Edgar Filing: HUNTINGTON BANCSHARES INC/MD

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FORM 10-Q

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 March 31, 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):

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 838,757,987 shares of Registrant’s common stock ($0.01 par value) outstanding on March 31, 2013.

HUNTINGTON BANCSHARES INCORPORATED

INDEX


PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets at March 31, 2013 and December 31, 2012	58

	Condensed Consolidated Statements of Income for the three months ended March 31, 2013 and 2012	59

	Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012	60

	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2013 and 2012	61

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012	62

	Notes to Unaudited Condensed Consolidated Financial Statements	63

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	20
	Market Risk	33
	Liquidity Risk	36
	Operational Risk	39
	Compliance Risk	41
	Capital	41
	Fair Value	44

	Business Segment Discussion	45

	Additional Disclosures	56

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	127

Item 4.	Controls and Procedures	127

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	127

Item 1A.	Risk Factors	127

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	127

Item 6.	Exhibits	128

Signatures		130

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-Maturities
IRS		Internal Revenue Service
ISE		Interest Sensitive Earnings
LCR		Liquidity Coverage Ratio
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 13), troubled debt restructured loans (Table 14), 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

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.

EXECUTIVE OVERVIEW

Summary of 2013 First Quarter Results

For the quarter, we reported net income of $151.8 million, or $0.17 per common share, compared with $167.3 million, or $0.19 per common share, in the prior quarter (see Table 1).

Fully-taxable equivalent net interest income was $430.1 million for the quarter, down $9.4 million, or 2%, from the prior quarter. The decrease reflected the seasonal impact of a fewer number of calendar days in the quarter, as well as a 3 basis point decrease in NIM, partially offset by a $0.3 billion increase in average earnings assets. The primary items affecting the NIM were a 5 basis point negative impact from the mix and yield of earning assets and a 3 basis point lower benefit from noninterest-bearing funds, which were partially offset by a 5 basis point positive impact from the reduction in total funding costs.

The provision for credit losses decreased $9.9 million, or 25%, from the prior quarter. This reflected an $18.4 million, or 26%, decrease in NCOs to $51.7 million, or an annualized 0.51% of average total loans and leases, from $70.1 million, or an annualized 0.69%, in the prior quarter.

Noninterest income decreased $45.4 million, or 15%, from the prior quarter. Gain on sale of loans decreased $18.1 million, or 87%, primarily related to the prior quarter automobile loan securitization. Mortgage banking income decreased $16.5 million, or 27%, primarily due to lower origination and secondary marketing income. Lower than expected commercial customer transactions negatively impacted both capital markets revenue and service charges on commercial deposit accounts, more than offsetting the favorable impact from continued commercial customer relationship growth of 11.9% annualized during the quarter. The decrease in service charges on deposit accounts also reflects typical seasonality and the February 2013 implementation of a new posting order for consumer transaction accounts. The full-year impact from the new posting order, which was incorporated into previous 2013 guidance, is estimated to be between $25 million and $30 million. Consumer household checking account growth of 11.8% annualized during the quarter partially offset the unfavorable impact from the new posting order.

Noninterest expense decreased $27.8 million, or 6%, from the prior quarter. Professional services decreased $15.3 million, 68%, primarily reflecting the decline in regulatory-related expenses. Other expenses decreased $8.2 million, or 20%, due to lower litigation and travel expenses, while marketing decreased $5.5 million, or 33%, as the latest advertising campaign did not launch until late in the quarter. Personnel costs increased $4.9 million, or 2%, reflecting approximately $8 million of costs related to the annual payroll tax resets, partially offset by approximately $5 million in lower commission expense due to lower levels of capital markets and other customer-related activities.

The period-end ACL as a percentage of total loans and leases decreased to 1.91% from 1.99% in the prior quarter. The ACL as a percentage of period end NALs increased 8 percentage points to 207%. NALs declined by $27.3 million, or 7%, to $380.3 million, or 0.92% of total loans. The decreases primarily reflect continued improvement in commercial NALs.

The tangible common equity to tangible asset ratio increased to 8.92% from 8.76% in the prior quarter. Our Tier 1 common risk-based capital ratio at quarter end was 10.62%, up from 10.48% in the prior quarter. The regulatory Tier 1 risk-based capital ratio at March 31, 2013 was 12.16%, up from 12.02%, at December 31, 2012. All capital ratios were impacted by the repurchase of 4.7 million common shares over the quarter at an average price per share of $7.07.

The Federal Reserve completed its review of our January 2013 capital plan submission and did not object to our proposed capital actions. This allows us to increase our quarterly common stock dividend to $0.05 per common share and gives us the potential to repurchase up to $227.0 million of common stock through the first quarter of 2014. Reinvesting excess capital to organically grow the business remains our priority. Importantly, dividends and share repurchases provide us additional means of creating long-term shareholder value.

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 year is off to a solid start, and the first quarter results continue to demonstrate that our strategies are working. We have differentiated ourselves by investing in innovative products and customer services, including our Fair Play approach. As a result, we are continuing to see double digit household growth and recognition by national entities of our customer service execution. Our growth has occurred in a challenging economic and regulatory environment. While some companies are hesitant to invest in light of the uncertain economy, we will continue to look for areas where we can improve efficiency, continue to deliver positive operating leverage, and selectively invest in our businesses in order to drive our long-term profitability.

Economy

The FRB of Philadelphia Coincident Economic Activity Index, a proxy for overall economic growth, indicates the recoveries in Michigan, Ohio, and Indiana have been stronger than in the overall nation since the recession ended in June 2009. Led by Indiana and Michigan, five of our six footprint states are forecasted to grow faster than the overall nation over the six months beginning in March 2013. For the 12 months ended January 31, 2013, home prices rose 13.9% in the Detroit MSA, well above the S&P Case Shiller index for the nation, which rose 8.1%. In aggregate, housing markets in our footprint states have mirrored the national recovery trend. Firming of natural gas prices and a gradual improvement in the global economy should also provide some additional support to economic growth as the year progresses.

Legislative and Regulatory

Regulatory reforms continue to be adopted which impose additional restrictions on current business practices. Recent items affecting us include the Federal Reserve’s Capital Plan Review and a recently issued CFPB bulletin.

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.

CFPB Issues Bulletin on Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act – On March 21, 2013, the CFPB issued a bulletin to provide guidance about compliance with requirements of the Equal Credit Opportunity Act (ECOA) for indirect auto lenders that permit auto dealers to increase consumer interest rates and that compensate dealers with a share of the increased interest revenues. The Bulletin states that indirect auto lenders may be liable for pricing disparities on a prohibited basis within the lender’s portfolio arising from dealer markup and compensation policies. The Bulletin further states that indirect auto lenders should take steps to ensure they are operating in compliance with ECOA. Those steps may include, but are not limited to, eliminating dealer pricing discretion or, if dealer pricing discretion is retained, imposing controls on dealer pricing discretion, testing the lender’s portfolio, monitoring dealer compliance, and when unexplained disparities on prohibited bases are found, addressing the effects of such discretion through corrective action against dealers and remuneration of affected consumers. Our indirect auto lending business is subject to this Bulletin, and we are currently evaluating this regulatory guidance to ensure it is appropriately incorporated into the operation and conduct of our business.

Expectations

We are starting to see positive signs in both our business and consumer customer bases as the economic recovery progresses. We believe the soundness of our strategy will continue to drive growth and improve our profitability. Our retail customers and our mortgage lending businesses are benefiting from recovering housing markets. Although a recent uptick among our business customers of drawing down cash balances to support working capital needs and to fund new projects has negative near-term implications on our balance sheet, we are encouraged by this activity as it suggests improving confidence among business owners and implies a more robust long-term economic outlook. Competition continues to pressure asset yields and more recently loan structure, but we will remain disciplined as we manage our aggregate moderate-to-low risk profile.

Net interest income is expected to modestly grow over the course of 2013, as we anticipate an increase in total loans, excluding the impact of any future loan securitizations. However, those benefits to net interest income are expected to be mostly offset by downward NIM pressure. 2013 NIM 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.

The C&I portfolio is expected to continue to see growth in 2013, although we expect growth will be more heavily weighted to the back half of the year as the economic recovery progresses. Our C&I sales 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. While on-balance sheet loans are expected to increase, we will continue to evaluate the use of automobile loan securitizations due to our expectation of continued strong levels of originations. We currently anticipate one securitization in the second half of 2013. Residential mortgages and home equity loan balances are expected to increase modestly. CRE loans likely will experience declines from current levels but are expected to remain in the $5.0 billion range.

Excluding potential future automobile loan securitizations, we anticipate the increase in total loans will modestly outpace growth in total deposits. This reflects our continued focus on the overall cost of funds, the continued shift towards low- and no-cost demand deposits and money market deposit accounts.

Noninterest income over the course of the year, excluding the impact of any automobile loan sales and any net MSR impact, is expected to be at similar levels as 2012. The anticipated slowdown in mortgage banking activity is expected to be offset by continued growth in new customers, increased contribution from higher cross-sell, and the continued maturation of our previous strategic investments.

Noninterest expense in the 2013 first quarter was below our expected average quarterly run rate for the year. The second quarter is expected to increase due to higher commission expense related to a more normal level of commercial customer-related activity, annual merit increases, higher marketing expense as we continue the launch our new media campaign, and equipment related to our continued in-store expansion. We remain committed to posting positive operating leverage in 2013 as growth in total revenue is expected to outpace total expense growth.

Overall credit quality is expected to experience continued improvement, and NCOs while in the normalized range this quarter, are expected to remain volatile but reach normalized levels by the end of 2013. The level of provision for credit losses was at the low end of our long-term expectation, and we expect some quarterly volatility within each of the loan categories given the absolute low level of the provision for credit losses and the uncertain and uneven nature of the economic recovery.

We anticipate an effective tax rate for the remainder of 2013 to be in the range of 25% to 28%, primarily reflecting the impact of tax-exempt income, tax advantaged investments, and general business credits.

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.”

Table 1 - Selected Quarterly Income Statement Data (1)


	2013			2012
(dollar amounts in thousands, except per share amounts)	First			Fourth			Third			Second			First
Interest income	$	465,319		$	478,995		$	483,787		$	487,544		$	479,937
Interest expense		41,149			44,940			53,489			58,582			62,728

Net interest income		424,170			434,055			430,298			428,962			417,209
Provision for credit losses		29,592			39,458			37,004			36,520			34,406

Net interest income after provision for credit losses		394,578			394,597			393,294			392,442			382,803

Service charges on deposit accounts		60,883			68,083			67,806			65,998			60,292
Mortgage banking income		45,248			61,711			44,614			38,349			46,418
Trust services		31,160			31,388			29,689			29,914			30,906
Electronic banking		20,713			21,011			22,135			20,514			18,630
Brokerage income		17,995			17,415			16,526			19,025			19,260
Insurance income		19,252			17,268			17,792			17,384			18,875
Gain on sale of loans		2,616			20,690			6,591			4,131			26,770
Bank owned life insurance income		13,442			13,767			14,371			13,967			13,937
Capital markets fees		8,051			12,918			11,805			13,455			9,982
Securities gains (losses)		(509	)		863			4,169			350			(613	)
Other income		33,358			32,537			25,569			30,732			40,863

Total noninterest income		252,209			297,651			261,067			253,819			285,320

Personnel costs		258,895			253,952			247,709			243,034			243,498
Outside data processing and other services		49,265			48,699			50,396			48,568			42,592
Net occupancy		30,114			29,008			27,599			25,474			29,079
Equipment		24,880			26,580			25,950			24,872			25,545
Deposit and other insurance expense		15,490			16,327			15,534			15,731			20,738
Professional services		7,192			22,514			17,510			15,037			10,697
Marketing		10,971			16,456			16,842			17,396			13,569
Amortization of intangibles		10,320			11,647			11,431			11,940			11,531
OREO and foreclosure expense		2,666			4,233			4,982			4,106			4,950
Loss (Gain) on early extinguishment of debt		—			—			1,782			(2,580	)		—
Other expense		33,000			41,212			38,568			40,691			60,477

Total noninterest expense		442,793			470,628			458,303			444,269			462,676

Income before income taxes		203,994			221,620			196,058			201,992			205,447
Provision for income taxes		52,214			54,341			28,291			49,286			52,177

Net income	$	151,780		$	167,279		$	167,767		$	152,706		$	153,270

Dividends on preferred shares		7,970			7,973			7,983			7,984			8,049

Net income applicable to common shares	$	143,810		$	159,306		$	159,784		$	144,722		$	145,221

Average common shares—basic		841,103			847,220			857,871			862,261			864,499
Average common shares—diluted		848,708			853,306			863,588			867,551			869,164
Net income per common share—basic	$	0.17		$	0.19		$	0.19		$	0.17		$	0.17
Net income per common share—diluted		0.17			0.19			0.19			0.17			0.17
Cash dividends declared per common share		0.04			0.04			0.04			0.04			0.04
Return on average total assets		1.10	%		1.19	%		1.19	%		1.10	%		1.13	%
Return on average common shareholders’ equity		10.7			11.6			11.9			11.1			11.4
Return on average tangible common shareholders’ equity (2)		12.4			13.5			13.9			13.1			13.5
Net interest margin (3)		3.42			3.45			3.38			3.42			3.40
Efficiency ratio (4)		63.3			62.3			64.5			62.8			63.8
Effective tax rate		25.6			24.5			14.4			24.4			25.4
Revenue—FTE
Net interest income	$	424,170		$	434,055		$	430,298		$	428,962		$	417,209
FTE adjustment		5,923			5,470			5,254			5,747			3,935

Net interest income (3)		430,093			439,525			435,552			434,709			421,144
Noninterest income		252,209			297,651			261,067			253,819			285,320

Total revenue (3)	$	682,302		$	737,176		$	696,619		$	688,528		$	706,464

⁽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.

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:

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.

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.

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

Table 2 - Significant Items Influencing Earnings Performance Comparison


	Three Months Ended
	March 31, 2013					December 31, 2012					March 31, 2012
(dollar amounts in thousands, except per share amounts)	After-tax		EPS (2)			After-tax		EPS (2)			After-tax			EPS (2)
Net income	$	151,780				$	167,279				$	153,270
Earnings per share, after-tax			$	0.17				$	0.19					$	0.17
Change from prior quarter—$				(0.02	)				—						0.03
Change from prior quarter—%				(11	)%				—	%					21	%
Change from year-ago—$			$	—				$	0.05					$	0.03
Change from year-ago—%				—	%				36	%					21	%

Significant Items—favorable (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	)

⁽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:

Table 3 - Consolidated Quarterly Average Balance Sheets


	Average Balances															Change
	2013			2012												1Q13 vs. 1Q12
(dollar amounts in millions)	First			Fourth			Third			Second (2)			First			Amount			Percent
Assets:
Interest-bearing deposits in banks	$	72		$	73		$	82		$	124		$	100		$	(28	)		(28	)%
Loans held for sale		709			840			1,829			410			1,265			(556	)		(44	)
Securities:
Available-for-sale and other securities:
Taxable		6,964			7,131			8,014			8,285			8,171			(1,207	)		(15	)
Tax-exempt		549			492			423			387			404			145			36

Total available-for-sale and other securities		7,513			7,623			8,437			8,672			8,575			(1,062	)		(12	)
Trading account securities		85			97			66			54			50			35			70
Held-to-maturity securities—taxable		1,717			1,652			796			611			632			1,085			172

Total securities		9,315			9,372			9,299			9,337			9,257			58			1

Loans and leases: (1)
Commercial:
Commercial and industrial		16,954			16,507			16,343			16,094			14,824			2,130			14
Commercial real estate:
Construction		598			576			569			584			598			—			—
Commercial		4,694			4,897			5,153			5,491			5,254			(560	)		(11	)

Commercial real estate		5,292			5,473			5,722			6,075			5,852			(560	)		(10	)

Total commercial		22,246			21,980			22,065			22,169			20,676			1,570			8

Consumer:
Automobile		4,833			4,486			4,065			4,985			4,576			257			6
Home equity		8,395			8,345			8,369			8,310			8,234			161			2
Residential mortgage		4,978			5,155			5,177			5,253			5,174			(196	)		(4	)
Other consumer		412			431			444			462			485			(73	)		(15	)

Total consumer		18,618			18,417			18,055			19,010			18,469			149			1

Total loans and leases		40,864			40,397			40,120			41,179			39,145			1,719			4
Allowance for loan and lease losses		(772	)		(783	)		(855	)		(908	)		(961	)		189			(20	)

Net loans and leases		40,092			39,614			39,265			40,271			38,184			1,908			5

Total earning assets		50,960			50,682			51,330			51,050			49,767			1,193			2

Cash and due from banks		904			1,459			960			928			1,012			(108	)		(11	)
Intangible assets		571			581			597			609			613			(42	)		(7	)
All other assets		4,065			4,115			4,106			4,158			4,225			(160	)		(4	)

Total assets	$	55,728		$	56,054		$	56,138		$	55,837		$	54,656		$	1,072			2	%

Liabilities and Shareholders’ Equity:
Deposits:
Demand deposits—noninterest-bearing	$	12,165		$	13,121		$	12,329		$	12,064		$	11,273		$	892			8	%
Demand deposits—interest-bearing		5,977			5,843			5,814			5,939			5,646			331			6

Total demand deposits		18,142			18,964			18,143			18,003			16,919			1,223			7
Money market deposits		15,045			14,749			14,515			13,182			13,141			1,904			14
Savings and other domestic deposits		5,083			4,960			4,975			4,978			4,817			266			6
Core certificates of deposit		5,346			5,637			6,131			6,618			6,510			(1,164	)		(18	)

Total core deposits		43,616			44,310			43,764			42,781			41,387			2,229			5
Other domestic time deposits of $250,000 or more		360			359			300			298			347			13			4
Brokered deposits and negotiable CDs		1,697			1,756			1,878			1,421			1,301			396			30
Deposits in foreign offices		340			342			356			357			430			(90	)		(21	)

Total deposits		46,013			46,767			46,298			44,857			43,465			2,548			6
Short-term borrowings		762			1,012			1,329			1,391			1,512			(750	)		(50	)
Federal Home Loan Bank advances		686			42			107			626			419			267			64
Subordinated notes and other long-term debt		1,348			1,374			1,638			2,251			2,652			(1,304	)		(49	)

Total interest-bearing liabilities		36,644			36,074			37,043			37,061			36,775			(131	)		—

All other liabilities		1,085			1,017			1,035			1,094			1,116			(31	)		(3	)
Shareholders’ equity		5,834			5,842			5,731			5,618			5,492			342			6

Total liabilities and shareholders’ equity	$	55,728		$	56,054		$	56,138		$	55,837		$	54,656		$	1,072			2	%

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

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

Table 4 - Consolidated Quarterly Net Interest Margin Analysis


	Average Rates (2)
Fully-taxable equivalent basis (1)	2013			2012
	First			Fourth			Third			Second			First
Assets
Interest-bearing deposits in banks		0.16	%		0.28	%		0.21	%		0.31	%		0.05	%
Loans held for sale		3.22			3.18			3.18			3.46			3.80
Securities:
Available-for-sale and other securities:
Taxable		2.31			2.32			2.29			2.33			2.39
Tax-exempt		3.96			4.03			4.15			4.23			4.17

Total available-for-sale and other securities		2.43			2.43			2.39			2.41			2.47
Trading account securities		0.50			1.01			1.07			1.64			1.65
Held-to-maturity securities—taxable		2.29			2.24			2.81			2.97			2.98

Total securities		2.39			2.38			2.41			2.45			2.50

Loans and leases: (3)
Commercial:
Commercial and industrial		3.83			3.88			3.90			3.99			4.01
Commercial real estate:
Construction		4.05			4.13			3.84			3.66			3.85
Commercial		4.00			4.20			3.85			3.93			3.82

Commercial real estate		4.01			4.19			3.85			3.89			3.82

Total commercial		3.87			3.96			3.89			3.97			3.96

Consumer:
Automobile		4.28			4.52			4.87			4.68			4.87
Home equity		4.20			4.24			4.27			4.30			4.30
Residential mortgage		3.97			4.07			4.02			4.14			4.17
Other consumer		7.05			7.16			7.16			7.42			7.47

Total consumer		4.22			4.33			4.40			4.43			4.49

Total loans and leases		4.03			4.13			4.12			4.18			4.21

Total earning assets		3.75	%		3.80	%		3.79	%		3.89	%		3.91	%

Liabilities
Deposits:
Demand deposits—noninterest-bearing		—	%		—	%		—	%		—	%		—	%
Demand deposits—interest-bearing		0.04			0.05			0.07			0.07			0.06

Total demand deposits		0.01			0.02			0.02			0.02			0.02
Money market deposits		0.23			0.27			0.33			0.30			0.26
Savings and other domestic deposits		0.30			0.33			0.37			0.39			0.45
Core certificates of deposit		1.19			1.21			1.25			1.38			1.60

Total core deposits		0.37			0.41			0.47			0.50			0.54
Other domestic time deposits of $250,000 or more		0.52			0.61			0.68			0.66			0.68
Brokered deposits and negotiable CDs		0.67			0.71			0.71			0.75			0.79
Deposits in foreign offices		0.17			0.18			0.18			0.19			0.18

Total deposits		0.38			0.42			0.48			0.51			0.55
Short-term borrowings		0.12			0.14			0.16			0.16			0.16
Federal Home Loan Bank advances		0.18			1.20			0.50			0.21			0.21
Subordinated notes and other long-term debt		2.54			2.55			2.91			2.83			2.74

Total interest-bearing liabilities		0.45	%		0.50	%		0.58	%		0.63	%		0.68	%

Net interest rate spread		3.30	%		3.30	%		3.21	%		3.26	%		3.23	%
Impact of noninterest-bearing funds on margin		0.12			0.15			0.17			0.16			0.17

Net interest margin		3.42	%		3.45	%		3.38	%		3.42	%		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.

Table 5 - Average Loans/Leases and Deposits


	First Quarter				Fourth Quarter		1Q13 vs 1Q12						1Q13 vs 4Q12
(dollar amounts in millions)	2013		2012		2012		Amount			Percent			Amount			Percent
Loans/Leases:
Commercial and industrial	$	16,954	$	14,824	$	16,507	$	2,130			14	%	$	447			3	%
Commercial real estate		5,292		5,852		5,473		(560	)		(10	)		(181	)		(3	)

Total commercial		22,246		20,676		21,980		1,570			8			266			1
Automobile		4,833		4,576		4,486		257			6			347			8
Home equity		8,395		8,234		8,345		161			2			50			1
Residential mortgage		4,978		5,174		5,155		(196	)		(4	)		(177	)		(3	)
Other loans		412		485		431		(73	)		(15	)		(19	)		(4	)

Total consumer		18,618		18,469		18,417		149			1			201			1

Total loans and leases	$	40,864	$	39,145	$	40,397	$	1,719			4	%	$	467			1	%

Deposits:
Demand deposits—noninterest-bearing	$	12,165	$	11,273	$	13,121	$	892			8	%	$	(956	)		(7	)%
Demand deposits—interest-bearing		5,977		5,646		5,843		331			6			134			2

Total demand deposits		18,142		16,919		18,964		1,223			7			(822	)		(4	)
Money market deposits		15,045		13,141		14,749		1,904			14			296			2
Savings and other domestic time deposits		5,083		4,817		4,960		266			6			123			2
Core certificates of deposit		5,346		6,510		5,637		(1,164	)		(18	)		(291	)		(5	)

Total core deposits		43,616		41,387		44,310		2,229			5			(694	)		(2	)
Other deposits		2,397		2,078		2,457		319			15			(60	)		(2	)

Total deposits	$	46,013	$	43,465	$	46,767	$	2,548			6	%	$	(754	)		(2	)%

2013 First Quarter versus 2012 First Quarter

Fully-taxable equivalent net interest income increased $8.9 million, or 2%, from the year-ago quarter. This reflected a $1.2 billion, or 2%, increase in average total earning assets and a 2 basis point increase in the FTE net interest margin. The primary items impacting the increase in the net interest margin were:

•

20 basis point impact from the reduction in the cost of subordinated notes and other long-term debt, reflecting the benefit of the redemption of $230 million of trust preferred securities in 2012.

•

17 basis point positive impact from the reduction in total deposit costs.

Partially offset by:

•

18 basis point negative impact from the mix and yield of loans.

•

11 basis point negative impact from the yield on total securities.

The $1.7 billion, or 4%, increase in average total loans and leases primarily reflected:

•

$2.1 billion, or 14%, increase in C&I loans. This reflected the continued growth across most business lines with particularly strong growth in equipment finance, dealer floorplan, and health care.

•

$0.3 billion, or 6%, increase in automobile loans. No automobile loans were transferred to held for sale during the 2013 first quarter as the only currently planned securitization is expected to be in the second half of 2013.

Partially offset by:

•

$0.6 billion, or 10%, decrease in 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.

•

$0.2 billion, or 4%, decrease in residential mortgages due to payoffs and the mix of originations shifted towards more saleable loans.

The $2.2 billion, or 5%, increase in average core deposits from the year-ago quarter reflected:

•

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

•

$1.2 billion, or 7%, increase in total demand deposits.

Partially offset by:

•

$1.2 billion, or 18%, decrease in core certificates of deposit.

2013 First Quarter versus 2012 Fourth Quarter

Fully-taxable equivalent net interest income decreased $9.4 million, or 2%, from the last quarter reflecting the seasonal impact of a fewer number of calendar days in the quarter, as well as a 3 basis point decrease in NIM, partially offset by a $0.3 billion increase in average earnings assets. The primary items affecting the NIM were:

•

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

•

3 basis point lower benefit from noninterest bearing funds.

Partially offset by:

•

5 basis point positive impact from the reduction in total funding costs.

The $0.5 billion, or 1%, increase in average total loans and leases from the 2012 fourth quarter reflected:

•

$0.4 billion, or 3%, increase in commercial and industrial loans.

•

$0.3 billion, or 8%, increase in automobile loans.

Partially offset by:

•

$0.2 billion, or 3%, decrease in commercial real estate loans.

•

$0.2 billion, or 3%, decrease in residential mortgages.

The $0.7 billion, or 2%, decrease in average total core deposits from the 2012 fourth quarter reflected:

•

$1.0 billion, or 7%, decrease in noninterest-bearing deposits primarily reflecting our continued effort to reduce collateralized deposits.

Partially offset by:

•

$0.3 billion, or 2%, increase in money market deposits.

Provision for Credit Losses

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

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

The provision for credit losses for the 2013 first quarter declined $9.9 million, or 25%, from the prior quarter and declined $4.8 million, or 14%, from the year-ago quarter. The current quarter’s provision for credit losses was $22.1 million less than total NCOs. (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 6 - Noninterest Income


	2013			2012									1Q13 vs 1Q12						1Q13 vs 4Q12
(dollar amounts in thousands)	First			Fourth		Third		Second		First			Amount			Percent			Amount			Percent
Service charges on deposit accounts	$	60,883		$	68,083	$	67,806	$	65,998	$	60,292		$	591			1	%	$	(7,200	)		(11	)%
Mortgage banking income		45,248			61,711		44,614		38,349		46,418			(1,170	)		(3	)		(16,463	)		(27	)
Trust services		31,160			31,388		29,689		29,914		30,906			254			1			(228	)		(1	)
Electronic banking		20,713			21,011		22,135		20,514		18,630			2,083			11			(298	)		(1	)
Brokerage income		17,995			17,415		16,526		19,025		19,260			(1,265	)		(7	)		580			3
Insurance income		19,252			17,268		17,792		17,384		18,875			377			2			1,984			11
Gain on sale of loans		2,616			20,690		6,591		4,131		26,770			(24,154	)		(90	)		(18,074	)		(87	)
Bank owned life insurance income		13,442			13,767		14,371		13,967		13,937			(495	)		(4	)		(325	)		(2	)
Capital markets fees		8,051			12,918		11,805		13,455		9,982			(1,931	)		(19	)		(4,867	)		(38	)
Securities gains (losses)		(509	)		863		4,169		350		(613	)		104			(17	)		(1,372	)		(159	)
Other income		33,358			32,537		25,569		30,732		40,863			(7,505	)		(18	)		821			3

Total noninterest income	$	252,209		$	297,651	$	261,067	$	253,819	$	285,320		$	(33,111	)		(12	)%	$	(45,442	)		(15	)%

2013 First Quarter versus 2012 First Quarter

The $33.1 million, or 12%, decrease in total noninterest income from the year-ago quarter reflected:

•

$24.2 million, or 90%, decrease in gain on sale of loans, primarily related to the prior year’s automobile loan securitization.

•

$7.5 million, or 18%, decrease in other income related to the prior year’s $11.4 million bargain purchase gain from the FDIC-assisted Fidelity Bank acquisition and a $2.7 million decrease in operating lease income. 2013 first quarter other income included a $7.6 million gain on the sale of Low Income Housing Tax Credit investments.

2013 First Quarter versus 2012 Fourth Quarter

The $45.4 million, or 15%, decrease in total noninterest income from the prior quarter reflected:

•

$18.1 million, or 87%, decrease in gain on sale of loans, primarily related to prior quarter’s automobile loan securitization.

•

$16.5 million, or 27%, decrease in mortgage banking income, primarily related to lower origination and secondary marketing income.

•

$7.2 million, or 11%, decrease in service charges on deposit accounts reflect typical seasonality and the February implementation of a new posting order for consumer transaction accounts.

•

$4.9 million, or 38%, decrease in capital market activity. Lower than expected commercial customer transactions negatively impacted both capital markets revenue and service charges on commercial deposit accounts, more than offsetting the favorable impact from continued growth in total customer relationships.

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 7 - Noninterest Expense


	2013		2012									1Q13 vs 1Q12						1Q13 vs 4Q12
(dollar amounts in thousands)	First		Fourth		Third		Second			First		Amount			Percent			Amount			Percent
Personnel costs	$	258,895	$	253,952	$	247,709	$	243,034		$	243,498	$	15,397			6	%	$	4,943			2	%
Outside data processing and other services		49,265		48,699		50,396		48,568			42,592		6,673			16			566			1
Net occupancy		30,114		29,008		27,599		25,474			29,079		1,035			4			1,106			4
Equipment		24,880		26,580		25,950		24,872			25,545		(665	)		(3	)		(1,700	)		(6	)
Deposit and other insurance expense		15,490		16,327		15,534		15,731			20,738		(5,248	)		(25	)		(837	)		(5	)
Professional services		7,192		22,514		17,510		15,037			10,697		(3,505	)		(33	)		(15,322	)		(68	)
Marketing		10,971		16,456		16,842		17,396			13,569		(2,598	)		(19	)		(5,485	)		(33	)
Amortization of intangibles		10,320		11,647		11,431		11,940			11,531		(1,211	)		(11	)		(1,327	)		(11	)
OREO and foreclosure expense		2,666		4,233		4,982		4,106			4,950		(2,284	)		(46	)		(1,567	)		(37	)
Loss (Gain) on early extinguishment of debt		—		—		1,782		(2,580	)		—		—			—			—			—
Other expense		33,000		41,212		38,568		40,691			60,477		(27,477	)		(45	)		(8,212	)		(20	)

Total noninterest expense	$	442,793	$	470,628	$	458,303	$	444,269		$	462,676	$	(19,883	)		(4	)%	$	(27,835	)		(6	)%

Number of employees (full-time equivalent), at period-end		12,052		11,806		11,731		11,417			11,166		886			8	%		246			2	%

2013 First Quarter versus 2012 First Quarter

The $19.9 million, or 4%, decrease in total noninterest expense from the year-ago quarter reflected:

•

$27.5 million, or 45%, decrease in other expense, reflecting a $2.1 million, or 73%, decrease to $0.7 million 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. The year ago quarter included a $23.5 million addition to litigation reserves.

•

$5.2 million, or 25%, decrease in deposit and other insurance expense, reflecting lower insurance premiums.

•

$3.5 million, or 33%, decrease in professional services, reflecting a decline in legal and outside consultant expenses.

Partially offset by:

•

$15.4 million, or 6%, increase in personnel costs, reflecting an increase in the number of full-time equivalent employees as well as higher salaries and benefits.

•

$6.7 million, or 16%, increase in outside data processing and other services primarily related to continued IT infrastructure investments.

2013 First Quarter versus 2012 Fourth Quarter

The $27.8 million, or 6%, decrease in total noninterest expense from the prior quarter reflected:

•

$15.3 million, or 68%, decrease in professional costs, primarily reflecting the decline in regulatory-related expense.

•

$8.2 million, or 20%, decrease in other expenses due to lower litigation and travel expense.

•

$5.5 million, or 33%, decrease in the marketing, as the latest advertising campaign did not launch until late in the quarter.

Partially offset by:

•

$4.9 million, or 2%, increase in personnel costs, reflecting approximately $8 million related to the annual payroll tax resets, partially offset by approximately $5 million in lower commission expense due to lower levels of capital markets and other customer-related activities.

Provision for Income Taxes

The provision for income taxes in the 2013 first quarter was $52.2 million. This compared with a provision for income taxes of $54.3 million in the 2012 fourth quarter and $52.2 million in the 2012 first quarter. All three quarters included the benefits from tax-exempt income, tax-advantaged investments, and general business credits. At March 31, 2013, we had a net federal deferred tax asset of $116.9 million and a net state deferred tax asset of $37.4 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 March 31, 2013. As of March 31, 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 current quarter, 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.

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 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, Risk Oversight 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 2012 Form 10-K and subsequent filings with the SEC. Additionally, 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. Our definition, philosophy, and approach to risk management have not materially changed from the discussion presented in the 2012 Form 10-K.

Credit Risk

Credit risk is the risk of financial loss if a counterparty is not able to meet the agreed upon terms of the financial obligation. The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. We also have 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.

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

Loan and Lease Credit Exposure Mix

At March 31, 2013, loans and leases totaled $41.3 billion, representing a $0.6 billion, or 1%, increase compared to $40.7 billion at December 31, 2012, primarily reflecting growth in the C&I and automobile portfolios, partially offset by a decline in the CRE portfolio. The C&I portfolio increase was spread across several segments and represented a continuation of the growth in high quality loans originated over recent quarters. The automobile portfolio increase primarily reflected a continued strong level of high quality originations.

At March 31, 2013, commercial loans and leases totaled $22.3 billion and represented 54% of our total credit exposure. Our commercial portfolio is diversified along product type, customer size, and geography, 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 expand our C&I portfolio, we have developed a “vertical” strategy to ensure that new products or lending types are embedded within the structured, centralized Commercial Lending area with designated experienced credit officers.

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

Total consumer loans and leases were $19.0 billion at March 31, 2013 and represented 46% 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 March 31, 2013.

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

Residential mortgage – Residential mortgage loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15-year to 30-year term, and in most cases, are extended to borrowers to finance their primary residence. Applications are underwritten centrally and we do not originate residential mortgages that allow negative amortization or allow the borrower multiple payment options. Residential mortgage loans include a complete full appraisal for collateral valuation.

Other consumer – Primarily consists of consumer loans not secured by real estate, including personal unsecured loans.

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

Table 8 - Loan and Lease Portfolio Composition


	2013				2012
(dollar amounts in millions)	March 31,				December 31,				September 30,				June 30,				March 31,
Commercial:⁽¹⁾
Commercial and industrial	$	17,267	42	%	$	16,971	42	%	$	16,478	41	%	$	16,322	41	%	$	15,838	39	%
Commercial real estate:
Construction		574	1			648	2			541	1			591	1			597	1
Commercial		4,485	11			4,751	12			4,956	12			5,317	13			5,443	13

Total commercial real estate		5,059	12			5,399	14			5,497	13			5,908	14			6,040	14

Total commercial		22,326	54			22,370	56			21,975	54			22,230	55			21,878	53

Consumer:
Automobile		5,036	12			4,634	11			4,276	11			3,808	10			4,787	12
Home equity		8,474	21			8,335	20			8,381	21			8,344	21			8,261	20
Residential mortgage		5,051	12			4,970	12			5,192	13			5,123	13			5,284	13
Other consumer		397	1			419	1			436	1			454	1			469	2

Total consumer		18,958	46			18,358	44			18,285	46			17,729	45			18,801	47

Total loans and leases	$	41,284	100	%	$	40,728	100	%	$	40,260	100	%	$	39,959	100	%	$	40,679	100	%

(1)	As defined by regulatory guidance, there were no commercial loans outstanding that would be considered a concentration of lending to a particular industry or group of industries.

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

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

Table 9 - Loan and Lease Portfolio by Collateral Type (1)


	2013				2012
(dollar amounts in millions)	March 31,				December 31,				September 30,				June 30,				March 31,
Secured loans:
Real estate—commercial	$	9,041	22	%	$	9,128	22	%	$	9,278	23	%	$	9,398	23	%	$	9,326	24	%
Real estate—consumer		13,525	33			13,305	33			13,573	33			13,467	33			13,470	34
Vehicles		6,928	17			6,659	16			6,096	15			5,650	14			6,623	16
Receivables/Inventory		5,383	13			5,178	13			5,046	13			5,026	13			4,749	12
Machinery/Equipment		2,815	7			2,749	7			2,639	7			2,759	7			2,536	6
Securities/Deposits		840	2			826	2			717	2			789	2			733	2
Other		1,015	2			1,090	3			1,110	3			1,043	3			983	2

Total secured loans and leases		39,547	96			38,935	96			38,459	96			38,132	95			38,420	96
Unsecured loans and leases		1,737	4			1,793	4			1,801	4			1,827	5			1,738	4

Total loans and leases	$	41,284	100	%	$	40,728	100	%	$	40,260	100	%	$	39,959	100	%	$	40,158	100	%

(1)	Loans acquired in the FDIC-assisted acquisition of Fidelity Bank are reflected in the above table effective June 30, 2012.

Commercial Credit

Refer to the “Commercial Credit” section of our 2012 Form 10-K for our commercial credit underwriting and on-going credit management processes.

C&I PORTFOLIO

While some C&I borrowers have been challenged by the continued weakness in the economy, problem loans have trended downward, reflecting a combination of proactive risk identification and effective workout strategies implemented by the SAD. Nevertheless, we continue to proactively identify borrowers that may be facing financial difficulty to assess all potential solutions.

CRE PORTFOLIO

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

In 2010, we segregated our CRE portfolio into core and noncore segments. We believe segregating noncore CRE from core CRE improved our ability to understand the nature, performance prospects, and problem resolution opportunities of these segments, thus allowing us to continue to deal proactively with any emerging credit issues. We have not subsequently originated any noncore CRE loans.

A CRE loan is generally considered core when the borrower is an experienced, well-capitalized developer in our Midwest footprint, and has either an established meaningful relationship with us that generated an acceptable return on capital or demonstrates the prospect of becoming one. The core CRE portfolio was $3.7 billion at March 31, 2013, representing 74% of total CRE loans. The performance of the core portfolio has met our expectations based on the consistency of the asset quality metrics within the portfolio. Based on our extensive project level assessment process, including forward-looking collateral valuations, we continue to believe the credit quality of the core portfolio is stable. Loans are not reclassified between the core and noncore segments based on performance.

Credit quality data regarding the ACL and NALs, segregated by core CRE loans and noncore CRE loans, is presented in the following table:

Table 10 - Commercial Real Estate - Core vs. Noncore Portfolios


	March 31, 2013
	Ending												Nonaccrual
(dollar amounts in millions)	Balance		Prior NCOs		ACL $		ACL%			Credit Mark (1)			Loans
Total core	$	3,744	$	30	$	87		2.32	%		3.10	%	$	48

Noncore—SAD (2)		567		125		127		22.40			36.42			61
Noncore—Other		748		17		58		7.75			9.80			2

Total noncore		1,315		142		185		14.07			22.44			63

Total commercial real estate	$	5,059	$	172	$	272		5.38	%		8.49	%	$	111


	December 31, 2012
	Ending												Nonaccrual
(dollar amounts in millions)	Balance		Prior NCOs		ACL $		ACL%			Credit Mark (1)			Loans
Total core	$	3,937	$	21	$	100		2.54	%		3.06	%	$	41

Noncore—SAD (2)		597		145		129		21.61			36.93			82
Noncore—Other		865		18		61		7.05			8.95			4

Total noncore		1,462		163		190		13.00			21.72			86

Total commercial real estate	$	5,399	$	184	$	290		5.37	%		8.49	%	$	127

⁽¹⁾	Calculated as (Prior NCOs + ACL $) / (Ending Balance + Prior NCOs).

⁽²⁾	Noncore loans managed by SAD, the area responsible for managing loans and relationships designated as Classified Loans.

As shown in the above table, the ending balance of the CRE portfolio at March 31, 2013, declined $0.3 billion, or 6%, compared with December 31, 2012. The decline in the noncore segment primarily reflected amortization and payoffs as we actively focus on the noncore portfolio to reduce our overall CRE exposure. This reduction demonstrates our continued commitment to achieving a materially lower risk profile in the CRE portfolio, consistent with our overall objective of maintaining an aggregate moderate-to-low risk profile. The decline in the core segment primarily reflected continued payoffs, partially offset by originations. We continue to support our core developer customers as appropriate, however, new core originations are balanced against internal concentration limits and increased competition, particularly pricing, for high quality developers and projects.

Also, as shown above, substantial reserves for the noncore portfolio have been established. At March 31, 2013, the ACL related to the noncore portfolio was 14.07%. The combination of the existing ACL and prior NCOs represents the total credit actions taken on each segment of the portfolio. From this data, we calculate a credit mark that provides a consistent measurement of the cumulative credit actions taken against a specific portfolio segment. The 36.42% credit mark associated with the SAD-managed noncore portfolio is an indicator of the proactive portfolio management strategy employed for this portfolio.

Consumer Credit

Refer to the “Consumer Credit” section of our 2012 Form 10-K for our consumer credit underwriting and on-going credit management processes.

AUTOMOBILE PORTFOLIO

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

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

RESIDENTIAL REAL ESTATE SECURED PORTFOLIOS

The properties securing our residential mortgage and home equity portfolios are primarily located within our geographic footprint. The continued stress on home prices has caused the performance in these portfolios to remain weaker than historical levels. The residential-secured portfolio originations continue to be of high quality, with the majority of the negative credit impact coming from loans originated in 2006 and earlier. We continue to evaluate all of our policies and processes associated with managing these portfolios. Our loss mitigation and foreclosure activities are consolidated in one location under common management. This structure allows us to focus on effectively helping our customers with appropriate solutions for their specific circumstances.

Table 11 - Selected Home Equity and Residential Mortgage Portfolio Data

(dollar amounts in millions)


	Home Equity												Residential Mortgage
	Secured by first-lien						Secured by junior-lien
	03/31/13			12/31/12			03/31/13			12/31/12			03/31/13			12/31/12
Ending balance	$	4,645		$	4,380		$	3,829		$	3,955		$	5,051		$	4,970
Portfolio weighted average LTV ratio⁽¹⁾		71	%		71	%		81	%		81	%		76	%		76	%
Portfolio weighted average FICO score⁽²⁾		754			755			738			741			736			738

	Home Equity												Residential Mortgage (3)
	Secured by first-lien						Secured by junior-lien
	Three Months Ended March 31,
	2013			2012			2013			2012			2013			2012
Originations	$	548		$	427		$	106		$	147		$	319		$	202
Origination weighted average LTV ratio⁽¹⁾		66	%		71	%		81	%		81	%		75	%		78	%
Origination weighted average FICO score⁽²⁾		778			772			751			757			759			755

(1)	The LTV ratios for home equity loans and home equity lines-of-credit are cumulative and reflect the balance of any senior loans. LTV ratios reflect collateral values at the time of loan origination.

(2)	Portfolio weighted average FICO scores reflect currently updated customer credit scores whereas origination weighted average FICO scores reflect the customer credit scores at the time of loan origination.

(3)	Represents only owned-portfolio originations.

Home Equity Portfolio

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

Given the low interest rate environment over the past several years, many borrowers have utilized the line-of-credit home equity product as the primary source of financing their home versus residential mortgages. The proportion of the home equity portfolio secured by a first-lien has increased significantly over the past three years, positively impacting the portfolio’s risk profile. At March 31, 2013, 55% of our total home equity portfolio was secured by first-lien mortgages. The first-lien position, combined with continued high average FICO scores, significantly reduces the PD associated with these loans.

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

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

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

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


	March 31, 2013
(dollar amounts in millions)	1 year or less		1 to 2 years		2 to 3 years		3 to 4 years		More than 4 years		Total
Secured by first-lien	$	46	$	63	$	19	$	—	$	2,204	$	2,332
Secured by junior-lien		236		259		196		143		2,377		3,211

Total home equity line-of-credit	$	282	$	322	$	215	$	143	$	4,581	$	5,543

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

Historically, less than 30% of our home equity lines-of-credit that are one year or less from maturity actually reach the maturity date as borrowers apply to re-establish the revolving period under current underwriting standards. We anticipate this percentage will decline in future periods as our proactive approach to managing maturity risk continues to evolve.

Residential Mortgages Portfolio

At March 31, 2013, 50% of our total residential mortgage portfolio were ARMs. These ARMs primarily consist of a fixed-rate of interest for the first 3 to 5 years, and then adjust annually. At March 31, 2013, ARM loans that were expected to have rates reset through 2015 totaled $1.4 billion. These loans scheduled to reset are primarily associated with loans originated subsequent to 2007, and as such, are not subject to the most significant declines in underlying property value. Given the quality of our borrowers, the relatively low current interest rates, and the results of our continued analysis (including possible impacts of changes in interest rates), we believe that we have a relatively limited exposure to ARM reset risk. Nonetheless, we have taken actions to mitigate our risk exposure. We initiate borrower contact at least six months prior to the interest rate resetting, and have been successful in converting many ARMs to fixed-rate loans through this process. Given the relatively low current interest rates, many fixed-rate products currently offer a better interest rate to our ARM borrowers.

Several government programs continued to impact the residential mortgage portfolio, including various refinance programs such as HAMP and HARP, which positively affected the availability of credit for the industry. During the three-month period ended March 31, 2013, we closed $211 million in HARP residential mortgages and $1 million in HAMP residential mortgages. The HARP residential mortgage loans are considered current and are either part of our residential mortgage portfolio or serviced for others. The HAMP refinancings are associated with residential mortgages that are serviced for others. We are subject to repurchase risk associated with residential mortgage loans sold in the secondary market. An appropriate level of reserve for representations and warranties related to residential mortgage loans sold has been established to address this repurchase risk inherent in the portfolio (see Operational Risk discussion).

Credit Quality

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

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

Credit quality performance in the 2013 first quarter, reflected overall continued improvement. NALs and NCOs declined 7% and 26%, respectively, compared to the prior quarter. Commercial criticized and commercial classified loans also declined reflecting the continued improvement in the commercial portfolio. The ACL to total loans ratio declined to 1.91% and our ACL coverage ratios remained at appropriate levels. Our ACL as a percentage of NALs remained strong at 207%.

NPAs, NALs, AND TDRs

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

NPAs and NALs

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

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

When interest accruals are suspended, accrued interest income is reversed with current year accruals charged to earnings and prior year amounts generally charged-off as a credit loss. When, in our judgment, the borrower’s ability to make required interest and principal payments has resumed and collectability is no longer in doubt, the loan or lease is returned to accrual status.

The following table reflects period-end NALs and NPAs detail for each of the last five quarters:

Table 13 - Nonaccrual Loans and Leases and Nonperforming Assets


	2013			2012
(dollar amounts in thousands)	March 31,			December 31,			September 30,			June 30,			March 31,
Nonaccrual loans and leases:
Commercial and industrial	$	80,928		$	90,705		$	109,452		$	133,678		$	142,492
Commercial real estate		110,803			127,128			148,986			219,417			205,105
Automobile		6,770			7,823			11,814			—			—
Residential mortgage		118,405			122,452			123,140			75,048			74,114
Home equity		63,405			59,525			51,654			46,023			45,847

Total nonaccrual loans and leases⁽¹⁾		380,311			407,633			445,046			474,166			467,558
Other real estate owned, net
Residential		19,538			21,378			23,640			21,499			31,850
Commercial		5,601			6,719			30,566			17,109			16,897

Total other real estate owned, net		25,139			28,097			54,206			38,608			48,747
Other nonperforming assets⁽²⁾		10,045			10,045			10,476			10,476			10,772

Total nonperforming assets	$	415,495		$	445,775		$	509,728		$	523,250		$	527,077

Nonaccrual loans as a % of total loans and leases		0.92	%		1.00	%		1.11	%		1.19	%		1.15	%
Nonperforming assets ratio⁽³⁾		1.01			1.09			1.26			1.31			1.29
(NPA+90days)/(Loan+OREO)⁽⁴⁾		1.48			1.59			1.75			1.76			1.68

(1)	Nonaccrual loans and leases related to Chapter 7 bankruptcy loans were $59.9 million, $60.1 million, and $63.0 million at March 31, 2013, December 31, 2012, and September 30, 2012, respectively.

(2)	Other nonperforming assets represent an investment security backed by a municipal bond.

(3)	This ratio is calculated as nonperforming assets divided by the sum of loans and leases, other nonperforming assets, and net other real estate.

(4)	This ratio is calculated as the sum of nonperforming assets and total accruing loans and leases past due 90 days or more divided by the sum of loans and leases and net other real estate.

The $30.3 million, or 7%, decline in NPAs compared with December 31, 2012, primarily reflected:

•

$16.3 million, or 13%, decline in CRE NALs, reflecting both NCO activity and problem credit resolutions, including borrower payments and payoffs partially resulting from successful workout strategies implemented by our SAD. Although we anticipate some degree of quarter-to-quarter volatility in our NAL levels, we expect that the overall trend will continue to be lower.

•

$9.8 million, or 11%, decline in C&I NALs, reflecting problem credit resolutions, including payoffs partially resulting from successful workout strategies implemented by our SAD. The decline was associated with loans throughout our footprint, with no specific industry concentration.

•

$4.0 million, or 3%, decrease in residential mortgage NALs, primarily due to successful workouts of several larger problem loans as well as a lower level of inflows compared to prior quarters. The NAL balances have been written down to collateral value, less anticipated selling costs which substantially limits any significant future risk of additional loss on these loans.

Partially offset by:

•

$3.9 million, or 7%, increase in home equity NALs, primarily reflecting lower NCOs as we continue to work with troubled borrowers to take advantage of the current low interest-rate environment and the recent stabilization of home prices. The NAL balances have been written down to collateral value, less anticipated selling costs which substantially limits any significant future risk of additional loss on these loans, and make a modification more likely for borrowers with consistent cash flow.

TDR Loans

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

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

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

Table 14 - Accruing and Nonaccruing Troubled Debt Restructured Loans


	2013		2012
(dollar amounts in thousands)	March 31,		December 31,		September 30,		June 30,		March 31,
Troubled debt restructured loans—accruing:
Commercial and industrial	$	90,642	$	76,586	$	55,809	$	57,008	$	53,795
Commercial real estate		192,167		208,901		222,155		202,190		231,923
Automobile		34,379		35,784		33,719		34,460		35,521
Home equity		162,087		110,581		92,763		66,997		59,270
Residential mortgage		288,041		290,011		280,890		298,967		294,836
Other consumer		2,514		2,544		2,644		3,038		4,233

Total troubled debt restructured loans—accruing		769,830		724,407		687,980		662,660		679,578

Troubled debt restructured loans—nonaccruing:

Commercial and industrial		14,970		19,268		28,859		35,535		26,886
Commercial real estate		26,588		32,548		20,284		55,022		39,606
Automobile		6,770		7,823		11,814		—		—
Home equity		11,235		6,951		7,756		374		334
Residential mortgage		84,317		84,515		83,163		28,332		29,549
Other consumer		—		113		113		113		113

Total troubled debt restructured loans—nonaccruing		143,880		151,218		151,989		119,376		96,488

Total troubled debt restructured loans	$	913,710	$	875,625	$	839,969	$	782,036	$	776,066

The increase in the accruing TDR home equity portfolio is primarily related to the refinancing of certain maturing lines-of-credit structured as a 10-year draw period with a balloon payment to a new loan with a 20-year amortization period. Based on the borrower’s financial condition, we believe the new 20-year amortizing loan would not have been available to the borrower through normal channels or other sources. As such, we view this as a concession and have designated the new loan as a TDR.

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

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

Loans are not automatically considered to be accruing TDRs upon the granting of a new concession. Accrual status is determined based on delinquency status and whether collection of principal and interest is in doubt. If the loan is not 90-days past due and no loss is expected based on the modified terms, the modified TDR remains in accruing status. For loans that are on nonaccrual status before the modification, collection of both principal and interest must not be in doubt, and the borrower must be able to exhibit sufficient cash flows for a six-month period of time to service the debt in order to return to accruing status. This six-month period could extend before or after the restructure date.

The following table reflects TDR activity for each of the past five quarters:

Table 15 - Troubled Debt Restructured Loan Activity


	2013			2012
(dollar amounts in thousands)	First			Fourth			Third			Second			First
TDRs, beginning of period	$	875,625		$	839,968		$	782,035		$	776,065		$	805,650
New TDRs		164,407			169,850			196,707			94,631			136,237
Payments		(44,183	)		(61,491	)		(51,125	)		(38,299	)		(40,120	)
Charge-offs		(5,395	)		(16,985	)		(22,537	)		(16,551	)		(25,042	)
Sales		(4,814	)		(2,933	)		(3,978	)		(1,840	)		(5,036	)
Transfer to OREO		(1,124	)		(3,403	)		(15,974	)		(860	)		(1,472	)
Restructured TDRs—accruing⁽¹⁾		(53,936	)		(40,682	)		(30,439	)		(20,135	)		(62,327	)
Restructured TDRs—nonaccruing⁽¹⁾		(10,674	)		(7,138	)		(14,721	)		(10,833	)		(30,388	)
Other		(6,196	)		(1,561	)		—			(143	)		(1,437	)

TDRs, end of period	$	913,710		$	875,625		$	839,968		$	782,035		$	776,065

(1)	Represents existing commercial TDRs that were re-underwritten with new terms providing a concession. A corresponding amount is included in the New TDRs amount above.

ACL

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

We maintain two reserves, both of which in our judgment are appropriate to absorb credit losses inherent in our loan and lease portfolio: the ALLL and the AULC. Combined, these reserves comprise the total ACL. Our Credit Administration group is responsible for developing the methodology assumptions and estimates used in the calculation, as well as determining the appropriateness of the ACL. The ALLL represents the estimate of losses inherent in the loan portfolio at the reported date. Additions to the ALLL result from recording provision expense for loan losses or increased risk levels resulting from loan risk-rating downgrades, while reductions reflect charge-offs (net of recoveries), decreased risk levels resulting from loan risk-rating upgrades, or the sale of loans. The AULC is determined by applying the transaction reserve process to the unfunded portion of the loan exposures adjusted by an applicable funding expectation.

A provision for credit losses is recorded to adjust the ACL to the level we have determined to be appropriate to absorb credit losses inherent in our loan and lease portfolio. The provision for credit losses in the 2013 first quarter was $29.6 million, compared with $39.5 million in the prior quarter and $34.4 million in the year-ago quarter. (See Provision for Credit Losses discussion).

We regularly evaluate the appropriateness of the ACL by performing on-going evaluations of the loan and lease portfolio, including such factors as the differing economic risks associated with each loan category, the financial condition of specific borrowers, the level of delinquent loans, the value of any collateral and, where applicable, the existence of any guarantees or other documented support. We evaluate the impact of changes in interest rates and overall economic conditions on the ability of borrowers to meet their financial obligations when quantifying our exposure to credit losses and assessing the appropriateness of our ACL at each reporting date. In addition to general economic conditions and the other factors described above, we also consider the impact of collateral value trends and portfolio diversification.

Our ACL evaluation process includes the on-going assessment of credit quality metrics, and a comparison of certain ACL benchmarks to current performance. While the total ACL balance has declined in recent quarters, all of the relevant benchmarks remain strong.

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

Table 16 - Allocation of Allowance for Credit Losses (1)


	2013				2012
(dollar amounts in thousands)	March 31,				December 31,				September 30,				June 30,				March 31,
Commercial
Commercial and industrial	$	238,098	42	%	$	241,051	42	%	$	257,081	41	%	$	280,548	41	%	$	246,026	39	%
Commercial real estate		267,436	12			285,369	14			280,376	13			305,391	14			339,494	14

Total commercial		505,534	54			526,420	56			537,457	54			585,939	55			585,520	53

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