UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2013
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| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-35390
FIRST NIAGARA FINANCIAL GROUP, INC.
(exact name of registrant as specified in its charter)
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| Delaware | | 42-1556195 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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726 Exchange Street, Suite 618, Buffalo, NY | | 14210 |
| (Address of principal executive offices) | | (Zip Code) |
(716) 819-5500
(Registrant’s telephone number, including area code)
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 twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES x NO o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
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| Large accelerated filer | x | Accelerated filer | o |
| Non-accelerated filer | o | Smaller reporting company | o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES o NO o
As of August 7, 2013, there were issued and outstanding 353,995,048 shares of the Registrant’s Common Stock, $0.01 par value.
FIRST NIAGARA FINANCIAL GROUP, INC.
FORM 10-Q
For the Quarterly Period Ended June 30, 2013
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis is intended to provide greater details of our results of operations and financial condition and should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this document. Certain statements under this caption constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the business environment in which First Niagara Financial Group, Inc. and its subsidiaries operate, projections of future performance and perceived opportunities in the market. Our actual results may differ significantly from the results, performance, and achievements expressed or implied in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, economic conditions, competition in the geographic and business areas in which we conduct our operations, fluctuation in interest rates, changes in the credit quality of our borrowers and obligors on investment securities we own, increased regulation of financial institutions or other effects of recently enacted legislation, and other factors discussed under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012. First Niagara Financial Group, Inc. does not undertake, and specifically disclaims, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements.
OVERVIEW
First Niagara Financial Group, Inc. (the “Company”) is a Delaware corporation and a bank holding company, subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”), serving both retail and commercial customers through our bank subsidiary, First Niagara Bank, N.A. (the “Bank”), a national bank subject to supervision and regulation by the Office of the Comptroller of the Currency (the “OCC”). At June 30, 2013, we had $37 billion in assets, $27 billion in deposits, and 422 full-service branch locations across New York, Pennsylvania, Connecticut, and Western Massachusetts. The Company and the Bank are referred to collectively as “we” or “us” or “our.”
On May 18, 2012, the Bank acquired 137 full-service branches from HSBC Bank USA, National Association ("HSBC") and affiliates (the "HSBC Branch Acquisition") in the Buffalo, Rochester, Syracuse, Albany, Downstate New York and Connecticut banking markets and paid a net deposit premium of $772 million. The Bank acquired cash of $7.4 billion, performing loans with a fair value of approximately $1.6 billion, core deposit and other intangibles of $85 million, and deposits with a fair value of approximately $9.9 billion (shortly after acquisition, we allowed $0.5 billion in municipal deposits to one large customer run-off), resulting in goodwill of $770 million. The cash received was used to pay down wholesale borrowings, including those used to purchase securities in advance of the HSBC Branch Acquisition. In addition, we acquired certain wealth management relationships and approximately $2.5 billion of assets under management of such relationships. At closing, the Bank did not receive any loans greater than 60 days delinquent. Concurrent with the HSBC Branch Acquisition, we consolidated 15 existing First Niagara branches into acquired HSBC branches and, in the third quarter of 2012, we consolidated 19 of the HSBC branches into First Niagara branches, resulting in 103 net new full-service branches from the HSBC Branch Acquisition. The results of operations from the HSBC Branch Acquisition are included in our operations only since the date of acquisition.
In connection with the HSBC Branch Acquisition, we assigned purchase rights for 57 of the HSBC branches to other banks and sold seven First Niagara branches to these other banks.
BUSINESS AND INDUSTRY
We operate a multi-faceted regional bank that provides our customers with a full range of products and services. These products include commercial and residential real estate loans, commercial business loans and leases, home equity and other consumer loans, wealth management products, as well as various retail consumer and commercial deposit products and services. Additionally, we offer insurance services through a wholly-owned subsidiary of the Bank. Our business model has and will continue to evolve from our thrift roots to a relationship based community banking model that is supported by enhanced products and services that better serve our customer needs. Among our priorities, we will continue to invest in our digital platform and treasury management capabilities, as well as make continuous improvements in our technology platform, to drive future growth in fee income and positive operating leverage.
Our profitability is primarily dependent on the difference between the interest we receive on loans and investment securities, and the interest we pay on deposits and borrowings. The rates we earn on our assets and the rates we pay on our liabilities are a function of the general level of interest rates, the structure of the instrument, and competition within our markets. These rates are also highly sensitive to conditions that are beyond our control, such as inflation, economic growth, and unemployment, as well as actions and policies of the federal government and its regulatory agencies, including the Federal Reserve. We manage our interest rate risk as described in Item 3, “Quantitative and Qualitative Disclosures about Market Risk.”
The Federal Reserve implements national monetary policies (with objectives such as curbing inflation and combating recession) through its open-market operations in U.S. Government securities, by adjusting depository institutions reserve requirements, by varying the target federal funds and discount rates and by varying the supply of money. The actions of the Federal Reserve in these areas influence the growth of our loans, investments, and deposits, and also affect interest rates that we earn on interest-earning assets and that we pay on interest-bearing liabilities.
Since the third quarter of 2011, the Federal Reserve has taken certain actions which have resulted in lower longer-term interest rates. These actions had the impact of flattening the yield curve and reducing the yields on earning assets that are (a) adjustable rate and directly tied to longer term rates, such as certain commercial real estate loan products that we offer, and (b) fixed rate where the rate is based on longer-term rates, such as certain of our residential real estate loan products. As a consequence, the predictive ability of the 10 year Treasury rate as a proxy for mortgage rates has recently diminished. Accordingly, future mortgage rates have become more difficult to predict, and competitive market forces could cause mortgage rates to continue to rise, which could negatively impact mortgage origination volumes and the value of our mortgage-backed investment securities and certain loans.
MARKET AREAS AND COMPETITION
Our business operations are concentrated in our primary market areas of Upstate New York, Pennsylvania, Connecticut, and Western Massachusetts. Therefore, our financial results are affected by economic conditions in these geographic areas. If economic conditions in our markets deteriorate or if we are unable to sustain our competitive posture, our ability to expand our business and the quality of our loan portfolio could materially impact our financial results.
Our primary lending and deposit gathering areas are generally concentrated in the same areas as our branches. We face significant competition in both making loans and attracting deposits in our markets as they have a high density of financial institutions, some of which are significantly larger than we are and have greater financial resources. Our competition for loans comes principally from commercial banks, savings banks, savings and loan associations, mortgage banking companies, credit unions, insurance companies, and other financial services companies. Our most direct competition for deposits has historically come from commercial banks, savings banks, and credit unions, as well as additional competition for deposits from the mutual fund industry, internet banks, securities and brokerage firms, and insurance companies, as well as nontraditional competitors such as large retailers offering bank-like products. In addition to the traditional sources of competition for loans and deposits, payment processors and other companies exploring direct peer-to-peer banking provide additional competition for our products and services. In these marketplaces, opportunities to grow and expand are primarily a function of how we are able to differentiate our product offerings and customer experience from our competitors. We offer a variety of financial services to meet the needs of the communities that we serve, functioning under a philosophy that includes a commitment to customer service and the community.
REGULATORY REFORM
In July 2013, the Company's primary federal regulator, the Federal Reserve, and the Bank's primary federal regulator, the OCC, published final rules (the “New Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee's December 2010 capital framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The New Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, including the Company and the Bank, compared to the current U.S. risk-based capital rules. The New Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions' regulatory capital ratios. The New Capital Rules also address risk weights and other issues affecting the denominator in banking institutions' regulatory capital ratios and replace the existing risk-weighting approach, which was derived from Basel I capital accords of the Basel Committee, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee's 2004
“Basel II” capital accords. The New Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies' rules. The New Capital Rules are effective for the Company and the Bank on January 1, 2015 (subject to phase-in periods for certain of their components).
The New Capital Rules, among other things, (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions from and adjustments to capital as compared to existing regulations. The New Capital Rules, like the current capital rules, specify that Total capital consists of Tier 1 capital and Tier 2 capital. For most banking organizations, the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock, and the most common form of Tier 2 capital is subordinated notes and a portion of the allocation for loan and lease losses, in each case subject to the New Capital Rules' specific requirements.
Under the New Capital Rules, the minimum capital ratios as of January 1, 2015 will be as follows:
•4.5% CET1 to risk-weighted assets.
•6.0% Tier 1 capital to risk-weighted assets.
•8.0% Total capital to risk-weighted assets.
•4% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”).
When fully phased in on January 1, 2019, the New Capital Rules will require the Company and the Bank to maintain a 2.5% “capital conservation buffer”, composed entirely of CET1, on top of the minimum risk-weighted asset ratios, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital (that is Tier I plus Tier 2) to risk-weighted assets of at least 10.5%.
The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
The New Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under current capital rules, the effects of accumulated other comprehensive income or loss items included in shareholders' equity (for example, marks-to-market of securities held in the available for sale portfolio) are reversed for the purposes of determining regulatory capital ratios. Under the New Capital Rules, the effects of certain accumulated other comprehensive items are not excluded; however, non-advanced approaches banking organizations, including the Company and the Bank, may make a one-time permanent election to continue to exclude these items. The New Capital Rules state that certain hybrid securities, such as trust preferred securities, may be included in bank holding companies' Tier 1 capital, subject to phase-out and based on various criteria. Trust preferred securities excluded from Tier 1 capital may nonetheless be included as a component of Tier 2 capital.
Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2015 and will be phased-in over a 4-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).
With respect to the Bank, the New Capital Rules also revise the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act, by (i) introducing a CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the current 6%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may
have a 3% leverage ratio and still be adequately capitalized. The New Capital Rules do not change the total risk-based capital requirement for any “prompt corrective action” category.
The New Capital Rules prescribe a new standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. In addition, the New Capital Rules provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.
We have analyzed the impact of the finalized requirements. Based on our preliminary interpretation of the rules and our planned reduction of $275 million of asset-backed securities and collateralized loan obligations that will be subject to significant risk weighting increases under Basel III, we estimate that our reported Tier 1 common ratio at June 30, 2013 of 7.65% would be five to ten basis points lower under the New Capital Rules. We are confident in our ability to meet the minimum capital ratios plus the capital conservation buffer upon implementation of the revised requirements, as finalized.
The New Capital Rules adopted in July 2013 do not address the proposed liquidity coverage ratio test and net stable funding ratio test called for by the proposed Basel III framework. See “Item 1. Business-Supervision and Regulation-Liquidity Requirements” in our 2012 10-K for more information on these topics.
On July 31, 2013, the U.S. District Court for the District of Columbia (the "Court") issued an order granting summary judgment to the plaintiffs in a case challenging certain provisions of the Federal Reserve's rule concerning electronic debit card transaction fees and network exclusivity arrangements (i.e., routing for PIN and signature debit card transactions) (the “Current Rule”) that were adopted to implement Section 1075 of the Dodd-Frank Act (the “Durbin Amendment”.) The Court held that, in adopting the Current Rule, the Federal Reserve violated the Durbin Amendment's provisions concerning which costs are allowed to be taken into account for purposes of setting fees that are reasonable and proportional to the costs incurred by the issuer and therefore the Current Rule's maximum permissible fees of 21 cents per transactions were too high. In addition, the Court held that Current Rule's network non-exclusivity provisions concerning unaffiliated payment networks for debit cards also violated the Durbin Amendment. The Court vacated the Current Rule, but stayed its ruling to provide the Federal Reserve an opportunity to replace the invalidated portions. The Court also set an August 14, 2013 hearing to discuss its ruling with the Federal Reserve. We are currently evaluating the impact of the ruling on our business, and will continue to monitor future developments. At this point in time, we cannot predict the actions that the Federal Reserve may take in response to this ruling. We recorded $13 million and $10 million of debit card interchange revenues for the six months ended June 30, 2013 and 2012, respectively.
The Consumer Financial Protection Bureau (the “CFPB”) continues to provide guidance and adopt rules relevant to our businesses. On June 11, 2013, the CFPB released a report regarding financial institutions' provision of overdraft coverage on debit card transactions and ATM withdrawals. On March 21, 2013, the CFPB provided guidance about compliance with the fair lending requirements of the Equal Credit Opportunity Act and its implementing regulation, Regulation B, as they pertain to indirect automobile lending. We are evaluating our policies and procedures in light of these new releases and the CFPB's issuance in the first quarter of 2013 of amendments to Regulation Z, which, among other things, requires creditors to make a reasonable, good faith determination of a consumer's ability to repay certain mortgage loans and establishes certain protections from liability under this requirement for “qualified mortgages.”
Regulatory Reform is discussed in our Annual Report on Form 10-K for the year ended December 31, 2012 under Item 1, “Business—Supervision and Regulation,” and Item 1A, “Risk Factors.”
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We evaluate those accounting policies and estimates that we judge to be critical: those most important to the presentation of our financial condition and results of operations, and those which require our most subjective and complex judgments. Accordingly, our accounting estimates relating to the valuation of our investment securities, prepayment assumptions on our collateralized mortgage obligations and mortgage-backed securities, the accounting treatment and valuation of our acquired loans, adequacy of our allowance for loan losses, and the analysis of the carrying value of goodwill for impairment are deemed to be critical as our judgments could have a material effect on our results of operations. Additional accounting policies are more fully described in Note 1 in the “Notes to Consolidated Financial Statements” presented in our 2012 Annual Report on Form 10-K. A description of our current accounting policies involving significant management judgment follows:
Investment Securities
As of June 30, 2013, our available for sale and held to maturity investment securities totaled $11.8 billion, or 32% of our total assets. We use third party pricing services to value our investment securities portfolio, which is comprised almost entirely of Level 2 fair value measured securities. Fair value of our investment securities is based upon quoted market prices of identical securities, where available. If such quoted prices are not available, fair value is determined using valuation models that consider cash flow, security structure, and other observable information. For the vast majority of the portfolio, we validate the prices received from these third parties, on a quarterly basis, by comparing them to prices provided by a different independent pricing service. For the remaining securities that are priced by these third parties where we are unable to obtain a secondary independent price, we review material price changes for reasonableness based upon changes in interest rates, credit outlook based upon spreads for similar securities, and the weighted average life of the debt securities. We have also reviewed detailed valuation methodologies provided to us by our pricing services. We did not adjust any of the prices provided to us by the independent pricing services at June 30, 2013 or December 31, 2012. Where sufficient information is not available from the pricing services to produce a reliable valuation, we estimate fair value based on broker quotes, which are reviewed using the same process that is applied to our securities priced by pricing services where we are unable to obtain a secondary independent price, or based on internally developed models which consider estimated prepayment speeds, losses, recoveries, default rates that are implied by the underlying performance of collateral in the structure or similar structures, and discount rates that are implied by market prices for similar securities and collateral structure types.
Our investment securities portfolio includes residential mortgage backed securities and collateralized mortgage obligations. As the underlying collateral of each of these securities is comprised of a large number of similar residential mortgage loans for which prepayments are probable and the timing and amount of such prepayments can be reasonably estimated, we estimate future principal prepayments of the underlying residential mortgage loans to determine a constant effective yield used to apply the interest method, with retroactive adjustments as warranted.
In order to compute the constant effective yield for these securities, we estimate pooled level cash flows for each security based on a variety of factors, including historical and projected prepayment speeds, current and future interest rates, yield curve assumptions and security issuer. These loan level cash flows are then translated into security level cash flows based on the tranche we own and the unique structure and status of each security. At June 30, 2013, our portfolio of residential mortgage backed securities totaled $5.4 billion, which included $4.8 billion of collateralized mortgage obligations. In the determination of our constant effective yield, we estimate that we will receive $1.6 billion of principal cash flows on our collateralized mortgage obligations over the next 12 months.
Acquired Loans
Loans that we acquired in acquisitions subsequent to January 1, 2009 were recorded at fair value with no carryover of the related allowance for loan losses at the time of acquisition. Determining the fair value of the loans involved estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.
We have acquired loans in four separate acquisitions after January 1, 2009. For each acquisition, we reviewed all loans greater than $1 million and considered the following factors as indicators that such an acquired loan had evidence of deterioration in
credit quality and was therefore in the scope of Accounting Standards Codification (“ASC”) 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality):
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| • | Loans that were 90 days or more past due; |
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| • | Loans that had an internal risk rating of substandard or worse. Substandard is consistent with regulatory definitions and is defined as having a well defined weakness that jeopardizes liquidation of the loan; |
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| • | Loans that were classified as nonaccrual by the acquired bank at the time of acquisition; or |
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| • | Loans that had been previously modified in a troubled debt restructuring. |
Individual acquired loans determined to have evidence of deterioration in credit quality are accounted for individually in accordance with ASC 310-30. Any acquired loans that were not individually in the scope of ASC 310-30 because they did not meet the criteria above were either (i) pooled into groups of similar loans based on the borrower type, loan purpose, and collateral type and accounted for under ASC 310-30 by analogy, or (ii) accounted for under ASC 310-20 (Nonrefundable Fees and Other Costs).
Based on the guidance included in the December 18, 2009 letter from the AICPA Depository Institutions Panel to the Office of the Chief Accountant of the SEC, we have made an accounting policy election to apply ASC 310-30 by analogy to qualifying acquired pools of loans that (i) were acquired in a business combination or asset purchase, (ii) resulted in recognition of a discount attributable, at least in part, to credit quality, and (iii) were not subsequently accounted for at fair value.
Acquired loans accounted for under ASC 310-30
The excess of expected cash flows from acquired loans over the estimated fair value of acquired loans at acquisition is referred to as the accretable discount and is recognized into interest income over the remaining life of the acquired loans using the interest method. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. The nonaccretable discount represents estimated future credit losses expected to be incurred over the life of the acquired loans. Subsequent decreases to the expected cash flows require us to evaluate the need for an addition to the allowance for loan losses. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the nonaccretable discount which we then reclassify as accretable discount that is recognized into interest income over the remaining life of the loan using the interest method. Our evaluation of the amount of future cash flows that we expect to collect takes into account actual credit performance of the acquired loans to date and our best estimates for the expected lifetime credit performance of the loans using currently available information. Charge-offs of the principal amount on acquired loans would be first applied to the nonaccretable discount portion of the fair value adjustment. To the extent that we experience a deterioration in credit quality in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.
In accordance with ASC 310-30, recognition of income is dependent on having a reasonable expectation about the timing and amount of cash flows expected to be collected. We perform such an evaluation on a quarterly basis on both our acquired loans individually accounted for under ASC 310-30 and those in pools accounted for under ASC 310-30 by analogy.
Cash flows for acquired loans individually accounted for under ASC 310-30 are estimated on a quarterly basis. Based on this evaluation, a determination is made as to whether or not we have a reasonable expectation about the timing and amount of cash flows. Such an expectation includes cash flows from normal customer repayment, foreclosure or other collection efforts. Cash flows for acquired loans accounted for on a pooled basis under ASC 310-30 by analogy are also estimated on a quarterly basis. For residential real estate, home equity and other consumer loans, cash flow loss estimates are calculated by a vintage and FICO based model which incorporates a projected forward loss curve. For commercial loans, lifetime loss rates are assigned to each pool with consideration given for pool make-up, including risk rating profile. Lifetime loss rates are developed from internally generated loss data and are applied to each pool.
To the extent that we cannot reasonably estimate cash flows, interest income recognition is discontinued. The unit of account for loans in pools accounted for under ASC 310-30 by analogy is the pool of loans. Accordingly, as long as we can reasonably estimate cash flows for the pool as a whole, accretable yield on the pool is recognized and all individual loans within the pool - even those more than 90 days past due - would be considered to be accruing interest in our financial statement disclosures,
regardless of whether or not we expected to collect any principal or interest cash flows on an individual loan 90 days or more past due.
Allowance for Loan Losses
We determined our allowance for loan losses by portfolio segment, which consists of commercial loans and consumer loans. Our commercial loan portfolio includes both business and commercial real estate loans. Our consumer loan portfolio includes residential real estate, home equity, and other consumer loans. We further segregate these portfolios between loans which are accounted for under the amortized cost method (referred to as “originated” loans) and loans acquired (referred to as “acquired” loans), as acquired loans were originally recorded at fair value, which included an estimate of lifetime credit losses, resulting in no carryover of the related allowance for loan losses.
Originated loans
We establish our allowance for loan losses through a provision for credit losses. The level of the allowance for loan losses is based on our evaluation of the credit quality of our loan portfolio. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, and other factors that warrant recognition in determining our allowance for loan losses. We continue to monitor and modify the level of our allowance for loan losses to ensure it is adequate to cover losses inherent in our loan portfolio.
For our originated loans, our allowance for loan losses consists of the following elements: (i) valuation allowances based on net historical loan loss experience for similar loans with similar inherent risk characteristics and performance trends, adjusted, as appropriate, for qualitative risk factors specific to respective loan types; and (ii) specific valuation allowances based on probable losses on specifically identified impaired loans.
For our originated loans, when current information and events indicate that it is probable that we will be unable to collect all amounts of principal and interest due under the original terms of a business or commercial real estate loan greater than $200 thousand, such loan will be classified as impaired. Additionally, all loans modified in a troubled debt restructuring ("TDR") are considered impaired. The need for specific valuation allowances are determined for impaired loans and recorded as necessary. For impaired loans, we consider the fair value of the underlying collateral, less estimated costs to sell, if the loan is collateral dependent, or we use the present value of estimated future cash flows in determining the estimates of impairment and any related allowance for loan losses for these loans. Confirmed losses are charged off immediately. Prior to a loan becoming impaired, we typically would obtain an appraisal through our internal loan grading process to use as the basis for the fair value of the underlying collateral.
Commercial loan portfolio
We estimate the allowance for our commercial loan portfolio by applying a historic loss rate to loans based on their type and loan grade. This amount is then adjusted, as necessary, for qualitative considerations to reflect changes in underwriting, market or industry conditions, or based on changes in trends in the composition of the portfolio, including risk composition, seasoning, and underlying collateral. Our loan grading system is described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Credit Risk.”
Consumer loan portfolio
We estimate the allowance for loan losses for our consumer loan portfolio by estimating the amount of loans that will eventually default based on their current delinquency severity. We then apply a loss rate to the amount of loans that we predict will default based on our historical net loss experience. This amount is then adjusted, as necessary, for qualitative considerations to reflect changes in underwriting, market or industry conditions or based on changes in trends in the composition of the portfolio, including risk composition, seasoning, and underlying collateral. We obtain and review refreshed FICO scores on a quarterly basis, and trends are evaluated for consideration as a qualitative adjustment to the allowance. Other qualitative considerations include, but are not limited to, the evaluation of trends in property values, building permits and unemployment.
Acquired Loans
Acquired loans accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)
For our acquired loans accounted for under ASC 310-30, our allowance for loan losses is estimated based upon our expected cash flows for these loans. To the extent that we experience a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.
Acquired loans accounted for under ASC 310-20
We establish our allowance for loan losses through a provision for credit losses based upon an evaluation process that is similar to our evaluation process used for originated loans. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, carrying value of the loans, which includes the remaining net purchase discount or premium, and other factors that warrant recognition in determining our allowance for loan losses.
Goodwill
We record the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired less the fair value of liabilities assumed as goodwill. We do not amortize goodwill and we review it for impairment at our reporting unit level on an annual basis, as of November 1, and when events or changes in circumstances indicate that the carrying amounts may be impaired. We define a reporting unit as a distinct, separately identifiable component of one of our operating segments for which complete, discrete financial information is available and reviewed regularly by that segment's management. We have two reporting units: Banking and Financial Services.
The goodwill impairment review is a multi-step process that begins with determining whether or not each reporting unit's fair value is less than its carrying amount. We have the option to first assess qualitative factors to determine whether there are events or circumstances that exist that make it more likely than not that the fair value of the reporting unit is less than its carrying amount (Step 0). If it is more likely than not that the fair value of the reporting unit is less than its carrying amount, or if we choose to bypass the qualitative assessment, we proceed to a quantitative analysis where we compare each reporting unit’s fair value to its carrying value to identify potential impairment (Step 1). If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. Determining the fair value of a reporting unit as part of the Step 1 analysis involves significant judgment. Inputs and assumptions, such as future cash flows and earnings, discount rates, the assessment of relevant market transactions for comparability and the resulting control premium assumption, and multiples of relevant financial statement metrics, such as tangible book value and estimated earnings, are all estimates involving significant judgment. We are also required to assess the reasonableness of the overall combined fair value of our reporting units by reference to our market capitalization over time.
If the carrying amount of the reporting unit were to exceed its estimated fair value, a second step (Step 2) would be performed that would compare the implied fair value of the reporting unit's goodwill with the carrying amount of the goodwill for the reporting unit. The implied fair value of goodwill is determined in the same manner as goodwill that is recognized in a business combination. Significant judgment and estimates are also involved in estimating the fair value of the assets and liabilities of the reporting units, and therefore the implied fair value of goodwill, as part of this Step 2 analysis. The most significant estimates involved related to our Banking reporting unit would be the valuation of our loans and core deposit intangible asset. We would determine fair value of our loan portfolio by reference to market observable transactions for loan portfolios with similar characteristics, while we would estimate the value of the core deposit intangible asset using a discounted cash flow approach and market comparable transactions. Both of these estimates are highly subjective and involve many estimates.
For our Banking reporting unit, we utilize both the income and market approaches to determine fair value. Our application of the income approach is based upon assumptions of both balance sheet and income statement activity. In our application of the market approach, we apply market based multiples to the tangible book value and projected earnings of our Banking reporting unit. We also utilize a control premium assumption based on our review of transactions observable in the market place that we determine are comparable.
For our Financial Services reporting unit, we utilize both the income and market approaches to determine fair value. Our application of the income approach is based upon assumptions of income statement activity. In our application of the market approach, we apply market based earnings multiples to our Financial Services reporting unit's applicable earnings metrics. We also utilize a control premium assumption based on our review of transactions observable in the market place that we determine are comparable.
The aggregate fair values of both of our reporting units (Banking and Financial Services) are compared to our market capitalization as an assessment of the appropriateness of the fair value measurements.
SELECTED QUARTERLY FINANCIAL DATA |
| | | | | | | | | | | | | | | | |
| | 2013 | | 2012 |
| | June 30 | March 31 | | December 31 | September 30 | June 30 |
| Selected financial condition data: (in millions) | | | | | | |
| Total assets | $ | 37,150 |
| $ | 36,845 |
| | $ | 36,806 |
| $ | 35,874 |
| $ | 35,106 |
|
| Loans and leases, net | 20,359 |
| 19,863 |
| | 19,547 |
| 18,957 |
| 18,625 |
|
| Investment securities: | | | | | | |
| Available for sale | 7,916 |
| 7,876 |
| | 10,994 |
| 10,580 |
| 9,937 |
|
| Held to maturity | 3,857 |
| 4,219 |
| | 1,300 |
| 1,388 |
| 1,464 |
|
| Goodwill and other intangibles | 2,558 |
| 2,568 |
| | 2,618 |
| 2,627 |
| 2,632 |
|
| Deposits | 27,150 |
| 27,733 |
| | 27,677 |
| 27,698 |
| 27,897 |
|
| Borrowings | 4,431 |
| 3,661 |
| | 3,716 |
| 2,728 |
| 1,690 |
|
| Stockholders’ equity | $ | 4,903 |
| $ | 4,947 |
| | $ | 4,927 |
| $ | 4,915 |
| $ | 4,818 |
|
| Common shares outstanding | 354 |
| 353 |
| | 353 |
| 353 |
| 353 |
|
| Selected operations data: (in thousands) | | | | | | |
| Interest income | $ | 298,080 |
| $ | 295,601 |
| | $ | 283,599 |
| $ | 301,868 |
| $ | 299,841 |
|
| Interest expense | 28,637 |
| 29,471 |
| | 31,313 |
| 32,263 |
| 40,828 |
|
| Net interest income | 269,443 |
| 266,130 |
| | 252,286 |
| 269,605 |
| 259,013 |
|
| Provision for credit losses | 25,200 |
| 20,200 |
| | 22,000 |
| 22,200 |
| 28,100 |
|
| Net interest income after provision for credit losses | 244,243 |
| 245,930 |
| | 230,286 |
| 247,405 |
| 230,913 |
|
Noninterest income (1) | 95,546 |
| 89,312 |
| | 91,821 |
| 102,203 |
| 95,598 |
|
| Merger and acquisition integration expenses | — |
| — |
| | 3,678 |
| 29,404 |
| 131,460 |
|
| Restructuring charges | — |
| — |
| | — |
| — |
| 3,750 |
|
| Noninterest expense | 235,170 |
| 237,666 |
| | 235,106 |
| 237,138 |
| 210,429 |
|
| Income (loss) before income tax | 104,619 |
| 97,576 |
| | 83,323 |
| 83,066 |
| (19,128 | ) |
| Income tax expense (benefit) | 33,485 |
| 30,291 |
| | 22,226 |
| 24,682 |
| (8,204 | ) |
| Net income (loss) | 71,134 |
| 67,285 |
| | 61,097 |
| 58,384 |
| (10,924 | ) |
| Preferred stock dividend | 7,547 |
| 7,547 |
| | 7,547 |
| 7,547 |
| 7,547 |
|
| Net income (loss) available to common stockholders | $ | 63,587 |
| $ | 59,738 |
| | $ | 53,550 |
| $ | 50,837 |
| $ | (18,471 | ) |
| Stock and related per share data: | | | | | | |
| Earnings (loss) per common share: | | | | | | |
| Basic | $ | 0.18 |
| $ | 0.17 |
| | $ | 0.15 |
| $ | 0.15 |
| $ | (0.05 | ) |
| Diluted | 0.18 |
| 0.17 |
| | 0.15 |
| 0.14 |
| (0.05 | ) |
| Cash dividends | 0.08 |
| 0.08 |
| | 0.08 |
| 0.08 |
| 0.08 |
|
Book value (2) | 13.06 |
| 13.19 |
| | 13.15 |
| 13.11 |
| 12.84 |
|
Tangible book value per share(2)(3) | 5.74 |
| 5.84 |
| | 5.65 |
| 5.59 |
| 5.30 |
|
| Market Price (NASDAQ: FNFG): | | | | | | |
| High | 10.17 |
| 8.94 |
| | 8.52 |
| 8.50 |
| 9.87 |
|
| Low | 8.79 |
| 7.68 |
| | 7.08 |
| 7.14 |
| 7.49 |
|
| Close | 10.07 |
| 8.86 |
| | 7.93 |
| 8.07 |
| 7.65 |
|
| |
(1) | Includes $5 million and $16 million of gain on sale of mortgage-backed securities from securities portfolio repositioning for quarters ended September 30, 2012 and June 30, 2012, respectively. |
| |
(2) | Excludes unallocated employee stock ownership plan shares and unvested restricted stock shares. |
| |
(3) | Tangible common equity is used to calculate tangible book value per common share and excludes goodwill and other intangible assets of $2.6 billion as of June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012 and June 30, 2012. Tangible common equity also excludes preferred stock of $338 million. This is a non-GAAP financial measure that we believe provides management and investors with information that is useful in understanding our financial performance and condition. |
|
| | | | | | | | | | | | | | | | |
| | 2013 | | 2012 |
| At or for the quarter ended (dollars in millions) | June 30 | March 31 | | December 31 | September 30 | June 30 |
| Selected financial ratios and other data: | | | | | | |
Performance ratios(1): | | | | | | |
| Return on average assets | 0.77 | % | 0.74 | % | | 0.67 | % | 0.66 | % | (0.12 | )% |
| Common equity: | | | | | | |
| Return on average common equity | 5.48 |
| 5.24 |
| | 4.62 |
| 4.46 |
| (1.64 | ) |
Return on average tangible common equity(2) | 12.21 |
| 12.05 |
| | 10.72 |
| 10.60 |
| (3.18 | ) |
| Total equity: | | | | | | |
| Return on average equity | 5.72 |
| 5.50 |
| | 4.92 |
| 4.77 |
| (0.90 | ) |
Return on average tangible equity(3) | 11.75 |
| 11.62 |
| | 10.45 |
| 10.34 |
| (1.64 | ) |
| Net interest rate spread | 3.28 |
| 3.32 |
| | 3.13 |
| 3.45 |
| 3.16 |
|
| Net interest rate margin | 3.36 |
| 3.39 |
| | 3.22 |
| 3.54 |
| 3.26 |
|
Efficiency ratio (4) | 64.4 |
| 66.9 |
| | 69.4 |
| 71.7 |
| 97.5 |
|
Operating expenses as a percentage of average loans and deposits(5) | 0.50 |
| 0.50 |
| | 0.50 |
| 0.51 |
| 0.51 |
|
| Effective tax rate | 32.0 |
| 31.0 |
| | 26.7 |
| 29.7 |
| 42.9 |
|
| Dividend payout ratio | 44.44 |
| 47.06 |
| | 53.33 |
| 53.33 |
| N/M |
|
| Capital ratios: | | | | | | |
| First Niagara Financial Group, Inc. | | | | | | |
| Total risk-based capital | 11.35 |
| 11.38 |
| | 11.23 |
| 11.48 |
| 11.37 |
|
| Tier 1 risk-based capital | 9.41 |
| 9.45 |
| | 9.29 |
| 9.51 |
| 9.40 |
|
Tier 1 risk-based common capital(6) | 7.65 |
| 7.64 |
| | 7.45 |
| 7.59 |
| 7.41 |
|
| Leverage ratio | 7.01 |
| 6.92 |
| | 6.75 |
| 6.83 |
| 6.32 |
|
| Ratio of stockholders’ equity to total assets | 13.20 |
| 13.43 |
| | 13.39 |
| 13.70 |
| 13.72 |
|
Ratio of tangible common stockholders’ equity to tangible assets(7) | 5.80 |
| 5.95 |
| | 5.77 |
| 5.87 |
| 5.69 |
|
| First Niagara Bank: | | | | | | |
| Total risk-based capital | 10.85 |
| 10.89 |
| | 10.66 |
| 10.88 |
| 10.57 |
|
| Tier 1 risk-based capital | 10.08 |
| 10.15 |
| | 9.94 |
| 10.19 |
| 9.63 |
|
| Leverage ratio | 7.50 | % | 7.43 | % | | 7.23 | % | 7.32 | % | 6.48 | % |
| Asset quality: | | | | | | |
| Total nonaccruing loans | $ | 182 |
| $ | 173 |
| | $ | 173 |
| $ | 142 |
| $ | 129 |
|
| Other nonperforming assets | 8 |
| 11 |
| | 10 |
| 10 |
| 11 |
|
Total classified loans(8) | 701 |
| 720 |
| | 708 |
| 693 |
| 733 |
|
Total criticized loans(9) | 1,012 |
| 1,045 |
| | 1,003 |
| 991 |
| 1,030 |
|
| Allowance for loan losses | 184 |
| 172 |
| | 163 |
| 150 |
| 139 |
|
| Net loan charge-offs | $ | 13 |
| $ | 10 |
| | $ | 9 |
| $ | 10 |
| $ | 16 |
|
| Net charge-offs to average loans | 0.26 | % | 0.21 | % | | 0.18 | % | 0.21 | % | 0.36 | % |
| Provision to average loans | 0.49 |
| 0.40 |
| | 0.45 |
| 0.47 |
| 0.63 |
|
| Total nonaccruing loans to total loans | 0.89 |
| 0.87 |
| | 0.88 |
| 0.75 |
| 0.69 |
|
| Total nonperforming assets to total assets | 0.51 |
| 0.50 |
| | 0.50 |
| 0.42 |
| 0.40 |
|
| Allowance for loan losses to total loans | 0.89 |
| 0.86 |
| | 0.82 |
| 0.78 |
| 0.74 |
|
| Allowance for loan losses to nonaccruing loans | 100.8 |
| 99.2 |
| | 94.1 |
| 105.3 |
| 107.3 |
|
Texas ratio(10) | 16.34 |
| 16.10 |
| | 16.61 |
| 14.16 |
| 13.35 |
|
Asset quality-originated loans(11): | | | | | | |
| Net charge-offs of originated loans to average originated loans | 0.33 | % | 0.27 | % | | 0.24 | % | 0.30 | % | 0.55 | % |
| Provision for originated loans to average originated loans | 0.65 |
| 0.55 |
| | 0.67 |
| 0.72 |
| 0.93 |
|
| Total nonaccruing originated loans to total originated loans | 1.02 |
| 1.03 |
| | 1.07 |
| 0.93 |
| 0.96 |
|
| Allowance for originated loan losses to originated loans | 1.21 |
| 1.21 |
| | 1.20 |
| 1.20 |
| 1.19 |
|
| Other data: | | | | | | |
| Number of full service branches | 422 |
| 427 |
| | 430 |
| 432 |
| 452 |
|
| Full time equivalent employees | 5,779 |
| 5,875 |
| | 5,927 |
| 6,036 |
| 6,103 |
|
N/M Not meaningful
| |
(1) | Computed using daily averages. Annualized where appropriate. |
| |
(2) | Average tangible common equity excludes average goodwill, other intangibles and preferred stock of $2.9 billion, $2.9 billion, $3.0 billion, $3.0 billion, and $2.5 billion for the quarters ended June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, and June 30, 2012, respectively. This is a non-GAAP financial measure that we believe provides management and investors with information that is useful in understanding our financial performance and condition. |
| |
(3) | Average tangible equity excludes average goodwill and other intangibles of $2.6 billion for the quarters ended June 30, 2013, March 31, 2013, December 31, 2012, and September 30, 2012 and $2.2 billion for the quarter ended June 30, 2012. This is a non-GAAP financial measure that we believe provides management and investors with information that is useful in understanding our financial performance and condition. |
| |
(4) | Computed by dividing noninterest expense by the sum of net interest income and noninterest income. |
| |
(5) | Operating expenses exclude merger and acquisition expenses and restructuring charges of $3.7 million, $29.4 million, and $135.2 million for the quarters ended December 31, 2012, September 30, 2012, and June 30, 2012, respectively. This is a non-GAAP financial measure that we believe provides management and investors with information that is useful in understanding our financial performance and position. |
| |
(6) | Computed by subtracting the sum of preferred stock and the junior subordinated debentures associated with trust preferred securities from Tier I capital, divided by risk weighted assets. Tier 1 risk-based common capital, as calculated for purposes of this financial data and the earnings release, does not reflect the adjustments provided for in Basel III. This is a non-GAAP financial measure that we believe provides management and investors with information that is useful in understanding our financial performance and position. |
| |
(7) | Tangible common stockholders’ equity and tangible assets exclude goodwill, other intangibles, and preferred stock of $2.9 billion as of June 30, 2013, March 31, 2013, $3.0 billion as of December 31, 2012, September 30, 2012 and June 30, 2012. This is a non-GAAP financial measure that we believe provides management and investors with information that is useful in understanding our financial performance and condition. |
| |
(8) | Includes consumer loans, which are considered classified when they are 90 days or more past due. Classified loans include substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Asset Quality Review” in our Annual Report on 10-K for the year ended December 31, 2012. |
| |
(9) | Criticized loans includes consumer loans when they are 90 days or more past due. Criticized loans include special mention, substandard, doubtful, and loss. |
| |
(10) | The Texas ratio is computed by dividing the sum of nonperforming assets and loans 90 days past due still accruing by the sum of tangible equity and the allowance for loan losses. This is a non-GAAP measure that we believe provides management and investors with information that is useful in understanding our financial performance and position. |
| |
(11) | Originated loans represent total loans excluding acquired loans. |
RESULTS OF OPERATIONS
Overview
The following table summarizes our results of operations for the periods indicated on a GAAP basis and on an operating (non-GAAP) basis for the periods indicated. Our operating results exclude certain nonoperating income and expense items as detailed below. We believe this non-GAAP measure provides a meaningful comparison of our underlying operational performance and facilitates management’s and investors’ assessments of business and performance trends in comparison to others in the financial services industry and period over period analysis of our fundamental results. In addition, we believe the exclusion of the nonoperating items from our performance enables management and investors to perform a more effective evaluation and comparison of our results and to assess performance in relation to our ongoing operations.
|
| | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended June 30, |
| | June 30, | March 31, | June 30, | | 2013 | 2012 |
| (in thousands, except per share data) | 2013 | 2013 | 2012 | |
| Operating results (Non-GAAP): | | | | | | |
| Net interest income | $ | 269,443 |
| $ | 266,130 |
| $ | 267,371 |
| | $ | 535,573 |
| $ | 509,742 |
|
| Provision for credit losses | 25,200 |
| 20,200 |
| 28,100 |
| | 45,400 |
| 48,100 |
|
| Noninterest income | 95,546 |
| 89,312 |
| 79,703 |
| | 184,858 |
| 149,611 |
|
| Noninterest expense | 235,170 |
| 237,666 |
| 210,429 |
| | 472,836 |
| 394,934 |
|
| Income tax expense | 33,485 |
| 30,291 |
| 36,357 |
| | 63,776 |
| 74,078 |
|
| Net operating income (Non-GAAP) | $ | 71,134 |
| $ | 67,285 |
| $ | 72,188 |
| | $ | 138,419 |
| $ | 142,241 |
|
| Operating earnings per diluted share (Non-GAAP) | $ | 0.18 |
| $ | 0.17 |
| $ | 0.19 |
| | $ | 0.35 |
| $ | 0.37 |
|
| Reconciliation of net operating income to net income (loss) | $ | 71,134 |
| $ | 67,285 |
| $ | 72,188 |
| | $ | 138,419 |
| $ | 142,241 |
|
| Nonoperating income and expenses, net of tax at effective tax rate: | | | | | | |
| Gain on securities portfolio repositioning ($15,895 pre-tax) | — |
| — |
| 10,331 |
| | — |
| 10,331 |
|
| Retroactive premium amortization on securities portfolio ($8,358 pre-tax) | — |
| — |
| (5,558 | ) | | | (5,558 | ) |
| Merger and acquisition integration expenses ($131,460 pre-tax and $144,430 pre-tax for the three and six months ended June 30, 2012, respectively) | — |
| — |
| (85,448 | ) | | — |
| (93,879 | ) |
| Restructuring charges ($3,750 pre-tax and $6,453 pre-tax for the three and six months ended June 30, 2012, respectively) | — |
| — |
| (2,437 | ) | | — |
| (4,194 | ) |
| Total nonoperating expenses, net of tax | — |
| — |
| (83,112 | ) | | — |
| (93,300 | ) |
| Net income (loss) (GAAP) | $ | 71,134 |
| $ | 67,285 |
| $ | (10,924 | ) | | $ | 138,419 |
| $ | 48,941 |
|
| Earnings (loss) per diluted share (GAAP) | $ | 0.18 |
| $ | 0.17 |
| $ | (0.05 | ) | | $ | 0.35 |
| $ | 0.10 |
|
During the second quarter of 2013, we achieved positive operating leverage driven by strong customer activity that resulted in greater fee income and our continued focus on managing our expense base. We continued to generate loan growth across all our geographies through market share gains and concerted efforts to earn more of our customers' business and used a portion of the cash flows from our investment securities portfolio to partially fund this loan growth. Our businesses continued to drive profitable organic growth across our entire footprint while adhering to our longstanding credit underwriting discipline. Additionally, we continue to selectively invest in new products, services, and infrastructure to enhance our ability to serve our customers and increase shareholder value.
Comparison to Prior Quarter
Our second quarter 2013 GAAP net income was $71.1 million, or $0.18 per diluted share, compared to $67.3 million, or $0.17 per diluted share, for the first quarter of 2013. Prior quarter results were impacted by a $6.3 million pre-tax charge, or $0.01 per share, related to two executive departures.
Our net interest income was up modestly in the second quarter compared to the prior quarter. Our tax equivalent net interest margin declined three basis points to 3.36% from 3.39% in the first quarter of 2013. Noninterest income increased $6.2 million, or 7%, from the prior quarter primarily due to sequential strength in wealth management fees, deposit service charges, insurance commissions, and merchant and card fees.
The provision for loan losses on originated loans totaled $23.9 million in the second quarter of 2013, including $11.7 million to support loan growth and $12.2 million to cover net charge-offs during the quarter. At June 30, 2013, nonperforming originated loans comprised 1.02% of originated loans, essentially flat to the prior quarter. Net charge-offs equaled 33 basis points of average originated loans, annualized, compared to 35 basis points for the full year 2012.
The provision for losses on acquired loans totaled $0.9 million in the second quarter of 2013. Net charge-offs equaled six basis points of average acquired loans, annualized, compared to 12 basis points for the full year 2012.
Second quarter 2013 expenses of $235.2 million reflected higher incentive and variable compensation tied to strong fee income growth as well as costs related to selective investments in key initiatives and branch consolidations, partially offset by lower amortization of core deposit intangibles.
Comparison to Prior Year Quarter
Our second quarter 2013 GAAP net income was $71.1 million, or $0.18 per diluted share, compared to a loss of $10.9 million, or $0.05 per diluted share, for the second quarter of 2012, which included $135.2 million in pre-tax merger and acquisition integration expenses and restructuring charges incurred primarily as a result of the HSBC Branch Acquisition in May 2012, a $16 million gain on our securities portfolio repositioning, and an $8 million charge related to retroactive premium amortization on our securities portfolio. Non-GAAP operating net income was $72.2 million, or $0.19 per diluted share, in the second quarter of 2012.
Our tax equivalent net interest margin increased ten basis points to 3.36% from 3.26% in the second quarter of 2012. Excluding the gain on our securities portfolio restructuring, noninterest income increased $16 million as a result of the full quarter impact of the HSBC Branch Acquisition.
The provision for loan losses on originated loans decreased slightly to $23.9 million in the second quarter of 2013 from $25.4 million in the same quarter in 2012. Nonperforming originated loans as a percentage of originated loans increased six basis points to 1.02% at June 30, 2013 from 0.96% at June 30, 2012. Net charge-offs decreased to 33 basis points of average originated loans from 55 basis points of average originated loans in the second quarter of 2012.
Second quarter 2013 noninterest expenses, decreased $110 million compared to the second quarter of 2012. Excluding merger and acquisition integration expenses and restructuring charges in the second quarter of 2012, noninterest expenses increased $25 million as a result of the costs to operate the HSBC branches.
Comparison to Prior Year to Date
Our GAAP net income for the six months ended June 30, 2013 was $138 million, or $0.35 per diluted share, compared to $49 million, or $0.10 per diluted share, for the same period in 2012. Non-GAAP operating net income was $142 million, or $0.37 per diluted share, for the six months ended June 30, 2012.
Our tax equivalent net interest margin increased eight basis points to 3.38% for the first half of 2013 from 3.30% for the first half of 2012. Net interest income in the second quarter increased $34 million, or 7% compared to the same period in 2012. Excluding the $16 million on our securities portfolio restructuring, noninterest income increased $35 million, or 24%, primarily driven by the full six month impact of our May 2012 HSBC Branch Acquisition.
The provision for loan losses on originated loans increased modestly to $43 million for the first six months of 2013 from $41 million for the first six months of 2012. Net charge-offs decreased to 30 basis points of average originated loans from 46 basis points of average originated loans for the six months ended June 30, 2012.
Excluding $144 million in merger and acquisition integration expenses and $6 million in restructuring charges for 2012, noninterest expenses increased $78 million, or 20% for the six months ended June 30, 2013, compared to the same period in 2012 as a result of the costs to operate the HSBC branches.
Net Interest Income
Second quarter 2013 net interest income of $269.4 million increased 1% from the prior quarter. Compared to the prior quarter, the benefits of a 4% annualized increase in average interest-earning assets were partially offset by a three basis point decline in the net interest margin. Average loans increased an annualized 8% driven by strong commercial and indirect auto loan growth. Average other interest earning assets declined 3% annualized from the linked quarter.
In the second quarter of 2013, premium amortization on the residential mortgage backed securities portfolio was $11.6 million compared to $12.7 million in the prior quarter. During the quarter, cash flows from the collateralized mortgage obligation portfolio were below the company's expectations from last year due to the increase in mortgage rates. Compared to the first quarter of 2013, the modest benefits from commercial loan prepayments together with a two basis point decline in the cost of interest bearing deposits were offset by continued compression of loan yields from elevated prepayments and reinvestments at lower spreads.
During the month of June 2013, the yield curve steepened appreciably from prior quarter end and from a year ago driven by increased anticipation that the Federal Reserve will begin tapering its Quantitative Easing program sometime in 2013. As a result, at June 30, 2013, the two to ten year treasury spreads widened 52 basis points compared to prior quarter end and increased 80 basis points compared to June 30, 2012. The steepening of the yield curve primarily resulted from an increase in the mid-to-long end of the curve which has the positive impact of increasing reinvestment rates on securities purchases and mitigating premium amortization due to lower prepayment activity. While our balance sheet remains asset-sensitive, any material improvement in net interest income will require increases to short-term interest rate indices such as the prime rate or 90 day LIBOR. At June 30, 2013, approximately two-thirds of our loan portfolio were variable rate.
Comparison to Prior Quarter
The following table presents our condensed average balance sheet and taxable equivalent yields for the periods indicated. Yields earned on interest-earning assets, rates paid on interest-bearing liabilities, and average balances are based on average daily balances. |
| | | | | | | | | | | | | | | | | |
| | Three months ended | | Increase (decrease) |
| | June 30, 2013 | | March 31, 2013 | |
| (dollars in millions) | Average outstanding balance | Taxable equivalent yield/rate (1) | | Average outstanding balance | Taxable equivalent yield/rate (1) | | Average outstanding balance | Taxable equivalent yield/rate (1) |
| Interest-earning assets: | | | | | | | | |
Loans and leases(2) | | | | | | | | |
| Commercial: | | | | | | | | |
| Real estate | $ | 7,376 |
| 4.22 | % | | $ | 7,179 |
| 4.25 | % | | $ | 197 |
| (0.03 | )% |
| Business | 5,112 |
| 3.66 |
| | 4,999 |
| 3.74 |
| | 113 |
| (0.08 | ) |
| Total commercial lending | 12,488 |
| 3.99 |
| | 12,178 |
| 4.04 |
| | 310 |
| (0.05 | ) |
| Consumer: | | | | | | | | |
| Residential real estate | 3,570 |
| 3.94 |
| | 3,691 |
| 4.01 |
| | (121 | ) | (0.07 | ) |
| Home equity | 2,661 |
| 4.25 |
| | 2,648 |
| 4.29 |
| | 13 |
| (0.04 | ) |
| Indirect auto | 927 |
| 3.18 |
| | 712 |
| 3.29 |
| | 215 |
| (0.11 | ) |
| Credit cards | 302 |
| 10.96 |
| | 304 |
| 10.40 |
| | (2 | ) | 0.56 |
|
| Other consumer | 313 |
| 8.42 |
| | 328 |
| 8.17 |
| | (15 | ) | 0.25 |
|
| Total consumer lending | 7,773 |
| 4.41 |
| | 7,683 |
| 4.50 |
| | 90 |
| (0.09 | ) |
| Total loans | 20,261 |
| 4.19 |
| | 19,861 |
| 4.25 |
| | 400 |
| (0.06 | ) |
Residential mortgage-backed securities(3) | 5,496 |
| 2.40 |
| | 5,488 |
| 2.50 |
| | 8 |
| (0.10 | ) |
Commercial mortgage-backed securities(3) | 1,881 |
| 3.44 |
| | 1,914 |
| 3.78 |
| | (33 | ) | (0.34 | ) |
Other investment securities(3) | 4,833 |
| 3.37 |
| | 4,822 |
| 3.19 |
| | 11 |
| 0.18 |
|
| Money market and other investments | 171 |
| 1.85 |
| | 241 |
| 1.31 |
| | (70 | ) | 0.54 |
|
| Total interest-earning assets | 32,642 |
| 3.71 | % | | 32,326 |
| 3.76 | % | | 316 |
| (0.05 | )% |
Noninterest-earning assets(4)(5) | 4,341 |
| | | 4,481 |
| | | (140 | ) | |
| Total assets | $ | 36,983 |
| | | $ | 36,807 |
| | | $ | 176 |
| |
| Interest-bearing liabilities: | | | | | | | | |
| Deposits | | | | | | | | |
| Savings deposits | $ | 3,897 |
| 0.11 | % | | $ | 3,894 |
| 0.11 | % | | $ | 3 |
| — | % |
| Checking accounts | 4,504 |
| 0.04 |
| | 4,379 |
| 0.05 |
| | 125 |
| (0.01 | ) |
| Money market deposits | 10,178 |
| 0.20 |
| | 10,643 |
| 0.23 |
| | (465 | ) | (0.03 | ) |
| Certificates of deposit | 3,902 |
| 0.66 |
| | 4,081 |
| 0.67 |
| | (179 | ) | (0.01 | ) |
| Total interest-bearing deposits | 22,481 |
| 0.23 |
| | 22,997 |
| 0.25 |
| | (516 | ) | (0.02 | ) |
| Borrowings | | | | | | | | |
| Short-term borrowings | 3,536 |
| 0.41 |
| | 3,152 |
| 0.40 |
| | 384 |
| 0.01 |
|
| Long-term borrowings | 733 |
| 6.62 |
| | 730 |
| 6.71 |
| | 3 |
| (0.09 | ) |
| Total borrowings | 4,269 |
| 1.47 |
| | 3,882 |
| 1.59 |
| | 387 |
| (0.12 | ) |
| Total interest-bearing liabilities | 26,750 |
| 0.43 | % | | 26,879 |
| 0.44 | % | | (129 | ) | (0.01 | )% |
| Noninterest-bearing deposits | 4,711 |
| | | 4,468 |
| | | 243 |
| |
| Other noninterest-bearing liabilities | 533 |
| | | 502 |
| | | 31 |
| |
| Total liabilities | 31,994 |
| | | 31,849 |
| | | 145 |
| |
Stockholders’ equity(4) | 4,989 |
| | | 4,958 |
| | | 31 |
| |
| Total liabilities and stockholders’ equity | $ | 36,983 |
| | | $ | 36,807 |
| | | $ | 176 |
| |
| Net interest rate spread | | 3.28 | % | | | 3.32 | % | | | (0.04 | )% |
| Net interest rate margin | | 3.36 | % | | | 3.39 | % | | | (0.03 | )% |
| |
(1) | We use a taxable equivalent basis based upon a 35% tax rate in order to provide the most comparative yields among all types of interest-earning assets. |
| |
(2) | Average outstanding balances are net of deferred costs and net premiums or discounts and include nonperforming loans. |
| |
(3) | Average outstanding balances are at amortized cost. |
| |
(4) | Average outstanding balances include unrealized gains/losses on securities available for sale. |
| |
(5) | Average outstanding balances include allowances for loan losses and bank owned life insurance, earnings from which are reflected in noninterest income. |
Our taxable equivalent net interest income of $274 million for the quarter ended June 30, 2013 increased by $4 million from the quarter ended March 31, 2013. Overall, the yield on earning assets decreased five basis points quarter over quarter as a result of the combined effects of lower premium amortization on our residential mortgage-backed securities and a 4% increase in average earning assets, partially negated by continued yield compression on our loan portfolio. Net interest income was also assisted by lower interest expense from deposit pricing and wholesale funding strategies. Specifically:
| |
| • | Our average balance of investment securities decreased quarter over quarter by approximately $14 million. Yields on our investment securities portfolio decreased three basis points primarily due to lower commercial mortgage-backed securities balances partially offset by lower premium amortization on residential mortgage-backed securities. |
| |
| • | Our average balance of loans increased by $400 million due to growth in our average commercial loans of $310 million and our average indirect auto portfolio of $215 million, partially offset by a decrease in our residential real estate loans. Loan yields declined six basis points as commercial loan yields decreased by five basis points and our total consumer loan portfolio yields decreased by nine basis points. |
| |
| • | Overall, the gross commercial loan yields declined as a result of (i) new loan production being booked in a lower interest rate environment, and (ii) a shorter duration of our commercial loan portfolio. The shorter duration resulted as a higher percentage of our new originations were variable rate, which was partially attributable to our customer derivatives capacity, which permits us to offer our customers seeking a longer term rate the flexibility to swap their variable loan obligation to a fixed rate. |
| |
| • | Our average balances of interest bearing deposits declined by $516 million and our average rate paid declined by two basis points due to our deposit pricing actions. The decline in our average balances was driven by our interest rate and treasury management strategies as we continue to move down deposit pricing and cover any liquidity needs through our wholesale borrowings. |
| |
| • | Our average borrowings increased quarter over quarter by $387 million as we continued to fund our balance sheet growth and rotation through low cost short term borrowings. This funding strategy has also caused our cost of borrowings to decline 12 basis points from the first quarter of 2013. |
Comparison to Prior Year Quarter
The following table presents our condensed average balance sheet and taxable equivalent yields for the periods indicated. Yields earned on interest-earning assets, rates paid on interest-bearing liabilities and average balances are based on average daily balances.
|
| | | | | | | | | | | | | | | | | |
| | Three months ended | | Increase (decrease) |
| | June 30, 2013 | | June 30, 2012 | |
| (dollars in millions) | Average outstanding balance | Taxable equivalent yield/rate(1) | | Average outstanding balance | Taxable equivalent yield/rate(1) | | Average outstanding balance | Taxable equivalent yield/rate(1) |
| Interest-earning assets: | | | | | | | | |
Loans and leases(2) | | | | | | | | |
| Commercial: | | | | | | | | |
| Real estate | $ | 7,376 |
| 4.22 | % | | $ | 6,501 |
| 4.88 | % | | $ | 875 |
| (0.66 | )% |
| Business | 5,112 |
| 3.66 |
| | 4,293 |
| 4.03 |
| | 819 |
| (0.37 | ) |
| Total commercial lending | 12,488 |
| 3.99 |
| | 10,794 |
| 4.54 |
| | 1,694 |
| (0.55 | ) |
| Consumer: | | | | | | | | |
| Residential real estate | 3,570 |
| 3.94 |
| | 3,964 |
| 4.07 |
| | (394 | ) | (0.13 | ) |
| Home equity | 2,661 |
| 4.25 |
| | 2,412 |
| 4.42 |
| | 249 |
| (0.17 | ) |
| Indirect auto | 927 |
| 3.18 |
| | 84 |
| 4.16 |
| | 843 |
| (0.98 | ) |
| Credit cards | 302 |
| 10.96 |
| | 160 |
| 11.58 |
| | 142 |
| (0.62 | ) |
| Other consumer | 313 |
| 8.42 |
| | 283 |
| 8.12 |
| | 30 |
| 0.30 |
|
| Total consumer lending | 7,773 |
| 4.41 |
| | 6,903 |
| 4.55 |
| | 870 |
| (0.14 | ) |
| Total loans | 20,261 |
| 4.19 |
| | 17,697 |
| 4.59 |
| | 2,564 |
| (0.40 | ) |
Residential mortgage-backed securities(3)(4) | 5,496 |
| 2.40 |
| | 8,982 |
| 2.35 |
| | (3,486 | ) | 0.05 |
|
Commercial mortgage-backed securities(4) | 1,881 |
| 3.44 |
| | 1,867 |
| 3.94 |
| | 14 |
| (0.50 | ) |
Other investment securities(4) | 4,833 |
| 3.37 |
| | 3,652 |
| 3.43 |
| | 1,181 |
| (0.06 | ) |
| Money market and other investments | 171 |
| 1.85 |
| | 349 |
| 0.94 |
| | (178 | ) | 0.91 |
|
Total interest-earning assets(3) | 32,642 |
| 3.71 | % | | 32,546 |
| 3.77 | % | | 96 |
| (0.06 | )% |
Noninterest-earning assets(5)(6) | 4,341 |
| | | 3,953 |
| | | 388 |
| |
| Total assets | $ | 36,983 |
| | | $ | 36,500 |
| | | $ | 483 |
| |
| Interest-bearing liabilities: | | | | | | | | |
| Deposits | | | | | | | | |
| Savings deposits | $ | 3,897 |
| 0.11 | % | | $ | 3,302 |
| 0.14 | % | | $ | 595 |
| (0.03 | )% |
| Checking accounts | 4,504 |
| 0.04 |
| | 3,095 |
| 0.08 |
| | 1,409 |
| (0.04 | ) |
| Money market deposits | 10,178 |
| 0.20 |
| | 9,125 |
| 0.28 |
| | 1,053 |
| (0.08 | ) |
| Certificates of deposit | 3,902 |
| 0.66 |
| | 4,019 |
| 0.83 |
| | (117 | ) | (0.17 | ) |
| Total interest-bearing deposits | 22,481 |
| 0.23 |
| | 19,541 |
| 0.34 |
| | 2,940 |
| (0.11 | ) |
| Borrowings | | | | | | | | |
| Short-term borrowings | 3,536 |
| 0.41 |
| | 5,046 |
| 0.55 |
| | (1,510 | ) | (0.14 | ) |
| Long-term borrowings | 733 |
| 6.62 |
| | 2,433 |
| 2.91 |
| | (1,700 | ) | 3.71 |
|
| Total borrowings | 4,269 |
| 1.47 |
| | 7,479 |
| 1.31 |
| | (3,210 | ) | 0.16 |
|
| Total interest-bearing liabilities | 26,750 |
| 0.43 | % | | 27,020 |
| 0.61 | % | | (270 | ) | (0.18 | )% |
| Noninterest-bearing deposits | 4,711 |
| | | 3,835 |
| | | 876 |
| |
| Other noninterest-bearing liabilities | 533 |
| | | 765 |
| | | (232 | ) | |
| Total liabilities | 31,994 |
| | | 31,620 |
| | | 374 |
| |
Stockholders’ equity(5) | 4,989 |
| | | 4,880 |
| | | 109 |
| |
| Total liabilities and stockholders’ equity | $ | 36,983 |
| | | $ | 36,500 |
| | | $ | 483 |
| |
Net interest rate spread(3) | | 3.28 | % | | | 3.16 | % | | | 0.12 | % |
Net interest rate margin(3) | | 3.36 | % | | | 3.26 | % | | | 0.10 | % |
| |
(1) | We use a taxable equivalent basis based on a 35% tax rate in order to provide the most comparative yields among all types of interest-earning assets. |
| |
(2) | Average outstanding balances are net of deferred costs and net premiums and include nonperforming loans. |
(3)Our quarter ended June 30, 2012 operating (non-GAAP) results excluded $8 million of accelerated CMO adjustments from our net interest income. Had these adjustments been excluded from the table above, our yields for the quarter ended June 30, 2012 would have been: |
| | |
| Average balance sheet | Quarter ended June 30, 2012 |
| Residential mortgage-backed securities | 2.72 | % |
| Total interest-earning assets | 3.87 |
|
| Net interest rate spread | 3.26 |
|
| Net interest rate margin | 3.37 |
|
| |
(4) | Average outstanding balances are at amortized cost. |
| |
(5) | Average outstanding balances include unrealized gains/losses on securities available for sale. |
| |
(6) | Average outstanding balances include allowances for loan losses and bank owned life insurance, earnings from which are reflected in noninterest income. |
Our taxable equivalent net interest income, including the effects of the accelerated CMO premium adjustment in the prior year, increased $10 million, or 4%, for the second quarter of 2013 compared to the second quarter of 2012 reflecting an increase in net-interest earning assets of $365 million and an increase in our net interest margin of ten basis points. The $96 million increase in interest-earning assets reflects the $1.6 billion in interest earning assets acquired in our HSBC Branch Acquisition and continued organic loan growth in our Upstate New York and Pennsylvania markets, mostly offset by our securities portfolio repositioning transaction which occurred at the end of the second quarter of 2012. Over the same period our average interest bearing liabilities decreased by $269 million, with the impact of deposits acquired in the HSBC Branch Acquisition offset by pay downs in borrowings. The ten basis point increase in our net interest margin resulted from the favorable impact of replacing the majority of our borrowings with lower costing deposits, offset by lower yields on our loans and securities in the second quarter of 2013 compared to the second quarter of 2012 brought on by the market pressures on interest rates. Our yields on interest-earning assets in the second quarter of 2013 decreased six basis points compared to the second quarter of 2012, while costs on interest-bearing liabilities decreased 18 basis points, resulting in a 12 basis point increase in our interest rate spread.
Comparison to Prior Year to Date
The following table presents our condensed average balance sheet and taxable equivalent yields for the periods indicated. Yields earned on interest-earning assets, rates paid on interest-bearing liabilities and average balances are based on average daily balances.
|
| | | | | | | | | | | | | | | | | |
| | Six months ended June 30, | | Increase (decrease) |
| | 2013 | | 2012 | |
| (dollars in millions) | Average outstanding balance | Taxable equivalent yield/rate(1) | | Average outstanding balance | Taxable equivalent yield/rate(1) | | Average outstanding balance | Taxable equivalent yield/rate(1) |
| Interest-earning assets: | | | | | | | | |
Loans and leases(2) | | | | | | | | |
| Commercial: | | | | | | | | |
| Real estate | $ | 7,278 |
| 4.23 | % | | $ | 6,400 |
| 4.93 | % | | $ | 878 |
| (0.70 | )% |
| Business | 5,056 |
| 3.70 |
| | 4,104 |
| 4.05 |
| | 952 |
| (0.35 | ) |
| Total commercial lending | 12,334 |
| 4.02 |
| | 10,505 |
| 4.59 |
| | 1,829 |
| (0.57 | ) |
| Consumer: | | | | | | | | |
| Residential real estate | 3,631 |
| 3.98 |
| | 3,955 |
| 4.18 |
| | (324 | ) | (0.20 | ) |
| Home equity | 2,654 |
| 4.27 |
| | 2,284 |
| 4.41 |
| | 370 |
| (0.14 | ) |
| Indirect auto | 820 |
| 3.23 |
| | 46 |
| 4.58 |
| | 774 |
| (1.35 | ) |
| Credit cards | 303 |
| 10.68 |
| | 93 |
| 11.32 |
| | 210 |
| (0.64 | ) |
| Other consumer | 320 |
| 8.29 |
| | 263 |
| 7.61 |
| | 57 |
| 0.68 |
|
| Total consumer lending | 7,728 |
| 4.45 |
| | 6,641 |
| 4.51 |
| | 1,087 |
| (0.06 | ) |
| Total loans | 20,062 |
| 4.21 |
| | 17,146 |
| 4.60 |
| | 2,916 |
| (0.39 | ) |
Residential mortgage-backed securities(3)(4) | 5,492 |
| 2.45 |
| | 8,766 |
| 2.68 |
| | (3,274 | ) | (0.23 | ) |
Commercial mortgage-backed securities(4) | 1,898 |
| 3.61 |
| | 1,785 |
| 3.96 |
| | 113 |
| (0.35 | ) |
Other investment securities(4) | 4,827 |
| 3.28 |
| | 3,165 |
| 3.41 |
| | 1,662 |
| (0.13 | ) |
| Money market and other investments | 206 |
| 1.53 |
| | 311 |
| 0.94 |
| | (105 | ) | 0.59 |
|
| Total interest-earning assets | 32,485 |
| 3.74 | % | | 31,173 |
| 3.88 | % | | 1,312 |
| (0.14 | )% |
Noninterest-earning assets(5)(6) | 4,411 |
| | | 3,639 |
| | | 772 |
| |
| Total assets | $ | 36,896 |
| | | $ | 34,812 |
| | | $ | 2,084 |
| |
| Interest-bearing liabilities: | | | | | | | | |
| Deposits | | | | | | | | |
| Savings deposits | $ | 3,896 |
| 0.11 | % | | $ | 2,934 |
| 0.09 | % | | $ | 962 |
| 0.02 | % |
| Checking accounts | 4,442 |
| 0.05 |
| | 2,660 |
| 0.09 |
| | 1,782 |
| (0.04 | ) |
| Money market deposits | 10,409 |
| 0.21 |
| | 8,147 |
| 0.28 |
| | 2,262 |
| (0.07 | ) |
| Certificates of deposit | 3,991 |
| 0.66 |
| | 3,923 |
| 0.90 |
| | 68 |
| (0.24 | ) |
| Total interest-bearing deposits | 22,738 |
| 0.24 |
| | 17,662 |
| 0.36 |
| | 5,076 |
| (0.12 | ) |
| Borrowings | | | | | | | | |
| Short-term borrowings | 3,345 |
| 0.40 |
| | 4,339 |
| 0.59 |
| | (994 | ) | (0.19 | ) |
| Long-term borrowings | 731 |
| 6.67 |
| | 3,884 |
| 2.34 |
| | (3,153 | ) | 4.33 |
|
| Total borrowings | 4,076 |
| 1.53 |
| | 8,223 |
| 1.41 |
| | (4,147 | ) | 0.12 |
|
| Total interest-bearing liabilities | 26,814 |
| 0.44 | % | | 25,885 |
| 0.69 | % | | 929 |
| (0.25 | )% |
| Noninterest-bearing deposits | 4,591 |
| | | 3,444 |
| | | 1,147 |
| |
| Other noninterest-bearing liabilities | 517 |
| | | 618 |
| | | (101 | ) | |
| Total liabilities | 31,922 |
| | | 29,947 |
| | | 1,975 |
| |
Stockholders’ equity(5) | 4,974 |
| | | 4,865 |
| | | 109 |
| |
| Total liabilities and stockholders’ equity | $ | 36,896 |
| | | $ | 34,812 |
| | | $ | 2,084 |
| |
Net interest rate spread(3) | | 3.30 | % | | | 3.19 | % | | | 0.11 | % |
Net interest rate margin(3) | | 3.38 | % | | | 3.30 | % | | | 0.08 | % |
| |
(1) | We use a taxable equivalent basis based on a 35% tax rate in order to provide the most comparative yields among all types of interest-earning assets. |
| |
(2) | Average outstanding balances are net of deferred costs and net premiums and include nonperforming loans. |
(3)Our six months ended June 30, 2012 operating (non-GAAP) results excluded $8 million of accelerated CMO adjustments from our net interest income. Had these adjustments been excluded from the table above, our yields for the six months ended June 30, 2012 would have been: |
| | |
| Average balance sheet | Six months ended June 30, 2012 |
| Residential mortgage-backed securities | 2.87 | % |
| Total interest-earning assets | 3.93 |
|
| Net interest rate spread | 3.24 |
|
| Net interest rate margin | 3.36 |
|
| |
(4) | Average outstanding balances are at amortized cost. |
| |
(5) | Average outstanding balances include unrealized gains/losses on securities available for sale. |
| |
(6) | Average outstanding balances include allowances for loan losses and bank owned life insurance, earnings from which are reflected in noninterest income. |
Our taxable equivalent net interest income, including the effects of the accelerated CMO premium adjustment in the prior year, increased $32 million, or 6%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 reflecting an increase in net-interest earning assets of $383 million and an increase in our net interest margin of eight basis points. The $1.3 billion increase in interest-earning assets reflects the $1.6 billion in interest earning assets acquired in our HSBC Branch Acquisition and continued organic loan growth in our Upstate New York and Pennsylvania markets, partially offset by our securities portfolio repositioning transaction from the second quarter of 2012. Over the same period our average interest bearing liabilities increased by $0.9 billion, with the impact of deposits acquired in the HSBC Branch Acquisition offset by pay downs in borrowings. The eight basis point increase in our net interest margin resulted from the favorable impact of replacing the majority of our borrowings with lower costing deposits, offset by lower yields on our loans and securities in the second quarter of 2013 compared to the second quarter of 2012 brought on by the market pressures on interest rates. Our yields on interest-earning assets in the six months ended June 30, 2013 decreased 14 basis points compared to the six months ended June 30, 2012, while costs on interest-bearing liabilities decreased 25 basis points, resulting in an 11 basis point increase in our interest rate spread.
Provision for Credit Losses
Our provision for credit losses is comprised of three components: consideration of the adequacy of our allowance for originated loan losses; need for an allowance for acquired loan losses in excess of any credit discount due to deterioration in credit quality subsequent to acquisition; and probable losses associated with our unfunded loan commitments. The following table details the composition of our provision for credit losses for the periods indicated: |
| | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended June 30, |
| | June 30, | March 31, | June 30, | | 2013 | 2012 |
| (in thousands) | 2013 | 2013 | 2012 | |
| Provision for originated loans | $ | 23,904 |
| $ | 18,925 |
| $ | 25,375 |
| | $ | 42,829 |
| $ | 40,902 |
|
| Provision for acquired loans | 896 |
| 875 |
| 2,428 |
| | 1,771 |
| 6,801 |
|
| Provision for unfunded commitments | 400 |
| 400 |
| 297 |
| | 800 |
| 397 |
|
| Total | $ | 25,200 |
| $ | 20,200 |
| $ | 28,100 |
| | $ | 45,400 |
| $ | 48,100 |
|
The provision for credit losses of $25.2 million in the second quarter of 2013 reflects continued growth in our commercial portfolio, partially offset by a release of provision in our residential real estate portfolio reflecting the continued decrease in the portfolio balance. This provision included $0.4 million for unfunded loan commitments in the second quarter of 2013 as a result of the growth in our unfunded commitments. Our total unfunded commitments were $9.1 billion and $8.7 billion at June 30, 2013 and December 31, 2012, respectively. The liability for unfunded commitments is included in Other Liabilities in our Consolidated Statements of Condition and amounted to $13 million and $12 million at June 30, 2013 and December 31, 2012, respectively.
Our provision for loan losses related to our originated loans is based upon the inherent risk of our loans and considers such interrelated factors as the composition and other credit risk factors of our loan portfolio, trends in asset quality including loan concentrations, and the level of our delinquent loans. Consideration is also given to collateral value, government guarantees, and regional and global economic considerations. The provision for credit losses related to originated loans amounted to $23.9 million, or 0.65% of average originated loans annualized, for the quarter ended June 30, 2013, compared to $18.9 million, or
0.55% of average originated loans annualized, for the quarter ended March 31, 2013 and $25.4 million, or 0.93% of average originated loans annualized for the quarter ended June 30, 2012. This provision included $11.7 million to support sequential originated loan growth and $12.2 million to cover net charge-offs during the quarter.
Our provision for loan losses related to our acquired loans is based upon a deterioration in expected cash flows subsequent to the acquisition of the loans. These acquired loans were originally recorded at fair value on the date of acquisition. As the fair value at time of acquisition incorporated lifetime expected credit losses, there was no carryover of the related allowance for loan losses. Subsequent to acquisition, we periodically reforecast the expected cash flows for our acquired loans and compare this to our original estimates to evaluate the need for a loan loss provision. Our $0.9 million provision related to our acquired loans for the second quarter of 2013 was consistent with first quarter of 2013.
Noninterest Income
The following table presents our noninterest income for the periods indicated:
|
| | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended June 30, |
| (dollars in thousands) | June 30, 2013 | March 31, 2013 | June 30, 2012 | | 2013 | 2012 |
| Deposit service charges | $ | 26,482 |
| $ | 24,800 |
| $ | 21,433 |
| | $ | 51,282 |
| $ | 38,470 |
|
| Insurance commissions | 17,692 |
| 16,355 |
| 17,072 |
| | 34,047 |
| 33,905 |
|
| Merchant and card fees | 12,380 |
| 11,298 |
| 9,271 |
| | 23,678 |
| 14,799 |
|
| Wealth management services | 14,945 |
| 12,845 |
| 9,207 |
| | 27,790 |
| 18,246 |
|
| Mortgage banking | 6,882 |
| 6,424 |
| 7,174 |
| | 13,306 |
| 12,823 |
|
| Capital markets income | 5,002 |
| 6,031 |
| 6,831 |
| | 11,033 |
| 13,370 |
|
| Lending and leasing | 4,534 |
| 3,906 |
| 4,245 |
| | 8,440 |
| 7,368 |
|
| Bank owned life insurance | 3,321 |
| 3,467 |
| 3,848 |
| | 6,788 |
| 7,235 |
|
| Gain on securities portfolio repositioning | — |
| — |
| 15,895 |
| | — |
| 15,895 |
|
| Other | 4,308 |
| 4,186 |
| 622 |
| | 8,494 |
| 3,395 |
|
| Total noninterest income | $ | 95,546 |
| $ | 89,312 |
| $ | 95,598 |
| | $ | 184,858 |
| $ | 165,506 |
|
| Noninterest income as a percentage of net revenue | 26.2 | % | 25.1 | % | 27.0 | % | | 25.7 | % | 24.8 | % |
Comparison to Prior Quarter
Second quarter 2013 noninterest income of $95.5 million increased $6.2 million, or 7%, compared to the prior quarter, driven by strong customer activity and sales productivity primarily in our wealth management and insurance businesses.
Deposit service charges increased 7% from the prior quarter and were driven by an increase in non-sufficient funds incidence and collection rates. Insurance commissions increased $1.3 million, or 8%, from the first quarter due to higher renewal premiums. Merchant and card fees increased 10% driven by net growth in card member accounts and higher debit card interchange from strong customer usage as purchase volume was up 10%. The improvement in purchase volumes was driven by both seasonality and the impact of new card members that we acquired during our first quarter solicitation campaign to our existing depositor household base.
Wealth management services revenues increased $2.1 million, or 16%, driven by strong annuity sales, increased sales productivity, as well as a 7% increase in assets under management. Mortgage banking revenues increased 7% to $6.9 million from $6.4 million in the first quarter of 2013. Lock volumes were essentially flat from the prior quarter, while lower gain on sale income was offset by other mortgage revenues.
Offsetting these increases, capital markets income decreased $1.0 million, or 17%, from the prior quarter to $5.0 million primarily due to lower derivative product demand and syndication activity during the quarter.
Comparison to Prior Year Quarter
Second quarter 2013 noninterest income of $95.5 million was unchanged compared to the second quarter of 2012. Excluding the $16 million gain on securities portfolio repositioning in 2012, our second quarter 2013 noninterest income increased $16 million, or 20%, primarily due to the full quarter impact of the HSBC Branch Acquisition. Higher deposit service charges also resulted from new checking account openings and fee income initiatives. Merchant and card fees increased as a result of the expansion of our credit card business stemming from the acquisition of the business from HSBC. The acquisition of $2.5 billion in assets under management from HSBC was the primary contributor to the $5.7 million, or 62%, increase in revenues from wealth management services.
Comparison to Prior Year to Date
Noninterest income for the six months ended June 30, 2013 increased $19.4 million from the same period in 2012. Noninterest income for the six months ended June 30, 2012 includes a $16 million gain on securities portfolio repositioning. Excluding this gain, the increase from 2012 to 2013 was $35.2 million and resulted primarily from the impact of our May 2012 HSBC Branch Acquisition. The acquisition of credit card business from HSBC and continued expansion of this business both contributed to the $8.9 million increase in merchant and card fees. The acquisition of $2.5 billion in assets under management from HSBC and subsequent growth in assets under management contributed to the $9.5 million increase in revenues from wealth management services.
Noninterest Expense
The following table presents our operating noninterest expenses for the periods indicated:
|
| | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended June 30, |
| (dollars in thousands) | June 30,
2013 | March 31,
2013 | June 30,
2012 | | 2013 | 2012 |
| Salaries and benefits | $ | 116,305 |
| $ | 115,790 |
| $ | 104,507 |
| | $ | 232,095 |
| $ | 200,984 |
|
| Occupancy and equipment | 28,506 |
| 28,045 |
| 24,089 |
| | 56,551 |
| 46,106 |
|
| Technology and communications | 29,603 |
| 27,113 |
| 24,434 |
| | 56,716 |
| 44,147 |
|
| Marketing and advertising | 5,450 |
| 4,346 |
| 6,676 |
| | 9,796 |
| 13,439 |
|
| Professional services | 9,782 |
| 9,603 |
| 9,263 |
| | 19,385 |
| 18,158 |
|
| Amortization of intangibles | 10,850 |
| 14,119 |
| 9,839 |
| | 24,969 |
| 16,305 |
|
| FDIC premiums | 9,348 |
| 8,901 |
| 10,552 |
| | 18,249 |
| 16,685 |
|
| Merger and acquisition integration expenses | — |
| — |
| 131,460 |
| | — |
| 144,430 |
|
| Restructuring charges | — |
| — |
| 3,750 |
| | — |
| 6,453 |
|
| Other | 25,326 |
| 29,749 |
| 21,069 |
| | 55,075 |
| 39,110 |
|
| Total noninterest expenses | 235,170 |
| 237,666 |
| 345,639 |
| | 472,836 |
| 545,817 |
|
| Less nonoperating expenses: | | | | | | |
| Merger and acquisition integration expenses | — |
| — |
| (131,460 | ) | | — |
| (144,430 | ) |
| Restructuring charges | — |
| — |
| (3,750 | ) | | — |
| (6,453 | ) |
Total operating noninterest expenses(1) | $ | 235,170 |
| $ | 237,666 |
| $ | 210,429 |
| | $ | 472,836 |
| $ | 394,934 |
|
Efficiency ratio(2) | 64.4 | % | 66.9 | % | 97.5 | % | | 65.6 | % | 81.8 | % |
Operating efficiency ratio(1) | 64.4 | % | 66.9 | % | 60.6 | % | | 65.6 | % | 59.9 | % |
| |
(1) | We believe this non-GAAP measure provides a meaningful comparison of our underlying operational performance and facilitates management’s and investors’ assessments of business and performance trends in comparison to others in the financial services industry and period over period analysis of our fundamental results. The operating efficiency ratio is computed by dividing operating noninterest expense by the sum of net interest income and noninterest income. |
| |
(2) | The efficiency ratio is computed by dividing noninterest expense by the sum of net interest income and noninterest income. |
Comparison to Prior Quarter
Second quarter 2013 GAAP noninterest expenses decreased $2 million to $235 million from the first quarter of 2013, which included $6.3 million in charges related to executive departures. Noninterest expenses in the second quarter of 2013 reflected higher incentives and variable compensation expenses related to strong fee income generation as well as additional costs related to the consolidation of five branches. Additionally, higher technology and communication expenses reflect our ongoing enhancements to our technology platform.
Compared to the first quarter of 2013, a $4.2 million increase in incentives and variable compensation expenses tied to strong fee income growth was partially offset by a sequential decline in costs associated with employee headcount and payroll taxes. The amortization of intangibles decreased $3.3 million from the prior quarter primarily reflecting the decline in amortization of the HSBC transaction related core deposit intangible.
Our efficiency ratio improved to 64.4% in the second quarter from 65.1% in the prior quarter, excluding the executive departure charges.
Comparison to Prior Year Quarter
Noninterest expenses decreased $110 million, for the quarter ended June 30, 2013 from the quarter ended June 30, 2012, which included $131 million in merger and acquisition integration expenses and $4 million in restructuring charges. Excluding these one-time charges, our noninterest expenses increased $25 million primarily due to the increased operating costs related to the acquired HSBC branches.
Salaries and benefits increased $12 million, reflective of the increase in our full time equivalent employees, resulting from the HSBC Branch Acquisition and the growth of our infrastructure from a year ago. The increases in occupancy and equipment and technology and communications reflect the additional HSBC branches and continued investments in an effort to enhance the sophistication and efficiency of our back office processes. The $1 million increase in amortization of intangibles resulted from the intangibles we recorded in connection with the HSBC Branch Acquisition.
Merger and acquisition integration expenses of $131 million for the three months ended June 30, 2012 were attributable to the HSBC Branch Acquisition.
Comparison to Prior Year to Date
Noninterest expense for the six months ended June 30, 2013 decreased $73 million from the six months ended June 30, 2012. Excluding $144 million and $6 million in merger and acquisition integration expenses and restructuring charges, respectively, in 2012, noninterest expenses increased $78 million, or 20%, in 2013 primarily as a result of operating the acquired HSBC branches.
Taxes
Our effective tax rate of 32.0% for the three months ended June 30, 2013 was consistent with 31.0% for the three months ended March 31, 2013 and decreased from 42.9% for the three months ended June 30, 2012. The decrease from the three months ended June 30, 2012 was primarily due to lower pre-tax income in 2012 as a result of higher expense levels attributable to the HSBC Branch Acquisition resulting in pre-tax loss for the second quarter of 2012.
Our effective tax rate for the six months ended June 30, 2013 was 31.5% and 32.9% for the six months ended June 30, 2012. The decrease in the effective tax rate is primarily due to additional tax credits generated in 2013.
ANALYSIS OF FINANCIAL CONDITION AT JUNE 30, 2013
Overview
The table below details certain amounts in our Consolidated Statements of Financial Condition at the dates indicated:
|
| | | | | | | | |
| (in millions) | June 30,
2013 | December 31,
2012 | Increase (decrease) |
| Investment securities | $ | 12,203 |
| 12,714 |
| $ | (511 | ) |
| Loans and leases: | | | |
| Commercial: | | | |
| Real estate | 7,482 |
| 7,093 |
| 389 |
|
| Business | 5,166 |
| 4,953 |
| 212 |
|
| Total commercial loans | 12,648 |
| 12,047 |
| 601 |
|
| Consumer: | | | |
| Residential real estate | 3,558 |
| 3,762 |
| (204 | ) |
| Home equity | 2,671 |
| 2,652 |
| 19 |
|
| Indirect auto | 1,050 |
| 601 |
| 449 |
|
| Credit cards | 303 |
| 315 |
| (12 | ) |
| Other consumer | 313 |
| 334 |
| (21 | ) |
| Total consumer loans | 7,895 |
| 7,663 |
| 232 |
|
| Total loans and leases | 20,543 |
| 19,710 |
| 832 |
|
| Deposits: | | | |
| Savings accounts | 3,878 |
| 3,888 |
| (10 | ) |
| Interest-bearing checking | 4,500 |
| 4,451 |
| 49 |
|
| Money market deposits | 10,014 |
| 10,581 |
| (567 | ) |
| Noninterest-bearing deposits | 4,846 |
| 4,644 |
| 202 |
|
| Certificates of deposit | 3,912 |
| 4,113 |
| (201 | ) |
| Total deposits | 27,150 |
| 27,677 |
| (527 | ) |
| Total borrowings | 4,431 |
| 3,716 |
| 715 |
|
Our focus on rotating our balance sheet by using the repayments on our residential mortgage-backed investment securities portfolio to fund loan growth contributed to a portion of the $511 million decrease in our investment securities portfolio ending balance. The decrease in our investment securities portfolio was also the result of the increase in long-term interest rates as well as tightening credit spreads on some or our credit assets, which caused a decrease in our unrealized gains in our available for sale portfolio of $144 million, pre-tax.
We delivered strong growth in total loans and achieved our fourteenth consecutive quarter of double digit commercial loan growth. Key to our ability to deliver this industry-leading loan performance is attracting new customers, maintaining our discipline on credit, and leveraging our cross-solve approach to sell more to our growing customer base. Period end balances in our commercial loan portfolio increased $601 million, or 10% annualized, to $12.6 billion at June 30, 2013. Indirect auto loans increased $449 million from December 31, 2012, to an ending balance of $1.0 billion at June 30, 2013, as we originated $559 million in loans year to date. The decrease in residential mortgage loans reflected elevated industry wide prepayment levels.
Our efforts to grow our customer base, reposition our account mix, and increase our lower cost deposits are reflected in the decreases in our money market deposits and certificates of deposit and the increase in our noninterest-bearing deposits. We continued to be successful in attracting and retaining mass affluent customers through our Pinnacle checking account products.
Short-term borrowings increased $715 million from December 31, 2012 as we used short-term borrowings to fund asset growth due to the run off of our money market deposit accounts and certificates of deposit.
Lending Activities
Our primary lending activity is the origination of commercial business and commercial real estate loans, as well as residential mortgage and home equity loans to customers located within our primary market areas. Our commercial real estate and business loan portfolios provide opportunities to cross sell other fee-based banking services. Consistent with our long-term customer relationship focus, we retain the servicing rights on the majority of residential mortgage loans that we sell resulting in monthly servicing fee income to us. We also originate and retain in our lending portfolio various types of home equity and consumer loan products given their customer relationship building benefits.
Our total loans and leases outstanding increased $0.8 billion from December 31, 2012 to June 30, 2013 stemming from the continued growth in our commercial and indirect auto portfolios. Our commercial loan portfolio increased $0.6 billion, or 10% annualized, resulting from our continued strategic focus on the portfolio. Our period over period results display the strong organic growth across our footprint in our commercial lending activities. Commercial loans as a percentage of our total loans of 62% remained in line with the loan type composition at December 31, 2012. During the second quarter of 2013, we originated $296 million of indirect auto loans and added 51 dealers to our network within in our contiguous footprint.
Offsetting this growth was a decrease in our residential real estate loan portfolio of $203 million which reflected the elevated industry wide prepayment levels and our strategy of selling certain newly originated residential real estate loans in the secondary market.
The following table presents the composition of our loan and lease portfolios at the dates indicated:
|
| | | | | | | | | | | | |
| | June 30, 2013 | | December 31, 2012 | Increase (decrease) |
| (dollars in millions) | Amount | Percent | | Amount | Percent |
| Commercial: | | | | | | |
| Real estate | $ | 6,729 |
| 32.8 | % | | 6,466 |
| 32.8 | % | 263 |
|
| Construction | 753 |
| 3.7 |
| | 627 |
| 3.2 |
| 126 |
|
| Business | 5,166 |
| 25.1 |
| | 4,953 |
| 25.1 |
| 213 |
|
| Total commercial | 12,648 |
| 61.6 |
| | 12,047 |
| 61.1 |
| 602 |
|
| Consumer: | | | | | | |
| Residential real estate | 3,558 |
| 17.3 |
| | 3,762 |
| 19.1 |
| (203 | ) |
| Home equity | 2,671 |
| 13.0 |
| | 2,652 |
| 13.5 |
| 19 |
|
| Indirect auto | 1,050 |
| 5.1 |
| | 601 |
| 3.0 |
| 448 |
|
| Credit cards | 303 |
| 1.5 |
| | 315 |
| 1.6 |
| (12 | ) |
| Other consumer | 313 |
| 1.5 |
| | 334 |
| 1.7 |
| (21 | ) |
| Total loans and leases | 20,543 |
| 100.0 | % | | 19,710 |
| 100.0 | % | 833 |
|
| Allowance for loan losses | (184 | ) | | | (163 | ) | | (21 | ) |
| Total loans and leases, net | $ | 20,359 |
| | | 19,547 |
| | 812 |
|
Included in the table above are acquired loans with a carrying value of $5.4 billion and $6.3 billion at June 30, 2013 and December 31, 2012, respectively. Such loans were acquired through our mergers and acquisitions and were initially recorded at fair value with no carryover of any related allowance for loan losses.
The table below presents the composition of our loan and lease portfolios, including net deferred costs and unearned discounts, based on the region in which the loan was originated:
|
| | | | | | | | | | | | | | | | | | |
| (in millions) | Upstate New York | Western Pennsylvania | Eastern Pennsylvania | Connecticut and Western Massachusetts | Other(1) | Total loans and leases |
| June 30, 2013 | | | | | | |
| Commercial: | | | | | | |
| Real estate | $ | 3,632 |
| $ | 776 |
| $ | 1,441 |
| $ | 1,633 |
| $ | — |
| $ | 7,482 |
|
| Business | 2,261 |
| 858 |
| 811 |
| 692 |
| 544 |
| 5,166 |
|
| Total commercial | 5,893 |
| 1,634 |
| 2,252 |
| 2,325 |
| 544 |
| 12,648 |
|
| Consumer: | | | | | | |
| Residential real estate | 1,253 |
| 74 |
| 271 |
| 1,960 |
| — |
| 3,558 |
|
| Home equity | 1,341 |
| 219 |
| 570 |
| 540 |
| — |
| 2,671 |
|
| Indirect auto | 362 |
| 2 |
| 5 |
| 198 |
| 484 |
| 1,050 |
|
| Credit cards | 257 |
| 29 |
| 11 |
| 6 |
| — |
| 303 |
|
| Other consumer | 256 |
| 25 |
| 28 |
| 4 |
| — |
| 313 |
|
| Total loans and leases | $ | 9,362 |
| $ | 1,984 |
| $ | 3,138 |
| $ | 5,032 |
| $ | 1,027 |
| $ | 20,543 |
|
| December 31, 2012 | | | | | | |
| Commercial: | | | | | | |
| Real estate | $ | 3,536 |
| $ | 671 |
| $ | 1,336 |
| $ | 1,550 |
| $ | — |
| $ | 7,093 |
|
| Business | 2,390 |
| 753 |
| 619 |
| 635 |
| 556 |
| 4,953 |
|
| Total commercial | 5,927 |
| 1,424 |
| 1,955 |
| 2,186 |
| 556 |
| 12,047 |
|
| Consumer: | | | | | | |
| Residential real estate | 1,321 |
| 71 |
| 271 |
| 2,099 |
| — |
| 3,762 |
|
| Home equity | 1,316 |
| 203 |
| 581 |
| 552 |
| — |
| 2,652 |
|
| Indirect auto | 169 |
| 2 |
| — |
| 118 |
| 313 |
| 601 |
|
| Credit cards | 267 |
| 30 |
| 11 |
| 6 |
| — |
| 315 |
|
| Other consumer | 270 |
| 24 |
| 33 |
| 6 |
| — |
| 334 |
|
| Total loans and leases | $ | 9,270 |
| $ | 1,754 |
| $ | 2,852 |
| $ | 4,966 |
| $ | 868 |
| $ | 19,710 |
|
| |
(1) | Other consists of indirect auto loans made in states that border our footprint, and our capital markets portfolio. Our capital markets portfolio includes participations in syndicated loans that have been underwritten and purchased by us where we are not the lead bank. Nearly all of these loans are to companies in our footprint states or in states that border our footprint states. |
We continue to expand our commercial lending activities by taking advantage of opportunities to move up market while remaining focused on our sound credit fundamentals. Our enhanced specialty offerings in equipment financing, healthcare, and syndications continue to provide additional opportunities to enhance our relationships with our existing commercial customer base, as well as attract new customers. Overall, our commercial pipelines at the end of the second quarter of 2013 continue to be robust, particularly in our newer markets.
Our Western and Eastern Pennsylvania markets have exhibited strong growth with an increase in their commercial loan portfolios of $210 million and $298 million, or 30% annualized for both regions, from the end of 2012. Over the same period, our Connecticut and Western Massachusetts market also contributed to the growth, with a 13% annualized increase.
The table below presents a breakout of the unpaid principal balance of our commercial real estate and commercial business loan portfolios by individual loan size as of the dates indicated:
|
| | | | | | | | | | | |
| | June 30, 2013 | | December 31, 2012 |
| (dollars in millions) | Amount | Count | | Amount | Count |
Commercial real estate loans by balance size:(1) | | | | | |
| Greater than or equal to $20 million | $ | 496 |
| 20 |
| | $ | 384 |
| 15 |
|
| $10 million to $20 million | 1,258 |
| 92 |
| | 1,178 |
| 85 |
|
| $5 million to $10 million | 1,312 |
| 188 |
| | 1,189 |
| 170 |
|
| $1 million to $5 million | 2,687 |
| 1,243 |
| | 2,592 |
| 1,194 |
|
Less than $1 million(2) | 1,729 |
| 7,158 |
| | 1,750 |
| 7,423 |
|
| Total commercial real estate loans | $ | 7,482 |
| 8,701 |
| | $ | 7,093 |
| 8,887 |
|
Commercial business loans by size:(1) | | | | | |
| Greater than or equal to $20 million | $ | 197 |
| 8 |
| | $ | 259 |
| 10 |
|
| $10 million to $20 million | 972 |
| 73 |
| | 830 |
| 65 |
|
| $5 million to $10 million | 967 |
| 134 |
| | 1,013 |
| 145 |
|
| $1 million to $5 million | 1,573 |
| 699 |
| | 1,450 |
| 647 |
|
Less than $1 million(2) | 1,457 |
| 24,739 |
| | 1,401 |
| 23,840 |
|
| Total commercial business loans | $ | 5,166 |
| 25,653 |
| | $ | 4,953 |
| 24,707 |
|
| |
(1) | Multiple loans to one borrower have not been aggregated for purposes of this table. |
| |
(2) | Caption includes net deferred fees and costs and other adjustments. |
At June 30, 2013 and December 31, 2012, non-owner occupied commercial real estate represented 69% and 70%, respectively of the total commercial real estate balance. The table below provides the principal balance of our non-owner occupied commercial real estate loans by location and property type at the date indicated:
|
| | | | | | | | | | | | | | | | | | |
| (in millions) | Upstate New York | Western Pennsylvania | Eastern Pennsylvania | Connecticut and Western Massachusetts | Other(1) | Total |
| June 30, 2013: | | | | | | |
| Non-owner occupied commercial real estate loans: | | | | | | |
| Construction, acquisition and development | $ | 376 |
| $ | 74 |
| $ | 114 |
| $ | 127 |
| $ | 184 |
| $ | 876 |
|
| Multifamily and apartments | 983 |
| 61 |
| 136 |
| 206 |
| 83 |
| 1,469 |
|
| Office and professional space | 504 |
| 79 |
| 93 |
| 340 |
| 101 |
| 1,116 |
|
| Retail | 373 |
| 45 |
| 115 |
| 240 |
| 116 |
| 888 |
|
| Warehouse and industrial | 123 |
| 24 |
| 40 |
| 88 |
| 22 |
| 297 |
|
| Other | 265 |
| 25 |
| 145 |
| 76 |
| 28 |
| 539 |
|
| Total non-owner occupied commercial real estate loans | 2,624 |
| 307 |
| 642 |
| 1,077 |
| 534 |
| 5,185 |
|
| Owner occupied commercial real estate loans | 985 |
| 301 |
| 486 |
| 336 |
| 189 |
| 2,297 |
|
| Total commercial real estate loans | $ | 3,609 |
| $ | 608 |
| $ | 1,129 |
| $ | 1,413 |
| $ | 723 |
| $ | 7,482 |
|
| December 31, 2012: | | | | | | |
| Non-owner occupied commercial real estate loans: | | | | | | |
| Construction, acquisition and development | $ | 370 |
| $ | 52 |
| $ | 104 |
| $ | 110 |
| $ | 95 |
| $ | 732 |
|
| Multifamily and apartments | 950 |
| 56 |
| 151 |
| 219 |
| 87 |
| 1,462 |
|
| Office and professional space | 517 |
| 72 |
| 91 |
| 314 |
| 106 |
| 1,100 |
|
| Retail | 365 |
| 42 |
| 135 |
| 222 |
| 95 |
| 858 |
|
| Warehouse and industrial | 129 |
| 24 |
| 55 |
| 90 |
| 18 |
| 316 |
|
| Other | 263 |
| 22 |
| 130 |
| 73 |
| 23 |
| 511 |
|
| Total non-owner occupied commercial real estate loans | 2,594 |
| 268 |
| 665 |
| 1,028 |
| 423 |
| 4,979 |
|
| Owner occupied commercial real estate loans | 922 |
| 265 |
| 468 |
| 319 |
| 140 |
| 2,114 |
|
| Total commercial real estate loans | $ | 3,516 |
| $ | 533 |
| $ | 1,133 |
| $ | 1,348 |
| $ | 564 |
| $ | 7,093 |
|
| |
(1) | Primarily consists of loans located in states bordering our footprint. |
Investment Securities Portfolio
The fair value of our total investment securities portfolio was comprised of the following at the dates indicated:
|
| | | | | | | | | | | |
| | June 30, 2013 | | December 31, 2012 |
| (dollars in millions) | Fair
value | % of total
portfolio | | Fair
value | % of total
portfolio |
| Collateralized mortgage obligations | $ | 4,848 |
| 41.1 | % | | $ | 5,029 |
| 40.7 | % |
| Commercial mortgage-backed securities | 1,910 |
| 16.2 |
| | 2,060 |
| 16.7 |
|
| Collateralized loan obligations | 1,534 |
| 13.0 |
| | 1,545 |
| 12.5 |
|
| Asset-backed securities | 945 |
| 8.0 |
| | 956 |
| 7.7 |
|
| Corporate debt and trust preferred securities | 877 |
| 7.4 |
| | 851 |
| 6.9 |
|
| Other residential mortgage-backed securities | 706 |
| 6.0 |
| | 858 |
| 6.9 |
|
| States and political subdivisions | 563 |
| 4.8 |
| | 608 |
| 4.9 |
|
| U.S. government agencies and enterprises | 354 |
| 3.0 |
| | 409 |
| 3.3 |
|
| Other | 30 |
| 0.3 |
| | 31 |
| 0.2 |
|
| U.S. Treasury | 20 |
| 0.2 |
| | 21 |
| 0.2 |
|
| Total investment securities | $ | 11,788 |
| 100.0 | % | | $ | 12,368 |
| 100.0 | % |
Since the third quarter of 2011, the Federal Reserve has taken certain actions which have resulted in lower short-term and long-term interest rates. These actions had the impact of flattening the yield curve and reducing the yields on our investment securities portfolio. Additionally, the predictive ability of the 10 year Treasury rate as a proxy for mortgage rates has diminished. Accordingly, future mortgage rates have become more volatile and difficult to predict, and competitive market forces could cause mortgage rates to continue to rise, which could negatively impact the value of our mortgage-backed investment securities and certain loans.
At the end of the first quarter of 2013, we designated $3 billion of available for sale residential mortgage-backed securities as held to maturity. The net pre-tax unrealized gain on these securities at the time of transfer was $55 million. The securities were transferred at fair value, and the net unrealized pre-tax gain on these securities became part of the new amortized cost basis of the securities and will be amortized into interest income over the life of the securities. The amortization of this net pre-tax unrealized gain will be offset by the amortization of the related pre-tax amount recorded in other accumulated comprehensive income over the remaining life of the securities, resulting in no current or future impact to our net interest income as a result of the transfer.
The net unamortized purchase premiums on our CMO portfolio decreased to $45 million, or 1.0% of the portfolio, at June 30, 2013, from $74 million, or 1.6% of the portfolio, at December 31, 2012. For the six months ended June 30, 2013, our actual cash flows from our December 31, 2012 CMO portfolio were $844 million, which was $192 million lower than the $1.04 billion we estimated at December 31, 2012.
The net unamortized purchase premiums on our other residential mortgage-backed securities decreased to $15 million, or 2.3% of the portfolio, at June 30, 2013, from $22 million, or 2.7% of the portfolio, at December 31, 2012.
Mortgage rates have rebounded since the lows seen in the fourth quarter of 2012 and actual cash flows on our CMO portfolio were lower than expected. There were no retroactive adjustments to our residential mortgage-backed securities portfolio related to changes in prepayment speed estimates given the lack of sufficient trend data and the current levels of interest rate volatility seen and expected in the market coupled with the unprecedented actions of the Federal Reserve.
Changes in our expectations regarding the magnitude and duration of a lower interest rate environment could have a material impact on our net interest income in both the period of change, attributable to any retroactive accounting adjustment that would be required to maintain a constant effective yield, and in subsequent periods attributable to changes to the prospective yields on our investment securities.
Our holdings in residential mortgage-backed securities were 47% and 48% of our total investment securities portfolio at June 30, 2013 and December 31, 2012, respectively. At each of June 30, 2013 and December 31, 2012, 99% of our residential mortgage-backed securities in our available for sale portfolio were issued by the Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”), or Federal Home Loan Mortgage Corporation (“FHLMC”). GNMA, FNMA, and FHLMC guarantee the contractual cash flows of these investments. FNMA and FHLMC are government sponsored enterprises that are currently under the conservatorship of the U.S. government. Our GNMA mortgage-backed securities are backed by the full faith and credit of the U.S. government.
Deposits
Our total deposits decreased $527 million from December 31, 2012 to $27.2 billion at June 30, 2013, and core deposits increased to 86% of total deposits from 85% at December 31, 2012. We continued to focus our efforts on growing our customer base, re-positioning our account mix and increasing lower cost deposits. Transaction deposits, which include interest-bearing and noninterest bearing checking balances, increased $251 million, or 5.6% annualized, from December 31, 2012 and currently represent 34% of our deposit base, up from 31% a year ago.
The average cost of interest-bearing deposits declined six basis points to 0.23% from 0.29% in the fourth quarter of 2012 and two basis points from 0.25% in the prior quarter. Pricing actions on non-transactional deposit accounts together with a favorable shift in the mix of deposits drove the decline in overall cost of interest-bearing deposits.
The increase in transaction deposits from December 31, 2012 resulted from the acquisition of new checking accounts and mass affluent households, as well as higher balances held by customers. Noninterest-bearing deposits increased $202 million, or 9% annualized.
Since 2011, we consolidated over 60 branches across our regional footprint, investing in alternative delivery platforms such as online and mobile banking. More than 100,000 customers have registered for mobile banking since its launch in January 2013. In the first half of 2013, we consolidated nine branches, including five branches in the second quarter. As customers migrate to other banking platforms, we will continue to optimize our physical branch network.
The following table illustrates the composition of our deposits at the dates indicated: |
| | | | | | | | | | | | | | |
| | June 30, 2013 | | December 31, 2012 | Increase (decrease) |
| (dollars in millions) | Amount | Percent | | Amount | Percent |
| Core deposits: | | | | | | |
| Savings | $ | 3,878 |
| 14.3 | % | | $ | 3,888 |
| 14.0 | % | $ | (10 | ) |
| Interest-bearing checking | 4,500 |
| 16.6 |
| | 4,451 |
| 16.1 |
| 49 |
|
| Money market deposits | 10,014 |
| 36.9 |
| | 10,581 |
| 38.2 |
| (567 | ) |
| Noninterest-bearing | 4,846 |
| 17.8 |
| | 4,644 |
| 16.8 |
| 202 |
|
| Total core deposits | 23,238 |
| 85.6 |
| | 23,564 |
| 85.1 |
| (326 | ) |
| Certificates | 3,912 |
| 14.4 |
| | 4,113 |
| 14.9 |
| (201 | ) |
| Total deposits | $ | 27,150 |
| 100.0 | % | | $ | 27,677 |
| 100.0 | % | $ | (527 | ) |
The table below contains selected information on the composition of our deposits by geographic region at the dates indicated:
|
| | | | | | | | | | | | | | | |
| (n millions) | Upstate New
York(1) | Western
Pennsylvania | Eastern
Pennsylvania | Connecticut
and Western
Massachusetts | Total deposits |
| June 30, 2013 | | | | | |
| Core deposits: | | | | | |
| Savings | $ | 2,452 |
| $ | 168 |
| $ | 235 |
| $ | 1,023 |
| $ | 3,878 |
|
| Interest-bearing checking | 2,737 |
| 600 |
| 521 |
| 642 |
| 4,500 |
|
| Money market deposits | 6,487 |
| 1,187 |
| 947 |
| 1,393 |
| 10,014 |
|
| Noninterest-bearing | 2,968 |
| 689 |
| 547 |
| 642 |
| 4,846 |
|
| Total core deposits | 14,644 |
| 2,644 |
| 2,250 |
| 3,700 |
| 23,238 |
|
| Certificates | 2,157 |
| 523 |
| 382 |
| 850 |
| 3,912 |
|
| Total deposits | $ | 16,801 |
| $ | 3,167 |
| $ | 2,632 |
| $ | 4,550 |
| $ | 27,150 |
|
| December 31, 2012 | | | | | |
| Core deposits: | | | | | |
| Savings | $ | 2,393 |
| $ | 166 |
| $ | 230 |
| $ | 1,099 |
| $ | 3,888 |
|
| Interest-bearing checking | 2,625 |
| 589 |
| 622 |
| 615 |
| 4,451 |
|
| Money market deposits | 6,976 |
| 1,199 |
| 1,003 |
| 1,403 |
| 10,581 |
|
| Noninterest-bearing | 2,804 |
| 711 |
| 536 |
| 593 |
| 4,644 |
|
| Total core deposits | 14,798 |
| 2,665 |
| 2,391 |
| 3,710 |
| 23,564 |
|
| Certificates | 2,114 |
| 570 |
| 462 |
| 967 |
| 4,113 |
|
| Total deposits | $ | 16,912 |
| $ | 3,235 |
| $ | 2,853 |
| $ | 4,677 |
| $ | 27,677 |
|
(1) Includes brokered money market deposits of $291 million and $278 million at June 30, 2013 and December 31, 2012, respectively, and brokered certificates of deposit of $783 million and $635 million at June 30, 2013 and December 31, 2012, respectively.
Capital
During the first six months of 2013, our stockholders’ equity decreased $24 million primarily driven by a decline in the value of our available for sale investment securities. Net income of $138 million was offset by $89 million of unrealized losses on our available for sale investment securities, $56 million, or $0.16 per share, in common stock dividends and $15 million in preferred stock dividends. Our tangible common equity ratio was 5.80% at June 30, 2013 and 5.77% at December 31, 2012. During the same six month period, both our Tier 1 and Total risk-based regulatory capital ratios increased by 12 basis points to 9.41% and 11.35%, respectively. These increases reflect the favorable impacts of both our retained earnings and adjustments, totaling 17 basis points of capital, to disallowed deferred tax assets and goodwill. The increases were offset by a $1.2 billion increase in risk-weighted assets due to balance sheet growth and our balance sheet rotation strategy, whereby we are rotating investment security proceeds into loans.
At March 31, 2013, we designated $3.0 billion of available for sale CMO and MBS investment securities as held to maturity. The transfer from available for sale to held to maturity was at fair value. This designation partially protected tangible equity in the event of a rise in interest rates, as such a rise in interest rates would extend the duration and adversely impact the fair value of the investment securities.
During the quarter ended March 31, 2013, we recorded a $36 million reduction to our goodwill balance related to the establishment of deferred tax assets in connection with the HSBC Branch acquisition and our National City Bank branch acquisition.
First Niagara Financial Group, Inc. and our bank subsidiary, First Niagara Bank, N.A., are subject to regulatory capital requirements administered by the Federal Reserve and OCC, respectively. Failure to meet minimum capital requirements can result in regulators initiating certain mandatory and possibly additional discretionary actions that could have a direct material effect on our financial statements.
The capital amounts, ratios, and requirements for First Niagara Financial Group, Inc. and First Niagara Bank, N.A. at June 30, 2013 are presented in the following table:
|
| | | | | | | | | | | |
| | Actual | | Minimum amount to be
well-capitalized |
| (dollars in millions) | Amount | Ratio | | Amount | Ratio |
| First Niagara Financial Group, Inc.: | | | | | |
| Leverage ratio | $ | 2,406 |
| 7.01 | % | | $ | 1,716 |
| 5.00 | % |
| Tier 1 risk-based capital | 2,406 |
| 9.41 |
| | 1,534 |
| 6.00 |
|
| Total risk-based capital | 2,901 |
| 11.35 |
| | 2,556 |
| 10.00 |
|
| First Niagara Bank, N.A.: | | | | | |
| Leverage ratio | $ | 2,572 |
| 7.50 | % | | $ | 1,715 |
| 5.00 | % |
| Tier 1 risk-based capital | 2,572 |
| 10.08 |
| | 1,531 |
| 6.00 |
|
| Total risk-based capital | 2,768 |
| 10.85 |
| | 2,551 |
| 10.00 |
|
As of June 30, 2013, we met all capital adequacy requirements to which we were subject and both First Niagara Financial Group, Inc. and First Niagara Bank, N.A. were considered well-capitalized under the Federal Reserve’s Regulation Y (in the case of First Niagara Financial Group, Inc.) and the OCC’s prompt corrective action regulations (in the case of First Niagara Bank, N.A.). At June 30, 2013, the capital ratios reflect $75 million in dividends the Bank made to the Company during the first half of 2013.
In preparation for the implementation of the proposed regulatory capital rule revisions issued by the Federal Reserve pursuant to the Basel III framework, which was approved July 2013, we have analyzed the impact of the finalized requirements on our capital ratios over the phase in period. We are confident in our ability to meet the targeted capital ratios upon implementation of the revised requirements, as finalized. Based on our interpretation of the rules and our planned rotation out of assets most adversely impacted by Basel III, such as asset-backed securities and collateralized loan obligations, we estimate that our reported Tier 1 common ratio at June 30, 2013 of 7.65% would be five to ten basis points lower under Basel III.
We manage our capital position to ensure that our capital base is sufficient to support our current and future business needs, satisfy existing regulatory requirements, and meet appropriate standards of safety and soundness.
RISK MANAGEMENT
As with all companies, we face uncertainty and the management of risk is an important component of driving shareholder value and financial returns. We do this through robust governance processes and appropriate risk and control framework. We have an Enterprise Risk Management (“ERM”) framework which includes methods and processes to identify and manage risk. Successful management of risk allows us to identify situations that may significantly or materially interfere with the achievement of desired goals, or an event or activity which may cause a significant opportunity to be missed.
We employ three lines of defense as our primary means to ensure roles, responsibilities and accountabilities are defined and to allow for quick identification and response to risk events. The first line of defense is the businesses that are responsible for their risks and ensuring the continuous monitoring of their control environment. The second line of defense is the oversight areas residing primarily in the risk departments reporting to the Chief Risk Officer. These areas set policy, monitor to ensure compliance and report on the results of oversight. The third line of defense is Internal Audit which provides independent objective assurance services which audit and report on the design and operating effectiveness of internal controls, risk management framework and governance processes. The results of internal audit reviews are reported to the Audit Committee of the Board of Directors.
The Board of Directors has the fundamental responsibility of directing the management of the Bank's business and affairs, and establishing a corporate culture that prevents the circumvention of safe and sound policies and procedures. Our Board of Directors and Executive Management utilize various committees' in the management of risk. The main risk governance committees are the Audit Committee and Risk Committee of the Board and the Enterprise Risk Management Committee of Management ("ERMC"). The purpose of the Risk Committee of the Board of Directors is to assist the Board in fulfilling its oversight responsibilities of the Company with respect to understanding inherent risks impacting the Company and related control activities; and, assessing the risks of the Company. Sub-Committees of the ERMC, which support the core risk areas, are the Operational Risk Committee, Allowance for Loan and Lease Losses Committee, Credit Risk Committee, Credit Policy Committee, Consumer Finance Risk Committee, Asset/Liability Committee, Management Compliance Committee, and the Information Security & Privacy Committee. These sub-committees are supported by various working groups.
Credit Risk
Allowance for Loan Losses and Nonperforming Assets
Credit risk is the risk associated with the potential inability of some of our borrowers to repay their loans according to their contractual terms. This inability to repay could result in higher levels of nonperforming assets and credit losses, which could potentially reduce our earnings.
A detailed description of our methodology for calculating our allowance for loan losses is included in “Critical Accounting Policies and Estimates.”
Allowance for Loan Losses
The primary indicators of credit quality are delinquency status and our internal loan gradings for our commercial loan portfolio segment and delinquency status and current FICO scores for our consumer loan portfolio segment. We place non-credit card originated loans on nonaccrual status when they become more than 90 days past due, or earlier if we do not expect the full collection of interest or principal. When a loan is placed on nonaccrual status, any interest previously accrued and not collected is reversed from interest income. Credit cards are not placed on nonaccrual status until 180 days past due, at which time they are charged-off.
Our evaluation of our allowance for loan losses is based on a continuous review of our loan portfolio. The methodology that we use for determining the amount of the allowance for loan losses consists of several elements. We use an internal loan grading system with nine categories of loan grades used in evaluating our business and commercial real estate loans. In our loan grading system, pass loans are graded 1 through 5, special mention loans are graded 6, substandard loans are graded 7, doubtful loans are graded 8 and loss loans (which are fully charged off) are graded 9. Our definition of special mention, substandard, doubtful and loss are consistent with regulatory definitions.
In the normal course of our loan monitoring process, we review all pass graded individual commercial and commercial real estate loans and/or total loan concentration to one borrower no less frequently than annually for those greater than $3 million, every 18 months for those greater than $1 million but less than $3 million and every 36 months for those greater than $500 thousand and less than $1 million.
As part of our credit monitoring process, our loan officers perform formal reviews based upon the credit attributes of the respective loans. Pass graded loans are continually monitored through our review of current information related to each loan. The nature of the current information available and used by us includes, as applicable, review of payment status and delinquency reporting, receipt and analysis of interim and annual financial statements, rent roll data, delinquent property tax searches, periodic loan officer inspections of properties, and loan officer knowledge of their borrowers, as well as the business environment in their respective market areas. We perform a formal review on a more frequent basis if the above considerations indicate that such review is warranted. Further, based upon consideration of the above information, if appropriate, loan grading can be reevaluated prior to the scheduled full review.
Quarterly Criticized Asset Reports ("QCARs") are prepared every quarter for all special mention exposures greater than $300 thousand and substandard or doubtful exposures greater than $200 thousand. The purpose of the QCAR is to document as applicable, current payment status, payment history, charge-off amounts, collateral valuation information (including appraisal dates), and commentary on collateral valuations, guarantor information, interim financial data, cash flow, historical data and projections, rent roll data, and account history.
QCARs for substandard loans are reviewed on a quarterly basis by either management's Criticized Loan Review Committee (for such loans greater than $2 million) or by a Senior Credit Manager (for such loans between $200 thousand and $2 million). QCARs for all special mention loans greater than $300 thousand are reviewed on a quarterly basis by either management's Classified Loan Review Committee (for such loans greater than $2 million) or by a Senior Credit Manager (for such loans between $300 thousand and $2 million). Special mention and substandard loans below $300 thousand and $200 thousand, respectively, are reviewed by a loan officer on a quarterly basis ensuring that loan grade and accrual status are appropriate.
Updated valuations are obtained periodically in accordance with Interagency Appraisal and Evaluation Guidelines and internal policy. Appraisals or evaluations for assets securing substandard rated loans are completed within 90 days of the downgrade. Real estate collateral supporting substandard loans with an outstanding balance greater than $500 thousand is required to have an appraisal or evaluation performed at least every 18 months for general commercial properties and at least every 12 months for land and acquisition and development loans. Real estate collateral supporting substandard loans with an outstanding balance equal to or less than $500 thousand is required to have an appraisal or evaluation performed at least every 24 months for general commercial properties and at least every 18 months for land and acquisition and development loans. However, an appraisal or evaluation may be obtained more frequently than 18 to 24 months when volatile or unusual market conditions exist that could affect the ultimate realization of the value of the real estate collateral. Non-real estate collateral is reappraised on an as-needed basis, as determined by the loan officer, our Classified Loan Review Committee, or by credit risk management based upon the facts and circumstances of the individual relationship.
Among other factors, our quarterly reviews consist of an assessment of the fair value of collateral for all loans reviewed, including collateral dependent impaired loans. During this review process, an internal estimate of collateral value, as of each quarterly review date, is determined utilizing current information such as comparables from more current appraisals in our possession for similar collateral in our portfolio, recent sale information, current rent rolls, operating statements and cash flow information for the specific collateral. Further, we have an Appraisal Institute designated MAI appraiser on staff available for consultation during our quarterly estimation of collateral fair value. This current information is compared to the assumptions made in the most recent appraisal as well as in previous quarters. Quarterly adjustments to the estimated fair value of the collateral are made as determined necessary in the judgment of our experienced senior credit officers to reflect current market conditions and current operating results for the specific collateral.
Adjustments are made each quarter to the related allowance for loan losses for collateral dependent impaired loans to reflect the change, if any, in the estimated fair value of the collateral less estimated costs to sell as compared to the previous quarter. The determination of the appropriateness of obtaining new appraisals is also specifically addressed in each quarterly review. New appraisals will be obtained prior to the above noted required time frames if it is determined appropriate during these quarterly reviews. Further, our in-house MAI appraiser is available for consultation regarding the need for new valuations.
In addition to the credit monitoring procedures described above, our loan review department, which is independent of the lending function and is part of our risk management function, verifies the accuracy of loan grading, classification, and, if a loan is impaired, the related allowance for loan losses.
The following table details our allocation of our allowance for loan losses by loan category at the dates indicated:
|
| | | | | | | | | | | |
| | June 30, 2013 | | December 31, 2012 |
(dollars in thousands) | Amount of allowance for loan losses | Percent of loans to total loans | | Amount of allowance for loan losses | Percent of loans to total loans |
| Commercial: | | | | | |
| Real estate and construction | $ | 43,347 |
| 36.5 | % | | $ | 37,550 |
| 36.0 | % |
| Business | 106,597 |
| 25.1 |
| | 99,188 |
| 25.1 |
|
| Total commercial | 149,944 |
| 61.6 |
| | 136,738 |
| 61.1 |
|
| Consumer: | | | | | |
| Residential real estate | 2,690 |
| 17.3 |
| | 4,575 |
| 19.1 |
|
| Home equity | 5,795 |
| 13.0 |
| | 5,006 |
| 13.5 |
|
| Other consumer | 25,279 |
| 8.1 |
| | 16,203 |
| 6.3 |
|
| Total | $ | 183,708 |
| 100.0 | % | | $ | 162,522 |
| 100.0 | % |
| Allowance for loan losses to total loans | 0.89 | % | | | 0.82 | % | |
The following table presents the activity in our allowance for originated loan losses by portfolio segment for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | |
| | Commercial | | Consumer | |
| (in thousands) | Business | Real estate | | Residential | Home equity | Other
consumer | Total |
| Six months ended June 30, 2013 | | | | | | | |
| Allowance for loan losses: | | | | | | | |
| Balance at beginning of period | $ | 99,188 |
| $ | 37,550 |
| | $ | 4,515 |
| $ | 4,716 |
| $ | 14,989 |
| $ | 160,958 |
|
| Provision for loan losses | 19,486 |
| 8,964 |
| | (1,167 | ) | 2,307 |
| 13,239 |
| 42,829 |
|
| Charge-offs | (13,314 | ) | (3,791 | ) | | (1,095 | ) | (1,677 | ) | (5,211 | ) | (25,088 | ) |
| Recoveries | 1,237 |
| 535 |
| | 377 |
| 159 |
| 1,443 |
| 3,751 |
|
| Balance at end of period | $ | 106,597 |
| $ | 43,258 |
| | $ | 2,630 |
| $ | 5,505 |
| $ | 24,460 |
| $ | 182,450 |
|
| Six months ended June 30, 2012 | | | | | | | |
| Allowance for loan losses: | | | | | | | |
| Balance at beginning of period | $ | 57,348 |
| $ | 50,007 |
| | $ | 4,101 |
| $ | 4,374 |
| $ | 2,362 |
| $ | 118,192 |
|
| Provision for loan losses | 33,487 |
| (1,485 | ) | | 2,302 |
| 3,375 |
| 3,223 |
| 40,902 |
|
| Charge-offs | (16,631 | ) | (4,010 | ) | | (1,555 | ) | (2,963 | ) | (1,856 | ) | (27,015 | ) |
| Recoveries | 1,530 |
| 433 |
| | 280 |
| 266 |
| 803 |
| 3,312 |
|
| Allowance related to loans sold | (26 | ) | (18 | ) | | (52 | ) | (81 | ) | (18 | ) | (195 | ) |
| Balance at end of period | $ | 75,708 |
| $ | 44,927 |
| | $ | 5,076 |
| $ | 4,971 |
| $ | 4,514 |
| $ | 135,196 |
|
| Three months ended June 30, 2013 | | | | | | | |
| Allowance for loan losses: | | | | | | | |
| Balance at beginning of period | $ | 97,472 |
| $ | 41,344 |
| | $ | 3,817 |
| $ | 6,143 |
| $ | 21,963 |
| $ | 170,739 |
|
| Provision for loan losses | 16,300 |
| 3,880 |
| | (896 | ) | 267 |
| 4,353 |
| 23,904 |
|
| Charge-offs | (8,061 | ) | (2,482 | ) | | (311 | ) | (983 | ) | (2,597 | ) | (14,434 | ) |
| Recoveries | 886 |
| 516 |
| | 20 |
| 78 |
| 741 |
| 2,241 |
|
| Balance at end of period | $ | 106,597 |
| $ | 43,258 |
| | $ | 2,630 |
| $ | 5,505 |
| $ | 24,460 |
| $ | 182,450 |
|
| Three months ended June 30, 2012 | | | | | | | |
| Allowance for loan losses: | | | | | | | |
| Balance at beginning of period | $ | 71,653 |
| $ | 41,619 |
| | $ | 4,697 |
| $ | 4,504 |
| $ | 2,672 |
| $ | 125,145 |
|
| Provision for loan losses | 15,039 |
| 5,282 |
| | 586 |
| 2,084 |
| 2,384 |
| 25,375 |
|
| Charge-offs | (12,063 | ) | (2,229 | ) | | (336 | ) | (1,675 | ) | (915 | ) | (17,218 | ) |
| Recoveries | 1,105 |
| 273 |
| | 181 |
| 139 |
| 391 |
| 2,089 |
|
| Allowance related to loans sold | $ | (26 | ) | $ | (18 | ) | | $ | (52 | ) | $ | (81 | ) | $ | (18 | ) | $ | (195 | ) |
| Balance at end of period | $ | 75,708 |
| $ | 44,927 |
| | $ | 5,076 |
| $ | 4,971 |
| $ | 4,514 |
| $ | 135,196 |
|
The following table presents the activity in our allowance for loan losses for our acquired loan portfolio for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | |
| | Commercial | | Consumer | |
| (in thousands) | Business | Real estate | | Residential | Home equity | Other
consumer | Total |
| Six months ended June 30, 2013 | | | | | | | |
| Allowance for loan losses: | | | | | | | |
| Balance at beginning of period | $ | — |
| $ | — |
| | $ | 60 |
| $ | 290 |
| $ | 1,214 |
| $ | 1,564 |
|
| Provision for loan losses | — |
| 1,771 |
| | — |
| — |
| — |
| 1,771 |
|
| Charge-offs | — |
| (1,772 | ) | | — |
| — |
| (441 | ) | (2,213 | ) |
| Recoveries | — |
| 90 |
| | — |
| — |
| 46 |
| 136 |
|
| Balance at end of period | $ | — |
| $ | 89 |
| | $ | 60 |
| $ | 290 |
| $ | 819 |
| $ | 1,258 |
|
| Six months ended June 30, 2012 | | | | | | | |
| Allowance for loan losses: | | | | | | | |
| Balance at beginning of period | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | 1,908 |
| $ | 1,908 |
|
| Provision for loan losses | — |
| 4,801 |
| | — |
| — |
| 2,000 |
| 6,801 |
|
| Charge-offs | — |
| (4,999 | ) | | — |
| — |
| (701 | ) | (5,700 | ) |
| Recoveries | — |
| 198 |
| | — |
| — |
| 113 |
| 311 |
|
| Balance at end of period | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | 3,320 |
| $ | 3,320 |
|
| Three months ended June 30, 2013 | | | | | | | |
| Allowance for loan losses: | | | | | | | |
| Balance at beginning of period | $ | — |
| $ | 44 |
| | $ | 60 |
| $ | 290 |
| $ | 869 |
| $ | 1,263 |
|
| Provision for loan losses | — |
| 896 |
| | — |
| — |
| — |
| 896 |
|
| Charge-offs | — |
| (897 | ) | | — |
| — |
| (55 | ) | (952 | ) |
| Recoveries | — |
| 46 |
| | — |
| — |
| 5 |
| 51 |
|
| Balance at end of period | $ | — |
| $ | 89 |
| | $ | 60 |
| $ | 290 |
| $ | 819 |
| $ | 1,258 |
|
| Three months ended June 30, 2012 | | | | | | | |
| Allowance for loan losses: | | | | | | | |
| Balance at beginning of period | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | 1,601 |
| $ | 1,601 |
|
| Provision for loan losses | — |
| 428 |
| | — |
| — |
| 2,000 |
| 2,428 |
|
| Charge-offs | — |
| (626 | ) | | — |
| — |
| (358 | ) | (984 | ) |
| Recoveries | — |
| 198 |
| | — |
| — |
| 77 |
| 275 |
|
| Balance at end of period | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | 3,320 |
| $ | 3,320 |
|
As of June 30, 2013, we had a liability for unfunded commitments of $13 million. For the six months ended June 30, 2013, we recognized a provision for credit loss related to our unfunded loan commitments of $0.8 million. Our total unfunded commitments amounted to $9.1 billion at June 30, 2013.
Our net charge-offs of $23 million for the six months ended June 30, 2013 were $6 million lower than our net charge-offs of $29 million for the six months ended June 30, 2012. The period over period decrease was driven primarily by $4 million of charge-offs on two commercial loans acquired in the Harleysville acquisition in the prior year. Total net charge-offs for the second quarter of 2013 represented 0.26% of average total loans compared with 0.21% of average total loans in the first quarter of 2013. Excluding our acquired loans, our net charge-off ratio for originated loans was 0.33% for the second quarter of 2013 compared to 0.27% for first quarter of 2013 and 0.35% for the year ended December 31, 2012.
The following table details our net charge-offs by loan category for the periods indicated:
|
| | | | | | | | | | | |
| | Six months ended June 30, |
| | 2013 | | 2012 |
| (dollars in thousands) | Net charge-offs | Percent of average loans | | Net charge-offs | Percent of average loans |
| Commercial: | | | | | |
| Real estate | $ | 4,938 |
| 0.14 | % | | $ | 8,378 |
| 0.26 | % |
| Business | 12,077 |
| 0.48 |
| | 15,101 |
| 0.74 |
|
| Total commercial | 17,015 |
| 0.28 |
| | 23,479 |
| 0.45 |
|
| Consumer: | | | | | |
| Residential real estate | 718 |
| 0.04 |
| | 1,275 |
| 0.06 |
|
| Home equity | 1,518 |
| 0.11 |
| | 2,697 |
| 0.24 |
|
| Other consumer | 4,163 |
| 0.58 |
| | 1,641 |
| 0.82 |
|
| Total | $ | 23,414 |
| 0.23 | % | | $ | 29,092 |
| 0.34 | % |
Our nonperforming loans increased to $182 million from $173 million at December 31, 2012, and increased $53 million from $129 million at June 30, 2012. The increase from June 30, 2012 was largely due to several large commercial business loans in our Upstate New York footprint. These relationships have been adequately reserved for at quarter end. Changes in regulatory guidance have also contributed to the increase since June 30, 2012. Nonperforming loans comprised 0.89% of total loans at June 30, 2013 compared to 0.88% at December 31, 2012. Excluding our acquired loans, our nonperforming loans were 1.02% of originated loans at June 30, 2013 compared to 1.07% of originated loans at December 31, 2012.
The composition of our nonperforming loans and total nonperforming assets consisted of the following at the dates indicated:
|
| | | | | | |
| | June 30, | December 31, |
| (dollars in thousands) | 2013(1) | 2012(1) |
| Nonperforming loans: | | |
| Commercial: | | |
| Real estate | $ | 60,757 |
| $ | 51,968 |
|
| Business | 53,529 |
| 55,998 |
|
| Total commercial | 114,286 |
| 107,966 |
|
| Consumer: | | |
| Residential real estate | 29,667 |
| 27,192 |
|
| Home equity | 31,681 |
| 33,438 |
|
| Other consumer | 6,566 |
| 4,128 |
|
| Total nonperforming loans | 182,200 |
| 172,724 |
|
| Real estate owned | 8,144 |
| 10,114 |
|
Total nonperforming assets (2) | $ | 190,344 |
| $ | 182,838 |
|
Loans 90 days past due and still accruing interest (3) | $ | 167,560 |
| $ | 171,568 |
|
| Total nonperforming assets as a percentage of total assets | 0.51 | % | 0.50 | % |
| Total nonaccruing loans as a percentage of total loans | 0.89 | % | 0.88 | % |
| Total nonaccruing originated loans as a percentage of total originated loans | 1.02 | % | 1.07 | % |
| Allowance for loan losses to nonaccruing loans | 100.8 | % | 94.1 | % |
| |
(1) | Includes $28 million and $30 million of nonperforming acquired lines of credit, primarily in home equity at June 30, 2013 and December 31, 2012, respectively. The remaining credit discount, recorded at acquisition is adequate to cover losses on these balances. |
| |
(2) | Nonperforming assets do not include $70 million and $46 million of performing renegotiated loans that are accruing interest at June 30, 2013 and December 31, 2012, respectively. |
| |
(3) | Includes credit card loans, loans that have matured and are in the process of collection, and acquired loans that were originally recorded at fair value upon acquisition. |
An indicator of credit quality is delinquency status and our internal loan gradings for our commercial loan portfolio segment and delinquency status and current FICO scores for our consumer loan portfolio segment. Early stage delinquencies of $53 million at
June 30, 2013 in our originated loan portfolio increased from $39 million at December 31, 2012 of loans that are 30 to 89 days past due. Despite the increase in balance, as a percentage of total loans, our early stage delinquencies decreased. Our acquired loans that were 30 to 89 days past due decreased $24 million from $95 million as of December 31, 2012 to $71 million as of June 30, 2013.
The following table contains a percentage breakout of the delinquency composition of our loan portfolio segments at the dates indicated:
|
| | | | | | | | | | | | | | | | | | | |
| | Percent of loans 30-59 days past due | | Percent of loans 60-89 days past due | | Percent of loans 90 or more days past due | | Percent of loans past due |
| | June 30, 2013 | December 31, 2012 | | June 30,
2013 | December 31, 2012 | | June 30, 2013 | December 31, 2012 | | June 30, 2013 | December 31, 2012 |
| Originated loans | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | |
| Real estate | 0.2 | % | 0.1 | % | | — | % | 0.1 | % | | 0.8 | % | 0.8 | % | | 1.0 | % | 0.9 | % |
| Business | 0.2 |
| 0.1 |
| | 0.1 |
| 0.1 |
| | 0.5 |
| 0.4 |
| | 0.8 |
| 0.7 |
|
| Total commercial | 0.2 |
| 0.1 |
| | 0.1 |
| 0.1 |
| | 0.7 |
| 0.6 |
| | 0.9 |
| 0.8 |
|
| Consumer: | | | | | | | | | | | |
| Residential real estate | 0.4 |
| 0.4 |
| | 0.1 |
| 0.1 |
| | 1.1 |
| 1.1 |
| | 1.7 |
| 1.7 |
|
| Home equity | 0.2 |
| 0.2 |
| | 0.1 |
| 0.1 |
| | 0.7 |
| 0.7 |
| | 1.0 |
| 1.0 |
|
| Other consumer | 0.6 |
| 0.6 |
| | 0.2 |
| 0.1 |
| | 0.2 |
| 0.2 |
| | 1.1 |
| 0.9 |
|
| Total consumer | 0.4 |
| 0.4 |
| | 0.1 |
| 0.1 |
| | 0.7 |
| 0.7 |
| | 1.3 |
| 1.3 |
|
| Total | 0.3 | % | 0.2 | % | | 0.1 | % | 0.1 | % | | 0.7 | % | 0.7 | % | | 1.0 | % | 1.0 | % |
| Acquired loans | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | |
| Real estate | 0.5 | % | 0.5 | % | | 0.7 | % | 0.9 | % | | 4.6 | % | 3.9 | % | | 5.8 | % | 5.3 | % |
| Business | 0.9 |
| 0.8 |
| | 0.3 |
| 0.3 |
| | 2.3 |
| 1.9 |
| | 3.6 |
| 3.1 |
|
| Total commercial | 0.6 |
| 0.6 |
| | 0.6 |
| 0.7 |
| | 4.1 |
| 3.4 |
| | 5.2 |
| 4.8 |
|
| Consumer: | | | | | | | | | | | |
| Residential real estate | 1.0 |
| 1.2 |
| | 0.6 |
| 0.6 |
| | 3.7 |
| 3.4 |
| | 5.3 |
| 5.2 |
|
| Home equity | 0.7 |
| 0.7 |
| | 0.3 |
| 0.4 |
| | 1.6 |
| 1.5 |
| | 2.7 |
| 2.7 |
|
| Other consumer | 2.5 |
| 2.1 |
| | 1.3 |
| 1.4 |
| | 1.8 |
| 2.7 |
| | 5.5 |
| 6.1 |
|
| Total consumer | 0.9 |
| 1.1 |
| | 0.5 |
| 0.6 |
| | 2.8 |
| 2.6 |
| | 4.2 |
| 4.3 |
|
| Total | 0.8 | % | 0.9 | % | | 0.5 | % | 0.6 | % | | 3.4 | % | 3.0 | % | | 4.7 | % | 4.5 | % |
Our internal loan gradings provide information about the financial health of our commercial borrowers and our risk of potential loss. The following table presents a breakout of our commercial loans by loan grade at the dates indicated:
|
| | | | |
| | Percent of total |
| | June 30,
2013 | December 31,
2012 |
| Originated loans: | | |
| Pass | 94.5 | % | 94.5 | % |
Criticized:(1) | | |
| Accrual | 4.5 | % | 4.5 | % |
| Nonaccrual | 1.0 |
| 1.0 |
|
| Total criticized | 5.5 |
| 5.5 |
|
| Total | 100.0 | % | 100.0 | % |
| Acquired loans: | | |
| Pass | 87.0 | % | 87.4 | % |
Criticized:(1) | | |
| Accrual | 12.6 | % | 12.2 | % |
| Nonaccrual | 0.4 |
| 0.4 |
|
| Total criticized | 13.0 |
| 12.6 |
|
| Total | 100.0 | % | 100.0 | % |
| |
(1) | Includes special mention, substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Asset Quality Review” in our Annual Report on 10-K for the year ended December 31, 2012. |
Borrower FICO scores provide information about the credit quality of our consumer loan portfolio as they provide an indication as to the likelihood that debtors will repay their debts. We obtain the scores from a nationally recognized consumer rating agency on a quarterly basis and trends are evaluated for consideration as a qualitative adjustment to the allowance. The composition of our consumer portfolio segment is presented in the table below at the dates indicated:
|
| | | | |
| | Percent of total |
| | June 30,
2013 | December 31,
2012 |
| Originated loans by refreshed FICO score: | | |
| Over 700 | 76.6 | % | 73.7 | % |
| 660-700 | 12.4 |
| 13.6 |
|
| 620-660 | 5.8 |
| 6.2 |
|
| 580-620 | 2.5 |
| 2.8 |
|
| Less than 580 | 2.3 |
| 3.2 |
|
No score(1) | 0.4 |
| 0.5 |
|
| Total | 100.0 | % | 100.0 | % |
| Acquired loans by refreshed FICO score: | | |
| Over 700 | 71.7 | % | 68.3 | % |
| 660-700 | 8.2 |
| 9.6 |
|
| 620-660 | 5.1 |
| 5.7 |
|
| 580-620 | 3.3 |
| 3.8 |
|
| Less than 580 | 4.2 |
| 5.3 |
|
No score(1) | 7.5 |
| 7.3 |
|
| Total | 100.0 | % | 100.0 | % |
| |
(1) | Primarily includes loans that are serviced by others for which refreshed FICO scores were not available as of the indicated date. |
We maintain an allowance for loan losses for our originated portfolio segment, which is concentrated in the Upstate New York region and includes to a lesser degree, loan balances from organic growth in our acquired markets of Eastern Pennsylvania, Western Pennsylvania, Connecticut and Western Massachusetts. Despite the challenging market conditions, our asset quality continues to perform well when compared to peer averages.
As part of our determination of the fair value of our acquired loans at time of acquisition, we established a credit mark to provide for future losses in our acquired loan portfolio. Our credit mark, which represents the remaining principal balance on acquired loans that we do not expect to collect, was $141 million and $176 million as of June 30, 2013 and December 31, 2012, respectively.
The following table provides information about our acquired loan portfolio by acquisition as of the dates indicated or for the related quarters:
|
| | | | | | | | | | | | | | | |
| (dollars in thousands) | HSBC | NewAlliance | Harleysville | National City | Total |
| June 30, 2013 | | | | | |
| Provision for loan losses | $ | — |
| $ | — |
| $ | 896 |
| $ | — |
| 896 |
|
| Net charge-offs | — |
| — |
| 901 |
| — |
| 901 |
|
| Net charge-offs to average loans | — | % | — | % | 0.29 | % | — | % | 0.06 | % |
| Nonperforming loans | $ | 5,208 |
| $ | 7,752 |
| $ | 10,680 |
| $ | 3,916 |
| $ | 27,556 |
|
Total loans (1) | 1,046,492 |
| 3,033,416 |
| 1,199,236 |
| 302,507 |
| 5,581,651 |
|
| Allowance for acquired loan losses | 100 |
| — |
| 1,158 |
| — |
| 1,258 |
|
Credit related discount (2) | 29,029 |
| 72,413 |
| 28,045 |
| 11,318 |
| 140,805 |
|
| Credit related discount as percentage of loans | 2.77 | % | 2.39 | % | 2.34 | % | 3.74 | % | 2.52 | % |
Criticized loans (3) | $ | 39,911 |
| $ | 157,269 |
| $ | 161,600 |
| $ | 38,940 |
| $ | 397,720 |
|
Classified loans (4) | 29,448 |
| 109,544 |
| 129,760 |
| 26,715 |
| 295,467 |
|
Greater than 90 days past due and accruing (5) | 10,492 |
| 60,193 |
| 89,245 |
| 2,965 |
| 162,895 |
|
| December 31, 2012 |
| | | | |
| Provision for loan losses | $ | — |
| $ | (129 | ) | $ | 1,002 |
| $ | (714 | ) | $ | 159 |
|
| Net charge-offs | — |
| 3 |
| 1,118 |
| 198 |
| 1,319 |
|
| Net charge-offs to average loans | — | % | — | % | 0.33 | % | 0.22 | % | 0.08 | % |
| Nonperforming loans | $ | 5,037 |
| $ | 8,702 |
| $ | 13,484 |
| $ | 2,425 |
| $ | 29,648 |
|
Total loans (1) | 1,314,538 |
| 3,473,659 |
| 1,379,035 |
| 346,404 |
| 6,513,636 |
|
| Allowance for acquired loan losses | 100 |
| — |
| 1,464 |
| — |
| 1,564 |
|
Credit related discount (2) | $ | 40,956 |
| $ | 84,031 |
| $ | 38,204 |
| $ | 12,790 |
| $ | 175,981 |
|
| Credit related discount as percentage of loans | 3.12 | % | 2.42 | % | 2.77 | % | 3.69 | % | 2.70 | % |
Criticized loans (3) | $ | 39,530 |
| $ | 186,266 |
| $ | 174,403 |
| $ | 41,881 |
| $ | 442,080 |
|
Classified loans (4) | 30,044 |
| 134,932 |
| 144,708 |
| 22,524 |
| 332,208 |
|
| Greater than 90 days past due and accruing | 10,142 |
| 71,050 |
| 82,823 |
| 3,045 |
| 167,060 |
|
| |
(1) | Represents carrying value of acquired loans plus the principal not expected to be collected. |
| |
(2) | Represents principal on acquired loans not expected to be collected. |
| |
(3) | Includes special mention, substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Asset Quality Review” in our Annual Report on 10-K for the year ended December 31, 2012. |
| |
(4) | Includes consumer loans, which are considered classified when they are 90 days or more past due. Classified loans include substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Asset Quality Review” in our Annual Report on 10-K for the year ended December 31, 2012. |
| |
(5) | Includes credit card loans, loans that have matured and are in the process of collection, and acquired loans that were originally recorded at fair value upon acquisition. Acquired loans are considered to be accruing as we can reasonably estimate future cash flows on these acquired loans and we expect to fully collect the carrying value of these loans net of the allowance for acquired loan losses. Therefore, we are accreting the difference between the carrying value of these loans and their expected cash flows into interest income. |
The following table provides information about our originated loan portfolio as of the dates indicated or for the related quarters:
|
| | | | | | |
| (dollars in thousands) | June 30,
2013 | December 31,
2012 |
| Provision for loan losses | $ | 23,904 |
| $ | 21,366 |
|
| Net charge-offs | 12,193 |
| 7,617 |
|
| Net charge-offs to average loans | 0.33 | % | 0.24 | % |
| Nonperforming loans | $ | 154,644 |
| $ | 143,076 |
|
| Nonperforming loans to total loans | 1.02 | % | 1.07 | % |
| Total loans | $ | 15,102,336 |
| $ | 13,372,357 |
|
| Allowance for originated loan losses | 182,450 |
| 160,958 |
|
| Allowance for originated loan losses to total originated loans | 1.21 | % | 1.20 | % |
Classified loans(1) | $ | 405,637 |
| $ | 376,271 |
|
Greater than 90 days past due and accruing (2) | 4,665 |
| 4,508 |
|
| |
(1) | Includes consumer loans, which are considered classified when they are 90 days or more past due. Classified loans include substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Asset Quality Review” in our Annual Report on 10-K for the year ended December 31, 2012. |
| |
(2) | Includes credit card loans and loans that have matured and are in the process of collection. |
Our total allowance for loan losses related to both our originated and acquired loans increased $21 million from December 31, 2012 to $184 million at June 30, 2013 as our total provision for credit losses of $45 million exceeded our total net charge-offs of $23 million. The ratio of our total allowance for loan losses to total loans of 0.89% at June 30, 2013 compared to 0.82% as of December 31, 2012. Excluding acquired loans, the ratio of our allowance for originated loan losses to total originated loans was 1.21% at June 30, 2013 and remained consistent with the measure at December 31, 2012.
Of the $2.7 billion home equity portfolio at both June 30, 2013 and December 31, 2012, approximately $1.0 billion and $0.9 billion were in a first lien position at the respective period ends. We hold or service the first lien loan for approximately 10% of the remainder of the home equity portfolio that was in a second lien position as of June 30, 2013 and December 31, 2012. The Interagency Supervisory Guidance issued during the first quarter of 2012 related to junior lien home equity loans resulted in $7 million of additional nonaccrual loans at December 31, 2012, but did not have a significant impact on our allowance for loan losses.
As part of our credit risk management, we enter into modification agreements with troubled borrowers in order to mitigate our credit losses. Our aggregate recorded investment in impaired loans modified through troubled debt restructurings (“TDRs”) increased to $122 million at June 30, 2013 from $89 million at December 31, 2012 and $107 million at March 31, 2013. The modifications made to these restructured loans typically consist of an extension of the payment terms, providing for a period with interest-only payments with deferred principal payments, or a rate reduction. We generally do not forgive principal when restructuring loans. These modifications were considered to be concessions provided to the respective borrower due to the borrower’s financial distress. Our aggregate recorded investment in TDRs does not include modifications to acquired loans that are accounted for as part of a pool under ASC 310-30. We accrue interest on a TDR once the borrower has demonstrated the ability to perform for six consecutive payments. TDRs accruing interest totaled $70 million and $46 million at June 30, 2013 and December 31, 2012, respectively.
Certain pass-graded commercial loans may have repayment dates extended at or near original maturity dates in the normal course of business. When such extensions are considered to be concessions and provided as a result of the financial distress of the borrower, these loans are classified as TDRs and considered to be impaired. However, if such extensions or other modifications at or near the original maturity date or at any time during the life of a loan are not made as a result of financial distress related to the borrower, such a loan would not be classified as a TDR or as an impaired loan. Repayment extensions typically provided in a TDR are for periods of greater than six months. When providing loan modifications because of the financial distress of the borrowers, we consider that, after the modification, the borrower would be in a better position to continue with the payment of principal and interest. While such loans may be collateralized, they are not typically considered to be collateral dependent for accounting measurement purposes.
Residential Mortgage Banking
We often originate and sell residential mortgage loans with servicing retained. Our loan sales activity is generally conducted through loan sales in a secondary market sponsored by FNMA and FHLMC. Subsequent to the sale of mortgage loans, we do not typically retain any interest in the underlying loans except through our relationship as the servicer of the loans.
As is customary in the mortgage banking industry, we, or banks we have acquired, have made certain representations and warranties related to the sale of residential mortgage loans (including loans sold with servicing released) and to the performance of our obligations as servicer. The breach of any such representations or warranties could result in losses for us. Our maximum exposure to loss is equal to the outstanding principal balance of the sold loans; however, any loss would be reduced by any payments received on the loans or through the sale of collateral.
Our portfolio of mortgages serviced for others amounted to $3.4 billion and $2.9 billion at June 30, 2013 and December 31, 2012, respectively. Our liability for estimated repurchase obligations on loans sold, which is included in other liabilities in our Consolidated Statements of Condition, was $8 million and $9 million at June 30, 2013 and December 31, 2012, respectively.
The delinquencies as a percentage of loans serviced were as follows at the dates indicated:
|
| | | | |
| | June 30,
2013 | December 31,
2012 |
| 30 to 59 days past due | 0.34 | % | 0.38 | % |
| 60 to 89 days past due | 0.10 |
| 0.16 |
|
| Greater than 90 days past due | 0.72 |
| 0.77 |
|
| | 1.16 | % | 1.31 | % |
Investments
The following table presents the latest available underlying investment ratings of the fair value of our investment securities portfolio at the dates indicated: |
| | | | | | | | | | | | | | | | | | | | | |
| | | | Average credit rating of fair value amount |
| (in millions) | Amortized cost | Fair value | AA or better | A | BBB | BB or less | Not rated |
| June 30, 2013 | | | | | | | |
| Securities backed by U.S. Treasury, U.S. government agencies, and U.S. government sponsored enterprises: | | | | | | | |
| Debt securities | $ | 366 |
| $ | 374 |
| $ | 343 |
| $ | 11 |
| $ | — |
| $ | — |
| $ | 20 |
|
| Collateralized mortgage obligations | 4,833 |
| 4,830 |
| 4,817 |
| 8 |
| 3 |
| — |
| 2 |
|
| Residential mortgage-backed securities | 704 |
| 706 |
| 706 |
| — |
| — |
| — |
| — |
|
| Total | 5,903 |
| 5,910 |
| 5,866 |
| 19 |
| 3 |
| — |
| 22 |
|
| Commercial mortgage-backed securities | 1,831 |
| 1,910 |
| 996 |
| 643 |
| 271 |
| — |
| — |
|
| Collateralized loan obligations | 1,490 |
| 1,534 |
| 1,050 |
| 378 |
| 106 |
| — |
| — |
|
| Asset-backed securities | 936 |
| 945 |
| 668 |
| 277 |
| — |
| — |
| — |
|
| Corporate debt and trust preferred | 879 |
| 877 |
| — |
| 186 |
| 125 |
| 565 |
| 1 |
|
| States and political subdivisions | 550 |
| 563 |
| 292 |
| 223 |
| 30 |
| 1 |
| 17 |
|
| Other | 48 |
| 49 |
| 9 |
| — |
| — |
| — |
| 40 |
|
| Total investment securities | $ | 11,637 |
| $ | 11,788 |
| $ | 8,881 |
| $ | 1,726 |
| $ | 535 |
| $ | 566 |
| $ | 80 |
|
| December 31, 2012 | | | | | | | |
| Securities backed by U.S. Treasury, U.S. government agencies, and U.S. government sponsored enterprises: | | | | | | | |
| Debt securities | $ | 415 |
| $ | 429 |
| $ | 424 |
| $ | — |
| $ | — |
| $ | — |
| $ | 5 |
|
| Collateralized mortgage obligations | 4,839 |
| 4,968 |
| 4,965 |
| — |
| — |
| — |
| 3 |
|
| Residential mortgage-backed securities | 823 |
| 858 |
| 858 |
| — |
| — |
| — |
| — |
|
| Total | 6,077 |
| 6,255 |
| 6,247 |
| — |
| — |
| — |
| 8 |
|
| Commercial mortgage-backed securities | 1,930 |
| 2,060 |
| 1,213 |
| 583 |
| 264 |
| — |
| — |
|
| Collateralized loan obligations | 1,510 |
| 1,545 |
| 1,143 |
| 352 |
| 40 |
| — |
| 10 |
|
| Asset-backed securities | 936 |
| 956 |
| 633 |
| 323 |
| — |
| — |
| — |
|
| Corporate debt and trust preferred | 827 |
| 851 |
| — |
| 229 |
| 155 |
| 459 |
| 8 |
|
| States and political subdivisions | 587 |
| 608 |
| 460 |
| 123 |
| 17 |
| — |
| 8 |
|
| Other | 90 |
| 93 |
| 6 |
| 19 |
| 14 |
| 14 |
| 40 |
|
| Total investment securities | $ | 11,958 |
| $ | 12,368 |
| $ | 9,702 |
| $ | 1,629 |
| $ | 490 |
| $ | 473 |
| $ | 74 |
|
The weighted average credit rating of our portfolio was AA- and AA at June 30, 2013 and December 31, 2012, respectively.
Subsequent to our HSBC Branch Acquisition, in which we acquired $9.9 billion in deposits but only $1.6 billion in loans, we started purchasing assets with credit risk, such as commercial mortgage-backed securities and collateralized loan obligations. As a result, our risk profile changed which warranted the formation of an oversight committee to keep risk at an acceptable level. The Credit Portfolio Oversight Committee (the "Committee") meets monthly to analyze and monitor the securities portfolio from a credit perspective. In addition to reviewing security ratings, which are one measure of risk, the Committee reviews various credit metrics for each of the portfolios including these metrics under stressed environments. For structured securities, the Committee generally reviews changes in the underlying collateral and changes in credit enhancement. In the discussion of our investment portfolio below, we have included certain credit rating information because the information is one indication of the degree of credit risk to which we are exposed and significant changes in ratings classifications for our investment portfolio could result in increased risk for us.
Our commercial mortgage-backed securities ("CMBS") portfolio had an amortized cost of $1.8 billion at June 30, 2013. Gross unrealized losses on our CMBS portfolio amounted to $2.2 million and $1.3 million at June 30, 2013 and December 31, 2012, respectively. While market spreads on CMBS tightened in the second half of 2012, the fair value of our securities benefited from having completed 92% of our purchases before spreads tightened. Additionally, the structure of our CMBS and the underlying mortgage prepayment penalties limit unscheduled principal prepayments.
Securities in our CMBS portfolio have significant credit enhancement that provides us protection from default, and 86% of this portfolio was rated investment grade or higher at June 30, 2013. Our entire CMBS portfolio has either credit enhancement greater than 25% or underlying loans which collateralize our securities with loan to values of less than 100%.
The following table provides information on the credit enhancements of securities in our CMBS portfolio at the dates indicated: |
| | | | | | | | | | | |
| | June 30, 2013 | | December 31, 2012 |
| Credit enhancement | Amortized cost | % of total CMBS portfolio | | Amortized cost | % of total CMBS portfolio |
| | (dollars in millions) |
| 18 - 20% | $ | 29 |
| 1 | % | | $ | 41 |
| 2 | % |
| 20 - 25% | 105 |
| 6 |
| | 159 |
| 8 |
|
| 25 - 30% | 345 |
| 19 |
| | 285 |
| 15 |
|
| 30+% | 1,352 |
| 74 |
| | 1,444 |
| 75 |
|
| Total | $ | 1,831 |
| 100 | % |
| $ | 1,930 |
| 100 | % |
Our collateralized loan obligation ("CLO") portfolio had an amortized cost of $1.5 billion at June 30, 2013. Gross unrealized losses on our CLO portfolio amounted to $1.5 million and $0.9 million at June 30, 2013 and December 31, 2012, respectively. Our CLO portfolio is predominantly variable rate and returns a 3% yield at a credit quality level we believe superior to middle market lending. The collateral underlying our CLOs consists of approximately 90% senior secured loans, and over 90% of the obligors are domiciled in the United States. Half of the portfolio is comprised of CLOs originated in 2011 or later, and no CLO investments were made by us until the fourth quarter of 2011. As shown in the table above, of the underlying investment ratings of our portfolio, 93% of our CLO portfolio was rated investment grade or higher at June 30, 2013 and significant credit enhancements for our securities provide us protection from default. The following table provides information on the credit enhancements for our securities in our CLO portfolio at the dates indicated (amounts in millions):
|
| | | | | | | | | | | |
| | June 30, 2013 | | December 31, 2012 |
| Credit Enhancement | Amortized cost | % of total CLO portfolio | | Amortized cost | % of total CLO portfolio |
| | (dollars in millions) |
| 10 - 14.99% | $ | 57 |
| 4 | % | | $ | 66 |
| 4 | % |
| 15 - 19.99% | 315 |
| 21 |
| | 312 |
| 21 |
|
| 20 - 24.99% | 181 |
| 12 |
| | 238 |
| 16 |
|
| 25 - 29.99% | 436 |
| 29 |
| | 364 |
| 24 |
|
| 30 - 34.99% | 214 |
| 14 |
| | 233 |
| 15 |
|
| 35 - 39.99% | 206 |
| 14 |
| | 225 |
| 15 |
|
| 40+% | 82 |
| 6 |
| | 73 |
| 5 |
|
| Total | $ | 1,490 |
| 100 | % | | $ | 1,510 |
| 100 | % |
We have assessed our securities that were in an unrealized loss position at June 30, 2013 and December 31, 2012 and determined that any decline in fair value below amortized cost was temporary. In making this determination we considered the following factors: the period of time the securities were in an unrealized loss position, the percentage decline in comparison to the securities’ amortized cost, credit rating, the financial condition of the issuer and guarantor, where applicable, the delinquency or default rates of underlying collateral, projected collateral losses, projected cash flows and credit enhancement. If the level of credit enhancement is sufficient based on our expectations of future collateral losses, we conclude that we will receive all of the
originally scheduled cash flows. If the present value of the cash flows indicates that we should not expect to recover the amortized cost basis of the security, we would consider the security to be other than temporarily impaired and write down the credit component of the unrealized loss through a charge to current period earnings. We do not intend to sell these securities in an unrealized loss position and it is not more likely than not that we will be required to sell these securities before the recovery of their amortized cost bases, which may be at maturity. As of June 30, 2013, we have no direct exposure to the debt of European countries.
Liquidity Risk
Liquidity risk is the risk to earnings or capital arising from our inability to meet our obligations as they come due. Liquidity risk arises from our failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly or to obtain adequate funding to continue to operate profitably.
Liquidity refers to our ability to obtain cash, or to convert assets into cash timely, efficiently, and economically. Our Asset and Liability Committee ("ALCO") establishes procedures, guidelines and limits for managing and monitoring our liquidity to ensure we maintain adequate liquidity under both normal and stressed operating conditions at all times. We manage our liquidity to ensure that we have sufficient cash to:
| |
| • | Support our operating activities, |
| |
| • | Meet increases in demand for loans and other assets, |
| |
| • | Provide for repayments of deposits and borrowings, and |
| |
| • | To fulfill contract obligations. |
Factors or conditions that could affect our liquidity management objectives include profitability changes in the mix of assets and liabilities on our balance sheet; our investment, loan, and deposit balances; our reputation; and our credit rating. A significant change in our financial performance or credit rating could reduce the availability, or increase the cost, of funding from national markets.
As part of our liquidity risk management framework, we have a contingency funding plan (“CFP”) that is designed to address temporary and long-term liquidity disruptions. The CFP assesses liquidity needs under normal and various stress scenarios, encompassing both idiosyncratic and systemic conditions. The plan provides for on-going monitoring of the liquidity environment by using numerous indicators and metrics that are regularly reviewed by ALCO. Furthermore, the CFP provides for the ongoing monitoring of the unused borrowing capacity and available sources of contingent liquidity to address unexpected liquidity needs under adverse conditions.
Consolidated liquidity
Sources of liquidity
We obtain our liquidity from multiple sources, including gathering deposit balances, cash generated by principal and interest repayments on our investment and loan portfolios, short and long-term borrowings, as well as short-term federal funds, internally generated capital, and other credit facilities. The primary source of our non-deposit borrowings are FHLB advances, of which we had $3.3 billion outstanding at June 30, 2013.
Cash, interest-bearing demand accounts at correspondent banks and brokerage houses, federal funds sold, and short-term money market investments are our most liquid assets. The levels of those assets are monitored daily and are dependent on operating, financing, lending, and investing activities during any given period. Excess short-term liquidity is usually invested in overnight federal funds sold. In the event that funds beyond those generated internally are required due to higher than expected loan demand, deposit outflows, or the amount of debt maturing, additional sources of funds are available through the use of FHLB advances, repurchase agreements, the sale of loans or investments, or the use of our lines of credit.
We have a total borrowing capacity of up to $9.0 billion from various funding sources which include the FHLB, Federal Reserve Bank, and commercial banks that we can use to fund lending activities, liquidity needs, and/or to adjust and manage our asset and liability position, of which $5.7 billion was available as of June 30, 2013.
Uses of liquidity
The primary uses of our liquidity are to support our operating activities, fund loans or obtain other assets, and provide for repayments of deposits and borrowings.
In the ordinary course of business, we extend commitments to originate commercial and consumer loans. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Our commitments generally have fixed expiration dates or other termination clauses and may require our customer to pay us a fee. Since we do not expect all of our commitments to be funded, the total commitment amounts do not necessarily represent our future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. We may obtain collateral based upon our assessment of the customer’s creditworthiness. We may write a commitment to extend credit on a fixed rate basis exposing us to interest rate risk given the possibility that market rates may change between the commitment date and the actual extension of credit. We had outstanding commitments to originate residential real estate, commercial real estate and business, and consumer loans of approximately $9.1 billion and $8.7 billion at June 30, 2013 and December 31, 2012, respectively.
Included in these commitments are lines of credit to both consumer and commercial customers. The borrowers are able to draw on these lines as needed, making our funding requirements generally difficult to predict. Indicative of our strategic focus on commercial lending and relationship based home equity lending, at each of June 30, 2013 and December 31, 2012 our unused commercial lines of credit amounted to $3.2 billion, and our unused home equity and other consumer lines of credit increased to $4.7 billion at June 30, 2013 from $4.4 billion at December 31, 2012. Our commercial business lines of credit generally possess an expiration period of less than one year and our home equity and other consumer lines of credit have an expiration period of up to ten years.
In addition to the commitments discussed above, we issue standby letters of credit to third parties that guarantee payments on behalf of our commercial customers in the event the customer fails to perform under the terms of the contract between our customer and the third party. Our standby letters of credit, which generally have an expiration period of less than two years, amounted to $333 million and $352 million at June 30, 2013 and December 31, 2012, respectively. Since the majority of our unused lines of credit and outstanding standby letters of credit expire without being fully funded, our actual funding requirements may be substantially less than the amounts above. We anticipate that we will have sufficient funds available to meet our current loan commitments and other obligations through our normal business operations. The credit risk involved in our issuance of these commitments is essentially the same as that involved in extending loans to customers and is limited to the contractual notional amount of those instruments.
Given the current interest rate environment and current customer preference for long-term fixed rate mortgages, coupled with our desire to not hold these assets in our portfolio, we generally sell newly originated fixed rate conventional, 20 to 30 year and most FHA and VA loans in the secondary market to government sponsored enterprises such as FNMA and FHLMC or to wholesale lenders. We generally retain the servicing rights on residential mortgage loans sold which results in monthly service fee income. We will, however, sell select loans with servicing released on a nonrecourse basis. Our commitments to sell residential mortgages amounted to $315 million and $474 million at June 30, 2013 and December 31, 2012, respectively.
Parent Company liquidity
The Company obtains its liquidity from multiple sources, including dividends from the Bank, principal repayments on investment securities, interest received from the Bank, a line of credit facility with a bank, and the issuance of debt and equity securities. The primary uses of the Company’s liquidity are dividends to stockholders, capital contributions to the Bank, debt service, operating expenses, repurchases of our common stock, and acquisitions. The Company’s most liquid assets are cash, interest-bearing demand accounts at correspondent banks, and federal funds sold, all of which totaled $373 million at June 30, 2013. As of June 30, 2013, the Company has in excess of eight quarters of cash liquidity without reliance on dividends from the Bank.
The Company’s ability to pay dividends to our stockholders is substantially dependent upon the Bank’s ability to pay dividends to the Company. Subject to the Bank meeting or exceeding regulatory capital requirements, the prior approval of the OCC is required if the total of all dividends declared by the Bank in any calendar year would exceed the sum of the Bank’s net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits the Bank from paying dividends that would be greater than its undivided profits after deducting statutory bad debt in excess of its allowance for loan losses. The Bank paid dividends of $75 million to the Company during the six months ended
June 30, 2013. Under the foregoing dividend restrictions, and while maintaining its “well-capitalized” status, the Bank could pay additional dividends of approximately $384 million to the Company without obtaining regulatory approvals.
Loan Maturity and Repricing Schedule
The following table sets forth certain information at June 30, 2013 regarding the amount of loans maturing or repricing in our portfolio. Demand loans having no stated schedule of repayment and no stated maturity are reported as due in one year or less. Adjustable-rate loans are included in the period in which interest rates are next scheduled to adjust rather than the period in which they contractually mature, and fixed-rate loans (including bi-weekly loans) are included in the period in which contractual payments are due. No adjustments have been made for prepayment of principal.
|
| | | | | | | | | | | | |
| (in millions) | Within one year | One through five years | After five years | Total |
| Commercial: | | | | |
| Real estate | $ | 4,169 |
| $ | 2,354 |
| $ | 207 |
| $ | 6,730 |
|
| Construction | 679 |
| 44 |
| 29 |
| 752 |
|
| Business | 4,118 |
| 831 |
| 217 |
| 5,166 |
|
| Total commercial | 8,966 |
| 3,229 |
| 453 |
| 12,648 |
|
| Consumer: | | | | |
| Residential real estate | 1,157 |
| 1,783 |
| 618 |
| 3,558 |
|
| Home equity | 2,100 |
| 426 |
| 145 |
| 2,671 |
|
| Indirect auto | 419 |
| 615 |
| 16 |
| 1,050 |
|
| Credit cards | 303 |
| — |
| — |
| 303 |
|
| Other consumer | 174 |
| 92 |
| 47 |
| 313 |
|
| Total consumer | 4,153 |
| 2,916 |
| 826 |
| 7,895 |
|
| Total loans and leases | $ | 13,119 |
| $ | 6,145 |
| $ | 1,279 |
| $ | 20,543 |
|
For the loans reported in the preceding table, the following sets forth at June 30, 2013, the dollar amount of all of our fixed-rate and adjustable-rate loans due after June 30, 2014:
|
| | | | | | | | | |
| (in millions) | Fixed | Adjustable | Total |
| Commercial: | | | |
| Real estate | $ | 1,074 |
| $ | 1,487 |
| $ | 2,561 |
|
| Construction | 50 |
| 23 |
| 73 |
|
| Business | 975 |
| 73 |
| 1,048 |
|
| Total commercial | 2,099 |
| 1,583 |
| 3,682 |
|
| Consumer: | | | |
| Residential real estate | 1,279 |
| 1,122 |
| 2,401 |
|
| Home equity | 571 |
| — |
| 571 |
|
| Indirect auto | 631 |
| — |
| 631 |
|
| Other consumer | 138 |
| 1 |
| 139 |
|
| Total consumer | 2,619 |
| 1,123 |
| 3,742 |
|
| Total loans and leases | $ | 4,718 |
| $ | 2,706 |
| $ | 7,424 |
|
The following table sets forth at June 30, 2013, the dollar amount of all of our fixed-rate loans due after June 30, 2014 by the period in which the loans mature:
|
| | | | | | | | | | | | | | | | | | |
| Maturity | Commercial | Residential real estate | Home equity | Indirect auto | Other consumer | Total |
| | (in millions) |
| 1 to 2 years | $ | 626 |
| $ | 287 |
| $ | 163 |
| $ | 238 |
| $ | 31 |
| $ | 1,345 |
|
| 2 to 3 years | 528 |
| 229 |
| 117 |
| 184 |
| 26 |
| 1,084 |
|
| 3 to 5 years | 603 |
| 300 |
| 146 |
| 193 |
| 35 |
| 1,277 |
|
| Total 1 to 5 years | 1,757 |
| 816 |
| 426 |
| 615 |
| 92 |
| 3,706 |
|
| 5 to 10 years | 300 |
| 305 |
| 124 |
| 16 |
| 27 |
| 772 |
|
| More than 10 years | 42 |
| 158 |
| 21 |
| — |
| 19 |
| 240 |
|
| Total | $ | 2,099 |
| $ | 1,279 |
| $ | 571 |
| $ | 631 |
| $ | 138 |
| $ | 4,718 |
|
The following table sets forth at June 30, 2013, the dollar amount of all of our adjustable-rate loans due after June 30, 2014 by the period in which the loans reprice:
|
| | | | | | | | | | | | |
| Maturity | Commercial | Residential real estate | Home equity and other consumer | Total |
| | (in millions) |
| 1 to 2 years | $ | 489 |
| $ | 403 |
| $ | 1 |
| $ | 893 |
|
| 2 to 3 years | 439 |
| 253 |
| — |
| 692 |
|
| 3 to 5 years | 544 |
| 312 |
| — |
| 856 |
|
| Total 1 to 5 years | 1,472 |
| 968 |
| 1 |
| 2,441 |
|
| 5 to 10 years | 111 |
| 154 |
| — |
| 265 |
|
| More than 10 years | — |
| — |
| — |
| — |
|
| Total | $ | 1,583 |
| $ | 1,122 |
| $ | 1 |
| $ | 2,706 |
|
Our primary investing activities are the origination of loans, the purchase of investment securities, and the acquisition of banking and financial services companies.
Interest Rate and Market Risk
Our primary market risk is interest rate risk, which is defined as the potential variability of our earnings that arises from changes in market interest rates and the magnitude of the change at varying points along the yield curve. Changes in market interest rates, whether they are increases or decreases, can trigger repricings and changes in the pace of payments for both assets and liabilities (prepayment risk), which individually or in combination may affect our net income, net interest income and net interest margin, either positively or negatively.
Most of the yields on our earning assets, including adjustable-rate loans and investments, and the rates we pay on interest-bearing deposits and liabilities are related to market interest rates. Interest rate risk occurs when the interest income (yields) we earn on our assets changes at a pace that differs from the interest expense (rates) we pay on liabilities.
For example, as part of our normal commercial lending activities, a portion of our business and commercial real estate loans have adjustable interest rates that are based on longer term rates. The yield on these loans could fluctuate to a greater degree than loans that are based on relatively short-term rates. Accordingly, as a result of actions taken by the Federal Reserve, the yield on our commercial loans was negatively impacted by lower long-term interest rates. Conversely, our cost of funding was not significantly affected by this change in interest rates because the pricing of these instruments is related to a shorter-term part of the interest rate curve.
The primary tool we use to assess our exposure to interest rate risk is a computer model that simulates the effects of variations in interest rates on net interest income. These simulations, which we conduct at least quarterly, compare multiple hypothetical
interest rate scenarios to a stable or current interest rate environment. As a result of these simulations, we take actions to limit the variability on our net interest income due to changes in interest rates. Such actions include: (i) emphasizing the origination and retention of residential and commercial adjustable-rate loans, home equity loans, and residential fixed-rate mortgage loans having contractual maturities of no more than 20 years; (ii) selling the majority of 30 year fixed-rate, conforming residential mortgage loans into the secondary market without recourse; (iii) investing in securities with predictable cash flows; (iv) growing core deposits; (v) utilizing wholesale borrowings to support cash flow needs and help match asset repricing; and (vi) employing interest rate swaps.
Our Asset and Liability Committee monitors our sensitivity to interest rates and approves strategies to manage our exposure to interest rate risk. Our goal is to maximize the growth of net interest income on a consistent basis by minimizing the effects of fluctuations associated with changing market interest rates.
Our balance sheet is naturally asset-sensitive due to our large portfolio of rate sensitive commercial loans. As a result, changes in shorter-term rates impact our net interest income more than longer-term rates.
The following table shows the estimated impact on net interest income for the next 12 months resulting from potential changes in interest rates. The calculated changes assume a gradual parallel shift across the yield curve over the next 12 months and no growth in the balance sheet. These estimates require us to make certain assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. Typically model assumptions are based on historical data and subjected to periodic review, such as prepayments and deposit maturities and decay rates. Assumptions are subject to management judgment, such as reinvestment rates of securities and new loan volumes. These assumptions are inherently uncertain, particularly due to the impact of the prolonged nature of the current low interest rate environment for which historical data for similar periods is limited and, as a result, we cannot precisely predict the impact of changes in interest rates on our net interest income. Actual results may differ significantly due to timing, magnitude, and frequency of interest rate changes and changes in market conditions:
|
| | | | | | | | | | | |
| | Calculated increase (decrease) |
| | June 30, 2013 | | December 31, 2012 |
| Changes in interest rates | Net interest income | % change | | Net interest income | % change |
| | (dollars in thousands) |
+ 200 basis points (1) (2) | $ | 45,764 |
| 4.4 | % | | $ | 29,511 |
| 2.8 | % |
| + 100 basis points | 22,368 |
| 2.2 |
| | 11,188 |
| 1.1 |
|
| - 50 basis points | (5,979 | ) | (0.6 | ) | | (2,388 | ) | (0.2 | ) |
| |
(1) | Our Board of Directors has established a policy limiting the adverse change to net interest income to less than 5% under this scenario. |
| |
(2) | Under a shock scenario where interest rates increase 200 basis points immediately, net interest income is estimated to increase by approximately 7% at June 30, 2013. |
Operational Risk
Like all companies, we are subject to Operational Risk. We define Operational Risk as the risk to current or anticipated earnings or capital arising from inadequate or failed internal processes or systems, the misconduct or errors of people, and adverse external events. These events may include, but are not limited to, third party attempts to disrupt or penetrate our critical systems (i.e., hacking, cyber attacks or denial-of-service attacks), inadequate vendor management or oversight, clerical errors, theft and other criminal conduct.
We manage Operational Risk through our risk management framework and internal control processes. Within this framework, our business lines have direct and primary responsibility and accountability for identifying, controlling, and monitoring operational risks embedded in their business activities. In addition, we are continuing to invest in risk management systems and technology to support our businesses. The Operational Risk Committee, a senior management committee, provides oversight and assesses the most significant operational risks we face. In addition, risk management is responsible for establishing compliance program standards and policies, performing risk assessments on the business lines' adherence to laws, regulations and internal policies and procedures, and the regular monitoring of significant operating risks.
The ERMC periodically assesses the overall effectiveness of the Operational Risk Committee, our risk management program and our system of internal controls. ERMC reports the results of its review on internal controls and systems to the executive team as well as the Risk Committee and Audit Committee of our Board of Directors.
Impact of New Accounting Standards
In June 2013, the Financial Accounting Standards Board (“FASB”) released amended guidance to improve the accounting for determining whether an entity is an investment company. The amendments change the approach to assessing investment company status and provide two required fundamental characteristics and five typical characteristics for determining whether an entity is an investment company. The guidance becomes effective for us on January 1, 2014 and we do not expect it will have a significant impact on our financial statements.
In July 2013, the FASB released issued guidance to permit the Federal Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, Derivatives and Hedging. The amendment becomes effective prospectively for new or redesignated interest rate risk hedging relationships entered into on or after July 17, 2013. Given the elective nature of hedge accounting, the prospective nature of the guidance, and our objective to minimize ineffectiveness when hedge accounting is elected, we do not expect it will have a significant impact on our financial statements.
|
| |
| ITEM 1. | Financial Statements |
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Condition (unaudited)
(in thousands, except share and per share amounts)
|
| | | | | | |
| | June 30,
2013 | December 31,
2012 |
| ASSETS |
| Cash and cash equivalents | $ | 552,210 |
| $ | 430,862 |
|
| Investment securities: | | |
| Available for sale, at fair value (amortized cost of $7,780,269 and $10,658,220 in 2013 and 2012; includes pledged securities that can be sold or repledged of $292,057 and $585,967 in 2013 and 2012) | 7,916,353 |
| 10,993,605 |
|
| Held to maturity, at amortized cost (fair value of $3,871,855 and $1,373,971 in 2013 and 2012; includes pledged securities that can be sold or repledged of $434,580 and $31,139 in 2013 and 2012) | 3,856,960 |
| 1,299,806 |
|
| Federal Home Loan Bank and Federal Reserve Bank common stock, at amortized cost and fair value | 429,740 |
| 420,277 |
|
| Loans held for sale | 118,104 |
| 154,745 |
|
| Loans and leases (net of allowance for loan losses of $183,708 and $162,522 in 2013 and 2012) | 20,359,474 |
| 19,547,490 |
|
| Bank owned life insurance | 410,182 |
| 404,321 |
|
| Premises and equipment, net | 417,021 |
| 410,561 |
|
| Goodwill | 2,448,506 |
| 2,483,787 |
|
| Core deposit and other intangibles, net | 109,054 |
| 134,023 |
|
| Other assets | 532,123 |
| 526,755 |
|
| Total assets | $ | 37,149,727 |
| $ | 36,806,232 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
| Liabilities: | | |
| Deposits | $ | 27,149,836 |
| $ | 27,676,531 |
|
| Short-term borrowings | 3,698,279 |
| 2,983,718 |
|
| Long-term borrowings | 732,598 |
| 732,425 |
|
| Other | 666,270 |
| 487,000 |
|
| Total liabilities | 32,246,983 |
| 31,879,674 |
|
| Stockholders’ equity: | | |
| Preferred stock, $0.01 par value, 50,000,000 shares authorized; Series B, noncumulative perpetual preferred stock, $25 liquidation preference; 14,000,000 shares issued in 2013 and 2012 | 338,002 |
| 338,002 |
|
| Common stock, $0.01 par value, 500,000,000 shares authorized; 366,002,045 shares issued in 2013 and 2012 | 3,660 |
| 3,660 |
|
| Additional paid-in capital | 4,229,713 |
| 4,230,574 |
|
| Retained earnings | 450,798 |
| 398,711 |
|
| Accumulated other comprehensive income | 62,964 |
| 157,303 |
|
| Common stock held by employee stock ownership plan, 2,134,830 and 2,179,315 shares in 2013 and 2012 | (17,203 | ) | (17,825 | ) |
| Treasury stock, at cost, 12,069,892 and 13,381,063 shares in 2013 and 2012 | (165,190 | ) | (183,867 | ) |
| Total stockholders’ equity | 4,902,744 |
| 4,926,558 |
|
| Total liabilities and stockholders’ equity | $ | 37,149,727 |
| $ | 36,806,232 |
|
See accompanying notes to consolidated financial statements.
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income (unaudited)
(in thousands, except share and per share amounts)
|
| | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2013 | 2012 | | 2013 | 2012 |
| Interest income: | | | | | |
| Loans and leases | $ | 209,970 |
| $ | 200,725 |
| | $ | 416,610 |
| $ | 390,110 |
|
| Investment securities and other | 88,110 |
| 99,116 |
| | 177,071 |
| 200,511 |
|
| Total interest income | 298,080 |
| 299,841 |
| | 593,681 |
| 590,621 |
|
| Interest expense: | | | | | |
| Deposits | 12,967 |
| 16,391 |
| | 27,244 |
| 31,389 |
|
| Borrowings | 15,670 |
| 24,437 |
| | 30,864 |
| 57,848 |
|
| Total interest expense | 28,637 |
| 40,828 |
| | 58,108 |
| 89,237 |
|
| Net interest income | 269,443 |
| 259,013 |
| | 535,573 |
| 501,384 |
|
| Provision for credit losses | 25,200 |
| 28,100 |
| | 45,400 |
| 48,100 |
|
| Net interest income after provision for credit losses | 244,243 |
| 230,913 |
| | 490,173 |
| 453,284 |
|
| Noninterest income: | | | | | |
| Deposit service charges | 26,482 |
| 21,433 |
| | 51,282 |
| 38,470 |
|
| Insurance commissions | 17,692 |
| 17,072 |
| | 34,047 |
| 33,905 |
|
| Merchant and card fees | 12,380 |
| 9,271 |
| | 23,678 |
| 14,799 |
|
| Wealth management services | 14,945 |
| 9,207 |
| | 27,790 |
| 18,246 |
|
| Mortgage banking | 6,882 |
| 7,174 |
| | 13,306 |
| 12,823 |
|
| Capital markets income | 5,002 |
| 6,831 |
| | 11,033 |
| 13,370 |
|
| Lending and leasing | 4,534 |
| 4,245 |
| | 8,440 |
| 7,368 |
|
| Bank owned life insurance | 3,321 |
| 3,848 |
| | 6,788 |
| 7,235 |
|
| Gain on securities portfolio repositioning | — |
| 15,895 |
| | — |
| 15,895 |
|
| Other | 4,308 |
| 622 |
| | 8,494 |
| 3,395 |
|
| Total noninterest income | 95,546 |
| 95,598 |
| | 184,858 |
| 165,506 |
|
| Noninterest expense: | | | | | |
| Salaries and employee benefits | 116,305 |
| 104,507 |
| | 232,095 |
| 200,984 |
|
| Occupancy and equipment | 28,506 |
| 24,089 |
| | 56,551 |
| 46,106 |
|
| Technology and communications | 29,603 |
| 24,434 |
| | 56,716 |
| 44,147 |
|
| Marketing and advertising | 5,450 |
| 6,676 |
| | 9,796 |
| 13,439 |
|
| Professional services | 9,782 |
| 9,263 |
| | 19,385 |
| 18,158 |
|
| Amortization of intangibles | 10,850 |
| 9,839 |
| | 24,969 |
| 16,305 |
|
| Federal deposit insurance premiums | 9,348 |
| 10,552 |
| | 18,249 |
| 16,685 |
|
| Merger and acquisition integration expenses | — |
| 131,460 |
| | — |
| 144,430 |
|
| Restructuring charges | — |
| 3,750 |
| | — |
| 6,453 |
|
| Other | 25,326 |
| 21,069 |
| | 55,075 |
| 39,110 |
|
| Total noninterest expense | 235,170 |
| 345,639 |
| | 472,836 |
| 545,817 |
|
| Income (loss) before income taxes | 104,619 |
| (19,128 | ) | | 202,195 |
| 72,973 |
|
| Income taxes | 33,485 |
| (8,204 | ) | | 63,776 |
| 24,032 |
|
| Net income (loss) | 71,134 |
| (10,924 | ) | | 138,419 |
| 48,941 |
|
| Preferred stock dividend | 7,547 |
| 7,547 |
| | 15,094 |
| 12,662 |
|
| Net income (loss) available to common stockholders | $ | 63,587 |
| $ | (18,471 | ) | | $ | 123,325 |
| $ | 36,279 |
|
| Earnings (loss) per share: | | | | | |
| Basic | $ | 0.18 |
| $ | (0.05 | ) | | $ | 0.35 |
| $ | 0.10 |
|
| Diluted | $ | 0.18 |
| $ | (0.05 | ) | | $ | 0.35 |
| $ | 0.10 |
|
| Weighted average common shares outstanding: | | | | | |
| Basic | 349,542 |
| 348,941 |
| | 349,411 |
| 348,882 |
|
| Diluted | 350,384 |
| 348,941 |
| | 350,150 |
| 349,147 |
|
| Dividends per common share | $ | 0.08 |
| $ | 0.08 |
| | $ | 0.16 |
| $ | 0.16 |
|
See accompanying notes to financial statements.
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)
|
| | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2013 | 2012 | | 2013 | 2012 |
| Net income (loss) | $ | 71,134 |
| $ | (10,924 | ) | | $ | 138,419 |
| $ | 48,941 |
|
| Other comprehensive income, net of income taxes: | | | | | |
| Securities available for sale: | | | | | |
| Net unrealized (losses) gains arising during the period | (77,045 | ) | (11,678 | ) | | (89,012 | ) | 35,454 |
|
| Reclassification adjustment for realized gains included in net income | — |
| (9,798 | ) | | — |
| (9,798 | ) |
| Reclassification adjustment for net unrealized holding gains on securities transferred between available for sale and held to maturity during the period | — |
| 2,498 |
| | (33,823 | ) | 2,498 |
|
| Net unrealized (losses) gains on securities available for sale | (77,045 | ) | (18,978 | ) | | (122,835 | ) | 28,154 |
|
| Net unrealized holding gains on securities transferred between available for sale and held to maturity: | | | | | |
| Reclassification adjustment for net unrealized holding gains on securities transferred | — |
| (2,498 | ) | | 33,823 |
| (2,498 | ) |
| Amortization of net unrealized holding gains to income during the period | (5,169 | ) | (391 | ) | | (5,768 | ) | (840 | ) |
| Net unrealized holding (losses) gains on securities transferred during the period | (5,169 | ) | (2,889 | ) | | 28,055 |
| (3,338 | ) |
| Net unrealized gains on interest rate swaps designated as cash flow hedges arising during the period | 174 |
| 8,099 |
| | 346 |
| 6,359 |
|
| Pension and post-retirement plans: | | | | | |
| Pension remeasurement | — |
| — |
| | — |
| 4,612 |
|
| Amortization of net loss related to pension and post-retirement plans | 47 |
| 270 |
| | 95 |
| 321 |
|
| Total pension and post-retirement plans | 47 |
| 270 |
| | 95 |
| 4,933 |
|
| Total other comprehensive (loss) income | (81,993 | ) | (13,498 | ) | | (94,339 | ) | 36,108 |
|
| Total comprehensive (loss) income | $ | (10,859 | ) | $ | (24,422 | ) | | $ | 44,080 |
| $ | 85,049 |
|
See accompanying notes to consolidated financial statements.
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
(in thousands, except share and per share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred
stock | Common
stock | Additional
paid-in
capital | Retained
earnings | Accumulated
other
comprehensive
income | Common
stock
held by
ESOP | Treasury
stock | Total |
| Balances at January 1, 2013 | $ | 338,002 |
| $ | 3,660 |
| $ | 4,230,574 |
| $ | 398,711 |
| $ | 157,303 |
| $ | (17,825 | ) | $ | (183,867 | ) | $ | 4,926,558 |
|
| Net income | — |
| — |
| — |
| 138,419 |
| — |
| — |
| — |
| 138,419 |
|
| Total other comprehensive loss, net | — |
| — |
| — |
| — |
| (94,339 | ) | — |
| — |
| (94,339 | ) |
| ESOP shares committed to be released (88,970 shares) | — |
| — |
| — |
| (58 | ) | — |
| 622 |
| — |
| 564 |
|
| Stock-based compensation expense | — |
| — |
| 4,755 |
| — |
| — |
| — |
| — |
| 4,755 |
|
| Net tax expense from stock-based compensation | — |
| — |
| (815 | ) | — |
| — |
| — |
| — |
| (815 | ) |
| Restricted stock activity (1,311,171 shares) | — |
| — |
| (4,801 | ) | (15,023 | ) | — |
| — |
| 18,677 |
| (1,147 | ) |
| Preferred stock dividends | — |
| — |
| — |
| (15,094 | ) | — |
| — |
| — |
| (15,094 | ) |
| Common stock dividends of $0.16 per share | — |
| — |
| — |
| (56,157 | ) | — |
| — |
| — |
| (56,157 | ) |
| Balances at June 30, 2013 | $ | 338,002 |
| $ | 3,660 |
| $ | 4,229,713 |
| $ | 450,798 |
| $ | 62,964 |
| $ | (17,203 | ) | $ | (165,190 | ) | $ | 4,902,744 |
|
| Balances at January 1, 2012 | $ | 338,002 |
| $ | 3,660 |
| $ | 4,228,477 |
| $ | 374,840 |
| $ | 67,812 |
| $ | (19,070 | ) | $ | (195,543 | ) | $ | 4,798,178 |
|
| Net Income | — |
| — |
| — |
| 48,941 |
| — |
| — |
| — |
| 48,941 |
|
| Total other comprehensive income, net | — |
| — |
| — |
| — |
| 36,108 |
| — |
| — |
| 36,108 |
|
| ESOP shares committed to be released (89,730 shares) | — |
| — |
| 13 |
| — |
| — |
| 627 |
| — |
| 640 |
|
| Stock-based compensation expense | — |
| — |
| 4,054 |
| — |
| — |
| — |
| — |
| 4,054 |
|
| Excess tax benefit from stock-based compensation | — |
| — |
| 155 |
| — |
| — |
| — |
| — |
| 155 |
|
| Restricted stock activity (830,734 shares) | — |
| — |
| (8,848 | ) | (4,121 | ) | — |
| — |
| 11,751 |
| (1,218 | ) |
| Preferred stock dividends | — |
| — |
| — |
| (12,662 | ) | — |
| — |
| — |
| (12,662 | ) |
| Common stock dividends of $0.16 per share | — |
| — |
| — |
| (55,983 | ) | — |
| — |
| — |
| (55,983 | ) |
| Balances at June 30, 2012 | $ | 338,002 |
| $ | 3,660 |
| $ | 4,223,851 |
| $ | 351,015 |
| $ | 103,920 |
| $ | (18,443 | ) | $ | (183,792 | ) | $ | 4,818,213 |
|
See accompanying notes to consolidated financial statements.
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Cash Flows (unaudited)
(in thousands) |
| | | | | | |
| | Six months ended June 30, |
| | 2013 | 2012 |
| Cash flows from operating activities: | | |
| Net income | $ | 138,419 |
| $ | 48,941 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Amortization (accretion) of fees and discounts, net | 24,492 |
| (7,280 | ) |
| Provision for credit losses | 45,400 |
| 48,100 |
|
| Depreciation of premises and equipment | 27,266 |
| 19,945 |
|
| Amortization of intangibles | 24,969 |
| 16,305 |
|
| Gain on securities portfolio repositioning | — |
| (15,895 | ) |
| Origination of loans held for sale | (805,675 | ) | (687,271 | ) |
| Proceeds from sales of loans held for sale | 852,173 |
| 684,515 |
|
| ESOP and stock based-compensation expense | 5,319 |
| 4,702 |
|
| Deferred income tax (benefit) expense | (7,287 | ) | 18,200 |
|
| Contributions to defined benefit pension plans | — |
| (110,575 | ) |
| Other, net | 94,087 |
| (7,082 | ) |
| Net cash provided by operating activities | 399,163 |
| 12,605 |
|
| Cash flows from investing activities: | | |
| Proceeds from sales of securities available for sale | 357,258 |
| 3,143,638 |
|
| Proceeds from maturities of securities available for sale | 104,239 |
| 135,397 |
|
| Principal payments received on securities available for sale | 776,098 |
| 1,031,348 |
|
| Purchases of securities available for sale | (1,164,651 | ) | (3,993,510 | ) |
| Principal payments received on securities held to maturity | 428,226 |
| 327,587 |
|
| (Purchases of) proceeds from sale of Federal Home Loan Bank and Federal Reserve Bank common stock | (9,463 | ) | 28,604 |
|
| Net increase in loans and leases | (854,278 | ) | (782,931 | ) |
| Acquisitions, net of cash and cash equivalents | — |
| 7,298,182 |
|
| Purchases of premises and equipment | (34,943 | ) | (46,812 | ) |
| Other, net | (634 | ) | 26,184 |
|
| Net cash (used in) provided by investing activities | (398,148 | ) | 7,167,687 |
|
| Cash flows from financing activities: | | |
| Net decrease in deposits | (521,605 | ) | (1,082,726 | ) |
| Proceeds from (repayments of) short-term borrowings, net | 714,561 |
| (1,250,793 | ) |
| Repayments of long-term borrowings | (557 | ) | (5,126,190 | ) |
| Dividends paid on noncumulative preferred stock | (15,094 | ) | (12,662 | ) |
| Dividends paid on common stock | (56,157 | ) | (55,983 | ) |
| Other, net | (815 | ) | (266 | ) |
| Net cash provided by (used in) financing activities | 120,333 |
| (7,528,620 | ) |
| Net increase (decrease) in cash and cash equivalents | 121,348 |
| (348,328 | ) |
| Cash and cash equivalents at beginning of period | 430,862 |
| 836,555 |
|
| Cash and cash equivalents at end of period | $ | 552,210 |
| $ | 488,227 |
|
| | | |
| Supplemental disclosures | | |
| Cash paid during the period for: | | |
| Income taxes | $ | 4,689 |
| $ | 12,460 |
|
| Interest expense | 61,503 |
| 171,075 |
|
| Acquisition of noncash assets and liabilities: | | |
| Assets acquired | — |
| 2,570,284 |
|
| Liabilities assumed | — |
| 9,868,466 |
|
| Other noncash activity: | | |
| Securities transferred from available for sale to held to maturity (at fair value) | 3,001,330 |
| — |
|
| Securities available for sale purchased not settled | 183,839 |
| 49,388 |
|
| Securities transferred from held to maturity to available for sale | — |
| 860,674 |
|
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except as noted and per share amounts)
The accompanying consolidated financial statements of First Niagara Financial Group, Inc. (the “Company”), including its wholly owned subsidiary First Niagara Bank, N.A. (the “Bank”), have been prepared using U.S. generally accepted accounting principles (“GAAP”) for interim financial information.
These consolidated financial statements do not include all of the information and footnotes required by GAAP for a full year presentation and certain disclosures have been condensed or omitted in accordance with rules and regulations of the Securities and Exchange Commission. In our opinion, all adjustments necessary for a fair presentation have been included. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2012 Annual Report on Form 10-K. Results for the six months ended June 30, 2013 do not necessarily reflect the results that may be expected for the year ending December 31, 2013. We reviewed subsequent events and determined that no further disclosures or adjustments were required. Amounts in prior period financial statements are reclassified whenever necessary to conform to the current period presentation. The Company and the Bank are referred to collectively as “we” or “us” or “our.”
Note 1. Acquisitions
HSBC Bank Branches
On May 18, 2012, the Bank acquired 137 full-service branches from HSBC Bank USA, National Association (“HSBC”) and its affiliates (the “HSBC Branch Acquisition”) in the Buffalo, Rochester, Syracuse, Albany, Downstate New York and Connecticut banking markets, as contemplated by the Purchase and Assumption Agreement, dated July 30, 2011, as amended and restated as of May 17, 2012. The purchase price, net of deposit premiums received of $122 million upon closing of the assignments from HSBC to KeyBank N.A. (“Key”), Five Star Bank (“Five Star”), and Community Bank System, Inc. (“Community Bank”), was $772 million. We also acquired certain wealth management relationships which included approximately $2.5 billion of assets under management. While the HSBC Branch Acquisition is considered a purchase of a business for accounting purposes, pro forma income statement information is not presented because the HSBC Branch Acquisition does not represent the acquisition of a business which has continuity both before and after the acquisition.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
|
| | | |
| Recognized amounts of identifiable assets acquired and (liabilities assumed), at fair value: | |
Cash and cash equivalents (1) | $ | 7,360,218 |
|
| Loans | 1,599,712 |
|
| Core deposit and other intangibles | 84,631 |
|
| Other assets | 72,323 |
|
| Total assets acquired | 9,116,884 |
|
| | |
Deposits(2) | (9,854,589 | ) |
| Other liabilities | (32,792 | ) |
| Total liabilities assumed | (9,887,381 | ) |
| Goodwill | $ | 770,497 |
|
| |
(1) | Amount is net of $772 million deposit premium paid to HSBC. |
| |
(2) | Deposits reported exclude $0.5 billion in municipal deposits that were subject to a price concession. |
In connection with the regulatory process for the HSBC Branch Acquisition, we agreed with the U.S. Department of Justice to assign our purchase rights related to 26 HSBC branches in the Buffalo area. In January 2012, we entered into an agreement with Key assigning our right to purchase the 26 HSBC Buffalo branches as well as 11 additional HSBC branches in the Rochester area. On July 13, 2012, Key acquired these 37 branches with a total of $2.0 billion in deposits and approximately $256.5 million in loans, and paid us a deposit premium of $91.5 million.
In January 2012, we also entered into separate agreements with Five Star Bank and Community Bank for them to purchase seven First Niagara branches and 20 HSBC branches, for which we had assigned our purchase rights.
On June 22, 2012, Five Star acquired four First Niagara branches with $58.6 million in loans, assumed approximately $129.3 million in deposits, and paid us a deposit premium of $5.3 million. On August 17, 2012, Five Star acquired four of the HSBC branches, assumed approximately $18 million in loans, $157.2 million in deposits, and paid us a deposit premium of $6.5 million.
On July 20, 2012, Community Bank acquired the remaining 16 HSBC branches, with a total of $107.0 million in loans, $696.6 million in deposits, and paid us a deposit premium of $23.8 million. On September 7, 2012, Community Bank acquired three First Niagara branches, assumed approximately $55.4 million in loans, $100.8 million in deposits, and paid us a deposit premium of $3.1 million.
We estimated the fair value of loans acquired from HSBC by utilizing a methodology wherein similar loans were aggregated into pools. Cash flows for each pool were determined by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value based on a market rate for similar loans. There was no carryover of HSBC’s allowance for loan losses associated with the loans we acquired as the loans were initially recorded at fair value.
Information about the acquired HSBC loan portfolio as of May 18, 2012 is in the following table, and excludes home equity lines of credit, credit card, and any other line of credit: |
| | | |
| Contractually required principal and interest at acquisition | $ | 758,449 |
|
| Contractual cash flows not expected to be collected (nonaccretable discount) | (16,497 | ) |
| Expected cash flows at acquisition | 741,952 |
|
| Interest component of expected cash flows (accretable discount) | (90,670 | ) |
| Fair value of acquired loans (excluding lines of credit) | $ | 651,282 |
|
The $41 million core deposit intangible asset recognized as part of the HSBC Branch Acquisition is being amortized over its estimated useful life of approximately three years using an accelerated method and the $9 million wealth management and $34 million purchased credit card relationships intangibles are being amortized over their useful lives of ten years using an accelerated method. The goodwill, which is not amortized for book purposes, was assigned to our banking segment and is deductible for tax purposes.
The fair value of savings and transaction deposit accounts acquired from HSBC was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Certificates of deposit were valued by projecting out the expected cash flows based on the remaining contractual terms of the certificate of deposit. These cash flows were discounted based on a market rate for a certificate of deposit with a corresponding remaining maturity.
During the quarter ended March 31, 2013, we recorded a $36 million reduction to our goodwill balance related to the establishment of deferred tax assets in connection with the HSBC Branch Acquisition and our National City Bank branch acquisition.
Direct costs related to the HSBC Branch Acquisition were expensed as incurred and amounted to $144 million for the six months ended June 30, 2012. There were no such costs during the six months ended June 30, 2013.
Note 2. Investment Securities
The amortized cost, gross unrealized gains and losses, and fair value of our investment securities at the dates indicated are summarized as follows: |
| | | | | | | | | | | | |
| | Amortized | Unrealized | Unrealized | Fair |
| June 30, 2013 | cost | gains | losses | value |
| Investment securities available for sale: | | | | |
| Debt securities: | | | | |
| States and political subdivisions | $ | 549,779 |
| $ | 13,703 |
| $ | (451 | ) | $ | 563,031 |
|
| U.S. Treasury | 19,952 |
| 511 |
| — |
| 20,463 |
|
| U.S. government agencies | 4,283 |
| 15 |
| (4 | ) | 4,294 |
|
| U.S. government sponsored enterprises | 341,584 |
| 8,759 |
| (1,095 | ) | 349,248 |
|
| Corporate | 872,870 |
| 12,087 |
| (13,107 | ) | 871,850 |
|
| Trust preferred securities | 5,953 |
| 28 |
| (359 | ) | 5,622 |
|
| Total debt securities | 1,794,421 |
| 35,103 |
| (15,016 | ) | 1,814,508 |
|
| Mortgage-backed securities: | | | | |
| Residential mortgage-backed securities: | | | | |
| Government National Mortgage Association | 46,123 |
| 851 |
| (1,682 | ) | 45,292 |
|
| Federal National Mortgage Association | 161,205 |
| 4,197 |
| (7 | ) | 165,395 |
|
| Federal Home Loan Mortgage Corporation | 211,871 |
| 4,036 |
| — |
| 215,907 |
|
| Collateralized mortgage obligations: | | | | |
| Federal National Mortgage Association | 814,245 |
| 337 |
| (16,339 | ) | 798,243 |
|
| Federal Home Loan Mortgage Corporation | 446,650 |
| 602 |
| (7,773 | ) | 439,479 |
|
| Non-agency issued | 17,665 |
| 775 |
| (17 | ) | 18,423 |
|
| Total collateralized mortgage obligations | 1,278,560 |
| 1,714 |
| (24,129 | ) | 1,256,145 |
|
| Total residential mortgage-backed securities | 1,697,759 |
| 10,798 |
| (25,818 | ) | 1,682,739 |
|
| Commercial mortgage-backed securities, non-agency issued | 1,831,269 |
| 81,007 |
| (2,242 | ) | 1,910,034 |
|
| Total mortgage-backed securities | 3,529,028 |
| 91,805 |
| (28,060 | ) | 3,592,773 |
|
| Collateralized loan obligations, non-agency issued | 1,489,675 |
| 45,717 |
| (1,488 | ) | 1,533,904 |
|
| Asset-backed securities collateralized by: | | | | |
| Student loans | 330,401 |
| 6,689 |
| (598 | ) | 336,492 |
|
| Credit cards | 73,294 |
| 465 |
| (408 | ) | 73,351 |
|
| Auto loans | 356,353 |
| 3,700 |
| (721 | ) | 359,332 |
|
| Other | 176,272 |
| 844 |
| (1,593 | ) | 175,523 |
|
| Total asset-backed securities | 936,320 |
| 11,698 |
| (3,320 | ) | 944,698 |
|
| Other | 30,825 |
| 53 |
| (408 | ) | 30,470 |
|
| Total securities available for sale | $ | 7,780,269 |
| $ | 184,376 |
| $ | (48,292 | ) | $ | 7,916,353 |
|
| Investment securities held to maturity: | | | | |
| Residential mortgage-backed securities: | | | | |
| Government National Mortgage Association | $ | 19,650 |
| $ | 231 |
| $ | (95 | ) | $ | 19,786 |
|
| Federal National Mortgage Association | 169,626 |
| 139 |
| (4,204 | ) | 165,561 |
|
| Federal Home Loan Mortgage Corporation | 95,605 |
| 192 |
| (1,251 | ) | 94,546 |
|
| Collateralized mortgage obligations: | | | | |
| Government National Mortgage Association | 1,619,664 |
| 34,411 |
| (1,818 | ) | 1,652,257 |
|
| Federal National Mortgage Association | 985,839 |
| 1,177 |
| (16,550 | ) | 970,466 |
|
| Federal Home Loan Mortgage Corporation | 966,576 |
| 16,350 |
| (13,687 | ) | 969,239 |
|
| Total collateralized mortgage obligations | 3,572,079 |
| 51,938 |
| (32,055 | ) | 3,591,962 |
|
| Total securities held to maturity | $ | 3,856,960 |
| $ | 52,500 |
| $ | (37,605 | ) | $ | 3,871,855 |
|
|
| | | | | | | | | | | | |
| | Amortized | Unrealized | Unrealized | Fair |
| December 31, 2012 | cost | gains | losses | value |
| Investment securities available for sale: | | | | |
| Debt securities: | | | | |
| States and political subdivisions | $ | 587,482 |
| $ | 20,723 |
| $ | (144 | ) | $ | 608,061 |
|
| U.S. Treasury | 19,944 |
| 763 |
| — |
| 20,707 |
|
| U.S. government agencies | 4,641 |
| 13 |
| (3 | ) | 4,651 |
|
| U.S. government sponsored enterprises | 390,421 |
| 13,471 |
| — |
| 403,892 |
|
| Corporate | 811,720 |
| 28,390 |
| (3,083 | ) | 837,027 |
|
| Trust preferred securities | 15,524 |
| — |
| (1,329 | ) | 14,195 |
|
| Total debt securities | 1,829,732 |
| 63,360 |
| (4,559 | ) | 1,888,533 |
|
| Mortgage-backed securities: | | | | |
| Residential mortgage-backed securities: | | | | |
| Government National Mortgage Association | 67,700 |
| 2,123 |
| (197 | ) | 69,626 |
|
| Federal National Mortgage Association | 394,274 |
| 20,218 |
| (30 | ) | 414,462 |
|
| Federal Home Loan Mortgage Corporation | 342,906 |
| 11,987 |
| — |
| 354,893 |
|
| Collateralized mortgage obligations: | | | | |
| Government National Mortgage Association | 1,060,415 |
| 30,742 |
| — |
| 1,091,157 |
|
| Federal National Mortgage Association | 1,460,400 |
| 14,968 |
| (940 | ) | 1,474,428 |
|
| Federal Home Loan Mortgage Corporation | 1,036,308 |
| 11,204 |
| (295 | ) | 1,047,217 |
|
| Non-agency issued | 59,604 |
| 1,544 |
| (25 | ) | 61,123 |
|
| Total collateralized mortgage obligations | 3,616,727 |
| 58,458 |
| (1,260 | ) | 3,673,925 |
|
| Total residential mortgage-backed securities | 4,421,607 |
| 92,786 |
| (1,487 | ) | 4,512,906 |
|
| Commercial mortgage-backed securities, non-agency issued | 1,929,727 |
| 131,785 |
| (1,291 | ) | 2,060,221 |
|
| Total mortgage-backed securities | 6,351,334 |
| 224,571 |
| (2,778 | ) | 6,573,127 |
|
| Collateralized loan obligations, non-agency issued | 1,510,253 |
| 35,466 |
| (854 | ) | 1,544,865 |
|
| Asset-backed securities collateralized by: | | | | |
| Student loans | 377,923 |
| 11,952 |
| (134 | ) | 389,741 |
|
| Credit cards | 73,768 |
| 1,319 |
| (12 | ) | 75,075 |
|
| Auto loans | 366,501 |
| 5,708 |
| (43 | ) | 372,166 |
|
| Other | 117,885 |
| 781 |
| (7 | ) | 118,659 |
|
| Total asset-backed securities | 936,077 |
| 19,760 |
| (196 | ) | 955,641 |
|
| Other | 30,824 |
| 707 |
| (92 | ) | 31,439 |
|
| Total securities available for sale | $ | 10,658,220 |
| $ | 343,864 |
| $ | (8,479 | ) | $ | 10,993,605 |
|
| Investment securities held to maturity: | | | | |
| Residential mortgage-backed securities: | | | | |
| Government National Mortgage Association | $ | 5,988 |
| $ | 340 |
| $ | (28 | ) | $ | 6,300 |
|
| Federal National Mortgage Association | 5,223 |
| 168 |
| — |
| 5,391 |
|
| Federal Home Loan Mortgage Corporation | 6,753 |
| 326 |
| — |
| 7,079 |
|
| Collateralized mortgage obligations: | | | | |
| Government National Mortgage Association | 1,006,238 |
| 48,748 |
| (91 | ) | 1,054,895 |
|
| Federal National Mortgage Association | 18,463 |
| 657 |
| — |
| 19,120 |
|
| Federal Home Loan Mortgage Corporation | 257,141 |
| 24,045 |
| — |
| 281,186 |
|
| Total collateralized mortgage obligations | 1,281,842 |
| 73,450 |
| (91 | ) | 1,355,201 |
|
| Total securities held to maturity | $ | 1,299,806 |
| $ | 74,284 |
| $ | (119 | ) | $ | 1,373,971 |
|
The table below details certain information regarding our investment securities that were in an unrealized loss position at the dates indicated by the length of time those securities were in a continuous loss position:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or longer | | Total |
| | Fair | Unrealized | | | Fair | Unrealized | | | Fair | Unrealized | |
| June 30, 2013 | value | losses | Count | | Value | losses | Count | | value | losses | Count |
| Investment securities available for sale: | | | | | | | | | | | |
| Debt securities: | | | | | | | | | | | |
| States and political subdivisions | $ | 31,448 |
| $ | (401 | ) | 80 |
| | $ | 5,364 |
| $ | (50 | ) | 8 |
| | $ | 36,812 |
| $ | (451 | ) | 88 |
|
| U.S. government agencies | — |
| — |
| — |
| | 2,079 |
| (4 | ) | 2 |
| | 2,079 |
| (4 | ) | 2 |
|
| U.S. government sponsored enterprises | 69,555 |
| (1,095 | ) | 7 |
| | — |
| — |
| — |
| | 69,555 |
| (1,095 | ) | 7 |
|
| Corporate | 391,942 |
| (12,859 | ) | 273 |
| | 24,752 |
| (248 | ) | 1 |
| | 416,694 |
| (13,107 | ) | 274 |
|
| Trust preferred securities | — |
| — |
| — |
| | 1,305 |
| (359 | ) | 2 |
| | 1,305 |
| (359 | ) | 2 |
|
| Total debt securities | 492,945 |
| (14,355 | ) | 360 |
| | 33,500 |
| (661 | ) | 13 |
| | 526,445 |
| (15,016 | ) | 373 |
|
| Mortgage-backed securities: | | | | | | | | | | | |
| Residential mortgage-backed securities: | | | | | | | | | | | |
| Government National Mortgage Association | 20,096 |
| (1,682 | ) | 7 |
| | — |
| — |
| — |
| | 20,096 |
| (1,682 | ) | 7 |
|
| Federal National Mortgage Association | 293 |
| (1 | ) | 3 |
| | 311 |
| (6 | ) | 2 |
| | 604 |
| (7 | ) | 5 |
|
| Collateralized mortgage obligations: | | | | | | | | | | | |
| Federal National Mortgage Association | 697,915 |
| (16,339 | ) | 36 |
| | — |
| — |
| — |
| | 697,915 |
| (16,339 | ) | 36 |
|
| Federal Home Loan Mortgage Corporation | 309,331 |
| (7,773 | ) | 17 |
| | — |
| — |
| — |
| | 309,331 |
| (7,773 | ) | 17 |
|
| Non-agency issued | 1,112 |
| (17 | ) | 7 |
| | — |
| — |
| — |
| | 1,112 |
| (17 | ) | 7 |
|
| Total collateralized mortgage obligations | 1,008,358 |
| (24,129 | ) | 60 |
| | — |
| — |
| — |
| | 1,008,358 |
| (24,129 | ) | 60 |
|
| Total residential mortgage-backed securities | 1,028,747 |
| (25,812 | ) | 70 |
| | 311 |
| (6 | ) | 2 |
| | 1,029,058 |
| (25,818 | ) | 72 |
|
| Commercial mortgage-backed securities, non-agency issued | 172,282 |
| (2,217 | ) | 26 |
| | 1,932 |
| (25 | ) | 1 |
| | 174,214 |
| (2,242 | ) | 27 |
|
| Total mortgage-backed securities | 1,201,029 |
| (28,029 | ) | 96 |
| | 2,243 |
| (31 | ) | 3 |
| | 1,203,272 |
| (28,060 | ) | 99 |
|
| Collateralized loan obligations, non-agency issued | 167,623 |
| (1,488 | ) | 23 |
| | — |
| — |
| — |
| | 167,623 |
| (1,488 | ) | 23 |
|
| Asset-backed securities collateralized by: | | | | | | | | | | | |
| Student loans | 64,092 |
| (598 | ) | 9 |
| | — |
| — |
| — |
| | 64,092 |
| (598 | ) | 9 |
|
| Credit card | 36,078 |
| (408 | ) | 4 |
| | — |
| — |
| — |
| | 36,078 |
| (408 | ) | 4 |
|
| Auto loans | 53,534 |
| (721 | ) | 14 |
| | — |
| — |
| — |
| | 53,534 |
| (721 | ) | 14 |
|
| Other | 67,537 |
| (1,592 | ) | 11 |
| | 89 |
| (1 | ) | 1 |
| | 67,626 |
| (1,593 | ) | 12 |
|
| Total asset-backed securities | 221,241 |
| (3,319 | ) | 38 |
| | 89 |
| (1 | ) | 1 |
| | 221,330 |
| (3,320 | ) | 39 |
|
| Other | 14,263 |
| (174 | ) | 3 |
| | 7,768 |
| (234 | ) | 2 |
| | 22,031 |
| (408 | ) | 5 |
|
| Total securities available for sale in an unrealized loss position | $ | 2,097,101 |
| $ | (47,365 | ) | 520 |
| | $ | 43,600 |
| $ | (927 | ) | 19 |
| | $ | 2,140,701 |
| $ | (48,292 | ) | 539 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or longer | | Total |
| | Fair | Unrealized | | | Fair | Unrealized | | | Fair | Unrealized | |
| June 30, 2013 | value | losses | Count | | Value | losses | Count | | value | losses | Count |
| Investment securities held to maturity: | | | | | | | | | | | |
| Residential mortgage-backed securities: | | | | | | | | | | | |
| Government National Mortgage Association | $ | 12,216 |
| $ | (95 | ) | 4 |
| | $ | — |
| $ | — |
| — |
| | $ | 12,216 |
| $ | (95 | ) | 4 |
|
| Federal National Mortgage Association | 149,862 |
| (4,204 | ) | 39 |
| | — |
| — |
| — |
| | 149,862 |
| (4,204 | ) | 39 |
|
| Federal Home Loan Mortgage Corporation | 83,005 |
| (1,251 | ) | 22 |
| | — |
| — |
| — |
| | 83,005 |
| (1,251 | ) | 22 |
|
| Collateralized mortgage obligation: | | | | | | | | | | | |
| Government National Mortgage Association | 282,912 |
| (1,818 | ) | 32 |
| | — |
| — |
| — |
| | 282,912 |
| (1,818 | ) | 32 |
|
| Federal National Mortgage Association | 889,071 |
| (16,550 | ) | 47 |
| | — |
| — |
| — |
| | 889,071 |
| (16,550 | ) | 47 |
|
| Federal Home Loan Mortgage Corporation | 617,679 |
| (13,687 | ) | 37 |
| | — |
| — |
| — |
| | 617,679 |
| (13,687 | ) | 37 |
|
| Total collateralized mortgage obligations | 1,789,662 |
| (32,055 | ) | 116 |
| | — |
| — |
| — |
| | 1,789,662 |
| (32,055 | ) | 116 |
|
| Total securities held to maturity in an unrealized loss position | $ | 2,034,745 |
| $ | (37,605 | ) | 181 |
| | $ | — |
| $ | — |
| — |
| | $ | 2,034,745 |
| $ | (37,605 | ) | 181 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or longer | | Total |
| | Fair | Unrealized | | | Fair | Unrealized | | | Fair | Unrealized | |
| December 31, 2012 | value | losses | Count | | value | losses | Count | | value | losses | Count |
| Investment securities available for sale: | | | | | | | | | | | |
| Debt securities: | | | | | | | | | | | |
| States and political subdivisions | $ | 21,373 |
| $ | (98 | ) | 42 |
| | $ | 4,311 |
| $ | (46 | ) | 5 |
| | $ | 25,684 |
| $ | (144 | ) | 47 |
|
| U.S. government agencies | — |
| — |
| — |
| | 2,237 |
| (3 | ) | 2 |
| | 2,237 |
| (3 | ) | 2 |
|
| Corporate | 92,190 |
| (2,168 | ) | 27 |
| | 44,085 |
| (915 | ) | 2 |
| | 136,275 |
| (3,083 | ) | 29 |
|
| Trust preferred securities | 1,005 |
| (13 | ) | 1 |
| | 13,190 |
| (1,316 | ) | 6 |
| | 14,195 |
| (1,329 | ) | 7 |
|
| Total debt securities | 114,568 |
| (2,279 | ) | 70 |
| | 63,823 |
| (2,280 | ) | 15 |
| | 178,391 |
| (4,559 | ) | 85 |
|
| Mortgage-backed securities: | | | | | | | | | | | |
| Residential mortgage-backed securities: | | | | | | | | | | | |
| Government National Mortgage Association | 22,604 |
| (197 | ) | 6 |
| | — |
| — |
| — |
| | 22,604 |
| (197 | ) | 6 |
|
| Federal National Mortgage Association | 1,244 |
| (22 | ) | 7 |
| | 315 |
| (8 | ) | 2 |
| | 1,559 |
| (30 | ) | 9 |
|
| Collateralized mortgage obligations: | | | | | | | | | | | |
| Federal National Mortgage Association | 232,290 |
| (940 | ) | 12 |
| | — |
| — |
| — |
| | 232,290 |
| (940 | ) | 12 |
|
| Federal Home Loan Mortgage Corporation | 118,020 |
| (295 | ) | 6 |
| | — |
| — |
| — |
| | 118,020 |
| (295 | ) | 6 |
|
| Non-agency issued | — |
| — |
| — |
| | 4,123 |
| (25 | ) | 1 |
| | 4,123 |
| (25 | ) | 1 |
|
| Total collateralized mortgage obligations | 350,310 |
| (1,235 | ) | 18 |
| | 4,123 |
| (25 | ) | 1 |
| | 354,433 |
| (1,260 | ) | 19 |
|
| Total residential mortgage-backed securities | 374,158 |
| (1,454 | ) | 31 |
| | 4,438 |
| (33 | ) | 3 |
| | 378,596 |
| (1,487 | ) | 34 |
|
| Commercial mortgage-backed securities, non-agency issued | 29,660 |
| (613 | ) | 5 |
| | 31,567 |
| (678 | ) | 4 |
| | 61,227 |
| (1,291 | ) | 9 |
|
| Total mortgage-backed securities | 403,818 |
| (2,067 | ) | 36 |
| | 36,005 |
| (711 | ) | 7 |
| | 439,823 |
| (2,778 | ) | 43 |
|
| Collateralized loan obligations, non-agency issued | 167,997 |
| (854 | ) | 25 |
| | — |
| — |
| — |
| | 167,997 |
| (854 | ) | 25 |
|
| Asset-backed securities collateralized by: | | | | | | | | | | | |
| Student loans | 2,055 |
| (53 | ) | 1 |
| | 25,641 |
| (81 | ) | 1 |
| | 27,696 |
| (134 | ) | 2 |
|
| Credit cards | 5,987 |
| (12 | ) | 2 |
| | — |
| — |
| — |
| | 5,987 |
| (12 | ) | 2 |
|
| Auto loans | 41,605 |
| (43 | ) | 7 |
| | — |
| — |
| — |
| | 41,605 |
| (43 | ) | 7 |
|
| Other | 4,500 |
| (3 | ) | 2 |
| | 97 |
| (4 | ) | 1 |
| | 4,597 |
| (7 | ) | 3 |
|
| Total asset-backed securities | 54,147 |
| (111 | ) | 12 |
| | 25,738 |
| (85 | ) | 2 |
| | 79,885 |
| (196 | ) | 14 |
|
| Other | — |
| — |
| — |
| | 7,936 |
| (92 | ) | 3 |
| | 7,936 |
| (92 | ) | 3 |
|
| Total securities available for sale in an unrealized loss position | $ | 740,530 |
| $ | (5,311 | ) | 143 |
| | $ | 133,502 |
| $ | (3,168 | ) | 27 |
| | $ | 874,032 |
| $ | (8,479 | ) | 170 |
|
| Investment securities held to maturity: | | | | | | | | | | | |
| Residential mortgage-backed securities: | | | | | | | | | | | |
| Government National Mortgage Association | $ | 1,959 |
| $ | (28 | ) | 1 |
| | $ | — |
| $ | — |
| — |
| | $ | 1,959 |
| $ | (28 | ) | 1 |
|
| Collateralized mortgage obligations: | | | | | | | | | | | |
| Government National Mortgage Association | 23,485 |
| (91 | ) | 2 |
| | — |
| — |
| — |
| | 23,485 |
| (91 | ) | 2 |
|
| Total securities held to maturity in an unrealized loss position | $ | 25,444 |
| $ | (119 | ) | 3 |
| | $ | — |
| $ | — |
| — |
| | $ | 25,444 |
| $ | (119 | ) | 3 |
|
We have assessed the securities in an unrealized loss position at June 30, 2013 and December 31, 2012 and determined that the declines in fair value below amortized cost were temporary. We also do not intend to sell these securities and it is not more likely than not that we will be required to sell these securities before the recovery of their amortized cost bases, which may be at maturity.
Scheduled contractual maturities of our investment securities at June 30, 2013 were as follows: |
| | | | | | |
| | Amortized cost | Fair value |
| Debt securities: | | |
| Within one year | $ | 183,403 |
| $ | 184,832 |
|
| After one year through five years | 1,012,869 |
| 1,039,300 |
|
| After five years through ten years | 573,011 |
| 566,392 |
|
| After ten years | 25,138 |
| 23,984 |
|
| Total debt securities | 1,794,421 |
| 1,814,508 |
|
| Mortgage-backed securities | 7,385,988 |
| 7,464,628 |
|
| Collateralized loan obligations | 1,489,675 |
| 1,533,904 |
|
| Asset-backed securities | 936,320 |
| 944,698 |
|
| Other | 30,825 |
| 30,470 |
|
| | $ | 11,637,229 |
| $ | 11,788,208 |
|
While the contractual maturities of our mortgage-backed securities, collateralized loan obligations, asset-backed securities, and other securities generally exceed ten years, we expect the effective lives to be significantly shorter due to prepayments of the underlying loans and the nature of these securities. The duration of our investment securities portfolio was 2.4 years at June 30, 2013, which was consistent with the duration at December 31, 2012.
On March 29, 2013, we transferred $3 billion of residential mortgage-backed securities from available for sale to held to maturity. The amortized cost, unrealized gains and losses, and fair value of these transferred investment securities immediately prior to the transfer are as follows: |
| | | | | | | | | | | | |
| | Amortized | Unrealized | Unrealized | Fair |
| | cost | gains | losses | value |
| Residential mortgage-backed securities: | | | | |
| Government National Mortgage Association | $ | 14,615 |
| $ | 748 |
| $ | — |
| $ | 15,363 |
|
| Federal National Mortgage Association | 173,196 |
| 11,716 |
| (15 | ) | 184,897 |
|
| Federal Home Loan Mortgage Corporation | 96,468 |
| 5,224 |
| — |
| 101,692 |
|
| Collateralized mortgage obligations: | | | | |
| Government National Mortgage Association | 884,677 |
| 25,759 |
| — |
| 910,436 |
|
| Federal National Mortgage Association | 1,019,254 |
| 9,244 |
| (2,703 | ) | 1,025,795 |
|
| Federal Home Loan Mortgage Corporation | 758,248 |
| 6,664 |
| (1,765 | ) | 763,147 |
|
| Total collateralized mortgage obligations | 2,662,179 |
| 41,667 |
| (4,468 | ) | 2,699,378 |
|
| Total residential mortgage-backed securities | $ | 2,946,458 |
| $ | 59,355 |
| $ | (4,483 | ) | $ | 3,001,330 |
|
Note 3. Loans and Leases
Overall Portfolio
Our loan portfolio is made up of two segments, commercial loans and consumer loans. Those segments are further segregated between our loans initially accounted for under the amortized cost method (referred to as “originated” loans) and loans acquired (referred to as “acquired” loans). Our commercial loan portfolio segment includes both business and commercial real estate loans. Our consumer portfolio segment includes residential real estate, home equity, and other consumer loans.
Our loans and leases receivable consisted of the following at the dates indicated:
|
| | | | | | | | | | | | | | | | | | | |
| | June 30, 2013 | | December 31, 2012 |
| | Originated | Acquired | Total | | Originated | Acquired | Total |
| Commercial: | | | | | | | |
| Real estate | $ | 5,010,981 |
| $ | 1,718,443 |
| $ | 6,729,424 |
| | $ | 4,491,440 |
| $ | 1,974,607 |
| $ | 6,466,047 |
|
| Construction | 699,034 |
| 53,917 |
| 752,951 |
| | 552,265 |
| 74,881 |
| 627,146 |
|
| Business | 4,595,471 |
| 570,135 |
| 5,165,606 |
| | 4,286,331 |
| 666,992 |
| 4,953,323 |
|
| Total commercial | 10,305,486 |
| 2,342,495 |
| 12,647,981 |
| | 9,330,036 |
| 2,716,480 |
| 12,046,516 |
|
| Consumer: | | | | | | | |
| Residential real estate | 1,784,879 |
| 1,773,395 |
| 3,558,274 |
| | 1,724,134 |
| 2,037,433 |
| 3,761,567 |
|
| Home equity | 1,416,770 |
| 1,253,902 |
| 2,670,672 |
| | 1,286,243 |
| 1,365,648 |
| 2,651,891 |
|
| Indirect auto | 1,049,763 |
| — |
| 1,049,763 |
| | 601,456 |
| — |
| 601,456 |
|
| Credit cards | 303,455 |
| — |
| 303,455 |
| | 215,001 |
| 99,972 |
| 314,973 |
|
| Other consumer | 241,983 |
| 71,054 |
| 313,037 |
| | 215,487 |
| 118,122 |
| 333,609 |
|
| Total consumer | 4,796,850 |
| 3,098,351 |
| 7,895,201 |
| | 4,042,321 |
| 3,621,175 |
| 7,663,496 |
|
| Total loans and leases | 15,102,336 |
| 5,440,846 |
| 20,543,182 |
| | 13,372,357 |
| 6,337,655 |
| 19,710,012 |
|
| Allowance for loan losses | (182,450 | ) | (1,258 | ) | (183,708 | ) | | (160,958 | ) | (1,564 | ) | (162,522 | ) |
| Total loans and leases, net | $ | 14,919,886 |
| $ | 5,439,588 |
| $ | 20,359,474 |
| | $ | 13,211,399 |
| $ | 6,336,091 |
| $ | 19,547,490 |
|
As of June 30, 2013, we had a liability for unfunded loan commitments of $13 million. For the six months ended June 30, 2013, we recognized provision for credit losses related to our unfunded loan commitments of $0.8 million.
Of the $2.7 billion home equity portfolio at both June 30, 2013 and December 31, 2012, $1.0 billion and $0.9 billion were in a first lien position at the respective period ends. We hold or service the first lien loan for approximately 10% of the remainder of the home equity portfolio that was in a second lien position as of June 30, 2013 and December 31, 2012.
Acquired Loan Portfolios
We have acquired loans in four acquisitions since January 1, 2009. All acquired loans were initially measured at fair value and subsequently accounted for under either Accounting Standards Codification Topic (“ASC”) 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality) or ASC 310-20 (Nonrefundable Fees and Other Costs.)
The outstanding principal balance and the related carrying amount of our acquired loans included in our Consolidated Statements of Condition are as follows at the dates indicated:
|
| | | | | | |
| | June 30,
2013 | December 31,
2012 |
| Credit impaired acquired loans evaluated individually for future credit losses | | |
| Outstanding principal balance | $ | 28,945 |
| $ | 31,032 |
|
| Carrying amount | 22,315 |
| 24,157 |
|
| Acquired loans evaluated collectively for future credit losses | | |
| Outstanding principal balance | 4,095,783 |
| 4,773,965 |
|
| Carrying amount | 4,022,963 |
| 4,690,143 |
|
| Other acquired loans | | |
| Outstanding principal balance | 1,454,055 |
| 1,695,979 |
|
| Carrying amount | 1,395,568 |
| 1,623,355 |
|
| Total acquired loans | | |
| Outstanding principal balance | 5,578,783 |
| 6,500,976 |
|
| Carrying amount | 5,440,846 |
| 6,337,655 |
|
The following table presents changes in the accretable yield, which includes income recognized from contractual interest cash flows, for the dates indicated. Acquired lines of credit accounted for under ASC 310-20 are not included in this table.
|
| | | |
| Balance at January 1, 2012 | $ | (1,186,900 | ) |
| HSBC acquisition | (90,670 | ) |
| Net reclassifications from nonaccretable yield | (28,095 | ) |
| Accretion | 248,533 |
|
| Balance at December 31, 2012 | (1,057,132 | ) |
| Reclassifications from nonaccretable yield | (10,217 | ) |
| Accretion | 109,641 |
|
Other (1) | 21,722 |
|
| Balance at June 30, 2013 | $ | (935,986 | ) |
| |
(1) | Includes changes in expected cash flows from changes in interest rate and prepayment assumptions. |
During the first quarter of 2013, we reduced our estimate of future cash flows on acquired loans to reflect our current outlook for prepayment speeds on these balances. The increase in prepayment speed assumptions reduced our accretable discount by $21.7 million. This change did not materially impact our interest income or net interest margin in 2013.
Allowance for loan losses
We establish our allowance for loan losses through a provision for credit losses based on our evaluation of the credit quality of our loan portfolio. We determined our allowance for loan losses by portfolio segment as defined above. For our originated loans, our allowance for loan losses consists of the following elements: (i) specific valuation allowances based on probable losses on specifically identified impaired loans; and (ii) valuation allowances based on net historical loan loss experience for similar loans with similar inherent risk characteristics and performance trends, adjusted, as appropriate for qualitative risk factors specific to respective loan types.
We also maintain an allowance for loan losses on acquired loans when: (i) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to acquisition, and (ii) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remaining credit discount recorded at the time of acquisition.
The following table presents the activity in our allowance for loan losses on originated loans and related recorded investment of the associated loans in our originated loan portfolio segment for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | |
| | Commercial | | Consumer | |
| | Business | Real estate | | Residential | Home equity | Other
consumer | Total |
| Six months ended June 30, 2013 | | | | | | | |
| Allowance for loan losses: | | | | | | | |
| Balance at beginning of period | $ | 99,188 |
| $ | 37,550 |
| | $ | 4,515 |
| $ | 4,716 |
| $ | 14,989 |
| $ | 160,958 |
|
| Provision for loan losses | 19,486 |
| 8,964 |
| | (1,167 | ) | 2,307 |
| 13,239 |
| 42,829 |
|
| Charge-offs | (13,314 | ) | (3,791 | ) | | (1,095 | ) | (1,677 | ) | (5,211 | ) | (25,088 | ) |
| Recoveries | 1,237 |
| 535 |
| | 377 |
| 159 |
| 1,443 |
| 3,751 |
|
| Balance at end of period | $ | 106,597 |
| $ | 43,258 |
| | $ | 2,630 |
| $ | 5,505 |
| $ | 24,460 |
| $ | 182,450 |
|
| Allowance for loan losses: | | | | | | | |
| Individually evaluated for impairment | $ | 4,168 |
| $ | 4,627 |
| | $ | 967 |
| $ | 1,837 |
| $ | 38 |
| $ | 11,637 |
|
| Collectively evaluated for impairment | 102,429 |
| 38,631 |
| | 1,663 |
| 3,668 |
| 24,422 |
| 170,813 |
|
| Total | $ | 106,597 |
| $ | 43,258 |
| | $ | 2,630 |
| $ | 5,505 |
| $ | 24,460 |
| $ | 182,450 |
|
| Loans receivable: | | | | | | | |
| Balance at end of period | | | | | | | |
| Individually evaluated for impairment | $ | 62,237 |
| $ | 93,873 |
| | $ | 21,027 |
| $ | 6,175 |
| $ | 2,518 |
| $ | 185,830 |
|
| Collectively evaluated for impairment | 4,533,234 |
| 5,616,142 |
| | 1,763,852 |
| 1,410,595 |
| 1,592,683 |
| 14,916,506 |
|
| Total | $ | 4,595,471 |
| $ | 5,710,015 |
| | $ | 1,784,879 |
| $ | 1,416,770 |
| $ | 1,595,201 |
| $ | 15,102,336 |
|
| Six months ended June 30, 2012 | | | | | | | |
| Allowance for loan losses: | | | | | | | |
| Balance at beginning of period | $ | 57,348 |
| $ | 50,007 |
| | $ | 4,101 |
| $ | 4,374 |
| $ | 2,362 |
| $ | 118,192 |
|
| Provision for loan losses | 33,487 |
| (1,485 | ) | | 2,302 |
| 3,375 |
| 3,223 |
| 40,902 |
|
| Charge-offs | (16,631 | ) | (4,010 | ) | | (1,555 | ) | (2,963 | ) | (1,856 | ) | (27,015 | ) |
| Recoveries | 1,530 |
| 433 |
| | 280 |
| 266 |
| 803 |
| 3,312 |
|
| Allowance related to loans sold | (26 | ) | (18 | ) | | (52 | ) | (81 | ) | (18 | ) | (195 | ) |
| Balance at end of period | $ | 75,708 |
| $ | 44,927 |
| | $ | 5,076 |
| $ | 4,971 |
| $ | 4,514 |
| $ | 135,196 |
|
| Allowance for loan losses: | | | | | | | |
| Individually evaluated for impairment | $ | 1,645 |
| $ | 2,734 |
| | $ | 2,494 |
| $ | 397 |
| $ | 23 |
| $ | 7,293 |
|
| Collectively evaluated for impairment | 74,063 |
| 42,193 |
| | 2,582 |
| 4,574 |
| 4,491 |
| 127,903 |
|
| Total | $ | 75,708 |
| $ | 44,927 |
| | $ | 5,076 |
| $ | 4,971 |
| $ | 4,514 |
| $ | 135,196 |
|
| Loans receivable: | | | | | | | |
| Balance at end of period | | | | | | | |
| Individually evaluated for impairment | $ | 40,514 |
| $ | 64,734 |
| | $ | 12,405 |
| $ | 1,617 |
| $ | 72 |
| $ | 119,342 |
|
| Collectively evaluated for impairment | 3,625,421 |
| 4,419,350 |
| | 1,645,333 |
| 1,192,746 |
| 389,966 |
| 11,272,816 |
|
| Total | $ | 3,665,935 |
| $ | 4,484,084 |
| | $ | 1,657,738 |
| $ | 1,194,363 |
| $ | 390,038 |
| $ | 11,392,158 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Commercial | | Consumer | |
| | Business | Real estate | | Residential | Home equity | Other
consumer | Total |
| Three months ended June 30, 2013 | | | | | | | |
| Allowance for loan losses: | | | | | | | |
| Balance at beginning of period | $ | 97,472 |
| $ | 41,344 |
| | $ | 3,817 |
| $ | 6,143 |
| $ | 21,963 |
| $ | 170,739 |
|
| Provision for loan losses | 16,300 |
| 3,880 |
| | (896 | ) | 267 |
| 4,353 |
| 23,904 |
|
| Charge-offs | (8,061 | ) | (2,482 | ) | | (311 | ) | (983 | ) | (2,597 | ) | (14,434 | ) |
| Recoveries | 886 |
| 516 |
| | 20 |
| 78 |
| 741 |
| 2,241 |
|
| Balance at end of period | $ | 106,597 |
| $ | 43,258 |
| | $ | 2,630 |
| $ | 5,505 |
| $ | 24,460 |
| $ | 182,450 |
|
| Three months ended June 30, 2012 | | | | | | | |
| Allowance for loan losses: | | | | | | | |
| Balance at beginning of period | $ | 71,653 |
| $ | 41,619 |
| | $ | 4,697 |
| $ | 4,504 |
| $ | 2,672 |
| $ | 125,145 |
|
| Provision for loan losses | 15,039 |
| 5,282 |
| | 586 |
| 2,084 |
| 2,384 |
| 25,375 |
|
| Charge-offs | (12,063 | ) | (2,229 | ) | | (336 | ) | (1,675 | ) | (915 | ) | (17,218 | ) |
| Recoveries | 1,105 |
| 273 |
| | 181 |
| 139 |
| 391 |
| 2,089 |
|
| Allowance related to loans sold | (26 | ) | (18 | ) | | (52 | ) | (81 | ) | (18 | ) | (195 | ) |
| Balance at end of period | $ | 75,708 |
| $ | 44,927 |
| | $ | 5,076 |
| $ | 4,971 |
| $ | 4,514 |
| $ | 135,196 |
|
The following table presents the activity in our allowance for loan losses and related recorded investment of the associated loans in our acquired loan portfolio for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | |
| | Commercial | | Consumer | |
| | Business | Real estate | | Residential | Home equity | Other
consumer | Total |
| Six months ended June 30, 2013 | | | | | | | |
| Allowance for loan losses: | | | | | | | |
| Balance at beginning of period | $ | — |
| $ | — |
| | $ | 60 |
| $ | 290 |
| $ | 1,214 |
| $ | 1,564 |
|
| Provision for loan losses | — |
| 1,771 |
| | — |
| — |
| — |
| 1,771 |
|
| Charge-offs | — |
| (1,772 | ) | | — |
| — |
| (441 | ) | (2,213 | ) |
| Recoveries | — |
| 90 |
| | — |
| — |
| 46 |
| 136 |
|
| Balance at end of period | $ | — |
| $ | 89 |
| | $ | 60 |
| $ | 290 |
| $ | 819 |
| $ | 1,258 |
|
| Allowance for loan losses: | | | | | | | |
| Individually evaluated for impairment | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| Collectively evaluated for impairment | — |
| 89 |
| | 60 |
| 290 |
| 819 |
| 1,258 |
|
| Total | $ | — |
| $ | 89 |
| | $ | 60 |
| $ | 290 |
| $ | 819 |
| $ | 1,258 |
|
| Loans receivable: | | | | | | | |
| Balance at end of period | | | | | | | |
| Individually evaluated for impairment | $ | 6,610 |
| $ | 1,130 |
| | $ | — |
| $ | 3,207 |
| $ | — |
| $ | 10,947 |
|
| Collectively evaluated for impairment | 379,345 |
| — |
| | — |
| 995,627 |
| 10,779 |
| 1,385,751 |
|
| Loans acquired with deteriorated credit quality | 184,180 |
| 1,771,230 |
| | 1,773,395 |
| 255,068 |
| 60,275 |
| 4,044,148 |
|
| Total | $ | 570,135 |
| $ | 1,772,360 |
| | $ | 1,773,395 |
| $ | 1,253,902 |
| $ | 71,054 |
| $ | 5,440,846 |
|
| Six months ended June 30, 2012 | | | | | | | |
| Allowance for loan losses: | | | | | | | |
| Balance at beginning of period | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | 1,908 |
| $ | 1,908 |
|
| Provision for loan losses | — |
| 4,801 |
| | — |
| — |
| 2,000 |
| 6,801 |
|
| Charge-offs | — |
| (4,999 | ) | | — |
| — |
| (701 | ) | (5,700 | ) |
| Recoveries | — |
| 198 |
| | — |
| — |
| 113 |
| 311 |
|
| Balance at end of period | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | 3,320 |
| $ | 3,320 |
|
| Allowance for loan losses: | | | | | | | |
| Individually evaluated for impairment | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| Collectively evaluated for impairment | — |
| — |
| | — |
| — |
| 3,320 |
| 3,320 |
|
| Total | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | 3,320 |
| $ | 3,320 |
|
| Loans receivable: | | | | | | | |
| Balance at end of period | | | | | | | |
| Individually evaluated for impairment | $ | 2,849 |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | 2,849 |
|
| Collectively evaluated for impairment | 549,839 |
| — |
| | — |
| 1,098,995 |
| 324,729 |
| 1,973,563 |
|
| Loans acquired with deteriorated credit quality | 295,914 |
| 2,225,925 |
| | 2,379,307 |
| 389,878 |
| 103,922 |
| 5,394,946 |
|
| Total | $ | 848,602 |
| $ | 2,225,925 |
| | $ | 2,379,307 |
| $ | 1,488,873 |
| $ | 428,651 |
| $ | 7,371,358 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | Commercial | | Consumer | |
| | Business | | Real estate | | Residential | Home equity | Other
consumer | Total |
| Three months ended June 30, 2013 | | | | | | | | |
| Allowance for loan losses: | | | | | | | | |
| Balance at beginning of period | $ | — |
| | $ | 44 |
| | $ | 60 |
| $ | 290 |
| $ | 869 |
| $ | 1,263 |
|
| Provision for loan losses | — |
| | 896 |
| | — |
| — |
| — |
| 896 |
|
| Charge-offs | — |
| | (897 | ) | | — |
| — |
| (55 | ) | (952 | ) |
| Recoveries | — |
| | 46 |
| | — |
| — |
| 5 |
| 51 |
|
| Balance at end of period | $ | — |
| | $ | 89 |
| | $ | 60 |
| $ | 290 |
| $ | 819 |
| $ | 1,258 |
|
| Three months ended June 30, 2012 | | | | | | | | |
| Allowance for loan losses: | | | | | | | | |
| Balance at beginning of period | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| $ | 1,601 |
| $ | 1,601 |
|
| Provision for loan losses | — |
| | 428 |
| | — |
| — |
| 2,000 |
| 2,428 |
|
| Charge-offs | — |
| | (626 | ) | | — |
| — |
| (358 | ) | (984 | ) |
| Recoveries | — |
| | 198 |
| | — |
| — |
| 77 |
| 275 |
|
| Balance at end of period | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| $ | 3,320 |
| $ | 3,320 |
|
Credit Quality
We monitor credit quality as indicated by various factors and utilize such information in our evaluation of the adequacy of the allowance for loan losses. The following sections discuss the various credit quality indicators that we consider.
Nonperforming loans
Our nonperforming loans consisted of the following at the dates indicated:
|
| | | | | | | | | | | | | | | | | | | |
| | June 30, 2013 | | December 31, 2012 |
| | Originated | Acquired | Total | | Originated | Acquired | Total |
| Commercial: | | | | | | | |
| Real estate | $ | 59,624 |
| $ | 1,133 |
| $ | 60,757 |
| | $ | 50,848 |
| $ | 1,120 |
| $ | 51,968 |
|
| Business | 44,658 |
| 8,871 |
| 53,529 |
| | 47,066 |
| 8,932 |
| 55,998 |
|
| Total commercial | 104,282 |
| 10,004 |
| 114,286 |
| | 97,914 |
| 10,052 |
| 107,966 |
|
| Consumer: | | | | | | | |
| Residential real estate | 29,667 |
| — |
| 29,667 |
| | 27,192 |
| — |
| 27,192 |
|
| Home equity | 14,601 |
| 17,080 |
| 31,681 |
| | 14,233 |
| 19,205 |
| 33,438 |
|
| Other consumer | 6,094 |
| 472 |
| 6,566 |
| | 3,737 |
| 391 |
| 4,128 |
|
| Total consumer | 50,362 |
| 17,552 |
| 67,914 |
| | 45,162 |
| 19,596 |
| 64,758 |
|
| Total | $ | 154,644 |
| $ | 27,556 |
| $ | 182,200 |
| | $ | 143,076 |
| $ | 29,648 |
| $ | 172,724 |
|
The table below provides information about the interest income that would have been recognized if our nonperforming loans had performed in accordance with terms for the periods indicated:
|
| | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
| | June 30, | | June 30, |
| | 2013 | 2012 | | 2013 | 2012 |
| | | | | | |
| Additional interest income that would have been recorded if nonperforming loans had performed in accordance with original terms | $ | 1,817 |
| $ | 1,466 |
| | $ | 3,538 |
| $ | 3,130 |
|
Impaired loans
The following table provides information about our impaired originated loans including ending recorded investment, principal balance, and related allowance amount at the dates indicated. Loans with no related allowance for loan losses have adequate collateral securing their carrying value and in some circumstances have been charged down to their current carrying value based on the fair value of the collateral. The carrying value of our impaired loans, less any related allowance for loan losses, was 71% and 67% of the loans’ contractual principal balance at June 30, 2013 and December 31, 2012, respectively.
|
| | | | | | | | | | | | | | | | | | | |
| | June 30, 2013 | | December 31, 2012 |
| | Recorded investment | Unpaid principal balance | Related allowance | | Recorded investment | Unpaid principal balance | Related allowance |
| With no related allowance recorded: | | | | | | | |
| Commercial: | | | | | | | |
| Real estate | $ | 65,380 |
| $ | 84,823 |
| $ | — |
| | $ | 41,964 |
| $ | 54,926 |
| $ | — |
|
| Business | 31,984 |
| 51,633 |
| — |
| | 34,336 |
| 57,442 |
| — |
|
| Total commercial | 97,364 |
| 136,456 |
| — |
| | 76,300 |
| 112,368 |
| — |
|
| Consumer: | | | | | | | |
| Residential real estate | 12,879 |
| 13,553 |
| — |
| | 6,315 |
| 6,473 |
| — |
|
| Home equity | 2,788 |
| 3,310 |
| — |
| | 2,992 |
| 3,406 |
| — |
|
| Other consumer | 1,371 |
| 1,809 |
| — |
| | 1,830 |
| 1,924 |
| — |
|
| Total consumer | 17,038 |
| 18,672 |
| — |
| | 11,137 |
| 11,803 |
| — |
|
| Total | $ | 114,402 |
| $ | 155,128 |
| $ | — |
| | $ | 87,437 |
| $ | 124,171 |
| $ | — |
|
| With a related allowance recorded | | | | | | | |
| Commercial: | | | | | | | |
| Real estate | $ | 28,493 |
| $ | 38,181 |
| $ | 4,627 |
| | $ | 24,550 |
| $ | 37,037 |
| $ | 2,640 |
|
| Business | 30,253 |
| 38,513 |
| 4,168 |
| | 23,873 |
| 31,271 |
| 4,755 |
|
| Total commercial | 58,746 |
| 76,694 |
| 8,795 |
| | 48,423 |
| 68,308 |
| 7,395 |
|
| Consumer: | | | | | | | |
| Residential real estate | 8,148 |
| 8,576 |
| 967 |
| | 13,191 |
| 13,918 |
| 3,074 |
|
| Home equity | 3,387 |
| 3,757 |
| 1,837 |
| | 2,406 |
| 2,583 |
| 801 |
|
| Other consumer | 1,147 |
| 1,276 |
| 38 |
| | 79 |
| 99 |
| 10 |
|
| Total consumer | 12,682 |
| 13,609 |
| 2,842 |
| | 15,676 |
| 16,600 |
| 3,885 |
|
| Total | $ | 71,428 |
| $ | 90,303 |
| $ | 11,637 |
| | $ | 64,099 |
| $ | 84,908 |
| $ | 11,280 |
|
| Total | | | | | | | |
| Commercial: | | | | | | | |
| Real estate | $ | 93,873 |
| $ | 123,004 |
| $ | 4,627 |
| | $ | 66,514 |
| $ | 91,963 |
| $ | 2,640 |
|
| Business | 62,237 |
| 90,146 |
| 4,168 |
| | 58,209 |
| 88,713 |
| 4,755 |
|
| Total commercial | 156,110 |
| 213,150 |
| 8,795 |
| | 124,723 |
| 180,676 |
| 7,395 |
|
| Consumer: | | | | | | | |
| Residential real estate | 21,027 |
| 22,129 |
| 967 |
| | 19,506 |
| 20,391 |
| 3,074 |
|
| Home equity | 6,175 |
| 7,067 |
| 1,837 |
| | 5,398 |
| 5,989 |
| 801 |
|
| Other consumer | 2,518 |
| 3,085 |
| 38 |
| | 1,909 |
| 2,023 |
| 10 |
|
| Total consumer | 29,720 |
| 32,281 |
| 2,842 |
| | 26,813 |
| 28,403 |
| 3,885 |
|
| Total | $ | 185,830 |
| $ | 245,431 |
| $ | 11,637 |
| | $ | 151,536 |
| $ | 209,079 |
| $ | 11,280 |
|
The following table provides information about our impaired acquired loans with no related allowance at the dates indicated. The remaining credit mark is considered adequate to cover any loss on these balances.
|
| | | | | | | | | | | | | | | | | | | |
| | June 30, 2013 | | December 31, 2012 |
| | Recorded
investment | Unpaid
principal
balance | Related
allowance | | Recorded
investment | Unpaid principal balance | Related
allowance |
| Commercial: | | | | | | | |
| Real estate | $ | 1,130 |
| $ | 4,654 |
| $ | — |
| | $ | 1,130 |
| $ | 4,652 |
| $ | — |
|
| Business | 6,610 |
| 7,552 |
| — |
| | 6,656 |
| 7,436 |
| — |
|
| Total commercial | 7,740 |
| 12,206 |
| — |
| | 7,786 |
| 12,088 |
| — |
|
| Consumer: | | | | | | | |
| Residential real estate | — |
| — |
| — |
| | — |
| — |
| — |
|
| Home equity | 3,207 |
| 4,232 |
| — |
| | 2,345 |
| 3,470 |
| — |
|
| Other consumer | — |
| — |
| — |
| | 17 |
| 17 |
| — |
|
| Total consumer | 3,207 |
| 4,232 |
| — |
| | 2,362 |
| 3,487 |
| — |
|
Total(1) | $ | 10,947 |
| $ | 16,438 |
| $ | — |
| | $ | 10,148 |
| $ | 15,575 |
| $ | — |
|
| |
(1) | Included nonaccrual purchased credit impaired loans. |
The following table provides information about our impaired originated loans including the average recorded investment and interest income recognized on impaired loans for the periods indicated:
|
| | | | | | | | | | | | | |
| | June 30, |
| | 2013 | | 2012 |
| | Average recorded investment | Interest income recognized | | Average recorded investment | Interest income recognized |
| Six months ended | | | | | |
| Commercial: | | | | | |
| Real estate | $ | 93,908 |
| $ | 803 |
| | $ | 71,409 |
| $ | 563 |
|
| Business | 61,706 |
| 396 |
| | 38,123 |
| 283 |
|
| Total commercial | 155,614 |
| 1,199 |
| | 109,532 |
| 846 |
|
| Consumer: | | | | | |
| Residential real estate | 21,115 |
| 170 |
| | 12,480 |
| 206 |
|
| Home equity | 6,223 |
| 30 |
| | 1,628 |
| 30 |
|
| Other consumer | 2,640 |
| 8 |
| | 77 |
| 2 |
|
| Total consumer | 29,978 |
| 208 |
| | 14,185 |
| 238 |
|
| Total | $ | 185,592 |
| $ | 1,407 |
| | $ | 123,717 |
| $ | 1,084 |
|
| Three months ended | | | | | |
| Commercial: | | | | | |
| Real estate | $ | 84,938 |
| $ | 444 |
| | $ | 63,161 |
| $ | 278 |
|
| Business | 64,775 |
| 169 |
| | 42,562 |
| 134 |
|
| Total commercial | 149,713 |
| 613 |
| | 105,723 |
| 412 |
|
| Consumer: | | | | | |
| Residential real estate | 20,436 |
| 86 |
| | 12,816 |
| 100 |
|
| Home equity | 5,855 |
| 14 |
| | 1,687 |
| 14 |
|
| Other consumer | 2,215 |
| 4 |
| | 74 |
| 1 |
|
| Total consumer | 28,506 |
| 104 |
| | 14,577 |
| 115 |
|
| Total | $ | 178,219 |
| $ | 717 |
| | $ | 120,300 |
| $ | 527 |
|
The following table provides information about our impaired acquired loans including the average recorded investment and interest income recognized on impaired loans for the periods indicated: |
| | | | | | | | | | | | | |
| | June 30, |
| | 2013 | | 2012 |
| | Average
recorded
investment | Interest
income
recognized | | Average
recorded
investment | Interest
income
recognized |
| Six months ended | | | | | |
| Commercial: | | | | | |
| Real estate | $ | 1,107 |
| $ | — |
| | $ | — |
| $ | — |
|
| Business | 7,098 |
| — |
| | 1,761 |
| — |
|
| Total commercial | 8,205 |
| — |
| | 1,761 |
| — |
|
| Consumer: | | | | | |
| Residential real estate | — |
| — |
| | — |
| — |
|
| Home equity | 3,199 |
| 2 |
| | — |
| — |
|
| Other consumer | — |
| — |
| | — |
| — |
|
| Total consumer | 3,199 |
| 2 |
| | — |
| — |
|
Total(1) | $ | 11,404 |
| $ | 2 |
| | $ | 1,761 |
| $ | — |
|
| Three months ended | | | | | |
| Commercial: | | | | | |
| Real estate | $ | 1,176 |
| $ | — |
| | $ | — |
| $ | — |
|
| Business | 7,287 |
| — |
| | 3,521 |
| — |
|
| Total commercial | 8,463 |
| — |
| | 3,521 |
| — |
|
| Consumer: | | | | | |
| Residential real estate | — |
| — |
| | — |
| — |
|
| Home equity | 3,043 |
| 1 |
| | — |
| — |
|
| Other consumer | 1 |
| — |
| | — |
| — |
|
| Total consumer | 3,044 |
| 1 |
| | — |
| — |
|
Total(1) | $ | 11,507 |
| $ | 1 |
| | $ | 3,521 |
| $ | — |
|
| |
(1) | Included nonaccrual purchased credit impaired loans. |
Period end nonaccrual loans differed from the amount of total impaired loans as certain TDRs, which are considered impaired loans, were accruing interest because the borrower demonstrated its ability to satisfy the terms of the restructured loan for at least six consecutive payments. Also contributing to the difference are nonaccrual commercial loans less than $200 thousand and nonaccrual consumer loans, which are not considered impaired unless they have been modified in a TDR as they are evaluated collectively when determining the allowance for loan losses.
The following table is a reconciliation between nonaccrual loans and impaired loans at the dates indicated:
|
| | | | | | | | | |
| | Commercial | Consumer | Total |
| June 30, 2013 | | | |
| Nonaccrual loans | $ | 114,286 |
| $ | 67,914 |
| $ | 182,200 |
|
| Plus: Accruing TDRs | 61,560 |
| 8,332 |
| 69,892 |
|
| Less: Smaller balance nonaccrual loans evaluated collectively when determining the allowance for loan losses | (11,996 | ) | (43,319 | ) | (55,315 | ) |
Total impaired loans(1) | $ | 163,850 |
| $ | 32,927 |
| $ | 196,777 |
|
| December 31, 2012: | | | |
| Nonaccrual loans | $ | 107,966 |
| $ | 64,758 |
| $ | 172,724 |
|
| Plus: Accruing TDRs | 36,380 |
| 9,900 |
| 46,280 |
|
| Less: Smaller balance nonaccrual loans evaluated collectively when determining the allowance for loan losses | (11,837 | ) | (45,483 | ) | (57,320 | ) |
Total impaired loans(1) | $ | 132,509 |
| $ | 29,175 |
| $ | 161,684 |
|
| |
(1) | Included nonaccrual purchased credit impaired loans. |
Credit Quality Indicators
The primary indicators of credit quality are delinquency status and our internal loan gradings for our commercial loan portfolio segment and delinquency status and current FICO scores for our consumer loan portfolio segment.
The following tables contain an aging analysis of our loans by class at the dates indicated:
|
| | | | | | | | | | | | | | | | | | | | | |
| | 30-59 days past due | 60-89 days past due | Greater than 90 days past due | Total past due | Current | Total loans receivable | Greater than 90 days and accruing (1) |
| June 30, 2013 | | | | | | | |
| Originated loans | | | | | | | |
| Commercial: | | | | | | | |
| Real estate | $ | 10,904 |
| $ | 1,665 |
| $ | 44,774 |
| $ | 57,343 |
| $ | 5,652,672 |
| $ | 5,710,015 |
| $ | 3,726 |
|
| Business | 7,545 |
| 5,475 |
| 23,897 |
| 36,917 |
| 4,558,554 |
| 4,595,471 |
| 80 |
|
| Total commercial | 18,449 |
| 7,140 |
| 68,671 |
| 94,260 |
| 10,211,226 |
| 10,305,486 |
| 3,806 |
|
| Consumer: | | | | | | | |
| Residential real estate | 7,652 |
| 2,326 |
| 20,238 |
| 30,216 |
| 1,754,663 |
| 1,784,879 |
| — |
|
| Home equity | 2,605 |
| 1,719 |
| 9,698 |
| 14,022 |
| 1,402,748 |
| 1,416,770 |
| — |
|
| Other consumer | 10,036 |
| 2,906 |
| 3,956 |
| 16,898 |
| 1,578,303 |
| 1,595,201 |
| 859 |
|
| Total consumer | 20,293 |
| 6,951 |
| 33,892 |
| 61,136 |
| 4,735,714 |
| 4,796,850 |
| 859 |
|
| Total | $ | 38,742 |
| $ | 14,091 |
| $ | 102,563 |
| $ | 155,396 |
| $ | 14,946,940 |
| $ | 15,102,336 |
| $ | 4,665 |
|
| Acquired loans | | | | | | | |
| Commercial: | | | | | | | |
| Real estate | $ | 8,081 |
| $ | 12,335 |
| $ | 81,883 |
| $ | 102,299 |
| $ | 1,670,061 |
| $ | 1,772,360 |
| $ | 80,750 |
|
| Business | 5,359 |
| 1,938 |
| 13,026 |
| 20,323 |
| 549,812 |
| 570,135 |
| 6,886 |
|
| Total commercial | 13,440 |
| 14,273 |
| 94,909 |
| 122,622 |
| 2,219,873 |
| 2,342,495 |
| 87,636 |
|
| Consumer: | | | | | | | |
| Residential real estate | 17,330 |
| 10,527 |
| 66,490 |
| 94,347 |
| 1,679,048 |
| 1,773,395 |
| 66,490 |
|
| Home equity | 9,298 |
| 3,621 |
| 20,358 |
| 33,277 |
| 1,220,625 |
| 1,253,902 |
| 7,966 |
|
| Other consumer | 1,764 |
| 901 |
| 1,274 |
| 3,939 |
| 67,115 |
| 71,054 |
| 803 |
|
| Total consumer | 28,392 |
| 15,049 |
| 88,122 |
| 131,563 |
| 2,966,788 |
| 3,098,351 |
| 75,259 |
|
| Total | $ | 41,832 |
| $ | 29,322 |
| $ | 183,031 |
| $ | 254,185 |
| $ | 5,186,661 |
| $ | 5,440,846 |
| $ | 162,895 |
|
| December 31, 2012 | | | | | | | |
| Originated loans | | | | | | | |
| Commercial: | | | | | | | |
| Real estate | $ | 4,346 |
| $ | 2,584 |
| $ | 40,454 |
| $ | 47,384 |
| $ | 4,996,321 |
| $ | 5,043,705 |
| $ | 3,791 |
|
| Business | 5,398 |
| 4,698 |
| 19,237 |
| 29,333 |
| 4,256,998 |
| 4,286,331 |
| 315 |
|
| Total commercial | 9,744 |
| 7,282 |
| 59,691 |
| 76,717 |
| 9,253,319 |
| 9,330,036 |
| 4,106 |
|
| Consumer: | | | | | | | |
| Residential real estate | 7,590 |
| 2,414 |
| 19,241 |
| 29,245 |
| 1,694,889 |
| 1,724,134 |
| — |
|
| Home equity | 2,754 |
| 1,662 |
| 8,991 |
| 13,407 |
| 1,272,836 |
| 1,286,243 |
| — |
|
| Other consumer | 6,214 |
| 1,230 |
| 2,020 |
| 9,464 |
| 1,022,480 |
| 1,031,944 |
| 402 |
|
| Total consumer | 16,558 |
| 5,306 |
| 30,252 |
| 52,116 |
| 3,990,205 |
| 4,042,321 |
| 402 |
|
| Total | $ | 26,302 |
| $ | 12,588 |
| $ | 89,943 |
| $ | 128,833 |
| $ | 13,243,524 |
| $ | 13,372,357 |
| $ | 4,508 |
|
| Acquired loans | | | | | | | |
| Commercial: | | | | | | | |
| Real estate | $ | 10,651 |
| $ | 18,066 |
| $ | 80,374 |
| $ | 109,091 |
| $ | 1,940,397 |
| $ | 2,049,488 |
| $ | 79,255 |
|
| Business | 5,661 |
| 1,864 |
| 12,864 |
| 20,389 |
| 646,603 |
| 666,992 |
| 5,963 |
|
| Total commercial | 16,312 |
| 19,930 |
| 93,238 |
| 129,480 |
| 2,587,000 |
| 2,716,480 |
| 85,218 |
|
| Consumer: | | | | | | | |
| Residential real estate | 24,104 |
| 11,917 |
| 69,106 |
| 105,127 |
| 1,932,306 |
| 2,037,433 |
| 69,106 |
|
| Home equity | 10,241 |
| 5,437 |
| 20,705 |
| 36,383 |
| 1,329,265 |
| 1,365,648 |
| 7,268 |
|
| Other consumer | 4,506 |
| 2,968 |
| 5,859 |
| 13,333 |
| 204,761 |
| 218,094 |
| 5,468 |
|
| Total consumer | 38,851 |
| 20,322 |
| 95,670 |
| 154,843 |
| 3,466,332 |
| 3,621,175 |
| 81,842 |
|
| Total | $ | 55,163 |
| $ | 40,252 |
| $ | 188,908 |
| $ | 284,323 |
| $ | 6,053,332 |
| $ | 6,337,655 |
| $ | 167,060 |
|
| |
(1) | Includes credit card loans, loans that have matured and are in the process of collection, and acquired loans that were originally recorded at fair value upon acquisition. Acquired loans are considered to be accruing as we can reasonably estimate future cash flows on these acquired loans and we expect to fully collect the carrying value of these loans net of the allowance for acquired loan losses. Therefore, we are accreting the difference between the carrying value of these loans and their expected cash flows into interest income. |
Our internal loan risk assessment provides information about the financial health of our commercial borrowers and our risk of potential loss. The following tables present information about the credit quality of our commercial loan portfolio at the dates indicated:
|
| | | | | | | | | | | |
| | Real estate | Business | Total | Percent of Total |
| June 30, 2013 | | | | |
| Originated loans: | | | | |
| Pass | $ | 5,384,166 |
| $ | 4,357,956 |
| $ | 9,742,122 |
| 94.5 | % |
Criticized:(1) | | | | |
| Accrual | 266,225 |
| 192,857 |
| 459,082 |
| 4.5 | % |
| Nonaccrual | 59,624 |
| 44,658 |
| 104,282 |
| 1.0 |
|
| Total criticized | 325,849 |
| 237,515 |
| 563,364 |
| 5.5 |
|
| Total | $ | 5,710,015 |
| $ | 4,595,471 |
| $ | 10,305,486 |
| 100.0 | % |
| Acquired loans: | | | | |
| Pass | $ | 1,543,928 |
| $ | 493,657 |
| $ | 2,037,585 |
| 87.0 | % |
Criticized:(1) | | | | |
| Accrual | 227,299 |
| 67,607 |
| 294,906 |
| 12.6 | % |
| Nonaccrual | 1,133 |
| 8,871 |
| 10,004 |
| 0.4 |
|
| Total criticized | 228,432 |
| 76,478 |
| 304,910 |
| 13.0 |
|
| Total | $ | 1,772,360 |
| $ | 570,135 |
| $ | 2,342,495 |
| 100.0 | % |
| December 31, 2012 | | | | |
| Originated loans: | | | | |
| Pass | $ | 4,745,600 |
| $ | 4,069,410 |
| $ | 8,815,010 |
| 94.5 | % |
Criticized:(1) | | | | |
| Accrual | 247,257 |
| 169,855 |
| 417,112 |
| 4.5 | % |
| Nonaccrual | 50,848 |
| 47,066 |
| 97,914 |
| 1.0 |
|
| Total criticized | 298,105 |
| 216,921 |
| 515,026 |
| 5.5 |
|
| Total | $ | 5,043,705 |
| $ | 4,286,331 |
| $ | 9,330,036 |
| 100.0 | % |
| Acquired loans: | | | | |
| Pass | $ | 1,794,282 |
| $ | 581,555 |
| $ | 2,375,837 |
| 87.4 | % |
Criticized:(1) | | | | |
| Accrual | 254,086 |
| 76,505 |
| 330,591 |
| 12.2 | % |
| Nonaccrual | 1,120 |
| 8,932 |
| 10,052 |
| 0.4 |
|
| Total criticized | 255,206 |
| 85,437 |
| 340,643 |
| 12.6 |
|
| Total | $ | 2,049,488 |
| $ | 666,992 |
| $ | 2,716,480 |
| 100.0 | % |
| |
(1) | Includes special mention, substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business,” under “Asset Quality Review” in our Annual Report on 10-K for the year ended December 31, 2012. |
Borrower FICO scores provide information about the credit quality of our consumer loan portfolio as they provide an indication as to the likelihood that a debtor will repay their debts. The scores are obtained from a nationally recognized consumer rating agency and are presented in the table below at the dates indicated:
|
| | | | | | | | | | | | | | |
| | Residential real estate | Home equity | Other consumer | Total | Percent of Total |
| June 30, 2013 | | | | | |
| Originated loans by refreshed FICO score: | | | | | |
| Over 700 | $ | 1,519,985 |
| $ | 1,161,892 |
| $ | 991,079 |
| $ | 3,672,956 |
| 76.6 | % |
| 660-700 | 124,398 |
| 141,374 |
| 327,504 |
| 593,276 |
| 12.4 |
|
| 620-660 | 57,365 |
| 56,838 |
| 163,106 |
| 277,309 |
| 5.8 |
|
| 580-620 | 34,206 |
| 27,037 |
| 60,924 |
| 122,167 |
| 2.5 |
|
| Less than 580 | 38,713 |
| 25,763 |
| 45,634 |
| 110,110 |
| 2.3 |
|
No score(1) | 10,212 |
| 3,866 |
| 6,954 |
| 21,032 |
| 0.4 |
|
| Total | $ | 1,784,879 |
| $ | 1,416,770 |
| $ | 1,595,201 |
| $ | 4,796,850 |
| 100.0 | % |
| Acquired loans by refreshed FICO score: | | | | | |
| Over 700 | $ | 1,232,406 |
| $ | 962,129 |
| $ | 29,159 |
| $ | 2,223,694 |
| 71.7 | % |
| 660-700 | 129,134 |
| 113,658 |
| 10,480 |
| 253,272 |
| 8.2 |
|
| 620-660 | 84,834 |
| 66,379 |
| 6,153 |
| 157,366 |
| 5.1 |
|
| 580-620 | 53,321 |
| 44,762 |
| 3,383 |
| 101,466 |
| 3.3 |
|
| Less than 580 | 80,890 |
| 44,760 |
| 3,952 |
| 129,602 |
| 4.2 |
|
No score(1) | 192,810 |
| 22,214 |
| 17,927 |
| 232,951 |
| 7.5 |
|
| Total | $ | 1,773,395 |
| $ | 1,253,902 |
| $ | 71,054 |
| $ | 3,098,351 |
| 100.0 | % |
| December 31, 2012 | | | | | |
| Originated loans by refreshed FICO score: | | | | | |
| Over 700 | $ | 1,381,565 |
| $ | 1,009,913 |
| $ | 589,804 |
| $ | 2,981,282 |
| 73.7 | % |
| 660-700 | 167,046 |
| 148,692 |
| 232,474 |
| 548,212 |
| 13.6 |
|
| 620-660 | 67,520 |
| 59,085 |
| 122,656 |
| 249,261 |
| 6.2 |
|
| 580-620 | 38,570 |
| 28,487 |
| 45,545 |
| 112,602 |
| 2.8 |
|
| Less than 580 | 57,794 |
| 36,152 |
| 36,866 |
| 130,812 |
| 3.2 |
|
No score(1) | 11,639 |
| 3,914 |
| 4,599 |
| 20,152 |
| 0.5 |
|
| Total | $ | 1,724,134 |
| $ | 1,286,243 |
| $ | 1,031,944 |
| $ | 4,042,321 |
| 100.0 | % |
| Acquired loans by refreshed FICO score: | | | | | |
| Over 700 | $ | 1,353,416 |
| $ | 998,443 |
| $ | 120,305 |
| $ | 2,472,164 |
| 68.3 | % |
| 660-700 | 176,620 |
| 136,160 |
| 35,255 |
| 348,035 |
| 9.6 |
|
| 620-660 | 103,628 |
| 83,857 |
| 19,380 |
| 206,865 |
| 5.7 |
|
| 580-620 | 72,627 |
| 53,708 |
| 9,967 |
| 136,302 |
| 3.8 |
|
| Less than 580 | 109,337 |
| 69,664 |
| 13,594 |
| 192,595 |
| 5.3 |
|
No score(1) | 221,805 |
| 23,816 |
| 19,593 |
| 265,214 |
| 7.3 |
|
| Total | $ | 2,037,433 |
| $ | 1,365,648 |
| $ | 218,094 |
| $ | 3,621,175 |
| 100.0 | % |
| |
(1) | Primarily includes loans that are serviced by others for which refreshed FICO scores were not available as of the date indicated. |
Troubled Debt Restructures
The following table details additional information on our TDRs at the dates indicated:
|
| | | | | | |
| | June 30,
2013 | December 31,
2012 |
| Aggregate recorded investment of impaired loans with terms modified through a troubled debt restructuring: | | |
| Accruing interest | $ | 69,892 |
| $ | 46,280 |
|
| Nonaccrual | 52,343 |
| 42,244 |
|
Total troubled debt restructurings (1) | $ | 122,235 |
| $ | 88,524 |
|
| |
(1) | Includes 58 and 44 acquired loans that were restructured with a recorded investment of $3.2 million and $2.9 million at June 30, 2013 and December 31, 2012, respectively. |
The modifications made to loans classified as TDRs typically consist of an extension of the payment terms, deferral of principal, rate reduction, or loans restructured in a Chapter 7 bankruptcy. We generally do not forgive principal when restructuring loans.
The financial effects of our modifications are as follows for the periods indicated:
|
| | | | | | | | | | | |
| Type of Concession | Count | Postmodification recorded investment(1) | Premodification allowance for loan losses | Postmodification allowance for loan losses |
| Six months ended June 30, 2013 | | | | |
| Commercial: | | | | |
| Commercial real estate | | | | |
| Extension of term | 4 |
| $ | 6,250 |
| $ | 382 |
| $ | 510 |
|
| Extension of term and rate reduction | 6 |
| 15,910 |
| 740 |
| 438 |
|
| Deferral of principal | 1 |
| 7,782 |
| 429 |
| — |
|
| Commercial business | | | | |
| Extension of term | 4 |
| 7,239 |
| 1,147 |
| 170 |
|
| Extension of term and rate reduction | 1 |
| 112 |
| 16 |
| 9 |
|
| Total commercial | 16 |
| 37,293 |
| 2,714 |
| 1,127 |
|
| Consumer: | | | | |
| Residential real estate | | | | |
| Extension of term | 1 |
| $ | 118 |
| $ | — |
| $ | 11 |
|
| Rate reduction | 3 |
| 109 |
| — |
| 3 |
|
| Deferral of principal and extension of term | 2 |
| 49 |
| — |
| — |
|
| Extension of term and rate reduction | 6 |
| 1,529 |
| 1 |
| 44 |
|
| Chapter 7 bankruptcy | 8 |
| 436 |
| — |
| 11 |
|
| Home equity | | | | |
| Rate reduction | 1 |
| 89 |
| — |
| 10 |
|
| Extension of term and rate reduction | 1 |
| 22 |
| — |
| — |
|
| Chapter 7 Bankruptcy | 33 |
| 1,321 |
| 3 |
| 22 |
|
| Other consumer | | | | |
| Chapter 7 Bankruptcy | 72 |
| 1,371 |
| 15 |
| 1 |
|
| Total consumer | 127 |
| 5,044 |
| 19 |
| 102 |
|
| Total | 143 |
| $ | 42,337 |
| $ | 2,733 |
| $ | 1,229 |
|
| Six months ended June 30, 2012 | | | | |
| Commercial: | | | | |
| Commercial real estate | | | | |
| Extension of term | 7 |
| $ | 3,473 |
| $ | 181 |
| $ | — |
|
| Deferral of principal | 1 |
| 259 |
| 14 |
| — |
|
| Commercial business | | | | |
| Extension of term | 7 |
| 3,643 |
| 428 |
| 4 |
|
| Deferral of principal | 1 |
| 187 |
| — |
| — |
|
| Rate reduction | 1 |
| 125 |
| — |
| — |
|
| Combination of concession types | 1 |
| 386 |
| 6 |
| 96 |
|
| Total commercial | 18 |
| 8,073 |
| 629 |
| 100 |
|
| Consumer: | | | | |
| Residential real estate | | | | |
| Extension of term | 1 |
| $ | 91 |
| $ | 2 |
| $ | 7 |
|
| Deferral of principal and extension of term | 1 |
| 613 |
| 1 |
| 27 |
|
| Extension of term and rate reduction | 7 |
| 830 |
| 1 |
| 216 |
|
| Other | 6 |
| 677 |
| 1 |
| 204 |
|
| Home equity | | | | |
| Extension of term and rate reduction | 2 |
| 124 |
| — |
| 25 |
|
| Total consumer | 17 |
| 2,335 |
| 5 |
| 479 |
|
| Total | 35 |
| $ | 10,408 |
| $ | 634 |
| $ | 579 |
|
| |
(1) | Postmodification balances approximate premodification balances. The aggregate amount of charge-offs as a result of the restructurings was not significant. |
|
| | | | | | | | | | | |
| | | | | |
| Type of Concession | Count | Postmodification recorded investment(1) | Premodification allowance for loan losses | Postmodification allowance for loan losses |
| Three months ended June 30, 2013 | | | | |
| Commercial: | | | | |
| Commercial real estate | | | | |
| Deferral of principal | 1 |
| $ | 7,782 |
| $ | 429 |
| $ | — |
|
| Extension of term and rate reduction | 5 |
| 11,479 |
| 586 |
| 438 |
|
| Commercial business | | | | |
| Extension of term and rate reduction | 1 |
| 112 |
| 16 |
| 9 |
|
| Total commercial | 7 |
| 19,373 |
| 1,031 |
| 447 |
|
| Consumer: | | | | |
| Residential real estate | | | | |
| Rate reduction | 1 |
| 23 |
| — |
| — |
|
| Deferral of principal and extension of term | 2 |
| 49 |
| — |
| — |
|
| Extension of term and rate reduction | 4 |
| 883 |
| 1 |
| — |
|
| Chapter 7 Bankruptcy | 6 |
| 257 |
| — |
| — |
|
| Home equity | | | | |
| Extension of term and rate reduction | 1 |
| 22 |
| — |
| — |
|
| Chapter 7 Bankruptcy | 26 |
| 926 |
| 2 |
| — |
|
| Other consumer | | | | |
| Chapter 7 Bankruptcy | 50 |
| 1,184 |
| 12 |
| — |
|
| Total consumer | 90 |
| 3,344 |
| 15 |
| — |
|
| Total | 97 |
| $ | 22,717 |
| $ | 1,046 |
| $ | 447 |
|
| Three months ended June 30, 2012 | | | | |
| Commercial: | | | | |
| Commercial real estate | | | | |
| Extension of term | 5 |
| $ | 3,144 |
| $ | 135 |
| $ | — |
|
| Deferral of principal | 1 |
| 259 |
| 14 |
| — |
|
| Commercial business | | | | |
| Extension of term | 3 |
| 2,306 |
| 237 |
| 2 |
|
| Deferral of principal | 1 |
| 187 |
| — |
| — |
|
| Rate reduction | 1 |
| 125 |
| — |
| — |
|
| Combination of concession types | 1 |
| 199 |
| 6 |
| 96 |
|
| Total commercial | 12 |
| 6,220 |
| 392 |
| 98 |
|
| Consumer: | | | | |
| Residential real estate | | | | |
| Other | 6 |
| 677 |
| 1 |
| 204 |
|
| Total | 18 |
| $ | 6,897 |
| $ | 393 |
| $ | 302 |
|
| |
(1) | Postmodification balances approximate premodification balances. The aggregate amount of charge-offs as a result of the restructurings was not significant. |
The recorded investment in loans modified as TDRs within 12 months of the balance sheet date and for which there was a payment default during the periods indicated are shown below:
|
| | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2013 | 2012 | | 2013 | 2012 |
| Commercial: | | | | | |
| Real estate | $ | — |
| $ | — |
| | $ | — |
| $ | 399 |
|
| Business | — |
| — |
| | — |
| 707 |
|
| Total commercial | — |
| — |
| | — |
| 1,106 |
|
| Consumer: | | | | | |
| Residential real estate | — |
| — |
| | — |
| — |
|
| Home equity | 21 |
| — |
| | 76 |
| — |
|
| Consumer | — |
| — |
| | — |
| — |
|
| Total consumer | 21 |
| — |
| | 76 |
| — |
|
| Total | $ | 21 |
| $ | — |
| | $ | 76 |
| $ | 1,106 |
|
Residential Mortgage Banking
The following table provides information about our residential mortgage banking activities at the dates indicated:
|
| | | | | | |
| | June 30, |
| | 2013 | 2012 |
| Mortgages serviced for others | $ | 3,386,424 |
| $ | 2,453,285 |
|
| Mortgage servicing asset recorded for loans serviced for others, net | 31,278 |
| 20,399 |
|
Note 4. Derivative Financial Instruments
We are a party to derivative financial instruments in the normal course of business to manage our own exposure to fluctuations in interest rates and to meet the needs of our customers. These financial instruments have been limited to interest rate swap agreements, which are entered into with counterparties that meet established credit standards and, where appropriate, contain master netting and collateral provisions protecting the party at risk. We believe that the credit risk inherent in all of our derivative contracts is minimal based on our credit standards and the netting and collateral provisions of the interest rate swap agreements.
Our derivative positions include both instruments that are designated as hedging instruments and instruments that are customer related and not designated in hedging relationships. The following table presents information regarding our derivative financial instruments at the dates indicated: |
| | | | | | | | | | | | | |
| | Asset derivatives | | Liability derivatives |
| | Notional
amount | Fair value (1) | | Notional
amount | Fair value (2) |
| June 30, 2013 | | | | | |
| Derivatives designated as hedging instruments: | | | | | |
| Interest rate swap agreements | $ | 6,806 |
| $ | 185 |
| | $ | 9,899 |
| $ | 1,020 |
|
| Derivatives not designated as hedging instruments: | | | | | |
| Interest rate swap agreements | 2,678,925 |
| 68,845 |
| | 2,681,576 |
| 68,863 |
|
| Total derivatives | $ | 2,685,731 |
| $ | 69,030 |
| | $ | 2,691,475 |
| $ | 69,883 |
|
| December 31, 2012 | | | | | |
| Derivatives designated as hedging instruments: | | | | | |
| Interest rate swap agreements | $ | — |
| $ | — |
| | $ | 14,607 |
| $ | 1,983 |
|
| Derivatives not designated as hedging instruments: | | | | | |
| Interest rate swap agreements | 2,195,025 |
| 102,069 |
| | 2,195,025 |
| 102,714 |
|
| Total derivatives | $ | 2,195,025 |
| $ | 102,069 |
| | $ | 2,209,632 |
| $ | 104,697 |
|
| |
(1) | Represents gross amounts, included in Other Assets in our Consolidated Statements of Condition. |
| |
(2) | Represents gross amounts, included in Other Liabilities in our Consolidated Statements of Condition. |
At June 30, 2013, some of our interest rate swaps for which we had master netting arrangements with the counterparty were in a net liability position of $43 million. We offset $69 million of liabilities with $26 million of assets in our Consolidated Statements of Financial Condition at June 30, 2013 related to these interest rate swaps and we did not include any cash collateral in the netting. We posted collateral for liability positions with a fair value of $23 million at June 30, 2013.
At December 31, 2012, all of our interest rate swaps for which we had master netting arrangements with the counterparty were in a liability position. Accordingly, there was no offsetting in our Consolidated Statements of Financial Condition at December 31, 2012 related to these interest rate swaps. We posted collateral for these liability positions with a fair value of $125 million at December 31, 2012.
Derivatives designated in hedging relationships
We designate interest rate swap agreements used to manage changes in the fair value of loans due to interest rate changes as fair value hedges. We have designated the risk of changes in the fair value of loans attributable to changes in the benchmark rate as the hedged risk. Accordingly, changes to the fair value of the hedged items or derivatives attributable to a change in credit risk are excluded from our assessment of hedge effectiveness. The change in fair value of the derivatives, including both the effective and ineffective portions, is recognized in earnings and, so long as our fair value hedging relationships remain highly effective, such change is offset by the gain or loss due to the change in fair value of the loans. The net impact of the fair value hedging relationships on net income was not significant for the three and six months ended June 30, 2013 and 2012.
Historically, we have also entered into interest rate swaps to offset the variability in the interest cash outflows of LIBOR based borrowings. These derivative instruments have been designated as cash flow hedges. At June 30, 2013, we did not have any derivatives classified as cash flow hedges. At June 30, 2013, there was a $5.9 million loss recognized in accumulated other comprehensive income related to borrowings that were previously hedged using interest rate swaps that were classified as cash flow hedges. This amount will be reclassified out of accumulated other comprehensive income and into earnings over the remaining life of the hedged borrowings as an adjustment of yield.
The following table presents information about amounts recognized for our derivative financial instruments designated in cash flow hedging relationships for the periods indicated:
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | |
| Cash Flow Hedges | 2013 | | 2012 | | 2013 | | 2012 | |
| Interest rate swap agreements: | | | | | | | | |
| Amount of gain on derivatives recognized in other comprehensive income, net of tax | $ | 174 |
| | $ | 8,099 |
| | $ | 346 |
| | $ | 6,359 |
| |
| Amount of (loss) on derivatives reclassified from other comprehensive income to income | (283 | ) | (1) | (13,003 | ) | (2) | (562 | ) | (1) | (14,860 | ) | (3) |
| |
(1) | Recognized in interest expense on borrowings in our Consolidated Statements of Income. |
| |
(2) | Of this amount, $11.7 million was recognized in merger and acquisition integration expenses and $1.3 million was recognized in interest expense on borrowings in our Consolidated Statements of Operations. |
| |
(3) | Of this amount, $11.7 million was recognized in merger and acquisition integration expenses and $3.2 million was recognized in interest expense on borrowings in our Consolidated Statements of Operations. |
Derivatives not designated in hedging relationships
In addition to our derivatives designated in hedge relationships, we act as an interest rate swap counterparty for certain commercial borrowers in the normal course of servicing our customers, which are accounted for at fair value. We manage our exposure to such interest rate swaps by entering into corresponding and offsetting interest rate swaps with third parties that mirror the terms of the interest rate swaps we have with the commercial borrowers. These positions (referred to as “customer swaps”) directly offset each other and our exposure is the positive fair value of the derivatives due to changes in credit risk of our commercial borrowers and third parties. We recognized revenue for this service that we provide our customers of $9.5 million and $12.1 million for the six months ended June 30, 2013 and 2012, respectively, included in Capital Markets income in our Consolidated Statements of Income.
Note 5. Earnings Per Share
The following table is a computation of our basic and diluted earnings per share using the two-class method for the periods indicated:
|
| | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2013 | 2012 | | 2013 | 2012 |
| Net income (loss) available to common stockholders | $ | 63,587 |
| $ | (18,471 | ) | | $ | 123,325 |
| $ | 36,279 |
|
| Less income allocable to unvested restricted stock awards | 309 |
| 113 |
| | 501 |
| 163 |
|
| Net income (loss) allocable to common stockholders | $ | 63,278 |
| $ | (18,584 | ) | | $ | 122,824 |
| $ | 36,116 |
|
| Weighted average common shares outstanding: | | | | | |
| Total shares issued | 366,002 |
| 366,002 |
| | 366,002 |
| 366,002 |
|
| Unallocated employee stock ownership plan shares | (2,134 | ) | (2,312 | ) | | (2,156 | ) | (2,334 | ) |
| Unvested restricted stock awards | (2,031 | ) | (1,196 | ) | | (1,611 | ) | (931 | ) |
| Treasury shares | (12,295 | ) | (13,553 | ) | | (12,824 | ) | (13,855 | ) |
| Total basic weighted average common shares outstanding | 349,542 |
| 348,941 |
| | 349,411 |
| 348,882 |
|
| Incremental shares from assumed vesting of restricted stock awards | 842 |
| — |
| | 739 |
| 265 |
|
| Total diluted weighted average common shares outstanding | 350,384 |
| 348,941 |
| | 350,150 |
| 349,147 |
|
| Basic earnings (loss) per common share | $ | 0.18 |
| $ | (0.05 | ) | | $ | 0.35 |
| $ | 0.10 |
|
| Diluted earnings (loss) per common share | $ | 0.18 |
| $ | (0.05 | ) | | $ | 0.35 |
| $ | 0.10 |
|
| Anti-dilutive stock options and restricted stock awards excluded from the diluted weighted average common share calculations | 11,519 |
| 12,950 |
| | 11,884 |
| 11,878 |
|
Note 6. Other Comprehensive Income
The following table presents the activity in our Other Comprehensive Income for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | Pretax | Income taxes | Net | Pretax | Income taxes | Net | |
| 2013 | | | | | | | | |
| Securities available for sale: | | | | | | | | |
| Net unrealized holding losses arising during the period | $ | (125,660 | ) | $ | (48,615 | ) | $ | (77,045 | ) | | $ | (144,429 | ) | $ | (55,417 | ) | $ | (89,012 | ) | |
| Reclassification adjustment for net unrealized holding gains on securities transferred between available for sale and held to maturity | — |
| — |
| — |
| | (54,872 | ) | (21,049 | ) | (33,823 | ) | |
| Net unrealized losses on securities available for sale | (125,660 | ) | (48,615 | ) | (77,045 | ) | | (199,301 | ) | (76,466 | ) | (122,835 | ) | |
| Net unrealized holding gains on securities transferred between available for sale and held to maturity: | | | | | | | | |
| Net unrealized holding gains transferred during the period | — |
| — |
| — |
| | 54,872 |
| 21,049 |
| 33,823 |
| |
| Amortization of net unrealized holding gains to income during the period | (8,381 | ) | (3,212 | ) | (5,169 | ) | (1) | (9,348 | ) | (3,580 | ) | (5,768 | ) | (1) |
| Net unrealized holding (losses) gains on securities transferred during the period | (8,381 | ) | (3,212 | ) | (5,169 | ) | | 45,524 |
| 17,469 |
| 28,055 |
| |
| Interest rate swaps designated as cash flow hedges: | | | | | | | | |
| Reclassification adjustment for realized losses included in net income | 283 |
| 109 |
| 174 |
| (2) | 562 |
| 216 |
| 346 |
| (2) |
| Pension and post-retirement plans: | | | | | | | | |
| Amortization of net loss related to pension and post-retirement plans | 47 |
| — |
| 47 |
| | 95 |
| — |
| 95 |
| |
| Total other comprehensive loss | $ | (133,711 | ) | $ | (51,718 | ) | $ | (81,993 | ) | | $ | (153,120 | ) | $ | (58,781 | ) | $ | (94,339 | ) | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | Pretax | Income taxes | Net | Pretax | Income taxes | Net | |
| 2012 | | | | | | | | |
| Securities available for sale: | | | | | | | | |
| Net unrealized holding (losses) gains arising during the period | $ | (18,225 | ) | $ | (6,547 | ) | $ | (11,678 | ) | | $ | 58,012 |
| $ | 22,558 |
| $ | 35,454 |
| |
| Reclassification adjustment for realized (gains) included in net income | (15,895 | ) | (6,097 | ) | (9,798 | ) | | (15,895 | ) | (6,097 | ) | (9,798 | ) | |
| Reclassification adjustment for net unrealized holding gains on securities transferred between available for sale and held to maturity | 4,054 |
| 1,556 |
| 2,498 |
| | 4,054 |
| 1,556 |
| 2,498 |
| |
| Net unrealized (losses) gains on securities available for sale | (30,066 | ) | (11,088 | ) | (18,978 | ) | | 46,171 |
| 18,017 |
| 28,154 |
| |
| Net unrealized holding gains on securities transferred between available for sale and held to maturity: | | | | | | | | |
| Reclassification adjustment for net unrealized holding gains on securities transferred | (4,054 | ) | (1,556 | ) | (2,498 | ) | | (4,054 | ) | (1,556 | ) | (2,498 | ) | |
| Amortization of net unrealized holding gains to income during the period | (611 | ) | (220 | ) | (391 | ) | (1) | (1,329 | ) | (489 | ) | (840 | ) | (1) |
| Net unrealized holding gains on securities transferred | (4,665 | ) | (1,776 | ) | (2,889 | ) | | (5,383 | ) | (2,045 | ) | (3,338 | ) | |
| Interest rate swaps designated as cash flow hedges: | | | | | | | | |
| Net unrealized losses (gains) arising during the period | 97 |
| 10 |
| 87 |
| | (4,590 | ) | (1,789 | ) | (2,801 | ) | |
| Reclassification adjustment for realized losses included in net income | 13,003 |
| 4,991 |
| 8,012 |
| (2) | 14,860 |
| 5,700 |
| 9,160 |
| (2) |
| Net unrealized losses on interest rate swaps designated as cash flow hedges | 13,100 |
| 5,001 |
| 8,099 |
| | 10,270 |
| 3,911 |
| 6,359 |
| |
| Pension and postretirement plans: | | | | | | | | |
| Pension remeasurement | — |
| — |
| — |
| | 7,461 |
| 2,849 |
| 4,612 |
| |
| Amortization of net loss related to pension and post-retirement plans | 333 |
| 63 |
| 270 |
| | 766 |
| 445 |
| 321 |
| |
| Total pension and post-retirement plans | 333 |
| 63 |
| 270 |
| | 8,227 |
| 3,294 |
| 4,933 |
| |
| Total other comprehensive (loss) income | $ | (21,298 | ) | $ | (7,800 | ) | $ | (13,498 | ) | | $ | 59,285 |
| $ | 23,177 |
| $ | 36,108 |
| |
(1) Included in Interest income on investment securities and other in our Consolidated Statement of Income.
(2) Included in Interest expense on borrowings in our Consolidated Statement of Income.
The following table presents the activity in our accumulated other comprehensive income for the periods indicated:
|
| | | | | | | | | | | | | | | |
| | Net unrealized gains on securities available for sale | Net unrealized (losses) gains on
securities transferred from
available for sale to
held to maturity | Unrealized (losses)
gains on interest rate
swaps designated as
cash flow hedges | Pension and postretirement plans | Total |
| Balance, January 1, 2013 | $ | 206,733 |
| $ | (1,691 | ) | $ | (6,262 | ) | $ | (41,477 | ) | $ | 157,303 |
|
| Period change, net of tax | (122,835 | ) | 28,055 |
| 346 |
| 95 |
| (94,339 | ) |
| Balance, June 30, 2013 | $ | 83,898 |
| $ | 26,364 |
| $ | (5,916 | ) | $ | (41,382 | ) | $ | 62,964 |
|
| Balance, January 1, 2012 | $ | 105,276 |
| $ | 2,652 |
| $ | (13,003 | ) | $ | (27,113 | ) | $ | 67,812 |
|
| Period change, net of tax | 28,154 |
| (3,338 | ) | 6,359 |
| 4,933 |
| 36,108 |
|
| Balance, June 30, 2012 | $ | 133,430 |
| $ | (686 | ) | $ | (6,644 | ) | $ | (22,180 | ) | $ | 103,920 |
|
During the next twelve months, we expect to reclassify $1.1 million of pre-tax net loss on previous cash flow hedges from accumulated other comprehensive income to earnings.
Note 7. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Current accounting guidance establishes a fair value hierarchy based on the transparency of inputs participants use to price an asset or liability. The fair value hierarchy prioritizes these inputs into the following three levels:
Level 1 Inputs—Unadjusted quoted prices in active markets for identical assets or liabilities that are available at the measurement date.
Level 2 Inputs—Inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.), or inputs that are derived principally from or corroborated by market data through correlation or other means.
Level 3 Inputs—Unobservable inputs for determining the fair value of the asset or liability and are based on the entity’s own estimates about the assumptions that market participants would use to price the asset or liability.
A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While we believe our valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Securities Available for Sale
The fair value estimates of available for sale securities are based on quoted market prices of identical securities, where available (Level 1). However, as quoted prices of identical securities are not often available, the fair value estimate for almost our entire investment portfolio is based on quoted market prices of similar securities, adjusted for differences between the securities (Level 2). Adjustments may include amounts to reflect differences in underlying collateral, interest rates, estimated prepayment speeds, and counterparty credit quality. Where sufficient information is not available from the pricing services to produce a reliable valuation, we estimate fair value based on either broker quotes or internally developed models. Due to the lack of observable market data, we have classified our trust preferred securities and collateralized loan obligations in Level 3 of the fair value hierarchy. We determined the fair value using third party pricing services, including brokers. As of June 30, 2013, $1.7 billion of our investment securities were priced utilizing broker quotes and none were internally priced. For details regarding our pricing process and sources, refer to Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Income-Critical Accounting Policies and Estimates.”
Loans held for sale
We have elected the fair value option for certain residential real estate loans held for sale as we believe the fair value measurement of such loans reduces certain timing differences in our Statement of Income and better aligns with our management of the portfolio from a business perspective. This election is made at the time of origination, on a loan by loan basis, and is irrevocable. The secondary market for securities backed by similar loan types is actively traded, which provides readily observable market pricing to be used as input for the estimate for the fair value of our loans. Accordingly, we have classified this fair value measurement as Level 2. Interest income on these loans is recognized in Interest Income—Loans and Leases in our Consolidated Statements of Income.
There were no loans held for sale that were nonaccrual or 90 or more days past due as of June 30, 2013 or December 31, 2012. The table below presents information about our loans held for sale for which we elected the fair value option at the dates indicated:
|
| | | | | | |
| | June 30,
2013 | December 31,
2012 |
| Fair value carrying amount | $ | 118,104 |
| $ | 154,745 |
|
| Aggregate unpaid principal balance | 119,198 |
| 149,412 |
|
| Fair value carrying amount less aggregate unpaid principal balance | $ | (1,094 | ) | $ | 5,333 |
|
Derivatives
We obtain fair value measurements of our interest rate swaps from a third party. The fair value measurements are determined using a market standard methodology of netting discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). Variable cash payments (or receipts) are based on an expectation of future interest rates derived from observable market interest rate curves. Credit valuation adjustments are incorporated to appropriately reflect our nonperformance risk as well as the counterparty’s nonperformance risk. The impact of netting and any applicable credit enhancements, such as bilateral collateral postings, thresholds, mutual puts, and guarantees are also considered in the fair value measurement.
The fair value of our interest rate swaps was estimated using primarily Level 2 inputs. However, Level 3 inputs were used to determine credit valuation adjustments, such as estimates of current credit spreads to evaluate the likelihood of default. We have determined that the impact of these credit valuation adjustments was not significant to the overall valuation of our interest rate swaps. Therefore, we have classified the entire fair value of our interest rate swaps in Level 2 of the fair value hierarchy.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables summarize our assets and liabilities measured at fair value on a recurring basis at the dates indicated:
|
| | | | | | | | | | | | |
| | Fair Value Measurements |
| | Total | Level 1 | Level 2 | Level 3 |
| June 30, 2013 | | | | |
| Assets: | | | | |
| Investment securities available for sale: | | | | |
| Debt securities: | | | | |
| States and political subdivisions | $ | 563,031 |
| $ | — |
| $ | 563,031 |
| $ | — |
|
| U.S. Treasury | 20,463 |
| 20,463 |
| — |
| — |
|
| U.S. government agencies | 4,294 |
| — |
| 4,294 |
| — |
|
| U.S. government sponsored enterprises | 349,248 |
| — |
| 349,248 |
| — |
|
| Corporate | 871,850 |
| — |
| 871,850 |
| — |
|
| Trust preferred securities | 5,622 |
| — |
| — |
| 5,622 |
|
| Total debt securities | 1,814,508 |
| 20,463 |
| 1,788,423 |
| 5,622 |
|
| Mortgage-backed securities: | | | | |
| Residential mortgage-backed securities: | | | | |
| Government National Mortgage Association | 45,292 |
| — |
| 45,292 |
| — |
|
| Federal National Mortgage Association | 165,395 |
| — |
| 165,395 |
| — |
|
| Federal Home Loan Mortgage Corporation | 215,907 |
| — |
| 215,907 |
| — |
|
| Collateralized mortgage obligations: |
| | | |
| Federal National Mortgage Association | 798,243 |
| — |
| 798,243 |
| — |
|
| Federal Home Loan Mortgage Corporation | 439,479 |
| — |
| 439,479 |
| — |
|
| Non-agency issued | 18,423 |
| — |
| 18,423 |
| — |
|
| Total collateralized mortgage obligations | 1,256,145 |
| — |
| 1,256,145 |
| — |
|
| Total residential mortgage-backed securities | 1,682,739 |
| — |
| 1,682,739 |
| — |
|
| Commercial mortgage-backed securities, non-agency issued | 1,910,034 |
| — |
| 1,910,034 |
| — |
|
| Total mortgage-backed securities | 3,592,773 |
| — |
| 3,592,773 |
| — |
|
| Collateralized loan obligations, non-agency issued | 1,533,904 |
| — |
| — |
| 1,533,904 |
|
| Asset-backed securities collateralized by: | | | | |
| Student loans | 336,492 |
| — |
| 336,492 |
| — |
|
| Credit cards | 73,351 |
| — |
| 73,351 |
| — |
|
| Auto loans | 359,332 |
| — |
| 359,332 |
| — |
|
| Other | 175,523 |
| — |
| 175,523 |
| — |
|
| Total asset-backed securities | 944,698 |
| — |
| 944,698 |
| — |
|
| Other | 30,470 |
| 22,326 |
| 8,144 |
| — |
|
| Total securities available for sale | 7,916,353 |
| 42,789 |
| 6,334,038 |
| 1,539,526 |
|
Loans held for sale (1) | 118,104 |
| — |
| 118,104 |
| — |
|
| Derivatives | 69,030 |
| — |
| 69,030 |
| — |
|
| Total assets | $ | 8,103,487 |
| $ | 42,789 |
| $ | 6,521,172 |
| $ | 1,539,526 |
|
| Liabilities: | | | | |
| Derivatives | $ | 69,883 |
| $ | — |
| $ | 69,883 |
| $ | — |
|
| |
(1) | Represents loans for which we have elected the fair value option. |
There were no significant transfers of assets or liabilities into or out of Level 1, Level 2, or Level 3 of the fair value hierarchy during the six months ended June 30, 2013. During the first quarter of 2012, we transferred $158 million of collateralized loan obligations (“CLOs”) from level 2 to level 3 of the fair value hierarchy. We began purchasing the investments in the fourth quarter of 2011 and while our purchase price provided observable data regarding the fair value of the securities in the fourth quarter of 2011, observable market data was not been available to incorporate into the pricing during 2012 and our purchase price became less relevant as time elapsed from the purchase date. As a result, the fair values utilized significant unobservable inputs and warranted classification as level 3 fair value measurements.
|
| | | | | | | | | | | | |
| | Fair Value Measurements |
| | Total | Level 1 | Level 2 | Level 3 |
| December 31, 2012 | | | | |
| Assets: | | | | |
| Investment securities available for sale: | | | | |
| Debt securities: | | | | |
| States and political subdivisions | $ | 608,061 |
| $ | — |
| $ | 608,061 |
| $ | — |
|
| U.S. Treasury | 20,707 |
| 20,707 |
| — |
| — |
|
| U.S. government agencies | 4,651 |
| — |
| 4,651 |
| — |
|
| U.S. government sponsored enterprises | 403,892 |
| — |
| 403,892 |
| — |
|
| Corporate | 837,027 |
| — |
| 837,027 |
| — |
|
| Trust preferred securities | 14,195 |
| — |
| — |
| 14,195 |
|
| Total debt securities | 1,888,533 |
| 20,707 |
| 1,853,631 |
| 14,195 |
|
| Mortgage-backed securities: | | | | |
| Residential mortgage-backed securities: | | | | |
| Government National Mortgage Association | 69,626 |
| — |
| 69,626 |
| — |
|
| Federal National Mortgage Association | 414,462 |
| — |
| 414,462 |
| — |
|
| Federal Home Loan Mortgage Corporation | 354,893 |
| — |
| 354,893 |
| — |
|
| Collateralized mortgage obligations: | | | | |
| Government National Mortgage Association | 1,091,157 |
| — |
| 1,091,157 |
| — |
|
| Federal National Mortgage Association | 1,474,428 |
| — |
| 1,474,428 |
| — |
|
| Federal Home Loan Mortgage Corporation | 1,047,217 |
| — |
| 1,047,217 |
| — |
|
| Non-agency issued | 61,123 |
| — |
| 61,123 |
| — |
|
| Total collateralized mortgage obligations | 3,673,925 |
| — |
| 3,673,925 |
| — |
|
| Total residential mortgage-backed securities | 4,512,906 |
| — |
| 4,512,906 |
| — |
|
| Commercial mortgage-backed securities, non-agency issued | 2,060,221 |
| — |
| 2,060,221 |
| — |
|
| Total mortgage-backed securities | 6,573,127 |
| — |
| 6,573,127 |
| — |
|
| Collateralized loan obligations, non-agency issued | 1,544,865 |
| — |
| — |
| 1,544,865 |
|
| Asset-backed securities collateralized by: | | | | |
| Student loans | 389,741 |
| — |
| 389,741 |
| — |
|
| Credit cards | 75,075 |
| — |
| 75,075 |
| — |
|
| Auto loans | 372,166 |
| — |
| 372,166 |
| — |
|
| Other | 118,659 |
| — |
| 118,659 |
| — |
|
| Total asset-backed securities | 955,641 |
| — |
| 955,641 |
| — |
|
| Other | 31,439 |
| 23,311 |
| 8,128 |
| — |
|
| Total securities available for sale | 10,993,605 |
| 44,018 |
| 9,390,527 |
| 1,559,060 |
|
Loans held for sale (1) | 154,745 |
| — |
| 154,745 |
| — |
|
| Derivatives | 102,069 |
| — |
| 102,069 |
| — |
|
| Total assets | $ | 11,250,419 |
| $ | 44,018 |
| $ | 9,647,341 |
| $ | 1,559,060 |
|
| Liabilities: | | | | |
| Derivatives | $ | 104,697 |
| $ | — |
| $ | 104,697 |
| $ | — |
|
| |
(1) | Represents loans for which we have elected the fair value option. |
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The following table summarizes our assets and liabilities measured at fair value on a nonrecurring basis for the periods indicated:
|
| | | | | | | | | | | | | | | |
| | Fair Value Measurements | Total gains |
| | Total | Level 1 | Level 2 | Level 3 | (losses) |
| Six months ended June 30, 2013 | | | | | |
| Collateral dependent impaired loans | $ | 42,002 |
| $ | — |
| $ | 34,018 |
| $ | 7,984 |
| $ | (3,900 | ) |
| Six months ended June 30, 2012 | | | | | |
| Collateral dependent impaired loans | $ | 18,208 |
| $ | — |
| $ | 10,626 |
| $ | 7,582 |
| $ | (5,461 | ) |
Collateral Dependent Impaired Loans
We record nonrecurring fair value adjustments to the carrying value of collateral dependent impaired loans when establishing the allowance for loan losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan less estimated costs to sell the collateral. When the fair value of such collateral, less costs to sell, is less than the carrying value of the loan, a specific allowance or charge off is recorded through a provision for credit losses. Real estate collateral is typically valued using independent appraisals that we review for acceptability, or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace and the related nonrecurring fair value measurements have been classified as Level 2. Under certain circumstances significant adjustments may be made to the appraised value due to the lack of direct marketplace information. Such adjustments are made as determined necessary in the judgment of our experienced senior credit officers to reflect current market conditions and current operating results for the specific collateral. When the fair value of collateral dependent impaired loans is based on appraisals containing significant adjustments, such collateral dependent impaired loans are classified as Level 3. We obtain new appraisals from an approved appraiser, in accordance with Interagency Appraisal and Evaluation Guidelines and internal policy. Appraisals or evaluations for assets securing substandard rated loans are usually completed within 90 days of the downgrade. An appraisal may be obtained more frequently when volatile or unusual market conditions exist that could affect the ultimate realization of the value of the real estate collateral.
During the six months ended June 30, 2013, we recorded an increase of $3.9 million to our specific allowance as a result of adjusting the fair value of the collateral for certain collateral dependent impaired loans to $42 million at June 30, 2013, which is included in our provision for credit losses. During the six months ended June 30, 2012 we recorded an increase of $5.5 million to our specific allowance as a result of adjusting the fair value of the collateral for certain collateral dependent impaired loans to $18 million at June 30, 2012, which is included in our provision for credit losses.
Level 3 Assets
The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis were as follows for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, |
| | 2013 | | 2012 |
| | Trust
preferred
securities | Collateralized
loan obligations | Total | | Trust
preferred
securities | Collateralized
loan obligations | Total |
| Balance at beginning of period | $ | 14,195 |
| $ | 1,544,865 |
| $ | 1,559,060 |
| | $ | 25,032 |
| $ | — |
| $ | 25,032 |
|
Transfers from level 2(1) | — |
| — |
| — |
| | — |
| 157,999 |
| 157,999 |
|
| Purchases | — |
| 73,392 |
| 73,392 |
| | — |
| 840,492 |
| 840,492 |
|
| Settlements | (8,854 | ) | (93,932 | ) | (102,786 | ) | | (12,199 | ) | — |
| (12,199 | ) |
| Gains (losses) included in other comprehensive income | 998 |
| 9,617 |
| 10,615 |
| | 2,345 |
| (10,307 | ) | (7,962 | ) |
| Losses included in earnings | (717 | ) | (38 | ) | (755 | ) | | (486 | ) | — |
| (486 | ) |
| Balance at end of period | $ | 5,622 |
| $ | 1,533,904 |
| $ | 1,539,526 |
| | $ | 14,692 |
| $ | 988,184 |
| $ | 1,002,876 |
|
| |
(1) | Our policy is to recognize the transfer at the beginning of the period. |
Our CLOs are securitized products where payments from multiple middle sized and large business loans are pooled together and passed on to different classes of owners in various tranches. The markets for such securities are generally characterized by low trading volumes and wide bid-ask spreads, all driven by more limited market participants. Although estimated prices are generally obtained for such securities, the level of market observable assumptions used is limited in the valuation. Specifically, market assumptions regarding credit adjusted cash flows and liquidity influences on discount rates were difficult to observe at the individual bond level. Accordingly, the securities are valued either by a third party specialist using a discounted cash flow approach and proprietary pricing model or internally using similarly developed models. The models consider estimated prepayment speeds, losses, recoveries, default rates that are implied by the underlying performance of collateral in the structure or similar structures, and discount rates that are implied by market prices for similar securities and collateral structure types.
The table below provides a summary of our level 3 fair value measurements, valuation techniques, and the significant unobservable inputs at the date indicated:
|
| | | | | | |
| | Fair
Value | Valuation
technique | Unobservable
input | Range (weighted average) |
| December 31, 2012 | | | | |
| Collateralized loan obligations | $ | 1,544,865 |
| Internally modeled | Market spreads | 150 - 550 bps (213 bps) |
As of June 30, 2013, the fair values of our trust preferred securities and CLOs are all based upon third party pricing without adjustment and as a result the assets are not included in the above table. As of December 31, 2012, the fair values of our trust preferred securities were based upon third party pricing without adjustment and as a result the assets are not included in the above table.
Significant changes in any of the unobservable inputs would result in changes in fair value of the related assets. The fair value of our CLOs is inversely related to the market spreads. Increases in market spreads would decrease the fair value of our CLOs while decreases in the market spreads would increase our fair value.
Fair Value of Financial Instruments
The carrying value and estimated fair value of our financial instruments, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis, at the dates indicated are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | June 30, 2013 | | | December 31, 2012 | |
| | Carrying value | Estimated fair
value | Fair value
level | | Carrying value | Estimated fair
value | Fair value
level |
| Financial assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 552,210 |
| $ | 552,210 |
| 1 |
| | | $ | 430,862 |
| $ | 430,862 |
| 1 |
| |
| Investment securities available for sale | 7,916,353 |
| 7,916,353 |
| 1,2,3 |
| (1) | | 10,993,605 |
| 10,993,605 |
| 1,2,3 |
| (1) |
| Investment securities held to maturity | 3,856,960 |
| 3,871,855 |
| 2 |
| | | 1,299,806 |
| 1,373,971 |
| 2 |
| |
| Federal Home Loan Bank and Federal Reserve Bank common stock | 429,740 |
| 429,740 |
| 2 |
| | | 420,277 |
| 420,277 |
| 2 |
| |
| Loans held for sale | 118,104 |
| 118,104 |
| 2 |
| | | 154,745 |
| 154,745 |
| 2 |
| |
| Loans and leases, net | 20,359,474 |
| 20,811,940 |
| 2,3 |
| (2) | | 19,547,490 |
| 20,213,465 |
| 2,3 |
| (2) |
| Derivatives | 69,030 |
| 69,030 |
| 2 |
| | | 102,069 |
| 102,069 |
| 2 |
| |
| Accrued interest receivable | 105,906 |
| 105,906 |
| 2 |
| | | 107,757 |
| 107,757 |
| 2 |
| |
| Financial liabilities: | | | | | | | | | |
| Deposits | $ | 27,149,836 |
| 27,271,428 |
| 2 |
| | | $ | 27,676,531 |
| $ | 27,852,175 |
| 2 |
| |
| Borrowings | 4,430,877 |
| 4,465,031 |
| 2 |
| | | 3,716,143 |
| 3,773,787 |
| 2 |
| |
| Derivatives | 69,883 |
| 69,883 |
| 2 |
| | | 104,697 |
| 104,697 |
| 2 |
| |
| Accrued interest payable | 10,997 |
| 10,997 |
| 2 |
| | | 9,695 |
| 9,695 |
| 2 |
| |
| |
(1) | For a detailed breakout of our investment securities available for sale, refer to our table of recurring fair value measurements. |
| |
(2) | Loans and leases classified as level 2 are made up of $34 million and $31 million of collateral dependent impaired loans without significant adjustments made to appraised values at June 30, 2013 and December 31, 2012, respectively. All other loans and leases are classified as level 3. |
Our fair value estimates are based on our existing on and off balance sheet financial instruments without attempting to estimate the value of any anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on our fair value estimates and have not been considered in these estimates.
Our fair value estimates are made as of the dates indicated, based on relevant market information and information about the financial instruments, including our judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in our assumptions could significantly affect the estimates. Our fair value estimates, methods, and assumptions are set forth below for each type of financial instrument. The method of estimating the fair value of the financial instruments disclosed in the table above does not necessarily incorporate the exit price concept used to record financial instruments at fair value in our Consolidated Statements of Condition.
Cash and Cash Equivalents
The carrying value of our cash and cash equivalents approximates fair value because these instruments have original maturities of three months or less.
Investment Securities
The fair value estimates of securities are based on quoted market prices of identical securities, where available. However, as quoted prices of identical securities are not often available, the fair value estimate for almost our entire investment portfolio is based on quoted market prices of similar securities, adjusted for differences between the securities. Adjustments may include amounts to reflect differences in underlying collateral, interest rates, estimated prepayment speeds, and counterparty credit quality.
Federal Home Loan Bank and Federal Reserve Bank Common Stock
The carrying value of our Federal Home Loan Bank and Federal Reserve Bank common stock, which are non-marketable equity investments, approximates fair value.
Loans and Leases
Our variable rate loans reprice as the associated rate index changes. The calculation of fair value for our variable rate loans is driven by the comparison between the loan’s margin and the prevailing margin observed in the market at the time of the valuation. Any caps and floors embedded in the loan’s pricing structure are also incorporated into the fair value. We calculated the fair value of our fixed-rate loans and leases by discounting scheduled cash flows through the estimated maturity using credit adjusted period end origination rates. Our estimate of maturity is based on the contractual cash flows adjusted for prepayment estimates based on current economic and lending conditions.
Accrued Interest Receivable and Accrued Interest Payable
The carrying value of accrued interest receivable and accrued interest payable approximates fair value.
Deposits
The fair value of our deposits with no stated maturity, such as savings and checking, as well as mortgagors’ payments held in escrow, is equal to the amount payable on demand. The fair value of our certificates of deposit is based on the discounted value of contractual cash flows, using the period end rates offered for deposits of similar remaining maturities.
Borrowings
The fair value of our borrowings is calculated by discounting scheduled cash flows through the estimated maturity using period end market rates for borrowings of similar remaining maturities.
Commitments
The fair value of our commitments to extend credit, standby letters of credit, and financial guarantees are not included in the above table as the carrying value generally approximates fair value. These instruments generate fees that approximate those currently charged to originate similar commitments.
Note 8. Segment Information
We have two business segments: banking and financial services. The banking segment includes all of our retail and commercial banking operations. The financial services segment includes our insurance operations. Substantially all of our assets relate to the banking segment. Transactions between our banking and financial services segments are eliminated in consolidation.
Selected financial information for our segments follows for the periods indicated:
|
| | | | | | | | | |
| | Banking | Financial
services | Consolidated
total |
| Three months ended June 30, 2013 | | | |
| Net interest income | $ | 269,443 |
| $ | — |
| $ | 269,443 |
|
| Provision for credit losses | 25,200 |
| — |
| 25,200 |
|
| Net interest income after provision for credit losses | 244,243 |
| — |
| 244,243 |
|
| Noninterest income | 77,872 |
| 17,674 |
| 95,546 |
|
| Amortization of intangibles | 9,990 |
| 860 |
| 10,850 |
|
| Other noninterest expense | 211,327 |
| 12,993 |
| 224,320 |
|
| Income before income taxes | 100,798 |
| 3,821 |
| 104,619 |
|
| Income tax expense | 32,019 |
| 1,466 |
| 33,485 |
|
| Net income | $ | 68,779 |
| $ | 2,355 |
| $ | 71,134 |
|
| Three months ended June 30, 2012 | | | |
| Net interest income | $ | 259,020 |
| $ | (7 | ) | $ | 259,013 |
|
| Provision for credit losses | 28,100 |
| — |
| 28,100 |
|
| Net interest income after provision for credit losses | 230,920 |
| (7 | ) | 230,913 |
|
| Noninterest income | 78,790 |
| 16,808 |
| 95,598 |
|
| Amortization of core deposit and other intangibles | 8,759 |
| 1,080 |
| 9,839 |
|
| Other noninterest expense | 323,241 |
| 12,559 |
| 335,800 |
|
| (Loss)/Income before income taxes | (22,290 | ) | 3,162 |
| (19,128 | ) |
| Income tax (benefit)/expense | (9,422 | ) | 1,218 |
| (8,204 | ) |
| Net (loss)/income | $ | (12,868 | ) | $ | 1,944 |
| $ | (10,924 | ) |
| Six months ended June 30, 2013 | | | |
| Net interest income | $ | 535,573 |
| $ | — |
| $ | 535,573 |
|
| Provision for credit losses | 45,400 |
| — |
| 45,400 |
|
| Net interest income after provision for credit losses | 490,173 |
| — |
| 490,173 |
|
| Noninterest income | 150,798 |
| 34,060 |
| 184,858 |
|
| Amortization of intangibles | 23,202 |
| 1,767 |
| 24,969 |
|
| Other noninterest expense | 422,012 |
| 25,855 |
| 447,867 |
|
| Income before income taxes | 195,757 |
| 6,438 |
| 202,195 |
|
| Income tax expense | 61,306 |
| 2,470 |
| 63,776 |
|
| Net income | $ | 134,451 |
| $ | 3,968 |
| $ | 138,419 |
|
| Six months ended June 30, 2012 | | | |
| Net interest income | $ | 501,402 |
| $ | (18 | ) | $ | 501,384 |
|
| Provision for credit losses | 48,100 |
| — |
| 48,100 |
|
| Net interest income after provision for credit losses | 453,302 |
| (18 | ) | 453,284 |
|
| Noninterest income | 131,833 |
| 33,673 |
| 165,506 |
|
| Amortization of core deposit and other intangibles | 14,083 |
| 2,222 |
| 16,305 |
|
| Other noninterest expense | 504,065 |
| 25,447 |
| 529,512 |
|
| Income before income taxes | 66,987 |
| 5,986 |
| 72,973 |
|
| Income tax expense | 21,736 |
| 2,296 |
| 24,032 |
|
| Net income | $ | 45,251 |
| $ | 3,690 |
| $ | 48,941 |
|
|
| |
| ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk |
A discussion regarding our management of market risk is included in the section entitled “Interest Rate and Market Risk” included within Part I, Item 2 of this Form 10-Q.
|
| |
| ITEM 4. | Controls and Procedures |
In accordance with Rule 13a-15(b) of the Exchange Act, we carried out an evaluation as of June 30, 2013 under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures are effective as of June 30, 2013.
During the quarter ended June 30, 2013, there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II—OTHER INFORMATION
In the ordinary course of business, we are involved in various threatened and pending legal proceedings. We believe that we are not a party to any pending legal, arbitration, or regulatory proceedings that would have a material adverse impact on our financial position or liquidity.
There are no material changes to the risk factors as previously discussed in Item 1A to Part I of our 2012 Annual Report on Form 10-K.
|
| |
| ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
| |
| c) | We did not repurchase any shares of our common stock during the second quarter of 2013. |
|
| |
| ITEM 3. | Defaults Upon Senior Securities |
Not applicable.
|
| |
| ITEM 4. | Mine Safety Disclosures |
Not applicable.
(a)Not applicable.
(b)Not applicable.
The following exhibits are filed herewith:
|
| |
| Exhibits | |
| 10.1 | Separation Agreement for John R. Koelmel |
| 12 | Ratio of Earnings to Fixed Charges |
| 31.1 | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32 | Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101 | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements tagged as blocks of text and in detail |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | |
| | FIRST NIAGARA FINANCIAL GROUP, INC. |
| | | |
| Date: August 9, 2013 | By: | /s/ Gary M. Crosby |
| | | Gary M. Crosby |
| | | Interim President and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | |
| Date: August 9, 2013 | By: | /s/ Gregory W. Norwood |
| | | Gregory W. Norwood |
| | | Senior Executive Vice President and Chief Financial Officer |
| | | (Principal Financial Officer and Principal Accounting Officer) |
