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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

QUARTERLY PERIOD ENDED June 30, 2013

Commission File Number 1-34073

 

 

Huntington Bancshares Incorporated

 

 

 

Maryland   31-0724920

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

41 South High Street, Columbus, Ohio 43287

Registrant’s telephone number (614) 480-8300

 

 

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

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

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

 

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

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

There were 829,674,914 shares of Registrant’s common stock ($0.01 par value) outstanding on June 30, 2013.

 

 

 


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HUNTINGTON BANCSHARES INCORPORATED

INDEX

 

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements (Unaudited)

  

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

     66   

Condensed Consolidated Statements of Income for the three months and six months ended June 30, 2013 and 2012

     67   

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

     68   

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

     69   

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012

     70   

Notes to Unaudited Condensed Consolidated Financial Statements

     71   

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

  

Executive Overview

     6   

Discussion of Results of Operations

     9   

Risk Management and Capital:

  

Credit Risk

     25   

Market Risk

     40   

Liquidity Risk

     42   

Operational Risk

     46   

Compliance Risk

     47   

Capital

     47   

Fair Value

     50   

Business Segment Discussion

     52   

Additional Disclosures

     64   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     144   

Item 4. Controls and Procedures

     144   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     144   

Item 1A. Risk Factors

     144   

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

     144   

Item 6. Exhibits

     145   

Signatures

     146   

 

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Glossary of Acronyms and Terms

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

 

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

 

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

 

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PART I. FINANCIAL INFORMATION

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

 

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

INTRODUCTION

We are a multi-state diversified regional bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through the Bank, we have 147 years of 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 700 banking offices are located in Indiana, Kentucky, Michigan, Ohio, Pennsylvania, and West Virginia. Selected financial services and other activities are also conducted in various other states. International banking services are available through the headquarters office in Columbus, Ohio and a limited purpose office located in the Cayman Islands and another limited purpose office located in Hong Kong. Our foreign banking activities, in total or with any individual country, are not significant.

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

Our discussion is divided into key segments:

 

   

Executive Overview—Provides a summary of our current financial performance and business overview, including our thoughts on the impact of the economy, legislative and regulatory initiatives, and recent industry developments. This section also provides our outlook regarding our expectations for the remainder of 2013.

 

   

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

 

   

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

 

   

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

 

   

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

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

 

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EXECUTIVE OVERVIEW

Summary of 2013 Second Quarter Results

For the quarter, we reported net income of $150.7 million, or $0.17 per common share, compared with $151.8 million, or $0.17 per common share, in the prior quarter (see Table 1).

Fully-taxable equivalent net interest income was $431.5 million for the quarter, down $1.4 million, or less than 1%, from the prior quarter. The decrease reflected a 4 basis point decrease in the net interest margin, partially offset by a $0.2 billion increase in average earnings assets as well as an additional day in the quarter. The primary items affecting the net interest margin were a 7 basis point negative impact from the mix and yield of earning assets, which was partially offset by a 3 basis point positive impact from the mix and cost of deposits.

The provision for credit losses decreased $4.9 million, or 16%, from the prior quarter. This reflected a $16.9 million, or 33%, decrease in NCOs to $34.8 million, or an annualized 0.34% of average total loans and leases, from $51.7 million, or an annualized 0.51%, in the prior quarter.

Noninterest income decreased $3.6 million, or 1%, from the prior quarter. The decrease in noninterest income reflected the $11.6 million, or 26%, decrease in mortgage banking income as the benefit of net mortgage servicing rights decreased by $11.6 million. Other income decreased $7.9 million, or 24%, as the prior quarter included a $7.6 million gain on the sale of Low Income Housing Tax Credit investments. These were partially offset by a $7.1 million, or 12%, increase in service charges on deposit accounts that follow yearly seasonal trends in customer activity, an 8% annualized growth in consumer checking households, and a $4.4 million, or 56%, increase in capital markets activity.

Noninterest expense increased $3.1 million, or 1%, from the prior quarter due to a $5.0 million, or 2%, increase in personnel costs, reflecting higher commission expense and a $3.3 million, or 30%, seasonal increase in marketing. These were partially offset by a $2.9 million decline in OREO and foreclosure expense.

The period-end ACL as a percentage of total loans and leases decreased to 1.86% from 1.91% in the prior quarter. The ACL as a percentage of period-end NALs increased 7 percentage points to 214%. NALs declined by $16.8 million, or 4%, to $363.5 million, or 0.87% of total loans. The decreases primarily reflected meaningful improvement in commercial real estate NALs.

The tangible common equity to tangible asset ratio decreased to 8.78% from 8.92% in the prior quarter, resulting primarily from net unrealized losses on available-for-sale debt securities and cash flow hedging derivatives during the quarter, partially offset by retained earnings. Our Tier 1 common risk-based capital ratio at quarter end was 10.71%, up from 10.62% in the prior quarter. The regulatory Tier 1 risk-based capital ratio at June 30, 2013 was 12.24%, up from 12.16%, at March 31, 2013. All capital ratios were impacted by the repurchase of 10.0 million common shares over the quarter at an average price per share of $7.50.

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.

During the 2013 second quarter, we continued to demonstrate progress in our strategic priorities. We returned to pre-recession, normal credit levels, reflecting our disciplined and prudent lending approach and also continued to experience double-digit household growth. Expenses were managed to levels slightly below our expectations. Revenue was relatively unchanged as strategic growth overcame multiple environmental headwinds and the prior quarters’ gains from the sale of Low Income Housing Tax Credit investments. We remain on track to deliver sustainable levels of long-term profitability. Existing strategic investments continue to mature and we are focused on expense management and a more robust continuous improvement effort across the enterprise.

Economy

Consumer lending and deposits increased over the same quarter last year as consumer confidence in the recovery rises. Our commercial loan pipeline continues to be strong as business owners are seeing more signs of economic growth. Employment across our Midwest markets continues to improve with Ohio creating the largest month-to-month employment increase in the nation in May and Michigan coming in third.

 

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Legislative and Regulatory

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

Capital Plans Rule / Supervisory and Company-Run Stress Test Requirements – During 2012, we participated in the Federal Reserve’s Capital Plan Review (CapPR) process and made our capital plan submission in January 2013. On March 14, 2013, we announced that the Federal Reserve had completed its review of our capital plan submission and did not object to our proposed capital actions. The capital plan review process included reviews of our internal capital planning process and our plans to make capital distributions, such as dividend payments or stock repurchases, as well as a stress test requirement designed to test our capital adequacy throughout times of economic and financial stress.

Beginning with our Capital Plan submission in January 2014, we will be subject to the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) process. One of the primary additional elements of CCAR will be supervisory stress tests conducted by the Federal Reserve under different hypothetical macro-economic scenarios in addition to the stress tests routinely conducted by management. After completing its review, the Federal Reserve may object or not object to our proposed capital actions, such as plans to pay or increase common stock dividends or increase common stock repurchase programs. Beginning with our January 2014 submission, we will be subject to the OCC’s Annual Stress Test at the bank-level. The OCC stipulated that it will consult closely with the Federal Reserve to provide common stress scenarios which can be used at both the depository institution and bank holding company levels.

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

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

 

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

Tier 1 common equity

     4.5     5.125     5.75     6.375     7.0

Tier 1 risk-based capital ratio

     6.0     6.625     7.25     7.875     8.5

Total risk-based capital ratio

     8.0     8.625     9.25     9.875     10.5

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

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

Expectations

We are seeing an uptick in manufacturing across our markets led by the auto industry along with continued investments in the local oil and gas exploration industry. We believe these developments, along with recent upward revisions to economic growth forecasts in 2014, will trigger further business investment. We also are seeing a stronger than expected housing recovery across much of our region. We believe this, along with an increase in consumer confidence, will lead to more consumer spending. We will remain disciplined as we manage our returns on an aggregate moderate-to-low risk profile.

Net interest income is expected to modestly grow over the remainder of 2013. We anticipate an increase in total loans will be partially offset by a reduction in total securities, as the portfolio’s cash flow is not reinvested into additional securities. However, those benefits to net interest income are expected to be mostly offset by continued downward NIM pressure. NIM for 2013 is not expected to fall below the mid 3.30%s due to continued deposit repricing and mix shift opportunities while maintaining a disciplined approach to loan pricing.

 

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The C&I portfolio is expected to see growth consistent with the anticipated increase in customer activity. Our C&I loan pipeline remains robust with much of this reflecting the positive impact from our investments in specialized commercial verticals, focused OCR sales process, and continued support of middle market and small business lending. Given automobile loan yields are relatively more attractive than similar duration securities and the recent decline in estimated securitization gains, we currently do not anticipate any automobile securitizations in the second half of 2013. Residential mortgages and home equity loan balances are expected to increase modestly. CRE loans are expected to remain in the current $5 billion range.

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

Noninterest income, when compared with 2012 levels, is expected to be flat to slightly down, excluding the impact of any automobile loan sales and any net MSR impact. The anticipated slowdown in mortgage banking activity is expected to be mostly offset by continued growth in new customers, increased contribution from higher cross-sell, and the continued maturation of our previous strategic investments.

Effective December 31, 2013, the benefits earned in the Company’s pension plan will be frozen, as approved by the board of directors on July 17, 2013. As a result of the accounting treatment for the unamortized prior service pension cost and the change in the projected benefit obligation related to the curtailment, a one-time non-cash pre-tax gain of approximately $35 million, or $0.03 per share, is expected to be recognized in the 2013 third quarter.

Third quarter expenses are expected to modestly increase due to higher commission expense and higher occupancy and equipment expense related to our continued in-store expansion. Expenses will be consistent with previous expectations, with a modest downward bias related to the pension related expense and excluding the aforementioned one-time gain. We continue to evaluate additional cost saving opportunities and remain committed to posting positive operating leverage in 2013.

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

The effective tax rate for 2013 is expected to be in the range of 25% to 28%, primarily reflecting the impacts of tax-exempt income, tax advantaged investments, and general business credits.

 

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DISCUSSION OF RESULTS OF OPERATIONS

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

 

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Table 1—Selected Quarterly Income Statement Data (1)

 

      2013     2012  

(dollar amounts in thousands, except per share amounts)

   Second     First     Fourth     Third     Second  

Interest income

   $ 462,582     $ 465,319     $ 478,995     $ 483,787     $ 487,544  

Interest expense

     37,645       41,149       44,940       53,489       58,582  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     424,937       424,170       434,055       430,298       428,962  

Provision for credit losses

     24,722       29,592       39,458       37,004       36,520  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     400,215       394,578       394,597       393,294       392,442  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     68,009       60,883       68,083       67,806       65,998  

Mortgage banking income

     33,659       45,248       61,711       44,614       38,349  

Trust services

     30,666       31,160       31,388       29,689       29,914  

Electronic banking

     23,345       20,713       21,011       22,135       20,514  

Brokerage income

     19,546       17,995       17,415       16,526       19,025  

Insurance income

     17,187       19,252       17,268       17,792       17,384  

Gain on sale of loans

     3,348       2,616       20,690       6,591       4,131  

Bank owned life insurance income

     15,421       13,442       13,767       14,371       13,967  

Capital markets fees

     12,229       7,834       12,694       11,596       13,260  

Securities gains (losses)

     (410     (509     863       4,169       350  

Other income

     25,655       33,575       32,761       25,778       30,927  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     248,655       252,209       297,651       261,067       253,819  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Personnel costs

     263,862       258,895       253,952       247,709       243,034  

Outside data processing and other services

     49,898       49,265       48,699       50,396       48,568  

Net occupancy

     27,656       30,114       29,008       27,599       25,474  

Equipment

     24,947       24,880       26,580       25,950       24,872  

Deposit and other insurance expense

     13,460       15,490       16,327       15,534       15,731  

Professional services

     9,341       7,192       22,514       17,510       15,037  

Marketing

     14,239       10,971       16,456       16,842       17,396  

Amortization of intangibles

     10,362       10,320       11,647       11,431       11,940  

OREO and foreclosure expense

     (271     2,666       4,233       4,982       4,106  

Loss (Gain) on early extinguishment of debt

     —          —          —          1,782       (2,580

Other expense

     32,371       33,000       41,212       38,568       40,691  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     445,865       442,793       470,628       458,303       444,269  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     203,005       203,994       221,620       196,058       201,992  

Provision for income taxes

     52,354       52,214       54,341       28,291       49,286  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 150,651     $ 151,780     $ 167,279     $ 167,767     $ 152,706  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends on preferred shares

     7,967       7,970       7,973       7,983       7,984  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to common shares

   $ 142,684     $ 143,810     $ 159,306     $ 159,784     $ 144,722  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares—basic

     834,730       841,103       847,220       857,871       862,261  

Average common shares—diluted

     843,840       848,708       853,306       863,588       867,551  

Net income per common share—basic

   $ 0.17     $ 0.17     $ 0.19     $ 0.19     $ 0.17  

Net income per common share—diluted

     0.17       0.17       0.19       0.19       0.17  

Cash dividends declared per common share

     0.05       0.04       0.04       0.04       0.04  

Return on average total assets

     1.08     1.10     1.19     1.19     1.10

Return on average common shareholders’ equity

     10.4       10.7       11.6       11.9       11.1  

Return on average tangible common shareholders’ equity (2)

     12.0       12.4       13.5       13.9       13.1  

Net interest margin (3)

     3.38       3.42       3.45       3.38       3.42  

Efficiency ratio (4)

     64.0       63.3       62.3       64.5       62.8  

Effective tax rate

     25.8       25.6       24.5       14.4       24.4  

Revenue—FTE

          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   $ 424,937     $ 424,170     $ 434,055     $ 430,298     $ 428,962  

FTE adjustment

     6,587       5,923       5,470       5,254       5,747  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (3)

     431,524       430,093       439,525       435,552       434,709  

Noninterest income

     248,655       252,209       297,651       261,067       253,819  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue (3)

   $ 680,179     $ 682,302     $ 737,176     $ 696,619     $ 688,528  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

(2) 

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

(3) 

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

(4) 

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

 

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Table 2—Selected Year to Date Income Statement Data(1)

 

     Six Months Ended June 30,     Change  

(dollar amounts in thousands, except per share amounts)

   2013     2012     Amount     Percent  

Interest income

   $ 927,901     $ 967,481     $ (39,580     (4 )% 

Interest expense

     78,794       121,310       (42,516     (35
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     849,107       846,171       2,936       —     

Provision for credit losses

     54,314       70,926       (16,612     (23
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     794,793       775,245       19,548       3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     128,892       126,290       2,602       2  

Mortgage banking income

     78,907       84,767       (5,860     (7

Trust services

     61,826       60,820       1,006       2  

Electronic banking

     44,058       39,144       4,914       13  

Brokerage income

     37,541       38,285       (744     (2

Insurance income

     36,439       36,259       180       —     

Gain on sale of loans

     5,964       30,901       (24,937     (81

Bank owned life insurance income

     28,863       27,904       959       3  

Capital markets fees

     20,063       23,056       (2,993     (13

Securities gains (losses)

     (919     (263     (656     249  

Other income

     59,230       71,976       (12,746     (18
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     500,864       539,139       (38,275     (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Personnel costs

     522,757       486,532       36,225       7  

Outside data processing and other services

     99,163       91,160       8,003       9  

Net occupancy

     57,770       54,553       3,217       6  

Equipment

     49,827       50,417       (590     (1

Deposit and other insurance expense

     28,950       36,469       (7,519     (21

Professional services

     16,533       25,734       (9,201     (36

Marketing

     25,210       30,965       (5,755     (19

Amortization of intangibles

     20,682       23,471       (2,789     (12

OREO and foreclosure expense

     2,395       9,056       (6,661     (74

Gain on early extinguishment of debt

     —          (2,580     2,580       (100

Other expense

     65,371       101,168       (35,797     (35
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     888,658       906,945       (18,287     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     406,999       407,439       (440     —     

Provision for income taxes

     104,568       101,463       3,105       3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 302,431     $ 305,976     $ (3,545     (1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared on preferred shares

     15,937       16,033       (96     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to common shares

   $ 286,494     $ 289,943     $ (3,449     (1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares—basic

     837,917       863,380       (25,463     (3 )% 

Average common shares—diluted

     846,274       868,357       (22,083     (3

Per common share

        

Net income per common share - basic

   $ 0.34     $ 0.34     $ —          —  

Net income per common share - diluted

     0.34       0.33       0.01       3  

Cash dividends declared

     0.09       0.08       0.01       13  

Revenue—FTE

        

Net interest income

   $ 849,107     $ 846,171     $ 2,936       —  

FTE adjustment

     12,510       9,682       2,828       29  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (2)

     861,617       855,853       5,764       1  

Noninterest income

     500,864       539,139       (38,275     (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue (2)

   $ 1,362,481     $ 1,394,992     $ (32,511     (2 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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Significant Items

Definition of Significant Items

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

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

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

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

Significant Items Influencing Financial Performance Comparisons

Earnings comparisons were impacted by the Significant Items summarized below:

 

1. Litigation Reserve. During the 2012 first quarter, a $23.5 million addition to litigation reserves was recorded in other noninterest expense. This resulted in a negative impact of $0.02 per common share on a 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 on a year-to-date basis.

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

Table 3—Significant Items Influencing Earnings Performance Comparison

 

     Three Months Ended  
     June 30, 2013     March 31, 2013     June 30, 2012  

(dollar amounts in thousands, except per share amounts)

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

Net income

   $ 150,651        $ 151,780        $ 152,706     

Earnings per share, after-tax

      $ 0.17        $ 0.17        $ 0.17  

Change from prior quarter—$

        —             (0.02        —     

Change from prior quarter—%

        —          (11 )%         —  

Change from year-ago—$

      $ —           $ —           $ 0.01  

Change from year-ago—%

        —          —         

 

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     Six Months Ended  
     June 30, 2013     June 30, 2012  

(dollar amounts in thousands)

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

Net income

   $ 302,431        $ 305,976    

Earnings per share, after-tax

      $ 0.34       $ 0.33  

Change from a year-ago—$

        0.01         0.03  

Change from a year-ago—%

        3       10

Significant Items - favorable (unfavorable) impact:

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

Bargain purchase gain

     —           —          11,409       0.01  

Litigation reserves addition

     —           —          (23,500     (0.02

 

(1) 

Pretax unless otherwise noted.

(2) 

After-tax.

Net Interest Income / Average Balance Sheet

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

 

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Table 4—Consolidated Quarterly Average Balance Sheets

 

     Average Balances     Change  
     2013     2012     2Q13 vs. 2Q12  

(dollar amounts in millions)

   Second     First     Fourth     Third     Second     Amount     Percent  

Assets:

              

Interest-bearing deposits in banks

   $ 84     $ 72     $ 73     $ 82     $ 124     $ (40     (32 )% 

Loans held for sale

     678       709       840       1,829       410       268       65  

Securities:

              

Available-for-sale and other securities:

              

Taxable

     6,728       6,964       7,131       8,014       8,285       (1,557     (19

Tax-exempt

     591       549       492       423       387       204       53  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     7,319       7,513       7,623       8,437       8,672       (1,353     (16

Trading account securities

     84       85       97       66       54       30       56  

Held-to-maturity securities—taxable

     1,711       1,717       1,652       796       611       1,100       180  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     9,114       9,315       9,372       9,299       9,337       (223     (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (1)

              

Commercial:

              

Commercial and industrial

     17,033       16,954       16,507       16,343       16,094       939       6  

Commercial real estate:

              

Construction

     586       598       576       569       584       2       —     

Commercial

     4,429       4,694       4,897       5,153       5,491       (1,062     (19
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     5,015       5,292       5,473       5,722       6,075       (1,060     (17
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     22,048       22,246       21,980       22,065       22,169       (121     (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

              

Automobile

     5,283       4,833       4,486       4,065       4,985       298       6  

Home equity

     8,263       8,395       8,345       8,369       8,310       (47     (1

Residential mortgage

     5,225       4,978       5,155       5,177       5,253       (28     (1

Other consumer

     461       412       431       444       462       (1     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     19,232       18,618       18,417       18,055       19,010       222       1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     41,280       40,864       40,397       40,120       41,179       101       —     

Allowance for loan and lease losses

     (746     (772     (783     (855     (908     162       (18
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans and leases

     40,534       40,092       39,614       39,265       40,271       263       1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     51,156       50,960       50,682       51,330       51,050       106       —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and due from banks

     940       904       1,459       960       928       12       1  

Intangible assets

     563       571       581       597       609       (46     (8

All other assets

     3,976       4,065       4,115       4,106       4,158       (182     (4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 55,889     $ 55,728     $ 56,054     $ 56,138     $ 55,837     $ 52       —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Shareholders’ Equity:

              

Deposits:

              

Demand deposits—noninterest-bearing

   $ 12,879     $ 12,165     $ 13,121     $ 12,329     $ 12,064     $ 815      

Demand deposits—interest-bearing

     5,927       5,977       5,843       5,814       5,939       (12     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     18,806       18,142       18,964       18,143       18,003       803       4  

Money market deposits

     15,069       15,045       14,749       14,515       13,182       1,887       14  

Savings and other domestic deposits

     5,115       5,083       4,960       4,975       4,978       137       3  

Core certificates of deposit

     4,778       5,346       5,637       6,131       6,618       (1,840     (28
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     43,768       43,616       44,310       43,764       42,781       987       2  

Other domestic time deposits of $250,000 or more

     324       360       359       300       298       26       9  

Brokered deposits and negotiable CDs

     1,779       1,697       1,756       1,878       1,421       358       25  

Deposits in foreign offices

     316       340       342       356       357       (41     (11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     46,187       46,013       46,767       46,298       44,857       1,330       3  

Short-term borrowings

     701       762       1,012       1,329       1,391       (690     (50

Federal Home Loan Bank advances

     757       686       42       107       626       131       21  

Subordinated notes and other long-term debt

     1,292       1,348       1,374       1,638       2,251       (959     (43
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     36,058       36,644       36,074       37,043       37,061       (1,003     (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

All other liabilities

     1,064       1,085       1,017       1,035       1,094       (30     (3

Shareholders’ equity

     5,888       5,834       5,842       5,731       5,618       270       5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 55,889     $ 55,728     $ 56,054     $ 56,138     $ 55,837     $ 52       —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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Table 5—Consolidated Quarterly Net Interest Margin Analysis

 

     Average Rates (2)  

Fully-taxable equivalent basis (1)

   2013     2012  
   Second     First     Fourth     Third     Second  

Assets

          

Interest-bearing deposits in banks

     0.27     0.16     0.28     0.21     0.31

Loans held for sale

     3.39       3.22       3.18       3.18       3.46  

Securities:

          

Available-for-sale and other securities:

          

Taxable

     2.29       2.31       2.32       2.29       2.33  

Tax-exempt

     3.94       3.96       4.03       4.15       4.23  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     2.42       2.43       2.43       2.39       2.41  

Trading account securities

     0.60       0.50       1.01       1.07       1.64  

Held-to-maturity securities—taxable

     2.29       2.29       2.24       2.81       2.97  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     2.38       2.39       2.38       2.41       2.45  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (3)

          

Commercial:

          

Commercial and industrial

     3.75       3.83       3.88       3.90       3.99  

Commercial real estate:

          

Construction

     3.93       4.05       4.13       3.84       3.66  

Commercial

     4.13       4.00       4.20       3.85       3.93  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     4.09       4.01       4.19       3.85       3.89  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     3.83       3.87       3.96       3.89       3.97  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

          

Automobile

     3.96       4.28       4.52       4.87       4.68  

Home equity

     4.16       4.20       4.24       4.27       4.30  

Residential mortgage

     3.82       3.97       4.07       4.02       4.14  

Other consumer

     6.66       7.05       7.16       7.16       7.42  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     4.07       4.22       4.33       4.40       4.43  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     3.95       4.03       4.13       4.12       4.18  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     3.68     3.75     3.80     3.79     3.89
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

          

Deposits:

          

Demand deposits—noninterest-bearing

     —       —       —       —       —  

Demand deposits—interest-bearing

     0.04       0.04       0.05       0.07       0.07  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     0.01       0.01       0.02       0.02       0.02  

Money market deposits

     0.24       0.23       0.27       0.33       0.30  

Savings and other domestic deposits

     0.27       0.30       0.33       0.37       0.39  

Core certificates of deposit

     1.13       1.19       1.21       1.25       1.38  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     0.34       0.37       0.41       0.47       0.50  

Other domestic time deposits of $250,000 or more

     0.50       0.52       0.61       0.68       0.66  

Brokered deposits and negotiable CDs

     0.62       0.67       0.71       0.71       0.75  

Deposits in foreign offices

     0.14       0.17       0.18       0.18       0.19  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     0.36       0.38       0.42       0.48       0.51  

Short-term borrowings

     0.10       0.12       0.14       0.16       0.16  

Federal Home Loan Bank advances

     0.14       0.18       1.20       0.50       0.21  

Subordinated notes and other long-term debt

     2.35       2.54       2.55       2.91       2.83  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     0.42     0.45     0.50     0.58     0.63
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest rate spread

     3.26     3.30     3.30     3.21     3.26

Impact of noninterest-bearing funds on margin

     0.12       0.12       0.15       0.17       0.16  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin

     3.38     3.42     3.45     3.38     3.42
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

FTE yields are calculated assuming a 35% tax rate.

(2) 

Loan and lease and deposit average rates include impact of applicable derivatives, non-deferrable fees, and amortized deferred fees.

(3) 

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

 

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Table 6—Average Loans/Leases and Deposits

 

     Second Quarter      First Quarter      2Q13 vs 2Q12     2Q13 vs 1Q13  

(dollar amounts in millions)

   2013      2012      2013      Amount     Percent     Amount     Percent  

Loans/Leases:

                 

Commercial and industrial

   $ 17,033      $ 16,094      $ 16,954      $ 939       6   $ 79       —  

Commercial real estate

     5,015        6,075        5,292        (1,060     (17     (277     (5
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     22,048        22,169        22,246        (121     (1     (198     (1

Automobile

     5,283        4,985        4,833        298       6       450       9  

Home equity

     8,263        8,310        8,395        (47     (1     (132     (2

Residential mortgage

     5,225        5,253        4,978        (28     (1     247       5  

Other loans

     461        462        412        (1     (0     49       12  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     19,232        19,010        18,618        222       1       614       3  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

   $ 41,280      $ 41,179      $ 40,864      $ 101       —     $ 416       1
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Deposits:

                 

Demand deposits—noninterest-bearing

   $ 12,879      $ 12,064      $ 12,165      $ 815       7   $ 714       6

Demand deposits—interest-bearing

     5,927        5,939        5,977        (12     (0     (50     (1
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     18,806        18,003        18,142        803       4       664       4  

Money market deposits

     15,069        13,182        15,045        1,887       14       24       —     

Savings and other domestic time deposits

     5,115        4,978        5,083        137       3       32       1  

Core certificates of deposit

     4,778        6,618        5,346        (1,840     (28     (568     (11
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     43,768        42,781        43,616        987       2       152       —     

Other deposits

     2,419        2,076        2,397        343       17       22       1  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

   $ 46,187      $ 44,857      $ 46,013      $ 1,330       3   $ 174       —  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

2013 Second Quarter versus 2012 Second Quarter

Fully-taxable equivalent net interest income decreased $3.2 million, or 1%, from the year-ago quarter. This reflected a 4 basis point decrease in the FTE net interest margin, partially offset by a $0.1 billion, or less than 1%, increase in average total earning assets. The primary items impacting the decrease in the net interest margin were:

 

   

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

Partially offset by:

 

   

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

The $0.1 billion, or less than 1%, increase in average total loans and leases primarily reflected:

 

   

$0.9 billion, or 6%, growth in average C&I loans. This reflected the continued growth across most business lines, with particularly strong growth in the healthcare vertical, dealer floorplan, and equipment finance.

 

   

$0.3 billion, or 6%, increase in average automobile loans. In addition, $0.3 billion of automobile loans were transferred from held for sale to automobile loans and leases on June 30, as there are no securitizations expected for the remainder of 2013. This transfer had a minimal impact on average balances.

Partially offset by:

 

   

$1.1 billion, or 17%, decrease in average commercial real estate (CRE) loans. This reflected continued runoff of the noncore portfolio and managed reduction of the core portfolios as acceptable returns for new core origination were balanced against internal concentration limits and increased competition for projects sponsored by high quality developers.

 

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The $1.0 billion, or 3%, decrease in average interest-bearing liabilities from the year-ago quarter reflected:

 

   

$1.5 billion, or 36%, decrease in subordinated notes and other short and long-term debt including the repayment of $0.6 billion of TLGP related debt and the redemption of $0.2 billion of trust preferred securities in 2012 second half.

 

   

$1.8 billion, or 28%, decrease in average core certificates of deposit due to the strategic focus on changing the funding sources to no-cost demand deposits and low cost money markets deposits.

Partially offset by:

 

   

$1.9 billion, or 14%, increase in money market deposits reflecting the strategic focus on increased share of wallet and customer preference for increased liquidity.

2013 Second Quarter versus 2013 First Quarter

Fully-taxable equivalent net interest income increased $1.4 million, or less than 1%, from the last quarter reflecting a $0.2 billion increase in average earnings assets as well as an additional day in the quarter, partially offset by a 4 basis point decrease in net interest margin. The primary items affecting the net interest margin were:

 

   

7 basis point negative impact from the mix and yield of earning assets.

Partially offset by:

 

   

2 basis point positive impact from the mix and yield of deposits.

The $0.4 billion, or 1%, increase in average total loans and leases from the 2013 first quarter reflected:

 

   

$0.5 billion, or 9%, increase in automobile loans.

 

   

$0.2 billion, or 5%, increase in residential mortgage loans.

Partially offset by:

 

   

$0.3 billion, or 5%, decrease in commercial real estate loans.

The $0.6 billion, or 2%, decrease in average interest-bearing liabilities from the 2013 first quarter reflected:

 

   

$0.6 billion, or 11%, decrease in core certificates of deposits.

 

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Table 7—Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis

 

     YTD Average Balances     YTD Average Rates (2)  
Fully-taxable equivalent basis (1)    Six Months Ended June 30,     Change     Six Months Ended June 30,  

(dollar amounts in millions)

   2013     2012     Amount     Percent     2013     2012  

Assets:

            

Interest-bearing deposits in banks

   $ 78     $ 112     $ (34     (30 )%      0.22     0.19

Loans held for sale

     694       837       (143     (17     3.35       3.71  

Securities:

            

Available-for-sale and other securities:

            

Taxable

     6,845       8,228       (1,383     (17     2.30       2.36  

Tax-exempt

     570       396       174       44       3.95       4.20  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale and other securities

     7,415       8,624       (1,209     (14     3.95       4.20  

Trading account securities

     85       52       33       63       0.55       1.65  

Held-to-maturity securities—taxable

     1,714       622       1,092       176       2.29       2.98  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     9,214       9,298       (84     (1     2.38       2.47  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases: (3)

            

Commercial:

            

Commercial and industrial

     16,994       15,458       1,536       10       3.79       4.00  

Commercial real estate:

            

Construction

     592       591       1       —          3.99       3.76  

Commercial

     4,561       5,373       (812     (15     4.06       3.88  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate

     5,153       5,964       (811     (14     4.06       3.87  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     22,147       21,422       725       3       3.85       3.96  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer:

            

Automobile

     5,058       4,781       277       6       4.11       4.77  

Home equity

     8,277       8,272       5       —          4.17       4.30  

Residential mortgage

     5,102       5,214       (112     (2     3.89       4.15  

Other consumer

     488       473       15       3       6.76       7.44  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     18,925       18,740       185       1       4.15       4.46  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases

     41,072       40,162       910       2       3.99       4.20  
          

 

 

   

 

 

 

Allowance for loan and lease losses

     (758     (934     176       (19    
  

 

 

   

 

 

   

 

 

   

 

 

     

Net loans and leases

     40,314       39,228       1,086       3      
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     51,058       50,409       649       1       3.71     3.90
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and due from banks

     922       970       (48     (5    

Intangible assets

     567       611       (44     (7    

All other assets

     4,020       4,191       (171     (4    
  

 

 

   

 

 

   

 

 

   

 

 

     

Total assets

   $ 55,809     $ 55,247     $ 562       1    
  

 

 

   

 

 

   

 

 

   

 

 

     

Liabilities and Shareholders’ Equity:

            

Deposits:

            

Demand deposits—noninterest-bearing

   $ 12,524     $ 11,668     $ 856       7     —       —  

Demand deposits–interest-bearing

     5,952       5,792       160       3       0.04       0.06  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total demand deposits

     18,476       17,460       1,016       6       0.01       0.02  

Money market deposits

     15,057       13,162       1,895       14       0.23       0.28  

Savings and other domestic deposits

     5,099       4,898       201       4       0.29       0.42  

Core certificates of deposit

     5,060       6,564       (1,504     (23     1.16       1.49  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     43,692       42,084       1,608       4       0.36       0.52  

Other domestic time deposits of $250,000 or more

     342       323       19       6       0.51       0.67  

Brokered deposits and negotiable CDs

     1,738       1,361       377       28       0.65       0.77  

Deposits in foreign offices

     328       393       (65     (17     0.15       0.19  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     46,100       44,161       1,939       4       0.37       0.53  

Short-term borrowings

     732       1,451       (719     (50     0.11       0.16  

Federal Home Loan Bank advances

     722       523       199       38       0.16       0.21  

Subordinated notes and other long-term debt

     1,320       2,452       (1,132     (46     2.45       2.78  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     36,350       36,919       (569     (2     0.44       0.66  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

All other liabilities

     1,074       1,105       (31     (3    

Shareholders’ equity

     5,861       5,555       306       6      
  

 

 

   

 

 

   

 

 

   

 

 

     

Total liabilities and shareholders’ equity

   $ 55,809     $ 55,247     $ 562       1    
  

 

 

   

 

 

   

 

 

   

 

 

     

Net interest rate spread

             3.28       3.24  

Impact of noninterest-bearing funds on margin

             0.12       0.17  
          

 

 

   

 

 

 

Net interest margin

             3.40     3.41
          

 

 

   

 

 

 

 

(1) 

FTE yields are calculated assuming a 35% tax rate.

(2) 

Loan, lease, and deposit average rates include the impact of applicable derivatives, non-deferrable fees, and amortized deferred fees.

(3) 

For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans.

 

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2013 First Six Months versus 2012 First Six Months

Fully-taxable equivalent net interest income for the first six-month period of 2013 increased $5.8 million, or less than 1%, from the comparable year-ago period. This reflected the benefit of a $0.6 billion, or 1%, increase in average total earning assets. The fully-taxable equivalent net interest margin decreased to 3.40% from 3.41%. The increase in average earning assets reflected:

 

   

$0.9 billion, or 2%, increase in average total loans and leases.

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

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

 

     Six Months Ended June 30,      Change  

(dollar amounts in millions)

   2013 (1)      2012      Amount     Percent  

Loans/Leases:

          

Commercial and industrial

   $ 16,994      $ 15,458      $ 1,536       10

Commercial real estate

     5,153        5,964        (811     (14
  

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial

     22,147        21,422        725       3  

Automobile

     5,058        4,781        277       6  

Home equity

     8,277        8,272        5       —     

Residential mortgage

     5,102        5,214        (112     (2

Other consumer

     488        473        15       3  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total consumer

     18,925        18,740        185       1  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total loans and leases

   $ 41,072      $ 40,162      $ 910       2
  

 

 

    

 

 

    

 

 

   

 

 

 

Deposits:

          

Demand deposits—noninterest-bearing

   $ 12,524      $ 11,668      $ 856       7

Demand deposits—interest-bearing

     5,952        5,792        160       3  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total demand deposits

     18,476        17,460        1,016       6  

Money market deposits

     15,057        13,162        1,895       14  

Savings and other domestic deposits

     5,099        4,898        201       4  

Core certificates of deposit

     5,060        6,564        (1,504     (23
  

 

 

    

 

 

    

 

 

   

 

 

 

Total core deposits

     43,692        42,084        1,608       4  

Other deposits

     2,408        2,077        331       16  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total deposits

   $ 46,100      $ 44,161      $ 1,939       4
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) The acquisition of Fidelity Bank on March 30, 2012, contributed to the increase in average loans and deposits.

The $0.9 billion, or 2%, increase in average total loans and leases primarily reflected:

 

   

$1.5 billion, or 10%, increase in the average C&I portfolio, primarily reflecting a combination of factors, including growth across multiple business lines including healthcare vertical, dealer floorplan, and equipment finance.

 

   

$0.3 billion, or 6%, increase in the average automobile portfolio. While having a minimal impact on average balances, $0.3 billion of automobile loans were transferred from held for sale to automobile loan and leases on June 30, 2013, as there are no securitizations expected for the remainder of 2013.

Partially offset by:

 

   

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

 

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The $1.9 billion, or 4%, increase in average total deposits reflected:

 

   

$1.9 billion, or 14%, increase in money market deposits.

 

   

$1.0 billion, or 6%, increase in total demand deposits.

Partially offset by:

 

   

$1.5 billion, or 23%, decline in core certificates of deposits.

 

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Provision for Credit Losses

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

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

The provision for credit losses for the 2013 second quarter declined $4.9 million, or 16%, from the prior quarter and declined $11.8 million, or 32%, from the year-ago quarter. The provision for credit losses for the first six-month period of 2013 declined $16.6 million, or 23%, compared with the first six-month period of 2012. The current quarter’s provision for credit losses was $10.1 million less than total NCOs, and the provision for credit losses for the first six-month period of 2013 was $32.2 million less than total NCOs for the same period. (See Credit Quality discussion). Given the absolute low level of the provision for credit losses and the uncertain and uneven nature of the economic recovery, some degree of volatility on a quarter-to-quarter basis is expected.

Noninterest Income

(This section should be read in conjunction with Significant Item 2.)

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

Table 9—Noninterest Income

 

     2013     2012      2Q13 vs 2Q12     2Q13 vs 1Q13  

(dollar amounts in thousands)

   Second     First     Fourth      Third      Second      Amount     Percent     Amount     Percent  

Service charges on deposit accounts

   $ 68,009     $ 60,883     $ 68,083      $ 67,806      $ 65,998      $ 2,011       3   $ 7,126       12

Mortgage banking income

     33,659       45,248       61,711        44,614        38,349        (4,690     (12     (11,589     (26

Trust services

     30,666       31,160       31,388        29,689        29,914        752       3       (494     (2

Electronic banking

     23,345       20,713       21,011        22,135        20,514        2,831       14       2,632       13  

Brokerage income

     19,546       17,995       17,415        16,526        19,025        521       3       1,551       9  

Insurance income

     17,187       19,252       17,268        17,792        17,384        (197     (1     (2,065     (11

Gain on sale of loans

     3,348       2,616       20,690        6,591        4,131        (783     (19     732       28  

Bank owned life insurance income

     15,421       13,442       13,767        14,371        13,967        1,454       10       1,979       15  

Capital markets fees

     12,229       7,834       12,694        11,596        13,260        (1,031     (8     4,395       56  

Securities gains (losses)

     (410     (509     863        4,169        350        (760     (217     99       (19

Other income

     25,655       33,575       32,761        25,778        30,927        (5,272     (17     (7,920     (24
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 248,655     $ 252,209     $ 297,651      $ 261,067      $ 253,819      $ (5,164     (2 )%    $ (3,554     (1 )% 
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

2013 Second Quarter versus 2012 Second Quarter

The $5.2 million, or 2%, decrease in total noninterest income from the year-ago quarter reflected:

 

   

$5.3 million, or 17%, decrease in other noninterest income including a $4.3 million reduction in gains on the sale of Low Income Housing Tax Credit investments.

 

   

$4.7 million, or 12%, decrease in mortgage banking income as the benefit of net mortgage servicing rights decreased by $2.5 million while origination and secondary marketing income declined $2.3 million primarily due to lower spreads.

Partially offset by:

 

   

$2.8 million, or 14%, increase in electronic banking.

 

   

$1.5 million, or 10%, increase in bank owned life insurance income.

2013 Second Quarter versus 2013 First Quarter

The $3.6 million, or 1%, decrease in total noninterest income from the prior quarter reflected:

 

   

$11.6 million, or 26%, decrease in mortgage banking income as the benefit of net mortgage servicing rights decreased by $11.6 million.

 

   

$7.9 million, or 24%, decrease in other noninterest income as the prior quarter included a $7.6 million gain on the sale of Low Income Housing Tax Credit investments.

 

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Partially offset by:

 

   

$7.1 million, or 12%, increase in service charges on deposit accounts which reflect yearly seasonality trends in customer activity and an 8% annualized growth in consumer checking households.

 

   

$4.4 million, or 56%, increase in capital markets activity.

 

   

$2.6 million, or 13%, increase in electronic banking.

2013 First Six Months versus 2012 First Six Months

Noninterest income for the first six-month period of 2013 decreased $38.3 million, or 7%, from the comparable year-ago period.

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

 

     Six Months Ended June 30,     Change  

(dollar amounts in thousands)

   2013     2012     Amount     Percent  

Service charges on deposit accounts

   $ 128,892     $ 126,290     $ 2,602       2

Mortgage banking income

     78,907       84,767       (5,860     (7

Trust services

     61,826       60,820       1,006       2  

Electronic banking

     44,058       39,144       4,914       13  

Brokerage income

     37,541       38,285       (744     (2

Insurance income

     36,439       36,259       180       —     

Gain on sale of loans

     5,964       30,901       (24,937     (81

Bank owned life insurance income

     28,863       27,904       959       3  

Capital markets fees

     20,063       23,056       (2,993     (13

Securities gains (losses)

     (919     (263     (656     N.M.   

Other income

     59,230       71,976       (12,746     (18
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 500,864     $ 539,139     $ (38,275     (7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

The $38.3 million, or 7%, decrease in total noninterest income reflected:

 

   

$24.9 million, or 81%, decrease in gain on sale of loans, primarily related to the year-ago period’s automobile loan securitization.

 

   

$12.7 million, or 18%, decrease in other noninterest income, primarily related to prior year’s $11.4 million bargain purchase gain from the FDIC-assisted Fidelity Bank acquisition and due to auto operating lease portfolio run off.

 

   

$5.9 million, or 7%, decrease in mortgage banking income. This primarily reflected a $6.2 million decrease in origination and secondary marketing income.

Partially offset by:

 

   

$4.9 million, or 13%, increase in electronic banking income, primarily reflecting the seasonality and increase in debit card usage.

 

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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

 

     2013      2012     2Q13 vs 2Q12     2Q13 vs 1Q13  

(dollar amounts in thousands)

   Second     First      Fourth      Third      Second     Amount     Percent     Amount     Percent  

Personnel costs

   $ 263,862     $ 258,895      $ 253,952      $ 247,709      $ 243,034     $ 20,828       9   $ 4,967       2

Outside data processing and other services

     49,898       49,265        48,699        50,396        48,568       1,330       3       633       1  

Net occupancy

     27,656       30,114        29,008        27,599        25,474       2,182       9       (2,458     (8

Equipment

     24,947       24,880        26,580        25,950        24,872       75       —          67       —     

Deposit and other insurance expense

     13,460       15,490        16,327        15,534        15,731       (2,271     (14     (2,030     (13

Professional services

     9,341       7,192        22,514        17,510        15,037       (5,696     (38     2,149       30  

Marketing

     14,239       10,971        16,456        16,842        17,396       (3,157     (18     3,268       30  

Amortization of intangibles

     10,362       10,320        11,647        11,431        11,940       (1,578     (13     42       —     

OREO and foreclosure expense

     (271     2,666        4,233        4,982        4,106       (4,377     (107     (2,937     (110

Loss (Gain) on early extinguishment of debt

     —          —           —           1,782        (2,580     2,580       (100     —          —     

Other expense

     32,371       33,000        41,212        38,568        40,691       (8,320     (20     (629     (2
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

   $ 445,865     $ 442,793      $ 470,628      $ 458,303      $ 444,269     $ 1,596       —     $ 3,072       1
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Number of employees (full-time equivalent), at period-end

     12,155       12,052        11,806        11,731        11,417       738       6       103       1  

2013 Second Quarter versus 2012 Second Quarter

The $1.6 million, or less than 1%, increase in total noninterest expense from the year-ago quarter reflected:

 

   

$20.8 million, or 9%, increase in personnel costs, reflecting increased salaries and benefits and a 6% increase in the number of full-time equivalent employees, primarily reflecting growth in the in-store initiative and mortgage business.

Partially offset by:

 

   

$8.3 million, or 20%, decrease in other expense, reflecting lower representations and warranties-related expenses and lower litigation expense.

 

   

$5.7 million, or 38%, decrease in professional services, reflecting a decrease in legal and outside consultant expenses.

 

   

$4.4 million, or 107%, decline in OREO and foreclosure expense, as there were net recoveries of $0.3 million during the 2013 second quarter.

 

   

$3.2 million, or 18%, decrease in marketing, primarily reflecting the refinement of targeted marketing programs and reduced promotional offers.

2013 Second Quarter versus 2013 First Quarter

The $3.1 million, or 1%, increase in total noninterest expense from the prior quarter reflected:

 

   

$5.0 million, or 2%, increase in personnel costs reflecting higher commission expense.

 

   

$3.3 million, or 30%, seasonal increase in marketing.

Partially offset by:

 

   

$2.9 million, or 110%, decrease in OREO and foreclosure.

 

   

$2.0 million, or 13%, decrease in deposit and other insurance expense.

2013 First Six Months versus 2012 First Six Months

Noninterest expense for the first six-month period of 2013 decreased $18.3 million, or 2%, from the comparable year-ago period.

 

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Table 12—Noninterest Expense—2013 First Six Months vs. 2012 First Six Months

 

     Six Months Ended June 30,     Change  

(dollar amounts in thousands)

   2013      2012     Amount     Percent  

Personnel costs

   $ 522,757      $ 486,532     $ 36,225       7

Outside data processing and other services

     99,163        91,160       8,003       9  

Net occupancy

     57,770        54,553       3,217       6  

Equipment

     49,827        50,417       (590     (1

Deposit and other insurance expense

     28,950        36,469       (7,519     (21

Professional services

     16,533        25,734       (9,201     (36

Marketing

     25,210        30,965       (5,755     (19

Amortization of intangibles

     20,682        23,471       (2,789     (12

OREO and foreclosure expense

     2,395        9,056       (6,661     (74

Gain on early extinguishment of debt

     —           (2,580     2,580       N.M.   

Other expense

     65,371        101,168       (35,797     (35
  

 

 

    

 

 

   

 

 

   

 

 

 

Total noninterest expense

   $ 888,658      $ 906,945     $ (18,287     (2 )% 
  

 

 

    

 

 

   

 

 

   

 

 

 

Number of employees (full-time equivalent), at period-end

     12,155        11,417       738       6

The $18.3 million, or 2%, decrease in total noninterest expense reflected:

 

   

$35.8 million, or 35%, decrease in other expense, primarily reflecting a decrease in operating lease expense as the automobile lease portfolio continues to run off and is expected to be essentially zero by the end of the year and the decrease in the provision for mortgage representations and warranties. The year-ago period’s included a $23.5 million addition to litigation reserves.

 

   

$9.2 million, or 36%, decrease in professional services.

 

   

$7.5 million, or 21%, decrease in deposit and other insurance, reflecting lower insurance premiums.

Partially offset by:

 

   

$36.2 million, or 7%, increase in personnel costs, primarily reflecting an increase in bonuses, commissions, and full-time equivalent employees, as well as increased salaries and benefits.

 

   

$8.0 million, or 9%, increase in outside data processing and other services primarily related to continued IT infrastructure investments.

Provision for Income Taxes

The provision for income taxes in the 2013 second quarter was $52.4 million and $49.3 million in the 2012 second quarter. The provision for income taxes for the six month periods ended June 30, 2013 and June 30, 2012 was $104.6 million and $101.5 million, respectively. Both quarters included the benefits from tax-exempt income, tax-advantaged investments, and general business credits. At June 30, 2013, we had a net federal deferred tax asset of $159.0 million and a net state deferred tax asset of $39.7 million. At December 31, 2012, we had a net federal deferred tax asset of $171.4 million and a net state deferred tax asset of $32.4 million. Based on both positive and negative evidence and our level of forecasted future taxable income, there was no impairment to the net deferred tax asset at June 30, 2013 and December 31, 2012. As of June 30, 2013 and December 31, 2012, there was no disallowed deferred tax asset for regulatory capital purposes.

We file income tax returns with the IRS and various state, city, and foreign jurisdictions. Federal income tax audits have been completed for tax years through 2009. We have appealed certain proposed adjustments resulting from the IRS examination of our 2006, 2007, 2008 and 2009 tax returns. We believe the tax positions taken related to such proposed adjustments are correct and supported by applicable statutes, regulations, and judicial authority, and intend to vigorously defend them. In 2011, we entered into discussions with the Appeals Division of the IRS for the 2006 and 2007 tax returns. 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 first quarter of 2013, the IRS began an examination of our 2010 and 2011 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 MANAGEMENT AND CAPITAL

Risk awareness, identification and assessment, reporting, and active management are key elements in overall risk management. We manage risk to an aggregate moderate-to-low risk profile through a control framework and by monitoring and responding to identified