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 June 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
Registrants 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 858,401,176 shares of Registrants common stock ($0.01 par value) outstanding on June 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 | |
ARRA | American Recovery and Reinvestment Act of 2009 | |
ASC | Accounting Standards Codification | |
ASU | Accounting Standards Update | |
ATM | Automated Teller Machine | |
AULC | Allowance for Unfunded Loan Commitments | |
AVM | Automated Valuation Methodology | |
C&I | Commercial and Industrial | |
CapPR | Capital Plan Review | |
CCAR | Comprehensive Capital Analysis and Review | |
CDARS | Certificate of Deposit Account Registry Service | |
CDO | Collateralized Debt Obligations | |
CDs | Certificates of Deposit | |
CFPB | Bureau of Consumer Financial Protection | |
CMO | Collateralized Mortgage Obligations | |
CPP | Capital Purchase Program | |
CRE | Commercial Real Estate | |
DDA | Demand Deposit Account | |
DIF | Deposit Insurance Fund | |
Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act | |
EESA | Emergency Economic Stabilization Act of 2008 | |
EPS | Earnings Per Share | |
ERISA | Employee Retirement Income Security Act | |
EVE | Economic Value of Equity | |
FASB | Financial Accounting Standards Board | |
FDIC | Federal Deposit Insurance Corporation | |
FDICIA | Federal Deposit Insurance Corporation Improvement Act of 1991 | |
FFIEC | Federal Financial Institutions Examination Council | |
FHA | Federal Housing Administration | |
FHFA | Federal Housing Finance Agency | |
FHLB | Federal Home Loan Bank | |
FHLMC | Federal Home Loan Mortgage Corporation | |
FICA | Federal Insurance Contributions Act | |
FICO | Fair Isaac Corporation | |
FOMC | Federal Open Market Committee | |
FNMA | Federal National Mortgage Association | |
Franklin | Franklin Credit Management Corporation |
3
FRB | Federal Reserve Bank | |
FSP | Financial Stability Plan | |
FTE | Fully-Taxable Equivalent | |
FTP | Funds Transfer Pricing | |
GAAP | Generally Accepted Accounting Principles in the United States of America | |
GSIFI | Globally Systemically Important Financial Institution | |
GSE | Government Sponsored Enterprise | |
HAMP | Home Affordable Modification Program | |
HARP | Home Affordable Refinance Program | |
HASP | Homeowner Affordability and Stability Plan | |
HCER Act | Health Care and Education Reconciliation Act of 2010 | |
IPO | Initial Public Offering | |
IRS | Internal Revenue Service | |
ISE | Interest Sensitive Earnings | |
LIBOR | London Interbank Offered Rate | |
LGD | Loss-Given-Default | |
LTV | Loan to Value | |
MD&A | Managements Discussion and Analysis of Financial Condition and Results of Operations | |
MRC | Market Risk Committee | |
MSA | Metropolitan Statistical Area | |
MSR | Mortgage Servicing Rights | |
NALs | Nonaccrual Loans | |
NAV | Net Asset Value | |
NCO | Net Charge-off | |
NPAs | Nonperforming Assets | |
NPR | Notice of Proposed Rulemaking | |
NSF / OD | Nonsufficient Funds and Overdraft | |
OCC | Office of the Comptroller of the Currency | |
OCI | Other Comprehensive Income (Loss) | |
OCR | Optimal Customer Relationship | |
OLEM | Other Loans Especially Mentioned | |
OREO | Other Real Estate Owned | |
OTTI | Other-Than-Temporary Impairment | |
PD | Probability-Of-Default | |
Plan | Huntington Bancshares Retirement Plan | |
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). | ||
Reg E | Regulation E of the Electronic Fund Transfer Act | |
REIT | Real Estate Investment Trust | |
SAD | Special Assets Division | |
SBA | Small Business Administration | |
SEC | Securities and Exchange Commission | |
SERP | Supplemental Executive Retirement Plan | |
SIFIs | Systemically Important Financial Institutions | |
Sky Financial | Sky Financial Group, Inc. | |
SRIP | Supplemental Retirement Income Plan |
4
Sky Trust | Sky Bank and Sky Trust, National Association | |
TAGP | Transaction Account Guarantee Program | |
TARP | Troubled Asset Relief Program | |
TARP Capital | Series B Preferred Stock | |
TCE | Tangible Common Equity | |
TDR | Troubled Debt Restructured Loan | |
TLGP | Temporary Liquidity Guarantee Program | |
Treasury | U.S. Department of the Treasury | |
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 |
5
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: Managements 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 680 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 OverviewProvides 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 OperationsReviews 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 CapitalDiscusses 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 DiscussionProvides an overview of financial performance for each of our major business segments and provides additional discussion of trends underlying consolidated financial performance. |
| Additional DisclosuresProvides 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.
6
Summary of 2012 Second Quarter Results
For the quarter, we reported net income of $152.7 million, or $0.17 per common share, compared with $153.3 million, or $0.17 per common share, in the prior quarter (see Table 1).
Fully-taxable equivalent net interest income was $434.7 million for the quarter, up $13.6 million, or 3%, from the prior quarter. The increase reflected the benefit of a $1.3 billion, or 3% (10% annualized), increase in average earning assets, and a 2 basis point increase in the fully-taxable equivalent net interest margin to 3.42% from 3.40%. The 2 basis point increase in the net interest margin reflected the benefits from the 5 basis point reduction in the cost of total interest bearing liabilities, as well as $0.8 billion, or 7%, growth in average noninterest bearing deposits. However, there was a 3 basis point negative impact from the mix and yield of earning assets and other items. The acquisition of Fidelity Bank at the end of the prior quarter had a positive 2 basis point impact on the net interest margin, and the recent redemption of two trust preferred securities had a 1 basis point positive impact.
The provision for credit losses increased $2.1 million, or 6%, from the prior quarter. The provision for credit losses in the current quarter was $47.7 million lower than NCOs, reflecting continued improvement in credit quality.
Noninterest income decreased $31.5 million, or 11%. This included a $22.6 million decrease in gain on sale of loans as the prior quarter included a $23.0 million gain associated with that quarters automobile loan securitization. In addition, other income decreased $9.2 million as the prior quarter included an $11.4 million bargain purchase gain associated with the FDIC-assisted acquisition of Dearborn, Michigan-based Fidelity Bank. Mortgage banking income declined $8.1 million as the benefit of the net mortgage servicing rights decreased by $6.8 million. This was partially offset by an increase in service charges on deposit accounts and capital market fees, reflecting the results of our OCR initiative.
Noninterest expense decreased $18.4 million, or 4%. This reflected a $19.9 million reduction in other expense as the prior quarter included a $23.5 million addition to litigation reserves. Deposit and other insurance expense decreased $5.0 million, and net occupancy declined $3.6 million. The positive impacts from these reductions were partially offset by a $6.1 million increase in outside data processing and other services, a $4.6 million seasonal increase in marketing, and a $4.2 million increase in professional services. Of the total noninterest expense, $6.8 million related to the prior quarters FDIC-assisted acquisition of Fidelity Bank, of which approximately 40% was one-time in nature and mainly impacted outside data processing and other services and professional services. Of note, noninterest expense included four unrelated items that we believe were one-time in nature that, in total, reduced expenses $6.4 million.
The period end ACL as a percentage of total loans and leases decreased to 2.28%, from 2.37%. The ACL as a percentage of period end NALs decreased to 192% from 206%, as NALs increased $6.6 million, or 1%, to $474.2 million, or 1.19% of total loans and leases. Total NCOs for the 2012 second quarter were $84.2 million, or an annualized 0.82% of average total loans and leases, compared to $83.0 million, or an annualized 0.85%, in the prior quarter.
Our Tier 1 common risk-based capital ratio at June 30, 2012, was 10.08%, down from 10.15% at March 31, 2012, and our tangible common equity ratio increased to 8.41% from 8.33% over this same period. The regulatory Tier 1 risk-based capital ratio at June 30, 2012 was 11.93%, down from 12.22%, at March 31, 2012. This decline reflected an increase in risk-weighted assets due to balance sheet and unfunded commitment growth, as well as the capital actions taken throughout the quarter.
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 second quarter results clearly showed the benefit of 11.6% annualized growth in consumer checking account households and 11.9% annualized growth in commercial relationships, with both electronic banking and service charges on deposits up over 9%. Not only are we gaining customers, we are selling deeper with 76.0% of consumer checking account households and 32.6% commercial relationships now with 4 or more products or services. A portion of our strategic investments remains in the early stages, such as our in-store strategy. In contrast, others have matured and are adding meaningfully to the bottom line, like our customer focused capital markets activities, which posted a record quarter resulting in 35% linked quarter and 58% year-over-year revenue growth.
7
Economy
We continue to see positive trends within our Midwest footprint. Relative to the broader United States, parts of the Midwest continue to experience lower levels of unemployment, strength in manufacturing, and more stable home prices.
Generally, our footprint large metropolitan statistical areas (MSA) unemployment rates were below the national average as of April 2012. In addition, our footprint states have continued to be strong export states. For the three-month average ending April 2012, exports from our footprint states were 3.2% greater than the same period last year. By comparison, overall U.S. exports were 2.9% higher. Office vacancy rates in our footprint MSAs were above the national vacancy rate in the prior quarter, but have remained on declining trends, with the exception of Cincinnati.
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. A recent action affecting us was 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 proposed NPRs would establish more restrictive capital definitions, higher risk-weightings for certain asset classes, capital buffers and higher minimum capital ratios. The proposed NPRs are in a comment period through September 7, 2012 and subject to further modification by the Agencies. We are currently evaluating the impact of the proposed NPRs on our regulatory capital ratios and 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. 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 / Comprehensive Capital Analysis and Review (CCAR) In November 2011, the Federal Reserve issued its final rule requiring top-tier U.S. bank holding companies with total consolidated assets of $50 billion or more, including us, to submit to an annual capital planning review process. The capital planning review process includes 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 supervisory stress test designed to test our capital adequacy.
During 2011, we participated in the Federal Reserves 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. During 2012, we will transition into the Federal Reserves more rigorous CCAR or equivalent process, which had previously been required of only the largest 19 bank holding companies.
The Federal Reserves objective with CCAR is to ensure that large, systemically important banking institutions have forward-looking, risk tailored capital planning processes that provide reasonable assurance that they will have sufficient capital to remain going concerns in times of economic and financial distress. We are expected to have two year pro forma plans that illustrate that we will have sufficient capital to operate as usual, under adverse conditions, while still meeting certain regulatory capital thresholds.
Annually, the Federal Reserve will issue detailed instructions outlining the information they are requiring from us, as well as the required timeframes. The instructions will include the Federal Reserves adverse stress scenario that is required to be used in this exercise and is designed to represent economic conditions that could occur in a prolonged global economic recession. For additional discussion, please see Updates to Risk Factors within the Additional Disclosures section.
Expectations
For the remainder of 2012, average net interest income is expected to show modest improvement from the second quarter 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 downward NIM pressure due to the anticipated competitive pressures on loan pricing, as well as lower rate securities through reinvestment, and declining positive impacts from deposit repricing. The C&I portfolio is expected to continue to show meaningful growth. Our sales pipeline remains robust with much of this reflecting the positive impact from strategic initiatives to expand our commercial lending expertise into areas such as specialty banking, asset based lending, and equipment financing. It also reflects our long-standing, continued support of middle market and small business lending. Automobile loan balances are expected to grow from period-end balances. Residential mortgages and home equity loans are expected to be relatively flat as we continue to evaluate the impact of the proposed capital rules recently released by our regulators. CRE loans likely will experience modest levels of declines from current levels.
8
Excluding potential future automobile loan securitizations, we anticipate the increase in total loans will modestly outpace growth in total deposits. This reflects our heightened focus on our overall cost of funding and the continued shift towards low- and no-cost demand deposits and money market deposit accounts.
Noninterest income is expected to show a modest increase from the 2012 second quarter level after excluding the impacts of any future automobile loan securitization gains and any net MSR impact. This growth is expected to reflect primarily the continued growth in new customers and increased contribution from key fee income activities including capital markets, treasury management services, and brokerage, as well as the continued positive impact of our cross-sell and product penetration initiatives throughout the company.
Noninterest expense continued to run at levels above our long-term expectations relative to revenue. For the full year, we continue to anticipate positive operating leverage and modest improvement in our expense efficiency ratio. This will likely reflect the benefit of revenue growth as we expect expenses could increase slightly. While we will continue our focus on improving expense efficiencies throughout the company, additional regulatory costs and expenses associated with strategic actions, including the planned opening of over 30 in-store branches, may offset some of the improvements. Credit quality is expected to experience continued improvement. The level of provision for credit losses in the first half 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 provision and the uncertain and uneven nature of the economic recovery.
We anticipate the effective tax rate for 2012 to approximate 24% to 26%, which includes permanent tax benefits primarily related to tax-exempt income, tax-advantaged investments, and general business credits.
9
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.
10
Table 1 - Selected Quarterly Income Statement Data (1)
2012 | 2011 | |||||||||||||||||||
(dollar amounts in thousands, except per share amounts) |
Second | First | Fourth | Third | Second | |||||||||||||||
Interest income |
$ | 487,544 | $ | 479,937 | $ | 485,216 | $ | 490,996 | $ | 492,137 | ||||||||||
Interest expense |
58,582 | 62,728 | 70,191 | 84,518 | 88,800 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest income |
428,962 | 417,209 | 415,025 | 406,478 | 403,337 | |||||||||||||||
Provision for credit losses |
36,520 | 34,406 | 45,291 | 43,586 | 35,797 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest income after provision for credit losses |
392,442 | 382,803 | 369,734 | 362,892 | 367,540 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Service charges on deposit accounts |
65,998 | 60,292 | 63,324 | 65,184 | 60,675 | |||||||||||||||
Trust services |
29,914 | 30,906 | 28,775 | 29,473 | 30,392 | |||||||||||||||
Electronic banking |
20,514 | 18,630 | 18,282 | 32,901 | 31,728 | |||||||||||||||
Mortgage banking income |
38,349 | 46,418 | 24,098 | 12,791 | 23,835 | |||||||||||||||
Brokerage income |
19,025 | 19,260 | 18,688 | 20,349 | 20,819 | |||||||||||||||
Insurance income |
17,384 | 18,875 | 17,906 | 17,220 | 16,399 | |||||||||||||||
Bank owned life insurance income |
13,967 | 13,937 | 14,271 | 15,644 | 17,602 | |||||||||||||||
Capital markets fees |
13,455 | 9,982 | 9,811 | 11,256 | 8,537 | |||||||||||||||
Gain on sale of loans |
4,131 | 26,770 | 2,884 | 19,097 | 2,756 | |||||||||||||||
Automobile operating lease income |
2,877 | 3,775 | 4,727 | 5,890 | 7,307 | |||||||||||||||
Securities gains (losses) |
350 | (613 | ) | (3,878 | ) | (1,350 | ) | 1,507 | ||||||||||||
Other income |
27,855 | 37,088 | 30,464 | 30,104 | 34,210 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total noninterest income |
253,819 | 285,320 | 229,352 | 258,559 | 255,767 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Personnel costs |
243,034 | 243,498 | 228,101 | 226,835 | 218,570 | |||||||||||||||
Outside data processing and other services |
48,149 | 42,058 | 53,422 | 49,602 | 43,889 | |||||||||||||||
Net occupancy |
25,474 | 29,079 | 26,841 | 26,967 | 26,885 | |||||||||||||||
Equipment |
24,872 | 25,545 | 25,884 | 22,262 | 21,921 | |||||||||||||||
Deposit and other insurance expense |
15,731 | 20,738 | 18,481 | 17,492 | 23,823 | |||||||||||||||
Marketing |
21,365 | 16,776 | 16,379 | 22,251 | 20,102 | |||||||||||||||
Professional services |
15,458 | 11,230 | 16,769 | 20,281 | 20,080 | |||||||||||||||
Amortization of intangibles |
11,940 | 11,531 | 13,175 | 13,387 | 13,386 | |||||||||||||||
Automobile operating lease expense |
2,183 | 2,854 | 3,362 | 4,386 | 5,434 | |||||||||||||||
OREO and foreclosure expense |
4,106 | 4,950 | 5,009 | 4,668 | 4,398 | |||||||||||||||
Gain on early extinguishment of debt |
(2,580 | ) | | (9,697 | ) | | | |||||||||||||
Other expense |
34,537 | 54,417 | 32,548 | 30,987 | 29,921 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total noninterest expense |
444,269 | 462,676 | 430,274 | 439,118 | 428,409 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income before income taxes |
201,992 | 205,447 | 168,812 | 182,333 | 194,898 | |||||||||||||||
Provision for income taxes |
49,286 | 52,177 | 41,954 | 38,942 | 48,980 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 152,706 | $ | 153,270 | $ | 126,858 | $ | 143,391 | $ | 145,918 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Dividends on preferred shares |
7,984 | 8,049 | 7,703 | 7,703 | 7,704 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income applicable to common shares |
$ | 144,722 | $ | 145,221 | $ | 119,155 | $ | 135,688 | $ | 138,214 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Average common sharesbasic |
862,261 | 864,499 | 864,136 | 863,911 | 863,358 | |||||||||||||||
Average common sharesdiluted |
867,551 | 869,164 | 868,156 | 867,633 | 867,469 | |||||||||||||||
Net income per common sharebasic |
$ | 0.17 | $ | 0.17 | $ | 0.14 | $ | 0.16 | $ | 0.16 | ||||||||||
Net income per common sharediluted |
0.17 | 0.17 | 0.14 | 0.16 | 0.16 | |||||||||||||||
Cash dividends declared per common share |
0.04 | 0.04 | 0.04 | 0.04 | 0.01 | |||||||||||||||
Return on average total assets |
1.10 | % | 1.13 | % | 0.92 | % | 1.05 | % | 1.11 | % | ||||||||||
Return on average common shareholders equity |
11.1 | 11.4 | 9.3 | 10.8 | 11.6 | |||||||||||||||
Return on average tangible common shareholders equity (2) |
13.1 | 13.5 | 11.2 | 13.0 | 13.3 | |||||||||||||||
Net interest margin (3) |
3.42 | 3.40 | 3.38 | 3.34 | 3.40 | |||||||||||||||
Efficiency ratio (4) |
62.8 | 63.8 | 64.0 | 63.5 | 62.7 | |||||||||||||||
Effective tax rate |
24.4 | 25.4 | 24.9 | 21.4 | 25.1 | |||||||||||||||
RevenueFTE |
||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest income |
$ | 428,962 | $ | 417,209 | $ | 415,025 | $ | 406,478 | $ | 403,337 | ||||||||||
FTE adjustment |
5,747 | 3,935 | 3,479 | 3,658 | 3,834 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest income (3) |
434,709 | 421,144 | 418,504 | 410,136 | 407,171 | |||||||||||||||
Noninterest income |
253,819 | 285,320 | 229,352 | 258,559 | 255,767 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total revenue (3) |
$ | 688,528 | $ | 706,464 | $ | 647,856 | $ | 668,695 | $ | 662,938 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Comparisons for presented periods are impacted by a number of factors. Refer to Significant Items. |
11
(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). |
12
Table 2 - Selected Year to Date Income Statement Data(1)
Six Months Ended June 30, | Change | |||||||||||||||
(dollar amounts in thousands, except per share amounts) |
2012 | 2011 | Amount | Percent | ||||||||||||
Interest income |
$ | 967,481 | $ | 994,014 | $ | (26,533 | ) | (3 | )% | |||||||
Interest expense |
121,310 | 186,347 | (65,037 | ) | (35 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income |
846,171 | 807,667 | 38,504 | 5 | ||||||||||||
Provision for credit losses |
70,926 | 85,182 | (14,256 | ) | (17 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income after provision for credit losses |
775,245 | 722,485 | 52,760 | 7 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Service charges on deposit accounts |
126,290 | 114,999 | 11,291 | 10 | ||||||||||||
Trust services |
60,820 | 61,134 | (314 | ) | (1 | ) | ||||||||||
Electronic banking |
39,144 | 60,514 | (21,370 | ) | (35 | ) | ||||||||||
Mortgage banking income |
84,767 | 46,519 | 38,248 | 82 | ||||||||||||
Brokerage income |
38,285 | 41,330 | (3,045 | ) | (7 | ) | ||||||||||
Insurance income |
36,259 | 34,344 | 1,915 | 6 | ||||||||||||
Bank owned life insurance income |
27,904 | 32,421 | (4,517 | ) | (14 | ) | ||||||||||
Capital markets fees |
23,437 | 15,473 | 7,964 | 51 | ||||||||||||
Gain on sale of loans |
30,901 | 9,963 | 20,938 | 210 | ||||||||||||
Automobile operating lease income |
6,652 | 16,154 | (9,502 | ) | (59 | ) | ||||||||||
Securities gains (losses) |
(263 | ) | 1,547 | (1,810 | ) | (117 | ) | |||||||||
Other income |
64,943 | 58,314 | 6,629 | 11 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total noninterest income |
539,139 | 492,712 | 46,427 | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Personnel costs |
486,532 | 437,598 | 48,934 | 11 | ||||||||||||
Outside data processing and other services |
90,207 | 84,171 | 6,036 | 7 | ||||||||||||
Net occupancy |
54,553 | 55,321 | (768 | ) | (1 | ) | ||||||||||
Equipment |
50,417 | 44,398 | 6,019 | 14 | ||||||||||||
Deposit and other insurance expense |
36,469 | 41,719 | (5,250 | ) | (13 | ) | ||||||||||
Marketing |
38,141 | 36,997 | 1,144 | 3 | ||||||||||||
Professional services |
26,688 | 33,545 | (6,857 | ) | (20 | ) | ||||||||||
Amortization of intangibles |
23,471 | 26,756 | (3,285 | ) | (12 | ) | ||||||||||
Automobile operating lease expense |
5,037 | 12,270 | (7,233 | ) | (59 | ) | ||||||||||
OREO and foreclosure expense |
9,056 | 8,329 | 727 | 9 | ||||||||||||
Gain on early extinguishment of debt |
(2,580 | ) | | (2,580 | ) | | ||||||||||
Other expense |
88,954 | 78,004 | 10,950 | 14 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total noninterest expense |
906,945 | 859,108 | 47,837 | 6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income taxes |
407,439 | 356,089 | 51,350 | 14 | ||||||||||||
Provision for income taxes |
101,463 | 83,725 | 17,738 | 21 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 305,976 | $ | 272,364 | $ | 33,612 | 12 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Dividends declared on preferred shares |
16,033 | 15,407 | 626 | 4 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income applicable to common shares |
$ | 289,943 | $ | 256,957 | $ | 32,986 | 13 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Average common sharesbasic |
863,380 | 863,358 | 22 | | % | |||||||||||
Average common sharesdiluted (2) |
868,357 | 867,353 | 1,004 | | ||||||||||||
Per common share |
||||||||||||||||
Net income per common share - basic |
$ | 0.34 | $ | 0.30 | $ | 0.04 | 13 | % | ||||||||
Net income per common share - diluted |
0.33 | 0.30 | 0.03 | 10 | ||||||||||||
Cash dividends declared |
0.08 | 0.02 | 0.06 | 300 | ||||||||||||
Return on average total assets |
1.11 | % | 1.03 | % | 0.08 | % | 8 | % | ||||||||
Return on average common shareholders equity |
11.3 | 11.0 | 0.3 | 3 | ||||||||||||
Return on average tangible common shareholders equity (3) |
13.3 | 13.4 | (0.1 | ) | (1 | ) | ||||||||||
Net interest margin (4) |
3.41 | 3.41 | | | ||||||||||||
Efficiency ratio (5) |
63.3 | 63.7 | (0.4 | ) | (1 | ) | ||||||||||
Effective tax rate |
24.9 | 23.5 | 1.4 | 6 | ||||||||||||
RevenueFTE |
||||||||||||||||
Net interest income |
$ | 846,171 | $ | 807,667 | $ | 38,504 | 5 | % | ||||||||
FTE adjustment |
9,682 | 7,779 | 1,903 | 24 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income (4) |
855,853 | 815,446 | 40,407 | 5 | ||||||||||||
Noninterest income |
539,139 | 492,712 | 46,427 | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue (4) |
$ | 1,394,992 | $ | 1,308,158 | $ | 86,834 | 7 | % | ||||||||
|
|
|
|
|
|
|
|
13
(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 Huntingtons 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
There were not any Significant Items for the current quarter. 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 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. |
14
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 | ||||||||||||||||||||||||
June 30, 2012 | March 31, 2012 | June 30, 2011 | ||||||||||||||||||||||
(dollar amounts in thousands, except per share amounts) |
After-tax | EPS (2) | After-tax | EPS (2) | After-tax | EPS (2) | ||||||||||||||||||
Net incomeGAAP |
$ | 152,706 | $ | 153,270 | $ | 145,918 | ||||||||||||||||||
Earnings per share, aftertax |
$ | 0.17 | $ | 0.17 | $ | 0.16 | ||||||||||||||||||
Change from prior quarter$ |
| 0.03 | 0.02 | |||||||||||||||||||||
Change from prior quarter% |
| % | 21 | % | 14 | % | ||||||||||||||||||
Change from year-ago$ |
$ | 0.01 | $ | 0.03 | $ | 0.13 | ||||||||||||||||||
Change from year-ago% |
6 | % | 21 | % | 433 | % | ||||||||||||||||||
Significant Itemsfavorable (unfavorable) impact: |
Earnings (1) | EPS (2) | Earnings (1) | EPS (2) | Earnings (1) | EPS (2) | ||||||||||||||||||
Bargain purchase gain |
$ | | $ | | $ | 11,409 | $ | 0.01 | $ | | $ | | ||||||||||||
Litigation reserves addition |
| | (23,500 | ) | (0.02 | ) | | |
Six Months Ended | ||||||||||||||||
June 30, 2012 | June 30, 2011 | |||||||||||||||
(dollar amounts in thousands) |
After-tax | EPS (2) | After-tax | EPS (2) | ||||||||||||
Net income |
$ | 305,976 | $ | 272,364 | ||||||||||||
Earnings per share, aftertax |
$ | 0.33 | $ | 0.30 | ||||||||||||
Change from a year-ago$ |
0.03 | 0.26 | ||||||||||||||
Change from a year-ago% |
10 | % | 650 | % | ||||||||||||
Significant Itemsfavorable (unfavorable) impact: |
Earnings (1) | EPS (2) | Earnings (1) | EPS (2) | ||||||||||||
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. |
15
Net Interest Income / Average Balance Sheet
The following tables detail the change in our average balance sheet and the net interest margin:
Table 4 - Consolidated Quarterly Average Balance Sheets
Average Balances | ||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||
(dollar amounts in millions) |
Second | First | Fourth | Third | Second | |||||||||||||||
Assets |
||||||||||||||||||||
Interest-bearing deposits in banks |
$ | 124 | $ | 100 | $ | 107 | $ | 164 | $ | 131 | ||||||||||
Trading account securities |
54 | 50 | 81 | 92 | 112 | |||||||||||||||
Federal funds sold and securities purchased under resale agreement |
| | | | 21 | |||||||||||||||
Loans held for sale |
410 | 1,265 | 316 | 237 | 181 | |||||||||||||||
Available-for-sale and other securities: |
||||||||||||||||||||
Taxable |
8,285 | 8,171 | 8,065 | 7,902 | 8,428 | |||||||||||||||
Tax-exempt |
387 | 404 | 409 | 421 | 436 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total available-for-sale and other securities |
8,672 | 8,575 | 8,474 | 8,323 | 8,864 | |||||||||||||||
Held-to-maturity securitiestaxable |
611 | 632 | 650 | 665 | 174 | |||||||||||||||
Loans and leases: (1) |
||||||||||||||||||||
Commercial: |
||||||||||||||||||||
Commercial and industrial |
16,094 | 14,824 | 14,219 | 13,664 | 13,370 | |||||||||||||||
Commercial real estate: |
||||||||||||||||||||
Construction |
584 | 598 | 533 | 670 | 554 | |||||||||||||||
Commercial |
5,491 | 5,254 | 5,425 | 5,441 | 5,679 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial real estate |
6,075 | 5,852 | 5,958 | 6,111 | 6,233 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
22,169 | 20,676 | 20,177 | 19,775 | 19,603 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Consumer: |
||||||||||||||||||||
Automobile |
4,985 | 4,576 | 5,639 | 6,211 | 5,954 | |||||||||||||||
Home equity |
8,310 | 8,234 | 8,149 | 8,002 | 7,874 | |||||||||||||||
Residential mortgage |
5,253 | 5,174 | 5,043 | 4,788 | 4,566 | |||||||||||||||
Other consumer |
462 | 485 | 511 | 521 | 538 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer |
19,010 | 18,469 | 19,342 | 19,522 | 18,932 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans and leases |
41,179 | 39,145 | 39,519 | 39,297 | 38,535 | |||||||||||||||
Allowance for loan and lease losses |
(908 | ) | (961 | ) | (1,014 | ) | (1,066 | ) | (1,128 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net loans and leases |
40,271 | 38,184 | 38,505 | 38,231 | 37,407 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total earning assets |
51,050 | 49,767 | 49,147 | 48,778 | 48,018 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash and due from banks |
928 | 1,012 | 1,671 | 1,700 | 1,068 | |||||||||||||||
Intangible assets |
609 | 613 | 625 | 639 | 652 | |||||||||||||||
All other assets |
4,158 | 4,225 | 4,221 | 4,142 | 4,160 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 55,837 | $ | 54,656 | $ | 54,650 | $ | 54,193 | $ | 52,770 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||||||
Deposits: |
||||||||||||||||||||
Demand depositsnoninterest-bearing |
$ | 12,064 | $ | 11,273 | $ | 10,716 | $ | 8,719 | $ | 7,806 | ||||||||||
Demand depositsinterest-bearing |
5,939 | 5,646 | 5,570 | 5,573 | 5,565 | |||||||||||||||
Money market deposits |
13,182 | 13,141 | 13,594 | 13,321 | 12,879 | |||||||||||||||
Savings and other domestic deposits |
4,978 | 4,817 | 4,706 | 4,752 | 4,778 | |||||||||||||||
Core certificates of deposit |
6,618 | 6,510 | 6,769 | 7,592 | 8,079 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total core deposits |
42,781 | 41,387 | 41,355 | 39,957 | 39,107 | |||||||||||||||
Other domestic time deposits of $250,000 or more |
298 | 347 | 405 | 387 | 467 | |||||||||||||||
Brokered deposits and negotiable CDs |
1,421 | 1,301 | 1,410 | 1,533 | 1,333 | |||||||||||||||
Deposits in foreign offices |
357 | 430 | 434 | 401 | 347 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total deposits |
44,857 | 43,465 | 43,604 | 42,278 | 41,254 | |||||||||||||||
Short-term borrowings |
1,391 | 1,512 | 1,728 | 2,251 | 2,112 | |||||||||||||||
Federal Home Loan Bank advances |
626 | 419 | 29 | 285 | 97 | |||||||||||||||
Subordinated notes and other long-term debt |
2,251 | 2,652 | 2,866 | 3,030 | 3,249 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total interest-bearing liabilities |
37,061 | 36,775 | 37,511 | 39,125 | 38,906 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
All other liabilities |
1,094 | 1,116 | 978 | 1,017 | 913 | |||||||||||||||
Shareholders equity |
5,618 | 5,492 | 5,445 | 5,332 | 5,145 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and shareholders equity |
$ | 55,837 | $ | 54,656 | $ | 54,650 | $ | 54,193 | $ | 52,770 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | For purposes of this analysis, NALs are reflected in the average balances of loans. |
16
Table 5 - Consolidated Quarterly Net Interest Margin Analysis
|
||||||||||||||||||||
Average Rates (2) | ||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||
Fully-taxable equivalent basis (1) |
Second | First | Fourth | Third | Second | |||||||||||||||
Assets |
||||||||||||||||||||
Interest-bearing deposits in banks |
0.31 | % | 0.05 | % | 0.06 | % | 0.04 | % | 0.22 | % | ||||||||||
Trading account securities |
1.64 | 1.65 | 0.97 | 1.41 | 1.59 | |||||||||||||||
Federal funds sold and securities purchased under resale agreement |
| | | | 0.09 | |||||||||||||||
Loans held for sale |
3.46 | 3.80 | 3.96 | 4.46 | 4.97 | |||||||||||||||
Available-for-sale and other securities: |
||||||||||||||||||||
Taxable |
2.33 | 2.39 | 2.37 | 2.43 | 2.59 | |||||||||||||||
Tax-exempt |
4.23 | 4.17 | 4.22 | 4.17 | 4.02 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total available-for-sale and other securities |
2.41 | 2.47 | 2.46 | 2.52 | 2.66 | |||||||||||||||
Held-to-maturity securitiestaxable |
2.97 | 2.98 | 2.99 | 3.04 | 2.96 | |||||||||||||||
Loans and leases: (3) |
||||||||||||||||||||
Commercial: |
||||||||||||||||||||
Commercial and industrial |
3.99 | 4.01 | 4.01 | 4.13 | 4.31 | |||||||||||||||
Commercial real estate: |
||||||||||||||||||||
Construction |
3.66 | 3.85 | 4.78 | 3.87 | 3.37 | |||||||||||||||
Commercial |
3.93 | 3.82 | 3.91 | 3.91 | 3.90 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial real estate |
3.89 | 3.82 | 3.99 | 3.91 | 3.84 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
3.97 | 3.96 | 4.01 | 4.06 | 4.16 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Consumer: |
||||||||||||||||||||
Automobile |
4.68 | 4.87 | 4.80 | 4.89 | 5.06 | |||||||||||||||
Home equity |
4.30 | 4.30 | 4.41 | 4.45 | 4.49 | |||||||||||||||
Residential mortgage |
4.14 | 4.17 | 4.30 | 4.47 | 4.62 | |||||||||||||||
Other consumer |
7.42 | 7.47 | 7.32 | 7.57 | 7.76 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer |
4.43 | 4.49 | 4.57 | 4.68 | 4.79 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans and leases |
4.18 | 4.21 | 4.28 | 4.37 | 4.47 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total earning assets |
3.89 | % | 3.91 | % | 3.95 | % | 4.02 | % | 4.14 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities |
||||||||||||||||||||
Deposits: |
||||||||||||||||||||
Demand depositsnoninterest-bearing |
| % | | % | | % | | % | | % | ||||||||||
Demand depositsinterest-bearing |
0.07 | 0.06 | 0.08 | 0.10 | 0.09 | |||||||||||||||
Money market deposits |
0.30 | 0.26 | 0.32 | 0.41 | 0.40 | |||||||||||||||
Savings and other domestic deposits |
0.39 | 0.45 | 0.52 | 0.69 | 0.74 | |||||||||||||||
Core certificates of deposit |
1.38 | 1.60 | 1.69 | 1.95 | 2.04 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total core deposits |
0.50 | 0.54 | 0.61 | 0.77 | 0.82 | |||||||||||||||
Other domestic time deposits of $250,000 or more |
0.66 | 0.68 | 0.78 | 0.93 | 1.01 | |||||||||||||||
Brokered deposits and negotiable CDs |
0.75 | 0.79 | 0.77 | 0.77 | 0.89 | |||||||||||||||
Deposits in foreign offices |
0.19 | 0.18 | 0.19 | 0.26 | 0.26 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total deposits |
0.51 | 0.55 | 0.61 | 0.77 | 0.82 | |||||||||||||||
Short-term borrowings |
0.16 | 0.16 | 0.18 | 0.16 | 0.16 | |||||||||||||||
Federal Home Loan Bank advances |
0.21 | 0.21 | 2.09 | 0.32 | 0.88 | |||||||||||||||
Subordinated notes and other long-term debt |
2.83 | 2.74 | 2.56 | 2.43 | 2.39 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total interest-bearing liabilities |
0.63 | % | 0.68 | % | 0.74 | % | 0.86 | % | 0.91 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest rate spread |
3.18 | % | 3.15 | % | 3.15 | % | 3.11 | % | 3.19 | % | ||||||||||
Impact of noninterest-bearing funds on margin |
0.25 | 0.25 | 0.23 | 0.22 | 0.21 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest margin |
3.42 | % | 3.40 | % | 3.38 | % | 3.34 | % | 3.40 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | FTE yields are calculated assuming a 35% tax rate. |
(2) | Loan and lease and deposit average rates include impact of applicable derivatives, non-deferrable fees, and amortized deferred fees. |
(3) | For purposes of this analysis, NALs are reflected in the average balances of loans. |
17
Table 6 - Average Loans/Leases and Deposits
Second Quarter | First Quarter | 2Q12 vs 2Q11 | 2Q12 vs 1Q12 | |||||||||||||||||||||||||
(dollar amounts in millions) |
2012 | 2011 | 2012 | Amount | Percent | Amount | Percent | |||||||||||||||||||||
Loans/Leases: |
||||||||||||||||||||||||||||
Commercial and industrial |
$ | 16,094 | $ | 13,370 | $ | 14,824 | $ | 2,724 | 20 | % | $ | 1,270 | 9 | % | ||||||||||||||
Commercial real estate |
6,075 | 6,233 | 5,852 | (158 | ) | (3 | ) | 223 | 4 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial |
22,169 | 19,603 | 20,676 | 2,566 | 13 | 1,493 | 7 | |||||||||||||||||||||
Automobile |
4,985 | 5,954 | 4,576 | (969 | ) | (16 | ) | 409 | 9 | |||||||||||||||||||
Home equity |
8,310 | 7,874 | 8,234 | 436 | 6 | 76 | 1 | |||||||||||||||||||||
Residential mortgage |
5,253 | 4,566 | 5,174 | 687 | 15 | 79 | 2 | |||||||||||||||||||||
Other loans |
462 | 538 | 485 | (76 | ) | (14 | ) | (23 | ) | (5 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total consumer |
19,010 | 18,932 | 18,469 | 78 | | 541 | 3 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total loans and leases |
$ | 41,179 | $ | 38,535 | $ | 39,145 | $ | 2,644 | 7 | % | $ | 2,034 | 5 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Deposits: |
||||||||||||||||||||||||||||
Demand depositsnoninterest-bearing |
$ | 12,064 | $ | 7,806 | $ | 11,273 | $ | 4,258 | 55 | % | $ | 791 | 7 | % | ||||||||||||||
Demand depositsinterest-bearing |
5,939 | 5,565 | 5,646 | 374 | 7 | 293 | 5 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total demand deposits |
18,003 | 13,371 | 16,919 | 4,632 | 35 | 1,084 | 6 | |||||||||||||||||||||
Money market deposits |
13,182 | 12,879 | 13,141 | 303 | 2 | 41 | | |||||||||||||||||||||
Savings and other domestic time deposits |
4,978 | 4,778 | 4,817 | 200 | 4 | 161 | 3 | |||||||||||||||||||||
Core certificates of deposit |
6,618 | 8,079 | 6,510 | (1,461 | ) | (18 | ) | 108 | 2 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total core deposits |
42,781 | 39,107 | 41,387 | 3,674 | 9 | 1,394 | 3 | |||||||||||||||||||||
Other deposits |
2,076 | 2,147 | 2,078 | (71 | ) | (3 | ) | (2 | ) | (0 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total deposits |
$ | 44,857 | $ | 41,254 | $ | 43,465 | $ | 3,603 | 9 | % | $ | 1,392 | 3 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 Second Quarter versus 2011 Second Quarter
Fully-taxable equivalent net interest income increased $27.5 million, or 7%, from the year-ago quarter. This reflected a $3.0 billion, or 6%, increase in average total earning assets and a 2 basis point increase in the FTE net interest margin. The increase in average earning assets reflected:
| $2.6 billion, or 7%, increase in average total loans and leases. |
| $0.4 billion, or 251%, increase in average held-to-maturity securities. |
| $0.2 billion, 127%, increase in average loans held for sale. |
Partially offset by:
| $0.2 billion, or 2%, decrease in average total available-for-sale and other securities. |
The 2 basis point increase in the FTE net interest margin reflected the 28 basis point positive impact from the reduction in the cost of average total interest-bearing liabilities, partially offset by a 25 basis point negative impact from lower earning asset yields and a shift to lower-yield, higher quality credits and other items.
The $2.6 billion, or 7%, 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 the benefits from our strategic initiatives focusing on equipment finance and large corporate. In addition, we continued to see strong growth in more traditional middle-market and business banking loans. This growth was evident despite line utilization rates that remained well below historical norms. |
| $0.7 billion, or 15%, increase in average residential mortgages reflecting a purposeful decision to sell a lower percentage of mortgages during the second half of 2011. |
| $0.4 billion, or 6%, increase in average home equity loans with over 70% of new originations in 2012 in a first lien position. |
18
Partially offset by:
| $1.0 billion, or 16%, decrease in the average automobile portfolio. This reflected the impact of our continued program of the securitization and sale of such loans. Specifically, $1.0 billion in the 2011 third quarter and $1.3 billion in the 2012 first quarter. While not impacting averages, $1.3 billion of automobile loans was reclassified to loans held for sale at the end of the current quarter in preparation for an expected securitization in the second half of 2012. |
The $3.6 billion, or 9%, increase in average total deposits from the year-ago quarter reflected:
| $3.7 billion, or 9%, growth in average total core deposits. The drivers of this change were a $4.6 billion, or 35%, growth in average total demand deposits and more modest growth in both money market deposits and savings and other domestic deposits, partially offset by $1.5 billion, or 18%, decline in average core certificates of deposit. |
2012 Second Quarter versus 2012 First Quarter
Fully-taxable equivalent net interest income increased $13.6 million, or 3%, from the 2012 first quarter. This reflected the combined positive impacts of a $1.3 billion, or 3%, increase in average earning assets and a 2 basis point increase in the FTE net interest margin. The increase in average earnings assets reflected a $2.0 billion, or 5%, increase in average total loans and leases, partially offset by a $0.8 billion decline in average loans held for sale, reflecting last quarters $1.3 billion automobile loan securitization and sale. The primary item impacting the increase in the FTE net interest margin was:
| 5 basis point positive impact from the reduction in the cost of average total interest bearing liabilities, as well as 7% growth in average noninterest bearing deposits. |
Partially offset by:
| 3 basis point negative impact from lower earning asset yields and a shift to lower-yield, higher quality credits and other items. |
The acquisition of Fidelity Bank at the end of the prior quarter had a 2 basis point positive impact to the FTE net interest margin, and the current quarters redemption of two issuances of trust preferred securities had a 1 basis point positive impact.
The $2.0 billion, or 5%, increase in average total loans and leases from the 2012 first quarter reflected:
| $1.3 billion, or 9%, growth in average total C&I loans. This reflected the continued elevated level of activity from multiple business lines including middle market and equipment finance, as well as the full quarter impact of the Fidelity Bank related loans. |
| $0.4 billion, or 9%, growth in average automobile loans. Automobile loan originations were more than $1.1 billion. At the end of the quarter, $1.3 billion of automobile loans were reclassified to loans held for sale in preparation of a securitization in the second half of 2012. |
| $0.2 billion, or 4%, growth in average CRE loans. This reflected the full quarter impact of the Fidelity Bank related loans partially offset by continued runoff of the noncore portfolio. |
The $1.4 billion, or 3%, increase in average total deposits from the 2012 first quarter reflected:
| $1.1 billion, or 6%, increase in average total demand deposits. |
| $0.2 billion, or 3%, increase in average savings and other domestic time deposits. |
| $0.1 billion, or 2%, increase in core certificates of deposit. |
The acquisition of Fidelity Bank at the end of the prior quarter contributed $0.5 billion to average total loans and $0.7 billion to average total deposits in the current quarter.
19
Table 7 - Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis
YTD Average Balances | YTD Average Rates (2) | |||||||||||||||||||||||
Fully-taxable equivalent basis (1) | Six Months Ended June 30, | Change | Six Months Ended June 30, | |||||||||||||||||||||
(dollar amounts in millions) |
2012 | 2011 | Amount | Percent | 2012 | 2011 | ||||||||||||||||||
Assets |
||||||||||||||||||||||||
Interest-bearing deposits in banks |
$ | 112 | $ | 130 | $ | (18 | ) | (14 | )% | 0.19 | % | 0.17 | % | |||||||||||
Trading account securities |
52 | 128 | (76 | ) | (59 | ) | 1.65 | 1.47 | ||||||||||||||||
Federal funds sold and securities purchased under resale agreement |
| 11 | (11 | ) | (100 | ) | 0.29 | 0.09 | ||||||||||||||||
Loans held for sale |
837 | 300 | 537 | 179 | 3.71 | 4.36 | ||||||||||||||||||
Available-for-sale and other securities: |
||||||||||||||||||||||||
Taxable |
8,228 | 8,766 | (538 | ) | (6 | ) | 2.36 | 2.56 | ||||||||||||||||
Tax-exempt |
396 | 441 | (45 | ) | (10 | ) | 4.20 | 4.37 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total available-for-sale and other securities |
8,624 | 9,207 | (583 | ) | (6 | ) | 2.44 | 2.65 | ||||||||||||||||
Held-to-maturity securitiestaxable |
622 | 87 | 535 | 615 | 2.98 | 2.95 | ||||||||||||||||||
Loans and leases: (3) |
||||||||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial and industrial |
15,458 | 13,246 | 2,212 | 17 | 4.00 | 4.44 | ||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Construction |
591 | 582 | 9 | 2 | 3.76 | 3.37 | ||||||||||||||||||
Commercial |
5,373 | 5,795 | (422 | ) | (7 | ) | 3.88 | 3.91 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial real estate |
5,964 | 6,377 | (413 | ) | (6 | ) | 3.87 | 3.86 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
21,422 | 19,623 | 1,799 | 9 | 3.96 | 4.25 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Consumer: |
||||||||||||||||||||||||
Automobile |
4,781 | 5,829 | (1,048 | ) | (18 | ) | 4.77 | 5.14 | ||||||||||||||||
Home equity |
8,272 | 7,801 | 471 | 6 | 4.30 | 4.51 | ||||||||||||||||||
Residential mortgage |
5,214 | 4,516 | 698 | 15 | 4.15 | 4.69 | ||||||||||||||||||
Other consumer |
473 | 548 | (75 | ) | (14 | ) | 7.44 | 7.80 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total consumer |
18,740 | 18,694 | 46 | | 4.46 | 4.85 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans and leases |
40,162 | 38,317 | 1,845 | 5 | 4.20 | 4.54 | ||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Allowance for loan and lease losses |
(934 | ) | (1,179 | ) | 245 | (21 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Net loans and leases |
39,228 | 37,138 | 2,090 | 6 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total earning assets |
50,409 | 48,180 | 2,229 | 5 | 3.90 | % | 4.19 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash and due from banks |
970 | 1,183 | (213 | ) | (18 | ) | ||||||||||||||||||
Intangible assets |
611 | 659 | (48 | ) | (7 | ) | ||||||||||||||||||
All other assets |
4,191 | 4,224 | (33 | ) | (1 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total assets |
$ | 55,247 | $ | 53,067 | $ | 2,180 | 4 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||||||||||
Deposits: |
||||||||||||||||||||||||
Demand depositsnoninterest-bearing |
$ | 11,668 | $ | 7,571 | $ | 4,097 | 54 | % | | % | | % | ||||||||||||
Demand depositsinterest-bearing |
5,792 | 5,462 | 330 | 6 | 0.06 | 0.09 | ||||||||||||||||||
Money market deposits |
13,162 | 13,184 | (22 | ) | | 0.28 | 0.45 | |||||||||||||||||
Savings and other domestic deposits |
4,898 | 4,740 | 158 | 3 | 0.42 | 0.78 | ||||||||||||||||||
Core certificates of deposit |
6,564 | 8,234 | (1,670 | ) | (20 | ) | 1.49 | 2.05 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total core deposits |
42,084 | 39,191 | 2,893 | 7 | 0.52 | 0.86 | ||||||||||||||||||
Other domestic time deposits of $250,000 or more |
323 | 536 | (213 | ) | (40 | ) | 0.67 | 1.05 | ||||||||||||||||
Brokered deposits and negotiable CDs |
1,361 | 1,372 | (11 | ) | (1 | ) | 0.77 | 1.00 | ||||||||||||||||
Deposits in foreign offices |
393 | 360 | 33 | 9 | 0.19 | 0.23 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total deposits |
44,161 | 41,459 | 2,702 | 7 | 0.53 | 0.86 | ||||||||||||||||||
Short-term borrowings |
1,451 | 2,123 | (672 | ) | (32 | ) | 0.16 | 0.17 | ||||||||||||||||
Federal Home Loan Bank advances |
523 | 63 | 460 | 730 | 0.21 | 1.36 | ||||||||||||||||||
Subordinated notes and other long-term debt |
2,452 | 3,386 | (934 | ) | (28 | ) | 2.78 | 2.36 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total interest-bearing liabilities |
36,919 | 39,460 | (2,541 | ) | (6 | ) | 0.66 | 0.95 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
All other liabilities |
1,105 | 952 | 153 | 16 | ||||||||||||||||||||
Shareholders equity |
5,555 | 5,084 | 471 | 9 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total liabilities and shareholders equity |
$ | 55,247 | $ | 53,067 | $ | 2,180 | 4 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Net interest rate spread |
3.16 | 3.20 | ||||||||||||||||||||||
Impact of noninterest-bearing funds on margin |
0.25 | 0.21 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest margin |
3.41 | % | 3.41 | % | ||||||||||||||||||||
|
|
|
|
20
(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 Six Months versus 2011 First Six Months
Fully-taxable equivalent net interest income for the first six-month period of 2012 increased $40.4 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 was unchanged at 3.41%. The increase in average earning assets reflected a combination of factors including:
| $1.8 billion, or 5%, increase in average total loans and leases. |
| $0.5 billion, or 179%, increase in average loans held for sale. |
| $0.5 billion, or 615%, increase in average held-to-maturity securities. |
Partially offset by:
| $0.6 billion, or 6%, 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 Six Months vs. 2011 First Six Months
Six Months Ended June 30, | Change | |||||||||||||||
(dollar amounts in millions) |
2012 | 2011 | Amount | Percent | ||||||||||||
Loans/Leases: |
||||||||||||||||
Commercial and industrial |
$ | 15,458 | $ | 13,246 | $ | 2,212 | 17 | % | ||||||||
Commercial real estate |
5,964 | 6,377 | (413 | ) | (6 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial |
21,422 | 19,623 | 1,799 | 9 | ||||||||||||
Automobile |
4,781 | 5,829 | (1,048 | ) | (18 | ) | ||||||||||
Home equity |
8,272 | 7,801 | 471 | 6 | ||||||||||||
Residential mortgage |
5,214 | 4,516 | 698 | 15 | ||||||||||||
Other consumer |
473 | 548 | (75 | ) | (14 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer |
18,740 | 18,694 | 46 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans and leases |
$ | 40,162 | $ | 38,317 | $ | 1,845 | 5 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Deposits: |
||||||||||||||||
Demand depositsnoninterest-bearing |
$ | 11,668 | $ | 7,571 | $ | 4,097 | 54 | % | ||||||||
Demand depositsinterest-bearing |
5,792 | 5,462 | 330 | 6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total demand deposits |
17,460 | 13,033 | 4,427 | 34 | ||||||||||||
Money market deposits |
13,162 | 13,184 | (22 | ) | | |||||||||||
Savings and other domestic deposits |
4,898 | 4,740 | 158 | 3 | ||||||||||||
Core certificates of deposit |
6,564 | 8,234 | (1,670 | ) | (20 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total core deposits |
42,084 | 39,191 | 2,893 | 7 | ||||||||||||
Other deposits |
2,077 | 2,268 | (191 | ) | (8 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total deposits |
$ | 44,161 | $ | 41,459 | $ | 2,702 | 7 | % | ||||||||
|
|
|
|
|
|
|
|
The $1.8 billion, or 5%, increase in average total loans and leases primarily reflected:
| $2.2 billion, or 17%, increase in the average C&I portfolio, primarily reflecting a combination of factors, including the benefits from our strategic initiatives focusing on equipment finance and large corporate. In addition, we continued to see strong growth in more traditional middle-market and business banking loans. This growth was evident despite line utilization rates that remained well below historical norms. |
| $0.7 billion, or 15%, increase in the average residential mortgage portfolio, primarily reflecting a purposeful decision to sell a lower percentage of mortgages in the secondary market during the second half of 2011. |
| $0.5 billion, or 6%, increase in the average home equity portfolio with over 70% of new originations in 2012 in a first-lien position. |
21
Partially offset by:
| $1.0 billion, or 18%, decline in the average automobile portfolio. This reflected the impact of our continued program of the securitization and sale of such loans. Specifically, $1.0 billion in the 2011 third quarter and $1.3 billion in the 2012 first quarter. |
| $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 $2.7 billion, or 7%, increase in average total deposits reflected:
| $4.4 billion, or 34%, increase in demand deposits reflecting an improved deposit mix as a result of growing total number of consumer checking account households as well as our treasury management and OCR focus on growing commercial demand deposits. |
Partially offset by:
| $1.7 billion, or 20%, decline in core certificates of deposits. |
22
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 second quarter was $36.5 million, an increase of $2.1 million, or 6%, from the prior quarter, and $0.7 million, or 2%, from the year-ago quarter. The current quarters provision for credit losses was $47.7 million less than total NCOs and the provision for credit losses for the first six-month period of 2012 was $96.3 million less than total NCOs. The level of provision for credit losses in the first half of 2012 was at the lower end of our long-term expectation. Some quarter-to-quarter volatility is expected given the absolute low level of the provision for credit losses and the uncertain and uneven nature of the economic recovery. (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 | 2Q12 vs 2Q11 | 2Q12 vs 1Q12 | |||||||||||||||||||||||||||||||||
(dollar amounts in thousands) |
Second | First | Fourth | Third | Second | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||
Service charges on deposit accounts |
$ | 65,998 | $ | 60,292 | $ | 63,324 | $ | 65,184 | $ | 60,675 | $ | 5,323 | 9 | % | $ | 5,706 | 9 | % | ||||||||||||||||||
Trust services |
29,914 | 30,906 | 28,775 | 29,473 | 30,392 | (478 | ) | (2 | ) | (992 | ) | (3 | ) | |||||||||||||||||||||||
Electronic banking |
20,514 | 18,630 | 18,282 | 32,901 | 31,728 | (11,214 | ) | (35 | ) | 1,884 | 10 | |||||||||||||||||||||||||
Mortgage banking income |
38,349 | 46,418 | 24,098 | 12,791 | 23,835 | 14,514 | 61 | (8,069 | ) | (17 | ) | |||||||||||||||||||||||||
Brokerage income |
19,025 | 19,260 | 18,688 | 20,349 | 20,819 | (1,794 | ) | (9 | ) | (235 | ) | (1 | ) | |||||||||||||||||||||||
Insurance income |
17,384 | 18,875 | 17,906 | 17,220 | 16,399 | 985 | 6 | (1,491 | ) | (8 | ) | |||||||||||||||||||||||||
Bank owned life insurance income |
13,967 | 13,937 | 14,271 | 15,644 | 17,602 | (3,635 | ) | (21 | ) | 30 | | |||||||||||||||||||||||||
Capital markets fees |
13,455 | 9,982 | 9,811 | 11,256 | 8,537 | 4,918 | 58 | 3,473 | 35 | |||||||||||||||||||||||||||
Gain on sale of loans |
4,131 | 26,770 | 2,884 | 19,097 | 2,756 | 1,375 | 50 | (22,639 | ) | (85 | ) | |||||||||||||||||||||||||
Automobile operating lease income |
2,877 | 3,775 | 4,727 | 5,890 | 7,307 | (4,430 | ) | (61 | ) | (898 | ) | (24 | ) | |||||||||||||||||||||||
Securities gains (losses) |
350 | (613 | ) | (3,878 | ) | (1,350 | ) | 1,507 | (1,157 | ) | (77 | ) | 963 | (157 | ) | |||||||||||||||||||||
Other income |
27,855 | 37,088 | 30,464 | 30,104 | 34,210 | (6,355 | ) | (19 | ) | (9,233 | ) | (25 | ) | |||||||||||||||||||||||
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Total noninterest income |
$ | 253,819 | $ | 285,320 | $ | 229,352 | $ | 258,559 | $ | 255,767 | $ | (1,948 | ) | (1 | )% | $ | (31,501 | ) | (11 | )% | ||||||||||||||||
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2012 Second Quarter versus 2011 Second Quarter
The $1.9 million, or 1%, decrease in total noninterest income from the year-ago quarter reflected:
| $11.2 million, or 35%, decline in electronic banking income related to implementing the lower debit card interchange fee structure mandated in the Durbin Amendment of the Dodd-Frank Act. |
| $6.4 million, or 19%, decrease in other income, as the prior year-ago quarter reflected an increased value in a loan servicing asset. |
| $4.4 million, or 61%, decline in automobile operating lease income, reflecting the impact of a declining portfolio as a result of having exited that business in 2008. |
| $3.6 million, or 21%, decline in bank owned life insurance income. |
Partially offset by:
| $14.5 million, or 61%, increase in mortgage banking income. This primarily reflected an $18.7 million increase in origination and secondary marketing income. Also impacting the year-over-year comparison was a $0.8 million net MSR hedging gain in the current quarter compared to a net MSR hedging gain of $4.7 million in the year-ago quarter. |
| $5.3 million, or 9%, increase in service charges on deposits, primarily reflecting continued strong customer growth. |
| $4.9 million, or 58%, increase in capital markets fees reflecting strong customer demand for interest rate protection and other risk management products. |
23
2012 Second Quarter versus 2012 First Quarter
The $31.5 million, or 11%, decrease in total noninterest income from the prior quarter reflected:
| $22.6 million, or 85%, decline in gain on sale of loans, as the previous quarter included a $23.0 million automobile loan securitization gain. |
| $9.2 million, or 25%, decline in other income, reflecting the prior quarters $11.4 million bargain purchase gain associated with the FDIC-assisted Fidelity Bank acquisition. |
| $8.1 million, or 17%, decline in mortgage banking income. This primarily reflected a $6.8 million decline in net MSR hedging gains, and a $1.1 million decline in origination and secondary marketing income. |
Partially offset by:
| $5.7 million, or 9%, increase in service charges on deposit accounts, reflecting continued growth in consumer households and business relationships. |
| $3.5 million, or 35%, increase in capital market fees, primarily reflecting strong customer demand for interest rate protection and other risk management products. |
2012 First Six Months versus 2011 First Six Months
Noninterest income for the first six-month period of 2012 increased $46.4 million, or 9%, from the comparable year-ago period.
Table 10 - Noninterest Income - 2012 First Six Months vs. 2011 First Six Months
Six Months Ended June 30, | Change | |||||||||||||||
(dollar amounts in thousands) |
2012 | 2011 | Amount | Percent | ||||||||||||
Service charges on deposit accounts |
$ | 126,290 | $ | 114,999 | $ | 11,291 | 10 | % | ||||||||
Trust services |
60,820 | 61,134 | (314 | ) | (1 | ) | ||||||||||
Electronic banking |
39,144 | 60,514 | (21,370 | ) | (35 | ) | ||||||||||
Mortgage banking income |
84,767 | 46,519 | 38,248 | 82 | ||||||||||||
Brokerage income |
38,285 | 41,330 | (3,045 | ) | (7 | ) | ||||||||||
Insurance income |
36,259 | 34,344 | 1,915 | 6 | ||||||||||||
Bank owned life insurance income |
27,904 | 32,421 | (4,517 | ) | (14 | ) | ||||||||||
Capital markets fees |
23,437 | 15,473 | 7,964 | 51 | ||||||||||||
Gain on sale of loans |
30,901 | 9,963 | 20,938 | 210 | ||||||||||||
Automobile operating lease income |
6,652 | 16,154 | (9,502 | ) | (59 | ) | ||||||||||
Securities gains (losses) |
(263 | ) | 1,547 | (1,810 | ) | (117 | ) | |||||||||
Other income |
64,943 | 58,314 | 6,629 | 11 | ||||||||||||
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Total noninterest income |
$ | 539,139 | $ | 492,712 | $ | 46,427 | 9 | % | ||||||||
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The $46.4 million, or 9%, increase in total noninterest income reflected:
| $38.2 million, or 82%, increase in mortgage banking income. This primarily reflected a $30.2 million increase in origination and secondary marketing income as originations increased 33% from the year-ago period, and a $7.2 million increase in MSR net hedging income. |
| $20.9 million, or 210%, increase in gain on sale of loans, as the current year-to-date period included a $23.0 million automobile loan securitization gain. |
| $11.3 million, or 10%, increase in service charges of deposit account, primarily reflecting continued strong customer growth. |
| $8.0 million, or 51%, increase in capital market fees, primarily reflecting strong customer demand for derivatives and other risk management products. |
| $6.6 million, or 11%, increase in other income, primarily reflecting the $11.4 million bargain purchase gain in the current year-to-date period associated with the FDIC-assisted Fidelity Bank acquisition, partially offset by the impacts related to an increased value in a loan servicing asset. |
24
Partially offset by:
| $21.4 million, or 35%, 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. |
| $9.5 million, or 59%, decline in automobile operating lease expense primarily reflecting the impact of a declining portfolio as a result of having exited that business in 2008. |
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 | 2Q12 vs 2Q11 | 2Q12 vs 1Q12 | |||||||||||||||||||||||||||||||||
(dollar amounts in thousands) |
Second | First | Fourth | Third | Second | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||
Personnel costs |
$ | 243,034 | $ | 243,498 | $ | 228,101 | $ | 226,835 | $ | 218,570 | $ | 24,464 | 11 | % | $ | (464 | ) | (0 | )% | |||||||||||||||||
Outside data processing and other services |
48,149 | 42,058 | 53,422 | 49,602 | 43,889 | 4,260 | 10 | 6,091 | 14 | |||||||||||||||||||||||||||
Net occupancy |
25,474 | 29,079 | 26,841 | 26,967 | 26,885 | (1,411 | ) | (5 | ) | (3,605 | ) | (12 | ) | |||||||||||||||||||||||
Equipment |
24,872 | 25,545 | 25,884 | 22,262 | 21,921 | 2,951 | 13 | (673 | ) | (3 | ) | |||||||||||||||||||||||||
Deposit and other insurance expense |
15,731 | 20,738 | 18,481 | 17,492 | 23,823 | (8,092 | ) | (34 | ) | (5,007 | ) | (24 | ) | |||||||||||||||||||||||
Marketing |
21,365 | 16,776 | 16,379 | 22,251 | 20,102 | 1,263 | 6 | 4,589 | 27 | |||||||||||||||||||||||||||
Professional services |
15,458 | 11,230 | 16,769 | 20,281 | 20,080 | (4,622 | ) | (23 | ) | 4,228 | 38 | |||||||||||||||||||||||||
Amortization of intangibles |
11,940 | 11,531 | 13,175 | 13,387 | 13,386 | (1,446 | ) | (11 | ) | 409 | 4 | |||||||||||||||||||||||||
Automobile operating lease expense |
2,183 | 2,854 | 3,362 | 4,386 | 5,434 | (3,251 | ) | (60 | ) | (671 | ) | (24 | ) | |||||||||||||||||||||||
OREO and foreclosure expense |
4,106 | 4,950 | 5,009 | 4,668 | 4,398 | (292 | ) | (7 | ) | (844 | ) | (17 | ) | |||||||||||||||||||||||
Gain on early extinguishment of debt |
(2,580 | ) | | (9,697 | ) | | | (2,580 | ) | | (2,580 | ) | | |||||||||||||||||||||||
Other expense |
34,537 | 54,417 | 32,548 | 30,987 | 29,921 | 4,616 | 15 | (19,880 | ) | (37 | ) | |||||||||||||||||||||||||
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Total noninterest expense |
$ | 444,269 | $ | 462,676 | $ | 430,274 | $ | 439,118 | $ | 428,409 | $ | 15,860 | 4 | % | $ | (18,407 | ) | (4 | )% | |||||||||||||||||
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Number of employees (full-time equivalent), at period-end |
11,417 | 11,166 | 11,245 | 11,473 | 11,457 | (40 | ) | (0 | ) | 251 | 2 |
2012 Second Quarter versus 2011 Second Quarter
The $15.9 million, or 4%, increase in total noninterest expense from the year-ago quarter reflected:
| $24.5 million, or 11%, increase in personnel costs, which primarily reflected increased salaries and benefits, including an increase in commissions and incentive compensation expense primarily due to improved performance metrics and results. |
| $4.6 million, or 15%, increase in other expense, reflecting a $3.1 million increase in the provision for the mortgage representations and warranties reserve. |
| $4.3 million, or 10%, increase in outside data processing and other services, primarily reflecting the implementation of strategic initiatives. |
| $3.0 million, or 13%, increase in equipment expense reflecting the impact of depreciation from technology investments. |
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Partially offset by:
| $8.1 million, or 34%, decline in deposit and other insurance expense reflecting lower insurance premiums. |
| $4.6 million, or 23%, decline in professional services reflecting lower legal related expenses. |
| $3.3 million, or 60%, decline in automobile operating lease expense as the portfolio continued its planned runoff as we exited that business in 2008. |
2012 Second Quarter versus 2012 First Quarter
The $18.4 million, or 4%, decrease in total noninterest expense from the prior quarter reflected:
| $19.9 million, or 37%, decrease in other expense, as the prior quarter included a $23.5 million addition to litigation reserves. |
| $5.0 million, or 24%, decline in deposit and other insurance, reflecting adjustments to insurance premiums. |
| $3.6 million, or 12%, decline in net occupancy expense, primarily reflecting seasonally lower utility and building service expense. |
Partially offset by:
| $6.1 million, or 14%, increase in outside data processing and other services, partially reflecting the conversion and integration of Fidelity Bank and the implementation of strategic initiatives. |
| $4.6 million, or 27%, increase in seasonal marketing expense. |
| $4.2 million, or 38%, increase in professional services, partially reflecting the conversion and integration of Fidelity Bank and increased consulting related expenses. |
2012 First Six Months versus 2011 First Six Months
Noninterest expense for the first six-month period of 2012 increased $47.8 million, or 6%, from the comparable year-ago period.
Table 12 - Noninterest Expense - 2012 First Six Months vs. 2011 First Six Months
Six Months Ended June 30, | Change | |||||||||||||||
(dollar amounts in thousands) |
2012 | 2011 | Amount | Percent | ||||||||||||
Personnel costs |
$ | 486,532 | $ | 437,598 | $ | 48,934 | 11 | % | ||||||||
Outside data processing and other services |
90,207 | 84,171 | 6,036 | 7 | ||||||||||||
Net occupancy |
54,553 | 55,321 | (768 | ) | (1 | ) | ||||||||||
Equipment |
50,417 | 44,398 | 6,019 | 14 | ||||||||||||
Deposit and other insurance expense |
36,469 | 41,719 | (5,250 | ) | (13 | ) | ||||||||||
Marketing |
38,141 | 36,997 | 1,144 | 3 | ||||||||||||
Professional services |
26,688 | 33,545 | (6,857 | ) | (20 | ) | ||||||||||
Amortization of intangibles |
23,471 | 26,756 | (3,285 | ) | (12 | ) | ||||||||||
Automobile operating lease expense |
5,037 | 12,270 | (7,233 | ) | (59 | ) | ||||||||||
OREO and foreclosure expense |
9,056 | 8,329 | 727 | 9 | ||||||||||||
Gain on early extinguishment of debt |
(2,580 | ) | | (2,580 | ) | | ||||||||||
Other expense |
88,954 | 78,004 | 10,950 | 14 | ||||||||||||
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Total noninterest expense |
$ | 906,945 | $ | 859,108 | $ | 47,837 | 6 | % | ||||||||
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Number of employees (full-time equivalent), at period-end |
11,417 | 11,457 | (40 | ) | | % |
26
The $47.8 million, or 6%, increase in total noninterest expense reflected:
| $48.9 million, or 11%, increase in personnel costs, primarily reflecting increased salaries and benefits, including an increase in commissions and incentive compensation expense due to improved performance metrics and results. |
| $11.0 million, or 14%, increase in other expense, primarily reflecting an addition to litigation reserves and an increase in the provision for the mortgage representations and warranties reserve. |
| $6.0 million, or 14%, increase in equipment, primarily reflecting the impact of depreciation from technology investments. |
| $6.0 million, or 7%, increase in outside data processing and other services, primarily reflecting the conversion and integration of Fidelity Bank and the implementation of strategic initiatives. |
Partially offset by:
| $7.2 million, or 59%, decline in automobile operating lease expense, primarily reflecting the impact of a declining portfolio as a result of having exited that business in 2008. |
| $6.9 million, or 20%, decline in professional services, primarily reflecting lower legal-related expenses. |
| $5.3 million, or 13%, decline in deposit and other insurance expense, primarily reflecting adjustments to insurance premiums. |
Provision for Income Taxes
The provision for income taxes in the 2012 second quarter was $49.3 million. This compared with a provision for income taxes of $52.2 million in the 2012 first quarter and $49.0 million in the 2011 second quarter. All three quarters included the benefits from tax-exempt income, tax-advantaged investments, and general business credits. At June 30, 2012, we had a net deferred tax asset of $232.4 million. Based on both positive and negative evidence and our level of forecasted future taxable income, there was no impairment to the deferred tax asset at June 30, 2012. As of June 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 possible the ultimate resolution of the proposed adjustments, if unfavorable, may be material to the results of operations in the period it occurs. Nevertheless, although no assurances can be given, we believe the resolution of these examinations will not, individually or in the aggregate, have a material adverse impact on our consolidated financial position. In the 2011 third quarter, the IRS began its examination of our 2008 and 2009 consolidated federal income tax returns. Various state and other jurisdictions remain open to examination, including Kentucky, Indiana, Michigan, Pennsylvania, West Virginia, and Illinois.
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Risk awareness, identification and assessment, reporting, and active management are key elements in overall risk management. We manage risk to an aggregate moderate-to-low risk profile through a control framework and by monitoring and responding to identified potential risks. Controls include, among others, effective segregation of duties, access, authorization and reconciliation procedures, as well as staff education and a disciplined assessment process.
We identify primary risks, and the sources of those risks, within each business unit. We utilize Risk and Control Self-Assessments (RCSA) to identify exposure risks. Through this RCSA process, we continually assess the effectiveness of controls associated with the identified risks, regularly monitor risk profiles and material exposure to losses, and identify stress events and scenarios to which we may be exposed. Our chief risk officer is responsible for ensuring that appropriate systems of controls are in place for managing and monitoring risk across the Company. Potential risk concerns are shared with the Risk Management Committee and the board of directors, as appropriate. Our internal audit department performs on-going independent reviews of the risk management process and ensures the adequacy of documentation. The results of these reviews are reported regularly to the audit committee and board of directors.
We believe that our primary risk exposures are credit, market, liquidity, operational, and compliance oriented. More information on risk can be found in the Risk Factors section included in Item 1A of our 2011 Form 10-K and subsequent filings with the SEC. Additionally, 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. Our definition, philosophy, and approach to risk management have not materially changed from the discussion presented in the 2011 Form 10-K.
Credit risk is the risk of financial loss if a counterparty is not able to meet the agreed upon terms of the financial obligation. The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. We also have significant credit risk associated with our available-for-sale and other investment and held-to-maturity securities portfolios (see Note 4 and Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements). We engage with other financial counterparties for a variety of purposes including investing, asset and liability management, mortgage banking, and for trading activities. While there is credit risk associated with derivative activity, we believe this exposure is minimal. The significant change in the economic conditions and the resulting changes in borrower behavior over the past several years resulted in our continuing focus on the identification, monitoring, and managing of our credit risk. In addition to the traditional credit risk mitigation strategies of credit policies and processes, market risk management activities, and portfolio diversification, we use additional quantitative measurement capabilities utilizing external data sources, enhanced use of modeling technology, and internal stress testing processes. Our portfolio management resources demonstrate our commitment to maintaining an aggregate moderate-to-low risk profile. In our efforts to continue to identify risk mitigation techniques, we have focused on product design features, origination policies, and treatment strategies for delinquent or stressed borrowers.
Loan and Lease Credit Exposure Mix
At June 30, 2012, our loans and leases totaled $40.0 billion, representing a $1.0 billion, or 3%, increase compared to $38.9 billion at December 31, 2011, primarily reflecting growth in the C&I portfolio, partially offset by a decline in the automobile portfolio as a result of our securitization program. The C&I loan growth included the impacts related to a continuation of the growth in high quality loans originated over recent quarters and the purchase of a portfolio of high quality municipal equipment leases. The decline in the automobile portfolio reflected the transfer of automobile loans to loans held for sale in the 2012 second quarter related to an automobile securitization planned for second half of 2012 (see Automobile Portfolio discussion).
At June 30, 2012, commercial loans and leases totaled $22.2 billion, and represented 55% of our total credit exposure. Our commercial portfolio is diversified along product type, customer size, and geography within our footprint, and is comprised of the following (see Commercial Credit discussion):
C&I C&I loans and leases are made to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or other projects. The majority of these borrowers are customers doing business within our geographic regions. C&I loans and leases are generally underwritten individually and secured with the assets of the company and/or the personal guarantee of the business owners. The financing of owner occupied facilities is considered a C&I loan even though there is improved real estate as collateral. This treatment is a 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 look to grow our C&I portfolio, we have further developed our ABL capabilities by adding experienced ABL professionals to take advantage of market opportunities resulting in better leveraging of the manufacturing base in our primary markets. Also, our Equipment Finance area is targeting larger equipment financings in the manufacturing sector in addition to our core products. We also expanded our Large Corporate Banking area with sufficient resources to ensure we appropriately recognize and manage the risks associated with this type of lending.
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CRE CRE loans consist of loans for income-producing real estate properties, real estate investment trusts, and real estate developers. We mitigate our risk on these loans by requiring collateral values that exceed the loan amount and underwriting the loan with projected cash flow in excess of the debt service requirement. These loans are made to finance properties such as apartment buildings, office and industrial buildings, and retail shopping centers, and are repaid through cash flows related to the operation, sale, or refinance of the property.
Construction CRE Construction CRE loans are loans to individuals, companies, or developers used for the construction of a commercial or residential property for which repayment will be generated by the sale or permanent financing of the property. Our construction CRE portfolio primarily consists of retail, residential (land, single family, and condominiums), office, and warehouse 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 $17.7 billion at June 30, 2012, and represented 45% of our total loan and lease credit exposure. The consumer portfolio is primarily comprised of automobile, home equity loans and lines-of-credit, and residential mortgages (see Consumer Credit discussion).
Automobile Automobile loans are primarily comprised of loans made through automotive dealerships and include exposure in selected states outside of our primary banking markets. No state outside of our primary banking markets represented more than 5% of our total automobile portfolio at June 30, 2012. We have successfully implemented a loan securitization strategy to maintain our established portfolio concentration limits.
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 borrowers residence, allows customers to borrow against the equity in their home. Given the current low interest rate environment, many borrowers have utilized the line-of-credit home equity product as the primary source of financing their home versus residential mortgages. As a result, the proportion of the home equity portfolio secured by a first-lien has increased significantly over the past three years, positively impacting the portfolios risk profile. The portfolios credit risk profile is substantially reduced when we hold a first-lien position. During the first six-month period of 2012, 75% of our home equity portfolio originations were secured by a first-lien. The first-lien position, combined with continued high average FICO scores, significantly reduces the PD associated with these loans. The combination provides a strong base when assessing the expected future performance of this portfolio. Real estate market values at the time of origination directly affect the amount of credit extended and, in the event of default, subsequent changes in these values impact the severity of losses. We actively manage the extension of credit and the amount of credit extended through a combination of criteria including financial position, debt-to-income policies, and LTV policy limits.
Residential mortgage Residential mortgage loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15-year to 30-year term, and in most cases, are extended to borrowers to finance their primary residence. Generally, our practice is to sell a significant portion of our fixed-rate originations in the secondary market. As such, at June 30, 2012, 51% 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. 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 the repurchase risk inherent in the portfolio (see Operational Risk section).
Other consumer Primarily consists of consumer loans not secured by real estate, including personal unsecured loans.
29
The table below provides the composition of our total loan and lease portfolio:
Table 13 - Loan and Lease Portfolio Composition (1)
2012 | 2011 | |||||||||||||||||||||||||||||||||||||||
(dollar amounts in millions) |
June 30, | March 31, | December 31, | September 30, | June 30, | |||||||||||||||||||||||||||||||||||
Commercial:(2) |
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Commercial and industrial |
$ | 16,322 | 41 | % | $ | 15,838 | 39 | % | $ | 14,699 | 38 | % | $ | 13,939 | 36 | % | $ | 13,544 | 34 | % | ||||||||||||||||||||
Commercial real estate: |
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Construction |