 | ) | — | |||||||||||
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|
|
|
|
|
|
|
|
|||||||||
| Total noninterest income |
$ | 800,206 | $ | 751,271 | $ | 48,935 | 7 | % | ||||||||
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|
|
|
|
|
|
|
|
|||||||||
The $48.9 million, or 7%, increase in total noninterest income reflected:
| • | $70.1 million, or 118%, increase in mortgage banking income. This primarily reflected a $55.4 million increase in origination and secondary marketing income as originations increased 31% from the year-ago period. Additionally, we recorded a $4.4 million net trading gain related to MSR hedging in the first nine-month period of 2012 compared to net trading loss related to MSR hedging of $7.9 million in the year-ago period. |
23
| • | $13.9 million, or 8%, increase in service charges of deposit account, due to continued strong customer growth. |
| • | $8.5 million, or 32%, increase in capital market fees, primarily reflecting strong customer demand for derivatives and other risk management products. |
| • | $8.4 million, or 29%, increase in gain on sale of loans, as the current year-to-date period included gains totaling $24.9 million from automobile loan securitizations and sales, partially offset by a $15.5 million automobile securitization gain in the year-ago period. |
Partially offset by:
| • | $32.1 million, or 34%, decline in electronic banking income, primarily reflecting the implementation of the lower debit card interchange fee structure mandated in the Durbin Amendment of the Dodd-Frank Act. |
| • | $13.2 million, or 60%, decline in automobile operating lease expense primarily reflecting the impact of a declining portfolio as a result of having exited that business in 2008. |
Other income was little changed. The current year-to-date period included an $11.4 million bargain purchase gain associated with the FDIC-assisted Fidelity Bank acquisition, almost entirely offset by the reimbursement of third party costs and larger gains on the sale of SBA loans in the year-ago period.
Noninterest Expense
(This section should be read in conjunction with Significant Item 1.)
The following table reflects noninterest expense for each of the past five quarters:
Table 11 - Noninterest Expense
| 2012 | 2011 | 3Q12 vs 3Q11 | 3Q12 vs 2Q12 | |||||||||||||||||||||||||||||||||
| (dollar amounts in thousands) |
Third | Second | First | Fourth | Third | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||
| Personnel costs |
$ | 247,709 | $ | 243,034 | $ | 243,498 | $ | 228,101 | $ | 226,835 | $ | 20,874 | 9 | % | $ | 4,675 | 2 | % | ||||||||||||||||||
| Outside data processing and other services |
49,880 | 48,149 | 42,058 | 53,422 | 49,602 | 278 | 1 | 1,731 | 4 | |||||||||||||||||||||||||||
| Net occupancy |
27,599 | 25,474 | 29,079 | 26,841 | 26,967 | 632 | 2 | 2,125 | 8 | |||||||||||||||||||||||||||
| Equipment |
25,950 | 24,872 | 25,545 | 25,884 | 22,262 | 3,688 | 17 | 1,078 | 4 | |||||||||||||||||||||||||||
| Deposit and other insurance expense |
15,534 | 15,731 | 20,738 | 18,481 | 17,492 | (1,958 | ) | (11 | ) | (197 | ) | (1 | ) | |||||||||||||||||||||||
| Marketing |
20,178 | 21,365 | 16,776 | 16,379 | 22,251 | (2,073 | ) | (9 | ) | (1,187 | ) | (6 | ) | |||||||||||||||||||||||
| Professional services |
18,024 | 15,458 | 11,230 | 16,769 | 20,281 | (2,257 | ) | (11 | ) | 2,566 | 17 | |||||||||||||||||||||||||
| Amortization of intangibles |
11,431 | 11,940 | 11,531 | 13,175 | 13,387 | (1,956 | ) | (15 | ) | (509 | ) | (4 | ) | |||||||||||||||||||||||
| Automobile operating lease expense |
1,619 | 2,183 | 2,854 | 3,362 | 4,386 | (2,767 | ) | (63 | ) | (564 | ) | (26 | ) | |||||||||||||||||||||||
| OREO and foreclosure expense |
4,982 | 4,106 | 4,950 | 5,009 | 4,668 | 314 | 7 | 876 | 21 | |||||||||||||||||||||||||||
| Loss (Gain) on early extinguishment of debt |
1,782 | (2,580 | ) | — | (9,697 | ) | — | 1,782 | — | 4,362 | N.R. | |||||||||||||||||||||||||
| Other expense |
33,615 | 34,537 | 54,417 | 32,548 | 30,987 | 2,628 | 8 | (922 | ) | (3 | ) | |||||||||||||||||||||||||
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|
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| Total noninterest expense |
$ | 458,303 | $ | 444,269 | $ | 462,676 | $ | 430,274 | $ | 439,118 | $ | 19,185 | 4 | % | $ | 14,034 | 3 | % | ||||||||||||||||||
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| Number of employees (full-time equivalent), at period-end |
11,731 | 11,417 | 11,166 | 11,245 | 11,473 | 258 | 2 | % | 314 | 3 | % | |||||||||||||||||||||||||
2012 Third Quarter versus 2011 Third Quarter
The $19.2 million, or 4%, increase in total noninterest expense from the year-ago quarter reflected:
| • | $20.9 million, or 9%, increase in personnel costs reflecting an increase in the number of full-time equivalent employees as well as increased salaries and benefits. |
| • | $3.7 million, or 17%, increase in equipment expense reflecting the impact of depreciation from our in-store branch expansions and other technology investments. |
24
Partially offset by:
| • | $2.8 million, or 63%, decline in automobile operating lease expense as the portfolio continued its planned runoff as we exited that business in 2008. |
2012 Third Quarter versus 2012 Second Quarter
The $14.0 million, or 3%, increase in total noninterest expense from the prior quarter reflected:
| • | $4.7 million, or 2%, increase in personnel costs, primarily reflecting higher healthcare costs. |
| • | $4.5 million total increase across several noninterest expense categories related to the development of infrastructure and systems to support the Federal Reserve CCAR process. |
| • | $4.4 million increase in the cost of extinguishment of debt related to a loss on trust preferred securities redemption in the current quarter compared with a gain in the prior quarter. |
2012 First Nine Months versus 2011 First Nine Months
Noninterest expense for the first nine-month period of 2012 increased $67.0 million, or 5%, from the comparable year-ago period.
Table 12 - Noninterest Expense - 2012 First Nine Months vs. 2011 First Nine Months
| Nine Months Ended September 30, | Change | |||||||||||||||
| (dollar amounts in thousands) |
2012 | 2011 | Amount | Percent | ||||||||||||
| Personnel costs |
$ | 734,241 | $ | 664,433 | $ | 69,808 | 11 | % | ||||||||
| Outside data processing and other services |
140,087 | 133,773 | 6,314 | 5 | ||||||||||||
| Net occupancy |
82,152 | 82,288 | (136 | ) | — | |||||||||||
| Equipment |
76,367 | 66,660 | 9,707 | 15 | ||||||||||||
| Deposit and other insurance expense |
52,003 | 59,211 | (7,208 | ) | (12 | ) | ||||||||||
| Marketing |
58,319 | 59,248 | (929 | ) | (2 | ) | ||||||||||
| Professional services |
44,712 | 53,826 | (9,114 | ) | (17 | ) | ||||||||||
| Amortization of intangibles |
34,902 | 40,143 | (5,241 | ) | (13 | ) | ||||||||||
| Automobile operating lease expense |
6,656 | 16,656 | (10,000 | ) | (60 | ) | ||||||||||
| OREO and foreclosure expense |
14,038 | 12,997 | 1,041 | 8 | ||||||||||||
| Gain on early extinguishment of debt |
(798 | ) | — | (798 | ) | — | ||||||||||
| Other expense |
122,569 | 108,991 | 13,578 | 12 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
| Total noninterest expense |
$ | 1,365,248 | $ | 1,298,226 | $ | 67,022 | 5 | % | ||||||||
|
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|
|
|
|
|
|
|
|||||||||
| Number of employees (full-time equivalent), at period-end |
11,731 | 11,473 | 258 | 2 | % | |||||||||||
The $67.0 million, or 5%, increase in total noninterest expense reflected:
| • | $69.8 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. |
| • | $13.6 million, or 12%, increase in other expense, primarily reflecting higher litigation reserves and an increase in the provision for mortgage representations and warranties. |
| • | $9.7 million, or 15%, increase in equipment, primarily reflecting the impact of depreciation from our in-store branch expansions and other technology investments. |
Partially offset by:
| • | $10.0 million, or 60%, decline in automobile operating lease expense, primarily reflecting the impact of a declining portfolio as a result of having exited that business in 2008. |
| • | $9.1 million, or 17%, decline in professional services, primarily reflecting lower legal-related expenses. |
| • | $7.2 million, or 12%, decline in deposit and other insurance expense. |
25
Provision for Income Taxes
The provision for income taxes in the 2012 third quarter was $28.3 million. This compared with a provision for income taxes of $49.3 million in the 2012 second quarter and $38.9 million in the 2011 third quarter. All three quarters included the benefits from tax-exempt income, tax-advantaged investments, and general business credits. In prior periods, we established a full valuation allowance against state deferred tax assets and state net operating loss carryforwards based on the uncertainty of forecasted state taxable income expected in applicable jurisdictions in order to utilize the state deferred tax asset and net operating loss carryforwards. Based on current analysis of both positive and negative evidence and projected forecasted state taxable income, we believe that it is more likely than not that a portion of the state deferred tax asset and state net operating loss carryforwards will be realized. As a result of this analysis, a $19.5 million reduction in the 2012 third quarter provision for income taxes was recorded. At September 30, 2012, a state valuation allowance of $62.7 million remains for certain net operating loss carryforwards that are not expected to be realized within the carryforward periods.
At September 30, 2012, we had a net deferred tax asset of $201.5 million. Based on both positive and negative evidence and our level of forecasted future taxable income, there was no impairment to the deferred tax asset at September 30, 2012. As of September 30, 2012, there is no disallowed deferred tax asset for regulatory capital purposes compared to $39.1 million at December 31, 2011.
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 2007. We have appealed certain proposed adjustments resulting from the IRS examination of our 2006 and 2007 tax returns. We believe our positions related to such proposed adjustments are correct and supported by applicable statutes, regulations, and judicial authority, and intend to vigorously defend them. In 2011, we entered into discussions with the Appeals Division of the IRS. It is po