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 September 30, 2014
OR |
| |
| 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.) |
| | |
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 þ 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 þ 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 | þ
| 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 þ
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 November 7, 2014, there were issued and outstanding 355,335,491 shares of the Registrant’s Common Stock, $0.01 par value.
FIRST NIAGARA FINANCIAL GROUP, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2014
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, 2013. 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 September 30, 2014, we had $38 billion in assets, $28 billion in deposits, and 411 full-service branch locations across New York, Western and Eastern Pennsylvania, Connecticut, and Western Massachusetts. The Company and the Bank are referred to collectively as “we” or “us” or “our.”
In January 2014, we announced a Strategic Investment Plan that represents a pivot in our strategic imperatives by choosing to collectively accelerate certain investments in our business. At the end of our planned three to four year investment period, our objective is to be better positioned to i) deliver greater fee generation and revenue capabilities; ii) improve operating leverage by lowering integration costs of new systems and our overall cost to serve; iii) address growing industry wide regulatory imperatives such as cybersecurity; and iv) improve our overall financial returns. The total cash spend for these investments is currently estimated at between $200 million and $250 million. Our Board of Directors has formed a Technology Committee to assist the Board of Directors in overseeing the planning and execution of our strategic investment in major technology projects; reviewing and approving major financial commitments related to the Strategic Investment Plan; from a technology perspective, monitoring how the Strategic Investment Plan competitively positions us in relation to our peers; and advising the Risk Committee of the Board of Directors on risk management associated with the Strategic Investment Plan and major technology vendor relationships.
There are three components that make up this strategic technology investment: 1) Revenue Generation, 2) Next Gen Infrastructure, and 3) Integration Layer. First, approximately one half of our planned overall investment will be focused on revenue generation by building specific new products and service enhancements. The second component, which is approximately 25% of our planned overall investment, is building our Next Gen Infrastructure, with a primary focus of reducing our overall operating costs and operational risk. The third area of focus, which is also approximately 25% of our planned overall investment, is on our technology integration capabilities that will significantly reduce our cost of delivering the first two components. The improved integration capabilities piece will allow us to lower both our development and operating costs while increasing our speed to market and maximizing our product capabilities.
For the revenue generation side, this is the continuation of the strategic plan we laid out in the fall of 2012. The key priorities that the revenue investments are intended to achieve include i) greater customer acquisition — whether it is the upper middle market commercial customer, indirect and direct customers including those who want home equity loans or credit cards, or a core deposit consumer customer attracted to a more robust online digital portal; ii) greater fee income generation both in the commercial segment, with more sophisticated cash management needs, and retail segments of our franchise; iii) greater commercial and consumer loan and deposit balances; and iv) effective cross-selling using customer relationship management and customer data to customize financial solutions.
The second piece of our Strategic Investment Plan, building our Next Gen Infrastructure, will drive improved operating leverage by lowering the cost to serve our customers. With the investments we are making, we expect to be able to consolidate our existing distributed model that will drive a reduction in vendors involved. This is intended to reduce the per-transaction costs, improve the customer experience, and address one of the top concerns that regulators are focused on today, cybersecurity.
The last piece of our overall investment is the redesign of our technology integration architecture. That is, we expect to create a simpler and less costly environment in which to build, integrate, and evolve our products and services so we achieve an environment in which new technologies can be more easily integrated and increase our speed to market while reducing product integration risk and our information technology budget. We will also invest in integrated data analytics which will enable us to better understand our customers' preferences using a complete 360° view of our customers.
We are actively enhancing our business cases and building detailed program execution plans for the Strategic Investment Plan. These detailed plans will provide the scope and timelines for each of the discrete programs that make up this Strategic Investment Plan. Additionally, we are actively working with a few key consultants to assist in the detailed planning effort, while at the same time ramping up our own resources necessary to execute and then operate our new capabilities. We remain within our time and budget estimates as we continue to move forward on initial projects and complete planning for others.
BUSINESS AND INDUSTRY
We operate a multi-faceted regional bank that provides our customers with a full range of products and services. These include commercial real estate loans, including construction loans, commercial business loans and leases, residential real estate, home equity, indirect auto, credit cards, and other consumer loans, as well as retail and commercial deposit products and insurance services, which we offer through a wholly owned subsidiary of the Bank. We also provide wealth management products and services. 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.
Our profitability is primarily dependent on 1) the difference between the interest we receive on loans and investment securities, and the interest we pay on deposits and borrowings, and 2) our cost to deliver these products. 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. While the prolonged low interest rate and weak economic environment has pressured our net interest income and margin in recent years, more recently, the competition from banks and non-banks has intensified both from a pricing and structural perspective. Absent an improvement in the competitive environment, net interest income will be challenged until we see an increase in short term interest rates. 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 of maximum employment, stable prices and moderate long-term interest rates) 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 in order to better position our overall interest rate risk profile.
Since 2011, the Federal Reserve has taken certain actions, such as “Operation Twist” and Quantitative Easing, aimed at keeping short- and long-term interest rates low, thus spurring economic growth in the labor and housing markets. The current round of Quantitative Easing began in September 2012, and was an open-ended program calling for the purchase of $85 billion per month in agency mortgage-backed securities and longer term Treasury securities. These actions had the cumulative impact of flattening the yield curve, keeping interest rates low and therefore reducing the yields on our earning assets. We have been replacing higher yielding, fixed rate, longer duration loans that prepaid or refinanced away with lower yielding, shorter duration loans.
In June 2013, the Federal Reserve began discussing the tapering of the Quantitative Easing program. This discussion caused the yield curve to steepen appreciably, and slowed the refinancing market in our mortgage banking business. Subsequent to its December 2013 meeting, the Federal Reserve began tapering its monthly purchases of Treasury and agency mortgage-backed securities by $10 billion and has since discontinued the program. While the Federal Open Market Committee ("FOMC") voted to discontinue monthly bond purchases, they are increasingly divided on the timing of any increase to short-term interest rates. Certain Federal Reserve policy officials have expressed growing concern that maintaining an accommodative monetary policy for longer will lead to inflation exceeding the Federal Reserve’s 2% inflation target and accordingly, the timing of the first increase to short-term interest rates should be early 2015. This view is currently offset by other FOMC members, including Federal Reserve Chair, Janet Yellen, who believe the accommodative policy needs to be maintained and that the Federal Reserve would continue to hold interest rates low until the outlook for the labor market and the general economy improve, including higher overall wages and fewer part time employees. Additionally, some market participants are expressing views that the Federal Funds terminal rate will be 2% lower than historic levels of 4% to 5%, which would impact the steepness of the yield curve in a normalized interest rate environment if correct. Further, depositor behavior is also subject to much debate regarding the pace and timing of deposits flowing out of the banking system.
In September, the Federal Reserve released its mechanisms for how they will raise interest rates when the decision is made to do so and include, in addition to conventional measures such as increases to the Federal Funds Rate, new tools such as paying interest on excess reserves and the use of reverse repurchase agreements. The timing and use of these tools may affect the direction and impact of short-term rate increases.
Based on the September 17, 2014 FOMC Meeting Statement and Economic Projections, the market developed a more clear expectation that rates would rise beginning in mid-2015, with the 10 year rate reaching 2.63%. However, the minutes released by the Federal Reserve in early October were interpreted to indicate that rates may indeed rise later than mid-2015, which caused rates to decrease significantly, with the 10 year Treasury yield closing as low as 2.15%. We do not expect to see significant improvement in net interest income until short-term interest rates increase, and the impact on net interest income will be influenced by the nature, timing, market reaction and customer behavior, all of which are very unpredictable.
MARKET AREAS AND COMPETITION
Our business operations are concentrated in our primary market areas of New York, Western and Eastern 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.
More recently, competition for loans, particularly commercial loans, has intensified given the weak economic activity within our markets and nationally. This increased competition from banks and non-banks has resulted in accelerated loan prepayments, particularly in our investor owned commercial real estate portfolio as borrowers gravitate towards financial institutions that are more willing to compete on price, loan structures or tenor. This competition is most notable in Eastern Pennsylvania and New England.
REGULATORY REFORM
Durbin Amendment
In July 2013, the U.S. District Court for the District of Columbia (the "District 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 District 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 transaction were too high. In addition, the District Court held that Current Rule's network non-exclusivity provisions concerning unaffiliated payment networks for debit cards also violated the Durbin Amendment. In September 2013, the District Court agreed to stay its ruling pending the Federal Reserve's expedited appeal to the District of Columbia Circuit Court of Appeals (“D.C. Circuit”). In January 2014, following receipt of appellate and amicus briefs in the case, a three-judge panel for the D.C. Circuit heard oral arguments in this case. In March 2014, the D.C. Circuit largely ruled in favor of the Federal Reserve's interpretation of the Durbin Amendment. We will continue to monitor future developments. We recorded $21 million and $20 million of debit card interchange revenues for the nine months ended September 30, 2014 and 2013, respectively.
Volcker Rule
The Volcker Rule provisions of the Dodd-Frank Act restrict the ability of affiliates of insured depository institutions to sponsor or invest in private funds or to engage in certain types of proprietary trading. Although the Volcker Rule became effective on July 21, 2012 and the final rules became effective April 1, 2014, in connection with the adoption of the final rules on December 10, 2013 by the responsible agencies, the Federal Reserve issued an order extending the period during which institutions have to conform their activities and investments to the requirements of the Volcker Rule to July 21, 2015. The issuance of the final Volcker Rule restricts our ability to hold debt securities issued by Collateralized Loan Obligations ("CLOs") where our investment in these debt securities is deemed to be an ownership interest in a CLO and the CLO itself does not qualify for an exclusion in the final rule for loan securitizations. On April 7, 2014, the Federal Reserve announced that it intends to grant banking entities two additional one year extensions, which together would extend until July 21, 2017 the time period for institutions to conform their ownership interests in CLOs to the stated provisions of the final Volcker Rule. Only CLOs in place as of December 31, 2013 that do not qualify for the exclusion in the final rule for loan securitizations would be eligible for the extension.
We have $1.1 billion of CLO investments at September 30, 2014 with a weighted average yield of 3.2% that could be impacted by this rule. These investments are further described under “Risk Management—Investment Securities Portfolio.” While we believe that it is unlikely that regulatory agencies will initiate any further changes in
the Volcker Rule, we continue to evaluate structural solutions that we can apply to our CLO securities and monitor expected prepayments, refinancing and other solutions initiated by the asset managers of the CLO structure that we believe would make any remaining CLO securities compliant with the stated provisions of the final Volcker Rule.
Should we no longer be able to hold such securities, we could i) sell these securities expeditiously, and not be able to realize the value we might be able to realize with a normal market sale; ii) recognize all unrealized losses on such securities should we determine it is not more likely than not that we can hold any securities that have a fair value less than book value to a time when the fair value would be at least equal to its book value, which could be the security’s maturity; and iii) reinvest proceeds in other, likely lower yielding investments, which would reduce our revenues. Of the bonds that do not qualify for an exclusion for loan securitizations, at September 30, 2014, we had $99 million of CLO securities with fair values less than their book values, aggregating to a $0.7 million unrealized loss. We continue to believe it is more likely than not that we can hold any underwater bonds to recovery, which could be maturity as the Federal Reserve has extended the holding period to July 21, 2017 and we believe that expected prepayments, refinancing and other structural remedies would enable us to make any remaining CLO securities compliant with the stated ownership interest provisions of the final Volcker Rule and thus allow us to continue holding the bonds after the conformance period ends.
Regulatory Reform is discussed in our Annual Report on Form 10-K for the year ended December 31, 2013 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 and have been discussed under this same heading in Item 7 of our 2013 Annual Report on Form 10-K. Additional accounting policies are more fully described in Note 1 in the “Notes to Consolidated Financial Statements” presented in our 2013 Annual Report on Form 10-K. The following are critical accounting estimates that have changed since our 2013 Annual Report on Form 10-K:
Investment Securities
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, security issuer and the current political environment. These 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 September 30, 2014, the par value of our portfolio of residential mortgage-backed securities totaled $6.5 billion, which included $6.1 billion of collateralized mortgage obligations. In the determination of our constant effective yield, we estimate that we will receive $1.1 billion of principal cash flows on our collateralized mortgage obligations over the next 12 months.
Allowance for Loan Losses
Impaired loans
Beginning in the second quarter of 2014, we raised our threshold for evaluating commercial loans individually for impairment from $200 thousand to $1 million. Impaired loans to commercial borrowers with outstandings less than $1 million are pooled and measured for impairment collectively. Additionally, all loans modified in a troubled debt restructuring ("TDR"), regardless of dollar size, are considered impaired. The impact of this change to our allowance for loan losses was not significant. This change is being implemented on a prospective basis, accordingly, prior period financial disclosures have not been revised.
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, and when events or changes in circumstances indicate that the carrying amounts may be impaired. At September 30, 2014 and December 31, 2013, our goodwill totaled $1.4 billion and $2.4 billion, respectively. Of this, approximately 95% and 97%, respectively, was allocated to our Banking reporting unit at September 30, 2014 and December 31, 2013.
For the period ending September 30, 2014, we concluded it was more likely than not that the fair value of our Banking reporting unit was less than its carrying value including goodwill, given our current expectations regarding the macroeconomic and industry environment, including our view of future interest rates and our current stock price range. Our analysis was conducted in accordance with prescribed accounting principles as set forth in our 2013 Annual Report on Form 10-K. Accordingly, we performed a “Step 1” review for possible goodwill impairment in advance of our annual impairment testing date. Determining the fair value of the Banking reporting unit as part of the Step 1 analysis involves significant judgment. For Step 1, we used a market approach to determine the fair value.
In our application of the market approach for our Banking reporting unit, we utilized a 35% control premium assumption based on our review of transactions observable in the market place that we determined were comparable plus the fair value of our outstanding preferred stock and applied market based multiples to the tangible book value and projected earnings of our Banking reporting unit. The projected earnings multiple used was 10x and was based on a stock price for assessment purposes of $7.37 per share and was applied to our projected 2014 and 2015 earnings. The tangible book value multiple used was 1.14x and was based on a $7.37 stock price and tangible book value at the assessment date.
Based on our review, we concluded that the carrying amount of the Banking reporting unit exceeded its estimated fair value and thus performed “Step 2.” For Step 2, we compared the implied fair value of the Banking reporting unit's goodwill with the carrying amount of the goodwill for the Banking 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 involved in the determination of the fair value of the assets and liabilities of the reporting units, and therefore directly impact the implied fair value of goodwill, as part of this Step 2 analysis. The most significant estimates involved related to our Banking reporting unit are the fair valuation of our loans and core deposit intangible asset. We determined the fair value of our loan portfolio 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 cash flows were then discounted to present value based on a market rate for similar loans. We estimated the value of the core deposit intangible asset using a discounted cash flow approach considering market comparable transactions. Both of these estimates are highly subjective and involve many judgments.
Based on our assessments under both Steps 1 and 2, we have recorded an impairment of our Banking reporting unit goodwill of $1.1 billion as of September 30, 2014. This amount differs from our previously disclosed,
preliminary estimate of $800 million due to the finalization of both Step 1 and Step 2 of the goodwill impairment test, in particular a further decline in our stock price from the preliminary estimate.
Negative changes to the assumptions necessary for the determination of the significant estimates used in computing fair value of our Banking reporting unit would result in further impairment. A 5% reduction to the price of our common stock utilized in the impairment test would result in a further write down of the fair value of our Banking reporting unit by approximately $175 million. A five percentage point decline in the control premium assumption to 30% changes the overall fair value of our Banking reporting unit by approximately $130 million.
SELECTED QUARTERLY FINANCIAL DATA |
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| | 2014 | | 2013 |
| At or for the quarter ended | September 30 | June 30 | March 31 | | December 31 | September 30 |
| Selected financial condition data: | (in millions, except per share amounts) |
| Total assets | $ | 37,966 |
| $ | 38,625 |
| $ | 37,990 |
| | $ | 37,628 |
| $ | 37,341 |
|
| Loans and leases, net | 22,538 |
| 22,122 |
| 21,536 |
| | 21,230 |
| 20,891 |
|
| Investment securities: | | | | | | |
| Available for sale | 6,198 |
| 6,684 |
| 7,060 |
| | 7,423 |
| 7,610 |
|
| Held to maturity | 5,352 |
| 4,834 |
| 4,467 |
| | 4,042 |
| 3,842 |
|
| Goodwill and other intangibles | 1,423 |
| 2,528 |
| 2,535 |
| | 2,543 |
| 2,550 |
|
| Deposits | 27,670 |
| 27,445 |
| 27,598 |
| | 26,665 |
| 26,969 |
|
| Borrowings | 5,662 |
| 5,624 |
| 4,871 |
| | 5,556 |
| 4,902 |
|
| Stockholders’ equity | $ | 4,090 |
| $ | 5,079 |
| $ | 5,026 |
| | $ | 4,993 |
| $ | 4,938 |
|
| Common shares outstanding | 355 |
| 355 |
| 354 |
| | 354 |
| 354 |
|
| Selected operations data: | | | | | | |
| Interest income | $ | 304 |
| $ | 302 |
| $ | 300 |
| | $ | 310 |
| $ | 307 |
|
| Interest expense | 31 |
| 30 |
| 29 |
| | 30 |
| 29 |
|
| Net interest income | 273 |
| 272 |
| 271 |
| | 280 |
| 278 |
|
| Provision for credit losses | 21 |
| 23 |
| 25 |
| | 32 |
| 28 |
|
| Net interest income after provision for credit losses | 252 |
| 249 |
| 246 |
| | 248 |
| 250 |
|
| Noninterest income | 75 |
| 81 |
| 77 |
| | 89 |
| 91 |
|
| Restructuring charges | 2 |
| — |
| 10 |
| | — |
| — |
|
| Goodwill impairment | 1,100 |
| — |
| — |
| | — |
| — |
|
| Deposit account remediation | 45 |
| — |
| — |
| | — |
| — |
|
| Other noninterest expense | 249 |
| 244 |
| 238 |
| | 227 |
| 231 |
|
| (Loss) income before income tax | (1,069 | ) | 86 |
| 74 |
| | 110 |
| 110 |
|
| Income tax expense (benefit) | (146 | ) | 12 |
| 14 |
| | 33 |
| 31 |
|
| Net (loss) income | (923 | ) | 74 |
| 59 |
| | 78 |
| 79 |
|
| Preferred stock dividend | 8 |
| 8 |
| 8 |
| | 8 |
| 8 |
|
| Net (loss) income available to common stockholders | $ | (931 | ) | $ | 66 |
| $ | 52 |
| | $ | 70 |
| $ | 72 |
|
| Common stock and related per share data: | | | | | | |
| (Loss) earnings per common share: | | | | | | |
| Basic | $ | (2.66 | ) | $ | 0.19 |
| $ | 0.15 |
| | $ | 0.20 |
| $ | 0.20 |
|
| Diluted | (2.66 | ) | 0.19 |
| 0.15 |
| | 0.20 |
| 0.20 |
|
| Cash dividends | 0.08 |
| 0.08 |
| 0.08 |
| | 0.08 |
| 0.08 |
|
Book value(1) | 10.71 |
| 13.53 |
| 13.40 |
| | 13.31 |
| 13.15 |
|
Tangible book value per share(1)(2) | 6.64 |
| 6.31 | 6.15 |
| | 6.04 |
| 5.86 |
|
| Market Price (NASDAQ: FNFG): |
|
|
|
| |
|
|
| High | 9.05 |
| 9.61 |
| 10.65 |
| | 11.34 |
| 11.02 |
|
| Low | 8.32 |
| 8.27 |
| 8.19 |
| | 10.14 |
| 9.78 |
|
| Close | 8.33 |
| 8.74 |
| 9.45 |
| | 10.62 |
| 10.37 |
|
| |
(1) | Excludes unallocated employee stock ownership plan shares and unvested restricted stock shares. |
| |
(2) | This is a non-GAAP measure that we believe is useful in understanding our financial performance and condition. Refer to the GAAP to Non-GAAP Reconciliation for further information. |
|
| | | | | | | | | | | | | | | | |
| | 2014 | | 2013 |
| At or for the quarter ended | September 30 | June 30 | March 31 | | December 31 | September 30 |
| | (dollars in millions) |
| Selected financial ratios and other data: | | | | | | |
Performance ratios(1): | | | | | | |
| Return on average assets | (9.49 | )% | 0.77 | % | 0.64 | % | | 0.82 | % | 0.85 | % |
| Common equity: | | | | | | |
| Return on average common equity | (77.58 | ) | 5.62 |
| 4.48 |
| | 5.99 |
| 6.18 |
|
Return on average tangible common equity(2) | (164.48 | ) | 12.10 |
| 9.76 |
| | 13.25 |
| 13.92 |
|
| Total equity: | | | | | | |
| Return on average equity | (71.85 | ) | 5.84 |
| 4.79 |
| | 6.18 |
| 6.37 |
|
Return on average tangible equity(2) | (141.80 | ) | 11.68 |
| 9.66 |
| | 12.64 |
| 13.20 |
|
| Net interest rate spread | 3.13 |
| 3.18 |
| 3.25 |
| | 3.33 |
| 3.32 |
|
| Net interest rate margin | 3.21 |
| 3.26 |
| 3.33 |
| | 3.41 |
| 3.40 |
|
Efficiency ratio(3) | 400.6 |
| 69.2 |
| 71.6 |
| | 61.5 |
| 62.7 |
|
Operating expenses as a percentage of average loans and deposits(4) | 11.19 |
| 1.97 |
| 2.06 |
| | 1.89 |
| 1.94 |
|
| Effective tax rate (benefit) | (13.7 | ) | 14.0 |
| 19.6 |
| | 29.7 |
| 28.2 |
|
| Dividend payout ratio | N/M |
| 42.11 |
| 53.33 |
| | 40.00 |
| 40.00 |
|
| Capital ratios: | | | | | | |
| First Niagara Financial Group, Inc. | | | | | | |
| Total risk-based capital | 11.76 |
| 11.53 |
| 11.60 |
| | 11.53 |
| 11.40 |
|
| Tier 1 risk-based capital | 9.80 |
| 9.57 |
| 9.62 |
| | 9.56 |
| 9.45 |
|
Tier 1 risk-based common capital(2) | 8.17 |
| 7.92 |
| 7.92 |
| | 7.86 |
| 7.72 |
|
| Leverage ratio | 7.32 |
| 7.33 |
| 7.28 |
| | 7.26 |
| 7.14 |
|
| Ratio of stockholders’ equity to total assets | 10.77 |
| 13.15 |
| 13.23 |
| | 13.27 |
| 13.22 |
|
Ratio of tangible common stockholders’ equity to tangible assets(2) | 6.37 | % | 6.13 | % | 6.07 | % | | 6.02 | % | 5.89 | % |
| Risk-weighted assets | $ | 27,731 |
| $ | 27,314 |
| $ | 26,639 |
| | $ | 26,412 |
| $ | 26,078 |
|
| First Niagara Bank: | | | | | | |
| Total risk-based capital | 11.28 | % | 11.05 | % | 11.08 | % | | 10.99 | % | 10.89 | % |
| Tier 1 risk-based capital | 10.39 |
| 10.18 |
| 10.22 |
| | 10.15 |
| 10.08 |
|
| Leverage ratio | 7.76 | % | 7.79 | % | 7.74 | % | | 7.70 | % | 7.61 | % |
| Risk-weighted assets | $ | 27,689 |
| $ | 27,273 |
| $ | 26,597 |
| | $ | 26,365 |
| $ | 26,037 |
|
| Other data: | | | | | | |
| Number of full service branches | 411 |
| 411 |
| 411 |
| | 421 |
| 422 |
|
| Full time equivalent employees | 5,768 |
| 5,874 |
| 5,750 |
| | 5,807 |
| 5,788 |
|
N/M Not meaningful
| |
(1) | Computed using daily averages. Annualized where appropriate. |
| |
(2) | This is a non-GAAP financial measure that we believe is useful in understanding our financial performance and condition. Refer to the GAAP to Non-GAAP Reconciliation for further information. |
| |
(3) | Computed by dividing noninterest expense by the sum of net interest income and noninterest income. |
| |
(4) | Computed by dividing noninterest expense by the sum of average total loans and deposits. |
|
| | | | | | | | | | | | | | | | |
| GAAP to Non-GAAP Reconciliation | | | | | | |
| | 2014 | | 2013 |
| At or for the quarter ended | September 30 | June 30 | March 31 | | December 31 | September 30 |
| | (in millions) |
| Computation of ending tangible assets: | | | |
| Total assets | $ | 37,966 |
| $ | 38,625 |
| $ | 37,990 |
| | $ | 37,628 |
| $ | 37,341 |
|
| Less: goodwill and other intangibles | (1,423 | ) | (2,528 | ) | (2,535 | ) | | (2,543 | ) | (2,550 | ) |
| Tangible assets | $ | 36,543 |
| $ | 36,096 |
| $ | 35,455 |
| | $ | 35,086 |
| $ | 34,791 |
|
| | | | | | | |
| Computation of ending tangible common equity: | | | | | | |
| Total stockholders' equity | $ | 4,090 |
| $ | 5,079 |
| $ | 5,026 |
| | $ | 4,993 |
| $ | 4,938 |
|
| Less: goodwill and other intangibles | (1,423 | ) | (2,528 | ) | (2,535 | ) | | (2,543 | ) | (2,550 | ) |
| Less: preferred stockholders' equity | (338 | ) | (338 | ) | (338 | ) | | (338 | ) | (338 | ) |
| Tangible common equity | $ | 2,328 |
| $ | 2,212 |
| $ | 2,153 |
| | $ | 2,113 |
| $ | 2,050 |
|
| | | | | | | |
| Computation of average tangible equity: | | | | | | |
| Total stockholders' equity | $ | 5,098 |
| $ | 5,065 |
| $ | 5,034 |
| | $ | 4,984 |
| $ | 4,933 |
|
| Less: goodwill and other intangibles | (2,515 | ) | (2,532 | ) | (2,539 | ) | | (2,546 | ) | (2,554 | ) |
| Tangible equity | $ | 2,583 |
| $ | 2,533 |
| $ | 2,495 |
| | $ | 2,438 |
| $ | 2,379 |
|
| | | | | | | |
| Computation of average tangible common equity: | | | | | | |
| Total stockholders' equity | $ | 5,098 |
| $ | 5,065 |
| $ | 5,034 |
| | $ | 4,984 |
| $ | 4,933 |
|
| Less: goodwill and other intangibles | (2,515 | ) | (2,532 | ) | (2,539 | ) | | (2,546 | ) | (2,554 | ) |
| Less: preferred stockholders' equity | (338 | ) | (338 | ) | (338 | ) | | (338 | ) | (338 | ) |
| Tangible common equity | $ | 2,245 |
| $ | 2,195 |
| $ | 2,157 |
| | $ | 2,100 |
| $ | 2,041 |
|
| | | | | | | |
| Computation of Tier 1 common capital: | | | | | | |
| Tier 1 capital | $ | 2,716 |
| $ | 2,614 |
| $ | 2,562 |
| | $ | 2,526 |
| $ | 2,465 |
|
| Less: qualifying restricted core capital elements | (114 | ) | (113 | ) | (113 | ) | | (113 | ) | (113 | ) |
| Less: perpetual non-cumulative preferred stock | (338 | ) | (338 | ) | (338 | ) | | (338 | ) | (338 | ) |
| Tier 1 common capital (Non-GAAP) | $ | 2,265 |
| $ | 2,162 |
| $ | 2,111 |
| | $ | 2,075 |
| $ | 2,014 |
|
| | | | | | | |
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. Our operating results exclude certain nonoperating 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 | | Nine months ended September 30, |
| | September 30, | June 30, | September 30, | | 2014 | 2013 |
| (in millions, except per share data) | 2014 | 2014 | 2013 | |
| Operating results (Non-GAAP): | | | | | | |
| Net interest income | $ | 273 |
| $ | 272 |
| $ | 278 |
| | $ | 816 |
| $ | 813 |
|
| Provision for credit losses | 21 |
| 23 |
| 28 |
| | 69 |
| 73 |
|
| Noninterest income | 75 |
| 81 |
| 91 |
| | 233 |
| 276 |
|
| Noninterest expense | 249 |
| 244 |
| 231 |
| | 732 |
| 704 |
|
| Income tax expense | 7 |
| 12 |
| 31 |
| | 36 |
| 95 |
|
| Net operating income (Non-GAAP) | $ | 71 |
| $ | 74 |
| $ | 79 |
| | $ | 212 |
| $ | 218 |
|
| Operating earnings per diluted share (Non-GAAP) | $ | 0.18 |
| $ | 0.19 |
| $ | 0.20 |
| | $ | 0.54 |
| $ | 0.55 |
|
| Reconciliation of net operating income to net (loss) income | $ | 71 |
| $ | 74 |
| $ | 79 |
| | $ | 212 |
| $ | 218 |
|
| Nonoperating expenses, net of tax at effective tax rate: | | | | | | |
| Restructuring charges ($2 million and $13 million pre-tax for the three and nine months ended September 30, 2014, respectively) | (2 | ) | — |
| — |
| | (10 | ) | — |
|
| Goodwill impairment ($1.1 billion pre-tax) | (963 | ) | — |
| | | (963 | ) | |
| Deposit account remediation ($45 million pre-tax) | (29 | ) | — |
| — |
| | (29 | ) | — |
|
| Total nonoperating expenses, net of tax | (994 | ) | — |
| — |
| | (1,002 | ) | — |
|
| Net (loss) income (GAAP) | $ | (923 | ) | $ | 74 |
| $ | 79 |
| | $ | (790 | ) | $ | 218 |
|
| (Loss) earnings per diluted share (GAAP) | $ | (2.66 | ) | $ | 0.19 |
| $ | 0.20 |
| | $ | (2.32 | ) | $ | 0.55 |
|
On an operating (non-GAAP) basis, our third quarter results, adjusted to exclude a $1.1 billion non-cash goodwill impairment charge and a reserve to fund potential costs of a recently self-identified process issue related to certain customer deposit accounts, reflect continued balance sheet growth and consistent credit quality. Through the third quarter, we remained on target with the execution of our Strategic Investment Plan, which is primarily focused on enhancing our product, channel, and service offerings to enable us to provide greater levels of value for our consumer and business customers. Our goal is to provide a relevant and distinctive customer experience that will drive higher levels of customer satisfaction, deeper customer relationships, and increased long-term shareholder value. In the third quarter of 2014, average loans increased 9% annualized from the prior quarter led by 6% growth in average commercial loans and a 13% increase in average consumer loan balances.
In the third quarter of 2014, we established a $45 million reserve to fund the potential costs of a recently self-identified process issue related to certain customer deposit accounts. This reserve related to the process issue, which dates back to the Spring of 2012, represents our current estimate of our customer redress plan and other resolution costs. This process issue also lowered our third quarter noninterest income by approximately $4 million. The process issue was not related to any of our recent acquisitions nor was it related to information security or data breaches.
We continue to work with internal and external constituencies to remediate this matter expeditiously. Until we complete the research and work with our regulators to resolve the process issue, our redress plan and estimates could change.
In the third quarter of 2014, our strong credit quality improved further with the net charge-off ratio on originated loans declining to 0.27%, down three basis points from the low levels in the prior quarter. Higher than normal expenses, which are not expected to continue, included a valuation write-down of a real estate property, costs incurred to protect our customers following the Home Depot data security breach, and higher state franchise taxes and totaled approximately $7 million. These higher than expected expenses were offset by a lower than expected tax rate in the third quarter.
Comparison to Prior Quarter
Our third quarter 2014 GAAP net loss was $923 million, or $2.66 per diluted share, and included a pre-tax $1.1 billion goodwill impairment charge, a $45 million pre-tax reserve to address a process issue related to certain customer deposit accounts, and $2 million in pre-tax restructuring and severance expenses incurred primarily in connection with a previously announced branch staffing realignment. Excluding these charges, our non-GAAP operating net income was $71 million, or $0.18 per diluted share. In the second quarter of 2014, we reported GAAP net income of $74 million, or $0.19 per diluted share and there were no restructuring expenses.
Our third quarter 2014 net interest income increased $1 million from the prior quarter to $273 million. The benefits of a 4% annualized increase in average interest-earning assets, an additional day in the quarter, and income accretion from collateralized loan obligations prepayments were partially offset by a five basis points decrease in our taxable equivalent net interest rate margin to 3.21%. Growth in average interest earning assets reflected continued strong loan growth, particularly in commercial, home equity, and indirect auto loans. Average investment securities decreased modestly from the prior quarter. The five basis points decrease in net interest margin in the third quarter of 2014 reflected continued compression of commercial and consumer loan yields in the current low interest rate environment and to a lesser extent, the impact of one additional day in the quarter. Average commercial and consumer loan yields declined nine and seven basis points, respectively, from the prior quarter.
During the third quarter of 2014, balance sheet growth remained strong as average loans increased 9% annualized compared to the prior quarter. Average commercial business and real estate loans increased 6% annualized, while average consumer loans increased 13% annualized driven by continued increases in our indirect auto and home equity portfolios.
Average transactional deposit balances, which include interest-bearing and noninterest-bearing checking accounts, increased 7% annualized from the prior quarter and represent 37% of our average deposit balances at September 30, 2014, up from 36% at June 30, 2014. Average noninterest-bearing checking deposit balances increased 14% from the prior quarter, driven by seasonal increases in commercial deposits, while average interest-bearing checking deposits were unchanged from the prior quarter. Money market deposit balances decreased 4% reflecting normal seasonal trends in municipal deposit balances. Time deposits averaged $4.0 billion and were unchanged from the prior quarter. The average cost of interest-bearing deposits was unchanged from the prior quarter at 0.24%.
Our provision for credit losses totaled $21 million and $23 million for the three months ended September 30, 2014 and June 30, 2014, respectively. The provision for loan losses on originated loans totaled $20 million and $22 million for the third quarter and second quarter of 2014, respectively. The provision for loan losses on originated
loans for the three months ended September 30, 2014 reflected $7 million to support organic loan growth and $13 million to cover net charge-offs during the quarter. Annualized net charge-offs equaled 0.27% of average originated loans, a three basis points decrease from 0.30% reported for the second quarter of 2014. At September 30, 2014, nonperforming originated loans comprised 0.91% of originated loans, a five basis points increase from the prior quarter.
The provision for losses on acquired loans totaled $1 million and $0.3 million in the third quarter and second quarter of 2014, respectively. Annualized net charge-offs equaled 0.05% of average acquired loans for the third quarter of 2014, compared to 0.06% for the second quarter of 2014.
Noninterest income decreased $5 million, or 7%, in the third quarter of 2014 compared to the second quarter of 2014. Excluding the process issue, fee income decreased from the prior quarter due primarily to lower mortgage banking revenues and other income, partially offset by higher insurance commissions. Other income for the quarters ended September 30, 2014 and June 30, 2014 included $7 million in amortization for historic tax credit investments, which was more than offset by lower tax expense. Noninterest expenses increased $1.2 billion from the second quarter of 2014. Excluding the $1.1 billion goodwill impairment charge, $45 million reserve to address a process issue related to certain customer deposit accounts, and $2 million in pre-tax restructuring and severance expenses incurred primarily in connection with a previously announced branch staffing realignment, noninterest expenses increased $5 million. The increase was driven by $7 million of elevated charges related to the valuation writedown of a single other real estate owned property, higher state franchise taxes, and expenses incurred to protect our customers in response to the widely publicized Home Depot data security breach that impacted debit and credit card holders and banks across North America. These increases were partially offset by lower salaries and benefits as well as lower leasehold depreciation costs from elevated second quarter levels.
The provision for income taxes in the third quarter of 2014 was a benefit of $146 million, resulting in an effective tax rate benefit of 13.7%. The effective tax rate was 14.0% for the prior quarter, resulting in income tax expense of $12 million. The third quarter’s effective tax rate benefit reflects the impact of the goodwill impairment charge, of which only a portion was tax deductible. On a non-GAAP operating basis, the effective tax rate for the third quarter of 2014 was 9%, reflecting the benefit of previously disclosed tax strategies and other items.
Comparison to Prior Year Quarter
Our third quarter 2014 GAAP net loss was $923 million, or $2.66 per diluted share, and included a pre-tax $1.1 billion goodwill impairment charge, a $45 million reserve to address a process issue related to certain customer deposit accounts, and $2 million in pre-tax restructuring and severance expenses incurred primarily in connection with a previously announced branch staffing realignment. Excluding these charges, our non-GAAP operating net income was $71 million, or $0.18 per diluted share. Our third quarter 2013 GAAP net income was $79 million, or $0.20 per diluted share.
Our third quarter of 2014 net interest income decreased $4 million, or 2%, from the third quarter of 2013. Our taxable equivalent net interest margin decreased nineteen basis points to 3.21% at September 30, 2014 from 3.40% in the third quarter of 2013. During the current quarter, yields on average interest-earning assets decreased eighteen basis points, compared to the same quarter in 2013, driven by lower yields across all loan portfolios with the exception of our other consumer portfolio. The cost of interest-bearing liabilities of 0.44% for the current quarter increased one basis point from the same quarter in 2013.
Average loans increased 8% for the quarter ended September 30, 2014 compared to the same quarter in 2013. Average commercial business and real estate loans increased 8% over the same quarter in 2013, with our commercial business portfolio increasing 10%. Average consumer loans increased 9%, primarily driven by growth in home equity and indirect auto loan balances, partially offset by decreases in residential real estate and other consumer loan portfolios.
Average transactional deposit balances, which include interest-bearing and noninterest-bearing checking accounts, increased 9% over the prior year and represent 37% of our average deposit balances, up from 35% a year ago. Average noninterest-bearing checking deposits increased an annualized 10% over the prior year. Average interest-
bearing checking balances increased $338 million, or 8%, for the quarter ended September 30, 2014 from the same quarter in the prior year. Average money market balances decreased 1% annualized compared to the prior year quarter while time deposits increased 4%. The average cost of interest-bearing deposits of 0.24% increased one basis point from the prior year quarter.
Our provision for credit losses totaled $21 million and $28 million for the three months ended September 30, 2014 and 2013, respectively. The provision for loan losses on originated loans decreased to $20 million in the third quarter of 2014 from $25 million in the same quarter in 2013. Nonperforming originated loans as a percentage of originated loans increased to 0.91% at September 30, 2014 from 0.89% at September 30, 2013. Annualized net charge-offs equaled 0.27% of average originated loans for the three months ended September 30, 2014 and 0.33% of average originated loans for the three months ended September 30, 2013.
The provision for losses on acquired loans totaled $1 million and $2 million in the third quarter of 2014 and 2013, respectively. Net charge-offs equaled 0.05% and 0.01% of average acquired loans for the quarters ended September 30, 2014 and 2013, respectively.
For the quarter ended September 30, 2014, noninterest income decreased $16 million, or 18%, from the same period in 2013. Excluding the process issue, fee income decreased from the prior year quarter due primarily to lower capital markets income and other income, partially offset by higher mortgage banking revenues. Other income for the quarter ended September 30, 2014 included $7 million in amortization for historic tax credit investments, which was more than offset by lower tax expense. Noninterest expenses increased $1.2 billion during the same period. Excluding the $1.1 billion goodwill impairment charge, $45 million reserve to address a process issue related to certain customer deposit accounts, and $2 million in pre-tax restructuring and severance expenses incurred primarily in connection with a previously announced branch staffing realignment, noninterest expenses increased $18 million, or 8%. Expenses increased across all categories, except amortization of intangibles, and included elevated expenses related to the valuation writedown of a single other real estate owned property, higher state franchise taxes, and expenses incurred to protect our customers in response to the widely publicized Home Depot data security breach that impacted debit and credit card holders and banks across North America, all of which are included in other expense for the three months ended September 30, 2014.
The provision for income taxes in the third quarter of 2014 was a benefit of $146 million, resulting in an effective tax rate benefit of 13.7%. The effective tax rate was 28.2% for the same quarter in 2013, resulting in income tax expense of $31 million. The effective tax rate for the three months ended September 30, 2014 reflects the impact of the goodwill impairment charge, of which only a portion was tax deductible, benefits of a taxable reorganization of a subsidiary and from investments in certain historic tax credits originated by our commercial real estate business. The taxable reorganization and historic tax credits will benefit our effective tax rate through the fourth quarter of 2014.
Comparison to Prior Year to Date
Our GAAP net loss for the nine months ended September 30, 2014 was $790 million, or $2.32 per diluted share, and included a pre-tax $1.1 billion goodwill impairment charge, a $45 million reserve to address a process issue related to certain customer deposit accounts, and $13 million in pre-tax restructuring and severance expenses incurred primarily in connection with a previously announced branch staffing realignment. Excluding these charges, our non-GAAP operating net income was $212 million, or $0.54 per diluted share, for the nine months ended September 30, 2014. GAAP net income for the nine months ended September 30, 2013 was $218 million, or $0.55 per diluted share, and included a $6 million, or $0.01 per diluted share, charge related to two executive departures.
Our net interest income for the nine months ended September 30, 2014 increased $3 million from the nine months ended September 30, 2013 to $816 million and was driven by a 4% annualized increase in average interest-earning assets partially offset by a twelve basis points decrease in our taxable equivalent net interest rate margin to 3.27%. Growth in average interest-earning assets reflected continued strong loan growth partially offset by lower average investment securities. The twelve basis points decrease in net interest margin in 2014 reflected lower yields on our loans, partially offset by modestly higher yields on securities.
Average loan balances increased 8% for the nine months ended September 30, 2014 compared to the same period in 2013 and average commercial business and real estate loans increased 8%. Average consumer loans increased 9% driven by growth in home equity, indirect auto loan balances, and credit cards, partially offset by a decrease in residential real estate loans and other consumer loans.
Average transactional deposit balances, which include interest-bearing and noninterest-bearing checking accounts, increased 8% over the prior year and represent 36% of our average deposit balances, up from 34% a year ago. Average noninterest-bearing checking deposits increased an annualized 9% over the prior year. Average interest-bearing checking balances increased $336 million, or 8%, for the nine months ended September 30, 2014 from the same period in 2013. Average money market deposits decreased 3% annualized compared to the prior year. The average cost of interest-bearing deposits of 0.24% for the nine months ended September 30, 2014 was unchanged from the nine months ended September 30, 2013.
Our provision for credit losses totaled $69 million and $73 million for the nine months ended September 30, 2014 and 2013, respectively. The provision for loan losses on originated loans was $63 million and $68 million for the nine months ended September 30, 2014 and 2013. Nonperforming originated loans as a percentage of originated loans increased to 0.91% at September 30, 2014 from 0.89% at September 30, 2013. Annualized net charge-offs equaled 0.31% of average originated loans for the nine months ended September 30, 2014 and 2013.
The provision for losses on acquired loans totaled $5 million and $4 million for the first nine months of 2014 and 2013, respectively.
For the nine months ended September 30, 2014, noninterest income decreased $43 million, or 16%, from the same period in 2013. Revenues from deposit service charges, insurance commissions, mortgage banking revenues, capital markets income, and other income decreased from 2013. Other income for the nine months ended September 30, 2014 included $23 million in amortization for historic tax credit investments, which was more than offset by lower tax expense. Noninterest expenses increased $1.2 billion during the same period. Excluding the $1.1 billion goodwill impairment charge, $45 million reserve to address a process issue related to certain customer deposit accounts, and $13 million in pre-tax restructuring and severance expenses incurred primarily in connection with a previously announced branch staffing realignment, noninterest expenses increased $28 million, or 4%. We incurred higher expenses in all line items except amortization of intangibles during the nine months ended September 30, 2014 as compared to the same period in 2013, including elevated expenses related to the valuation writedown of a single other real estate owned property, higher state franchise taxes, and expenses incurred to protect our customers in response to the widely publicized Home Depot data security breach that impacted debit and credit card holders and banks across North America.
The provision for income taxes for the nine months ended September 30, 2014 was a benefit of $120 million, resulting in an effective tax rate benefit of 13.2%. The effective tax rate was 30.3% for the same period in 2013, resulting in income tax expense of $95 million. The effective tax rate for the nine months ended September 30, 2014 reflects the impact of the goodwill impairment charge, of which only a portion was tax deductible, benefits of a taxable reorganization of a subsidiary and from investments in certain historic tax credits originated by our commercial real estate business. The taxable reorganization and historic tax credits will benefit our effective tax rate through the fourth quarter of 2014.
Net Interest Income
Third quarter 2014 net interest income increased $1 million from the prior quarter to $273 million and was driven by a 4% annualized increase in total average interest-earning assets, which was partially offset by a five basis points decrease in the tax equivalent net interest margin to 3.21%. Growth in average earning assets reflected continued organic loan growth, partially offset by modestly lower investment securities balances as we paused our balance sheet rotation strategy in the first quarter of 2014.
The five basis points decrease in our tax equivalent net interest margin reflects continued compression of loan yields from prepayments and reinvestments at current market rates, particularly in our commercial real estate portfolio, which had a 12 basis point decrease compared to the prior quarter. Additionally, in the third quarter of
2014, yields on our investment securities portfolio increased two basis points, with an increase in our other investment securities yields being mostly offset by decreases in both classes of mortgage-backed securities. Premium amortization on our residential mortgage-backed securities portfolio was $6.2 million, an increase of $1.2 million from the prior quarter. Premium amortization for the third quarter of 2014 included $0.9 million in retroactive adjustments to reflect faster expected prepayment speeds. No such adjustment was made in the second quarter of 2014.
During 2013, the yield curve steepened appreciably driven by increased anticipation that the Federal Reserve will begin tapering its Quantitative Easing Bond-Buying program. The steepening of the yield curve resulted from an increase in the mid-to-long end of the curve which has the positive impact of increasing reinvestment rates on certain securities purchases and mitigating premium amortization due to lower prepayment activity driven by higher mortgage rates. However, these benefits to net interest income continue to be more than offset by continued prepayments and/or refinancing of higher-yielding loans and new loan growth at current lower market rates. An intensifying competitive landscape, particularly for commercial and commercial real estate loans may drive spread compression in the future, which will likely impact net interest income.
In September, the Federal Reserve released its mechanisms for how they will raise interest rates when the decision is made to do so and include, in addition to conventional measures such as increases to the Federal Funds Rate, new tools such as paying interest on excess reserves and the use of reverse repurchase agreements. The timing and use of these tools may affect the direction and impact of short-term rate increases. We do not expect to see significant improvement in net interest income until short-term interest rates increase, and the impact on net interest income will be influenced by the nature, timing, market reaction and customer behavior, all of which are very unpredictable.
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) |
| | September 30, 2014 | | June 30, 2014 | |
| (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 | $ | 7,985 |
| 3.65 | % | | $ | 7,899 |
| 3.77 | % | | $ | 86 |
| (0.12 | )% |
| Business | 5,694 |
| 3.51 |
| | 5,564 |
| 3.56 |
| | 130 |
| (0.05 | ) |
| Total commercial lending | 13,679 |
| 3.59 |
| | 13,463 |
| 3.68 |
| | 216 |
| (0.09 | ) |
| Consumer: | | | | | | | | |
| Residential real estate | 3,351 |
| 3.77 |
| | 3,361 |
| 3.80 |
| | (10 | ) | (0.03 | ) |
| Home equity | 2,857 |
| 4.01 |
| | 2,800 |
| 4.06 |
| | 57 |
| (0.05 | ) |
| Indirect auto | 1,978 |
| 2.84 |
| | 1,750 |
| 2.85 |
| | 228 |
| (0.01 | ) |
| Credit cards | 313 |
| 11.44 |
| | 308 |
| 11.44 |
| | 5 |
| — |
|
| Other consumer | 287 |
| 8.54 |
| | 291 |
| 8.53 |
| | (4 | ) | 0.01 |
|
| Total consumer lending | 8,786 |
| 4.06 |
| | 8,510 |
| 4.13 |
| | 276 |
| (0.07 | ) |
| Total loans | 22,465 |
| 3.80 |
| | 21,973 |
| 3.89 |
| | 492 |
| (0.09 | ) |
Residential mortgage-backed securities(3) | 6,406 |
| 2.56 |
| | 6,097 |
| 2.67 |
| | 309 |
| (0.11 | ) |
Commercial mortgage-backed securities(3) | 1,564 |
| 3.32 |
| | 1,608 |
| 3.45 |
| | (44 | ) | (0.13 | ) |
Other investment securities(3) | 3,854 |
| 4.06 |
| | 4,159 |
| 3.69 |
| | (305 | ) | 0.37 |
|
| Total investment securities | 11,824 |
| 3.15 |
| | 11,864 |
| 3.13 |
| | (40 | ) | 0.02 |
|
| Money market and other investments | 86 |
| 2.76 |
| | 165 |
| 1.27 |
| | (79 | ) | 1.49 |
|
| Total interest-earning assets | 34,375 |
| 3.57 | % | | 34,002 |
| 3.62 | % | | 373 |
| (0.05 | )% |
Noninterest-earning assets(4)(5) | 4,213 |
| | | 4,210 |
| | | 3 |
| |
| Total assets | $ | 38,588 |
| | | $ | 38,212 |
| | | $ | 376 |
| |
| Interest-bearing liabilities: | | | | | | | | |
| Deposits | | | | | | | | |
| Savings deposits | $ | 3,552 |
| 0.09 | % | | $ | 3,654 |
| 0.09 | % | | $ | (102 | ) | — | % |
| Checking accounts | 4,821 |
| 0.03 |
| | 4,820 |
| 0.03 |
| | 1 |
| — |
|
| Money market deposits | 9,882 |
| 0.23 |
| | 9,971 |
| 0.22 |
| | (89 | ) | 0.01 |
|
| Certificates of deposit | 3,970 |
| 0.67 |
| | 3,971 |
| 0.66 |
| | (1 | ) | 0.01 |
|
| Total interest-bearing deposits | 22,225 |
| 0.24 |
| | 22,416 |
| 0.24 |
| | (191 | ) | — |
|
| Borrowings | | | | | | | | |
| Short-term borrowings | 4,737 |
| 0.43 |
| | 4,410 |
| 0.43 |
| | 327 |
| — |
|
| Long-term borrowings | 733 |
| 6.56 |
| | 733 |
| 6.62 |
| | — |
| (0.06 | ) |
| Total borrowings | 5,470 |
| 1.25 |
| | 5,143 |
| 1.31 |
| | 327 |
| (0.06 | ) |
| Total interest-bearing liabilities | 27,695 |
| 0.44 | % | | 27,559 |
| 0.44 | % | | 136 |
| — | % |
| Noninterest-bearing deposits | 5,259 |
| | | 5,077 |
| | | 182 |
| |
| Other noninterest-bearing liabilities | 536 |
| | | 511 |
| | | 25 |
| |
| Total liabilities | 33,490 |
| | | 33,147 |
| | | 343 |
| |
Stockholders’ equity(4) | 5,098 |
| | | 5,065 |
| | | 33 |
| |
| Total liabilities and stockholders’ equity | $ | 38,588 |
| | | $ | 38,212 |
| | | $ | 376 |
| |
| Net interest rate spread | | 3.13 | % | | | 3.18 | % | | | (0.05 | )% |
| Net interest rate margin | | 3.21 | % | | | 3.26 | % | | | (0.05 | )% |
| |
(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 $278 million for the quarter ended September 30, 2014 increased by $1 million from the quarter ended June 30, 2014, reflecting the impact of one more day in the quarter. Overall, the yield on earning assets decreased five basis points quarter over quarter as a result of the combined effects of continued yield compression on our loan portfolio and higher premium amortization on our residential mortgage-backed securities, partially offset by an annualized 4% increase in average earning assets.
Our average balance of investment securities decreased quarter over quarter by $40 million. Yields on our investment securities portfolio increased two basis point primarily due to a 37 basis point increase on other investment securities being offset by higher premium amortization on residential mortgage-backed securities. The increase in yields on our other investment securities during the current quarter resulted from higher prepayments than in the prior quarter of CLOs that were purchased at a discount. We recognized $5.4 million, or $2.9 million more than the previous quarter, of interest income related to these prepayments. While such income from CLO payoffs benefit the quarter in which they are received, the long-term implication is that these assets had above market interest rates that are being replaced with other lower yielding assets. The current quarter included a $0.9 million retroactive adjustment to reflect faster prepayment speeds on our residential mortgage-backed securities. No such adjustment was made in the second quarter of 2014. The yield on new purchases of investment securities in the current quarter was approximately 2.5%, below the yield on the investment securities rolling off of our portfolio of 2.74%.
Overall, our loan growth was 9% annualized from the second quarter of 2014, as our average loan balances increased by $492 million. Commercial loan growth was $216 million over the prior quarter, or 6% annualized, as the pipeline remained stable throughout the third quarter of 2014. Indirect auto remained a source of growth contributing almost half of the average net loan growth this quarter. Our average indirect auto portfolio increased $228 million, as we originated $376 million in new loans during the third quarter of 2014. These increases were partially offset by a slight decrease in our residential real estate and other consumer portfolios. Loan yields declined nine basis points as commercial loan yields decreased by nine basis points and our consumer loan portfolio yields decreased by seven basis points.
Overall, 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. These variable rate originations replaced the repayment of fixed rate loans with higher rates.
Our average balances of interest bearing deposits decreased by $191 million while our average rate paid remained unchanged from the prior quarter. The decrease in our average balances was driven by seasonal decreases in our municipal money market and savings accounts.
Our average borrowings increased quarter over quarter by $327 million as we utilized wholesale funding in the current quarter to fund our balance sheet growth. This funding strategy also caused our cost of borrowings to decrease six basis points from the second quarter of 2014.
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) |
| | September 30, 2014 | | September 30, 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 | $ | 7,985 |
| 3.65 | % | | $ | 7,551 |
| 4.16 | % | | $ | 434 |
| (0.51 | )% |
| Business | 5,694 |
| 3.51 |
| | 5,163 |
| 3.64 |
| | 531 |
| (0.13 | ) |
| Total commercial lending | 13,679 |
| 3.59 |
| | 12,714 |
| 3.95 |
| | 965 |
| (0.36 | ) |
| Consumer: | | | | | | | | |
| Residential real estate | 3,351 |
| 3.77 |
| | 3,538 |
| 3.91 |
| | (187 | ) | (0.14 | ) |
| Home equity | 2,857 |
| 4.01 |
| | 2,683 |
| 4.17 |
| | 174 |
| (0.16 | ) |
| Indirect auto | 1,978 |
| 2.84 |
| | 1,207 |
| 3.09 |
| | 771 |
| (0.25 | ) |
| Credit cards | 313 |
| 11.44 |
| | 309 |
| 12.02 |
| | 4 |
| (0.58 | ) |
| Other consumer | 287 |
| 8.54 |
| | 313 |
| 8.48 |
| | (26 | ) | 0.06 |
|
| Total consumer lending | 8,786 |
| 4.06 |
| | 8,050 |
| 4.35 |
| | 736 |
| (0.29 | ) |
| Total loans | 22,465 |
| 3.80 |
| | 20,764 |
| 4.14 |
| | 1,701 |
| (0.34 | ) |
Residential mortgage-backed securities(3) | 6,406 |
| 2.56 |
| | 5,515 |
| 2.68 |
| | 891 |
| (0.12 | ) |
Commercial mortgage-backed securities(3) | 1,564 |
| 3.32 |
| | 1,810 |
| 3.68 |
| | (246 | ) | (0.36 | ) |
Other investment securities(3) | 3,854 |
| 4.06 |
| | 4,620 |
| 3.47 |
| | (766 | ) | 0.59 |
|
| Total investment securities | 11,824 |
| 3.15 |
| | 11,945 |
| 3.14 |
| | (121 | ) | 0.01 |
|
| Money market and other investments | 86 |
| 2.76 |
| | 157 |
| 2.27 |
| | (71 | ) | 0.49 |
|
| Total interest-earning assets | 34,375 |
| 3.57 | % | | 32,866 |
| 3.75 | % | | 1,509 |
| (0.18 | )% |
Noninterest-earning assets(4)(5) | 4,213 |
| | | 4,227 |
| | | (14 | ) | |
| Total assets | $ | 38,588 |
| | | $ | 37,093 |
| | | $ | 1,495 |
| |
| Interest-bearing liabilities: | | | | | | | | |
| Deposits | | | | | | | | |
| Savings deposits | $ | 3,552 |
| 0.09 | % | | $ | 3,793 |
| 0.09 | % | | $ | (241 | ) | — | % |
| Checking accounts | 4,821 |
| 0.03 |
| | 4,483 |
| 0.04 |
| | 338 |
| (0.01 | ) |
| Money market deposits | 9,882 |
| 0.23 |
| | 9,959 |
| 0.20 |
| | (77 | ) | 0.03 |
|
| Certificates of deposit | 3,970 |
| 0.67 |
| | 3,824 |
| 0.69 |
| | 146 |
| (0.02 | ) |
| Total interest-bearing deposits | 22,225 |
| 0.24 |
| | 22,059 |
| 0.23 |
| | 166 |
| 0.01 |
|
| Borrowings | | | | | | | | |
| Short-term borrowings | 4,737 |
| 0.43 |
| | 4,014 |
| 0.41 |
| | 723 |
| 0.02 |
|
| Long-term borrowings | 733 |
| 6.56 |
| | 733 |
| 6.55 |
| | — |
| 0.01 |
|
| Total borrowings | 5,470 |
| 1.25 |
| | 4,747 |
| 1.36 |
| | 723 |
| (0.11 | ) |
| Total interest-bearing liabilities | 27,695 |
| 0.44 | % | | 26,806 |
| 0.43 | % | | 889 |
| 0.01 | % |
| Noninterest-bearing deposits | 5,259 |
| | | 4,787 |
| | | 472 |
| |
| Other noninterest-bearing liabilities | 536 |
| | | 567 |
| | | (31 | ) | |
| Total liabilities | 33,490 |
| | | 32,160 |
| | | 1,330 |
| |
Stockholders’ equity(4) | 5,098 |
| | | 4,933 |
| | | 165 |
| |
| Total liabilities and stockholders’ equity | $ | 38,588 |
| | | $ | 37,093 |
| | | $ | 1,495 |
| |
| Net interest rate spread | | 3.13 | % | | | 3.32 | % | | | (0.19 | )% |
| Net interest rate margin | | 3.21 | % | | | 3.40 | % | | | (0.19 | )% |
| |
(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) | 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 decreased $4 million for the third quarter of 2014 compared to the third quarter of 2013 reflecting an increase in net-interest earning assets of $620 million and a decrease in our net interest margin of 19 basis points. The $1.5 billion increase in interest-earning assets reflects organic loan growth in our commercial and indirect auto portfolios. This was partially funded with cash flows from our investment securities portfolio during 2013. Over the same period, our average interest-bearing liabilities increased by $889 million, as we funded our balance sheet growth by strategically replacing certain money market and time deposits with lower costing brokered deposits and short-term borrowings. The 19 basis point decrease in our net interest margin resulted from the continued yield compression on our loan and securities portfolio brought on by prepayments and market pressures on interest rates.
The yield on our commercial real estate and commercial business loan portfolios decreased by 51 basis points and 13 basis points, respectively. Consumer loan yields dropped 29 basis points during the same period, driven primarily by a 25 basis points decline in indirect auto yields.
Our yields on interest-earning assets in the third quarter of 2014 decreased 18 basis points compared to the third quarter of 2013, while costs on interest-bearing liabilities increased one basis point, resulting in a 19 basis point decrease 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.
|
| | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | Increase (decrease) |
| | 2014 | | 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 | $ | 7,896 |
| 3.77 | % | | $ | 7,370 |
| 4.21 | % | | $ | 526 |
| (0.44 | )% |
| Business | 5,558 |
| 3.54 |
| | 5,092 |
| 3.68 |
| | 466 |
| (0.14 | ) |
| Total commercial lending | 13,454 |
| 3.68 |
| | 12,462 |
| 3.99 |
| | 992 |
| (0.31 | ) |
| Consumer: | | | | | | | | |
| Residential real estate | 3,376 |
| 3.82 |
| | 3,599 |
| 3.95 |
| | (223 | ) | (0.13 | ) |
| Home equity | 2,805 |
| 4.07 |
| | 2,664 |
| 4.24 |
| | 141 |
| (0.17 | ) |
| Indirect auto | 1,782 |
| 2.87 |
| | 950 |
| 3.17 |
| | 832 |
| (0.30 | ) |
| Credit cards | 312 |
| 11.50 |
| | 305 |
| 11.14 |
| | 7 |
| 0.36 |
|
| Other consumer | 292 |
| 8.57 |
| | 318 |
| 8.36 |
| | (26 | ) | 0.21 |
|
| Total consumer lending | 8,567 |
| 4.15 |
| | 7,836 |
| 4.42 |
| | 731 |
| (0.27 | ) |
| Total loans | 22,021 |
| 3.89 |
| | 20,298 |
| 4.19 |
| | 1,723 |
| (0.30 | ) |
Residential mortgage-backed securities(3) | 6,067 |
| 2.65 |
| | 5,500 |
| 2.53 |
| | 567 |
| 0.12 |
|
Commercial mortgage-backed securities(3) | 1,623 |
| 3.35 |
| | 1,868 |
| 3.63 |
| | (245 | ) | (0.28 | ) |
Other investment securities(3) | 4,131 |
| 3.76 |
| | 4,758 |
| 3.34 |
| | (627 | ) | 0.42 |
|
| Total investment securities | 11,821 |
| 3.14 |
| | 12,126 |
| 3.02 |
| | (305 | ) | 0.12 |
|
| Money market and other investments | 125 |
| 1.74 |
| | 189 |
| 1.74 |
| | (64 | ) | — |
|
| Total interest-earning assets | 33,967 |
| 3.62 | % | | 32,613 |
| 3.74 | % | | 1,354 |
| (0.12 | )% |
Noninterest-earning assets(4)(5) | 4,219 |
| | | 4,349 |
| | | (130 | ) | |
| Total assets | $ | 38,186 |
| | | $ | 36,962 |
| | | $ | 1,224 |
| |
| Interest-bearing liabilities: | | | | | | | | |
| Deposits | | | | | | | | |
| Savings deposits | $ | 3,612 |
| 0.09 | % | | $ | 3,861 |
| 0.10 | % | | $ | (249 | ) | (0.01 | )% |
| Checking accounts | 4,792 |
| 0.03 |
| | 4,456 |
| 0.04 |
| | 336 |
| (0.01 | ) |
| Money market deposits | 9,913 |
| 0.22 |
| | 10,257 |
| 0.21 |
| | (344 | ) | 0.01 |
|
| Certificates of deposit | 3,864 |
| 0.68 |
| | 3,935 |
| 0.67 |
| | (71 | ) | 0.01 |
|
| Total interest-bearing deposits | 22,181 |
| 0.24 |
| | 22,509 |
| 0.24 |
| | (328 | ) | — |
|
| Borrowings | | | | | | | | |
| Short-term borrowings | 4,597 |
| 0.43 |
| | 3,570 |
| 0.41 |
| | 1,027 |
| 0.02 |
|
| Long-term borrowings | 733 |
| 6.62 |
| | 732 |
| 6.63 |
| | 1 |
| (0.01 | ) |
| Total borrowings | 5,330 |
| 1.28 |
| | 4,302 |
| 1.46 |
| | 1,028 |
| (0.18 | ) |
| Total interest-bearing liabilities | 27,511 |
| 0.44 | % | | 26,811 |
| 0.44 | % | | 700 |
| — | % |
| Noninterest-bearing deposits | 5,068 |
| | | 4,657 |
| | | 411 |
| |
| Other noninterest-bearing liabilities | 541 |
| | | 534 |
| | | 7 |
| |
| Total liabilities | 33,120 |
| | | 32,002 |
| | | 1,118 |
| |
Stockholders’ equity(4) | 5,066 |
| | | 4,960 |
| | | 106 |
| |
| Total liabilities and stockholders’ equity | $ | 38,186 |
| | | $ | 36,962 |
| | | $ | 1,224 |
| |
| Net interest rate spread | | 3.18 | % | | | 3.30 | % | | | (0.12 | )% |
| Net interest rate margin | | 3.27 | % | | | 3.39 | % | | | (0.12 | )% |
| |
(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) | 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 increased $4 million, or less than 1%, for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, reflecting an increase in net-interest earning assets of $654 million and a decrease in our net interest margin of twelve basis points. The $1.4 billion increase in interest-earning assets reflects the organic loan growth in our commercial and indirect auto portfolios. This was partially funded with cash flows from our investment securities portfolio during 2013. Over the same period our average interest bearing liabilities increased by $700 million, with a decrease in deposits caused by continued pricing actions being more than offset by increased short-term borrowings. The 12 basis point decrease in our net interest margin resulted from lower yields on our loans and was partially offset by higher yields on our investment securities in the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013.
The yield on our commercial real estate and commercial business loan portfolios decreased by 44 basis points and 14 basis points, respectively. Consumer loan yields dropped 27 basis points during the same period, driven primarily by a 30 basis points decline in indirect auto yields.
The yield on our interest-earning assets in the nine months ended September 30, 2014 decreased 12 basis points compared to the nine months ended September 30, 2013, while costs on interest-bearing liabilities were flat, resulting in a 12 basis point decrease 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; needs for allowance for acquired loan losses 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 | | Nine months ended September 30, |
| | September 30, | June 30, | September 30, | | 2014 | 2013 |
| (in millions) | 2014 | 2014 | 2013 | |
| Provision for originated loans | $ | 20 |
| $ | 22 |
| $ | 25 |
| | $ | 63 |
| $ | 68 |
|
| Provision for acquired loans | 1 |
| — |
| 2 |
| | 5 |
| 4 |
|
| Provision for unfunded commitments | — |
| — |
| — |
| | 1 |
| 1 |
|
| Total | $ | 21 |
| $ | 23 |
| $ | 28 |
| | $ | 69 |
| $ | 73 |
|
The provision for credit losses of $21 million in the third quarter of 2014 reflects continued growth in our commercial and indirect auto portfolios, as well as the changing complexion of our portfolio as we increase our balances in healthcare and multifamily industries.
Our provision for loan losses related to our originated loans is based upon the inherent risk of our loans and considers interrelated factors such 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 indicators. The provision for loan losses related to originated loans amounted to $20 million, or 0.42% of average originated loans annualized, for the quarter ended September 30, 2014, compared to $22 million, or 0.50% of average originated loans annualized, for the quarter ended June 30, 2014 and $25 million, or 0.65% of average originated loans annualized for the quarter ended September 30, 2013. The current quarter provision included $7 million to support sequential originated loan growth and $13 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 provision related to our acquired loans for the third quarter of 2014 was $1 million, compared to less than $1 million for the second quarter of 2014 and $2 million for the third quarter of 2013.
The provision for credit losses included $0.4 million for unfunded loan commitments in the third quarter of 2014 as a result of the growth in our unfunded commitments. Our total unfunded commitments were $10.7 billion and $9.5 billion at September 30, 2014 and December 31, 2013, respectively. The liability for unfunded commitments is included in other liabilities in our Consolidated Statements of Condition and amounted to $15 million and $13 million at September 30, 2014 and December 31, 2013, respectively.
Noninterest Income
The following table presents our noninterest income for the periods indicated:
|
| | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended September 30, |
| (dollars in millions) | September 30, 2014 | June 30, 2014 | September 30, 2013 | | 2014 | 2013 |
| Deposit service charges | $ | 20 |
| $ | 24 |
| $ | 27 |
| | $ | 67 |
| $ | 78 |
|
| Insurance commissions | 18 |
| 17 |
| 18 |
| | 51 |
| 52 |
|
| Merchant and card fees | 13 |
| 13 |
| 12 |
| | 37 |
| 36 |
|
| Wealth management services | 15 |
| 16 |
| 15 |
| | 47 |
| 43 |
|
| Mortgage banking | 4 |
| 5 |
| 2 |
| | 13 |
| 16 |
|
| Capital markets income | 4 |
| 3 |
| 5 |
| | 10 |
| 16 |
|
| Lending and leasing | 4 |
| 5 |
| 5 |
| | 13 |
| 13 |
|
| Bank owned life insurance | 3 |
| 3 |
| 4 |
| | 12 |
| 11 |
|
| Other income | (7 | ) | (5 | ) | 3 |
| | (18 | ) | 11 |
|
| Total noninterest income | $ | 75 |
| $ | 81 |
| $ | 91 |
| | $ | 233 |
| $ | 276 |
|
| Noninterest income as a percentage of net revenue | 21.6 | % | 22.9 | % | 24.8 | % | | 22.2 | % | 25.4 | % |
Comparison to Prior Quarter
Third quarter 2014 noninterest income of $75 million decreased $5 million, or 7%, compared to the second quarter of 2014. Excluding the process issue, fee income decreased from the prior quarter due primarily to lower mortgage banking revenues and other income, partially offset by increases in insurance commissions and capital markets income.
Revenues from wealth management services decreased 4% as lower interest rates and an increased supply of attractively priced longer-tenure certificate of deposit products resulted in lower demand and margins on annuity products. The higher pricing on longer-term CDs and the decline in the 10 year Treasury rate resulted in lower pricing and commissions paid by annuity issuers. Mortgage banking revenues decreased 17% as a result of lower gains on sale revenues. While gain on sale margins were stable from the prior quarter, locked volumes declined by 4%. Closed volumes increased 30% from the second quarter to $356 million, with 75% of the volumes attributable to new home purchases. Lending and leasing revenues decreased 16% and lower investment gains during the third quarter of 2014 contributed to the 31% decrease in other income.
For the third quarter of 2014, insurance commissions increased 6%, from the second quarter of 2014 reflecting strong typical renewal activity and capital markets revenues increased 20% primarily as a result of higher syndication fee income.
Other income for the quarters ended September 30, 2014 and June 30, 2014 include $7 million in amortization for historic tax credit investments. These investments are amortized in the first year of funding and we recognized the amortization as contra-fee income, included in other income, with an offsetting benefit that reduced our income tax expense. This amortization and tax credits will continue through the fourth quarter of 2014.
Comparison to Prior Year Quarter
Third quarter of 2014 noninterest income of $75 million decreased $16 million, or 18%, compared to the third quarter of 2013, driven primarily by lower revenues from deposit service charges, capital markets income, lending and leasing, bank owned life insurance, and other income. These decreases were partially offset by higher merchant and card fees and mortgage banking revenues.
Revenues from deposit service charges decreased $7 million, of which $4 million was attributable to the process issue, and the 31% decrease in capital markets income resulted from lower derivatives income partially offset by higher syndication fees. Long-term fixed rate pricing and competitive terms in the market place, coupled with the impact of the Dodd-Frank Act, has resulted in diminished customer demand for interest rate derivatives. Lending and leasing revenues decreased 20% while the $9 million decrease in other income was primarily due to $7 million of amortization of historic tax credit investments in the current year quarter, which was offset by a related reduction in income tax expense associated with these investments.
Mortgage banking revenues improved $2 million from the prior year quarter as a result of higher gain on sale margins.
Comparison to Prior Year to Date
Noninterest income decreased $43 million to $233 million for the nine months ended September 30, 2014 from $276 million for the nine months ended September 30, 2013 and primarily stemmed from $23 million in amortization for certain historic tax credit investments and lower deposit service charges, of which $4 million was attributable to the process issue. Additionally, we experienced decreases in insurance commissions, mortgage banking revenues, capital markets income, and other income. Higher revenues from merchant and card fees, wealth management services, and bank owned life insurance partially offset these decreases.
Lower policy renewals resulted in a 1% decrease in insurance commissions and a reduction in mortgage sales volumes and compressed gain on sale margins contributed to the 17% decrease in mortgage banking revenues. The 38% decrease in capital markets income was driven by lower derivative fee income partially offset by modestly higher syndication fees. Long-term fixed rate pricing and competitive terms in the market place, coupled with the impact of the Dodd-Frank Act, has resulted in diminished customer demand for interest rate derivatives. The $29 million decrease in other income was primarily comprised of $23 million in amortization for certain historic tax credit investments and lower investment income. These investments are amortized in the first year of funding and we recognized the amortization as contra-fee income, included in other income, with an offsetting benefit that reduced our income tax expense.
Merchant and card fees increased 3% during the nine months ended September 30, 2014 from the same period in 2013, stemming from higher debit card revenues and volume driven interchange fees. Wealth management services income increased $4 million, or 9%, for the nine months ended September 30, 2014 from the same period in 2013 driven growth in annuity sales resulting from favorable spreads between time deposits and fixed annuity rates. Bank owned life insurance income increased 11% as a result of benefits received on two insurance claims in the first quarter of 2014.
Noninterest Expense
The following table presents our noninterest expenses for the periods indicated:
|
| | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended September 30, |
| (dollars in millions) | September 30,
2014 | June 30,
2014 | September 30,
2013 | | 2014 | 2013 |
| Salaries and benefits | $ | 116 |
| $ | 118 |
| $ | 115 |
| | $ | 352 |
| $ | 347 |
|
| Occupancy and equipment | 27 |
| 29 |
| 27 |
| | 84 |
| 83 |
|
| Technology and communications | 31 |
| 31 |
| 29 |
| | 93 |
| 86 |
|
| Marketing and advertising | 8 |
| 8 |
| 6 |
| | 24 |
| 16 |
|
| Professional services | 14 |
| 13 |
| 10 |
| | 39 |
| 29 |
|
| Amortization of intangibles | 7 |
| 7 |
| 8 |
| | 21 |
| 33 |
|
| FDIC premiums | 10 |
| 10 |
| 9 |
| | 28 |
| 28 |
|
| Restructuring charges | 2 |
| — |
| — |
| | 13 |
| — |
|
| Goodwill impairment | 1,100 |
| — |
| — |
| | 1,100 |
| — |
|
| Deposit account remediation | 45 |
| — |
| — |
| | 45 |
| — |
|
| Other expense | 36 |
| 29 |
| 28 |
| | 92 |
| 83 |
|
| Total noninterest expenses | 1,397 |
| 244 |
| 231 |
| | 1,890 |
| 704 |
|
| Less nonoperating expenses: | | | | | | |
| Restructuring charges | (2 | ) | — |
| — |
| | (13 | ) | — |
|
| Goodwill impairment | (1,100 | ) | — |
| — |
| | (1,100 | ) | — |
|
| Deposit account remediation | (45 | ) | — |
| — |
| | (45 | ) | — |
|
Total operating noninterest expenses(1) | $ | 249 |
| $ | 244 |
| $ | 231 |
| | $ | 732 |
| $ | 704 |
|
Efficiency ratio(2) | 400.6 | % | 69.2 | % | 62.7 | % | | 180.2 | % | 64.6 | % |
Operating efficiency ratio(1) | 71.6 | % | 69.2 | % | 62.7 | % | | 69.8 | % | 64.6 | % |
| Full time equivalent employees | 5,768 |
| 5,874 |
| 5,788 |
| | | |
| |
(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
Third quarter 2014 GAAP noninterest expenses increased $1.2 billion to $1.4 billion from the second quarter of 2014, and included a pre-tax $1.1 billion goodwill impairment charge, a $45 million pre-tax reserve to address a process issue related to certain customer deposit accounts, and $2 million in pre-tax restructuring and severance expenses incurred primarily in connection with a previously announced branch staffing realignment. Excluding these charges, operating (non-GAAP) noninterest expenses increased $5 million, or 2%, as a result of higher professional services and other expense partially offset by decreases in salaries and benefits, occupancy and equipment, and marketing and advertising.
Professional services increased $1 million, or 7%, while other expenses increased $8 million, or 27%, during the third quarter. The increase in other expenses was the result of nonrecurring expenses which include a $3 million valuation writedown of a single other real estate owned property, $2 million related to higher state franchise taxes, and $2 million in losses and expenses incurred in protecting our customers in response to the widely publicized Home Depot data security breach that impacted debit and credit card holders across North America.
Salaries and benefits decreased $1 million, or 1%, from the second quarter of 2014 due to lower payroll taxes and incentive compensation. Lower occupancy and equipment for the third quarter of 2014 was driven by a moderation in depreciation costs following an accelerated write-off of certain leasehold improvements recognized in the prior quarter.
In the third quarter of 2014, our GAAP efficiency ratio was 400.6% compared to 69.2% in the prior quarter. Excluding the $1.1 billion goodwill impairment charge, a $45 million pre-tax reserve to address a process issue related to certain customer deposit accounts, and $2 million in pre-tax restructuring and severance expenses incurred primarily in connection with a previously announced branch staffing realignment, our non-GAAP operating efficiency ratio for the third quarter of 2014 was 71.6%.
Comparison to Prior Year Quarter
GAAP noninterest expenses increased $1.2 billion for the quarter ended September 30, 2014 from the quarter ended September 30, 2013. Noninterest expenses for 2014 included a pre-tax $1.1 billion goodwill impairment charge, a $45 million pre-tax reserve to address a process issue related to certain customer deposit accounts, and $2 million in pre-tax restructuring and severance expenses incurred primarily in connection with a previously announced branch staffing realignment. Excluding these charges, operating (non-GAAP) noninterest expenses increased $18 million. Third quarter 2013 other expense included a $2.6 million nonrecurring charge.
We experienced increases in all expense categories with the exception of amortization of intangibles. The $1 million increase in salaries and benefits was primarily due to 2014 merit increases. Higher depreciation contributed to the 3% increase in occupancy and equipment expenses. The 9% increase in technology and communications reflects higher depreciation related to loan processing platforms and 33% higher marketing and advertising resulted from promotional campaigns. Higher other expenses of 31% resulted from nonrecurring expenses including a $3 million valuation writedown of a single other real estate owned property, $2 million related to higher state franchise taxes, and $2 million in losses and expenses incurred in protecting our customers in response to the widely publicized Home Depot data security breach that impacted debit and credit card holders across North America.
Comparison to Prior Year to Date
GAAP noninterest expenses increased $1.2 billion, or 168%, for the nine months ended September 30, 2014 from the nine months ended September 30, 2013. Noninterest expenses for 2014 included a pre-tax $1.1 billion goodwill impairment charge, a $45 million pre-tax reserve to address a process issue related to certain customer deposit accounts, and $13 million in pre-tax restructuring and severance expenses incurred primarily in connection with a previously announced branch staffing realignment. Excluding these charges, operating (non-GAAP) noninterest expenses increased $28 million, or 4%.
The 1% increase in salaries and benefits resulted primarily from merit increases. The 8% increase in technology and communications reflects higher depreciation related to loan processing platforms and higher marketing and advertising expenses were the result of our promotional deposit campaigns in 2014. Included in other expense for the nine months ended September 30, 2014 are nonrecurring expenses which include a $3 million valuation writedown of a single other real estate owned property, $2 million related to higher state franchise taxes, and $2 million in losses and expenses incurred in protecting our customers in response to the widely publicized Home Depot data security breach that impacted debit and credit card holders across North America. These increases were partially offset by a $12 million, or 36%, decrease in amortization of intangibles.
Taxes
The provision for income taxes in the third quarter of 2014 was a benefit of $146 million, resulting in an effective tax rate benefit of 13.7%. The effective tax rate was 14.0% for the prior quarter, resulting in income tax expense of $12 million. The third quarter’s effective tax rate benefit reflects the impact of the goodwill impairment charge, of which only a portion was tax deductible. On a non-GAAP operating basis, the effective tax rate for the third quarter of 2014 was 9.1%, reflecting the benefit of previously disclosed tax strategies and other items.
The provision for income taxes in the third quarter of 2014 was a benefit of $146 million, resulting in an effective tax rate benefit of 13.7%. The effective tax rate was 28.2% for the same quarter in 2013, resulting in income tax expense of $31 million. The effective tax rate for the three months ended September 30, 2014 reflects the impact of the goodwill impairment charge, of which only a portion was tax deductible, benefits of a taxable reorganization of a subsidiary and from investments in certain historic tax credits originated by our commercial real estate business. The taxable reorganization and historic tax credits will benefit our effective tax rate through the fourth quarter of 2014.
The provision for income taxes for the nine months ended September 30, 2014 was a benefit of $120 million, resulting in an effective tax rate benefit of 13.2%. The effective tax rate was 30.3% for the same period in 2013, resulting in income tax expense of $95 million. The effective tax rate for the nine months ended September 30, 2014 reflects the impact of the goodwill impairment charge, of which only a portion was tax deductible, benefits of a taxable reorganization of a subsidiary and from investments in certain historic tax credits originated by our commercial real estate business. The taxable reorganization and historic tax credits will benefit our effective tax rate through the fourth quarter of 2014.
RISK MANAGEMENT
The risks we are subject to in the normal course of business, include, but are not limited to, credit, liquidity, market, operational, regulatory compliance, legal, and reputational. We maintain capital at a level that protects us against these risks.
As with all companies, we face uncertainty and the management of these risks is an important component of driving shareholder value and financial returns. We do this through robust governance processes and appropriate risk and control framework. Our Board of Directors, through the Risk Committee of the Board, sets the tone by establishing our consolidated risk appetite statement. This risk appetite statement provides guidance to ensure risk-taking is appropriate and strategy and tactics are properly aligned in the pursuit of financial objectives. Risk appetite and risk tolerances throughout the Company are an extension of this consolidated risk appetite statement. This is managed through an Enterprise Risk Management (“ERM”) framework which includes methods and processes to identify, monitor, manage, and report on risk. The ERM division, led by our Chief Risk Officer, is responsible for this framework. 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 a three lines of defense model as our primary means to ensure roles, responsibilities and accountabilities are defined and to allow for quick identification and response to risk events. The lines of business and functional areas represent the first line of defense. These areas own, identify, and manage the risks. The second line (those independent risk areas reporting to the Chief Risk Officer), have responsibility for the facilitation and implementation of robust enterprise risk management and compliance processes to effectively monitor and oversee (governance, policy, identification, assessment, analysis, monitoring, reporting) risks being managed by the first line. 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 Risk Committee and Audit Committee of the Board and the Enterprise Risk Management Committee ("ERMC"), Capital Management Committee ("CMC") and Disclosure Committee of Management. 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, Commercial Credit Risk and Policy Committee, Consumer Credit Risk and Policy Committee, Asset/
Liability Committee, Compliance Management Committee, and the Information Security and Privacy Committee. These sub-committees are supported by various working groups. The purpose of the CMC is to provide oversight to the Company's capital adequacy assessment activities and assess/recommend capital actions. The purpose of the Audit Committee is to assist the Board in fulfilling its financially related oversight responsibilities of the Company. The Disclosure Committee supports the Audit Committee and carries out Management’s responsibilities for the review and approval of reports submitted to the Securities and Exchange Commission under the authority granted to Management by the Board of Directors.
Credit Risk
As a bank, we make loans and loan commitments, and purchase securities whose realization is dependent on future principal and interest repayments. Credit risk is the risk associated with the potential inability of a borrower to repay their debt 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.
Loans
The following table presents the composition of our loan and lease portfolios at the dates indicated:
|
| | | | | | | | | | | | | | |
| | September 30, 2014 | | December 31, 2013 | Increase (decrease) |
| (dollars in millions) | Amount | Percent | | Amount | Percent |
| Commercial: | | | | | | |
| Real estate | $ | 6,864 |
| 30.1 | % | | $ | 6,914 |
| 32.3 | % | $ | (50 | ) |
| Construction | 1,150 |
| 5.1 |
| | 864 |
| 4.0 |
| 286 |
|
| Business | 5,836 |
| 25.6 |
| | 5,290 |
| 24.7 |
| 546 |
|
| Total commercial | 13,850 |
| 60.8 |
| | 13,068 |
| 61.0 |
| 782 |
|
| Consumer: | | | | | | |
| Residential real estate | 3,361 |
| 14.7 |
| | 3,448 |
| 16.1 |
| (87 | ) |
| Home equity | 2,887 |
| 12.7 |
| | 2,752 |
| 12.8 |
| 134 |
|
| Indirect auto | 2,074 |
| 9.1 |
| | 1,544 |
| 7.2 |
| 530 |
|
| Credit cards | 313 |
| 1.4 |
| | 325 |
| 1.5 |
| (13 | ) |
| Other consumer | 286 |
| 1.3 |
| | 302 |
| 1.4 |
| (16 | ) |
| Total consumer | 8,920 |
| 39.2 |
| | 8,371 |
| 39.0 |
| 549 |
|
| Total loans and leases | 22,770 |
| 100.0 | % | | 21,440 |
| 100.0 | % | 1,330 |
|
| Allowance for loan losses | (231 | ) | | | (209 | ) | | (22 | ) |
| Total loans and leases, net | $ | 22,538 |
| | | $ | 21,230 |
| | $ | 1,308 |
|
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. Substantially all of the residential mortgage loans that we originated in 2014 complied with the Qualified Mortgage rules of the Dodd-Frank Act. 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 $1.3 billion from December 31, 2013 to September 30, 2014 stemming from the continued growth in our commercial and indirect auto portfolios. Our commercial loan portfolio increased $782 million, or 8% annualized, resulting from our continued strategic focus on the portfolio. Our period over period results display the organic growth across our footprint in our commercial lending activities and from a slight increase in the utilization of line commitments, to 43% at September 30, 2014 from 40% at December 31, 2013. Commercial loans as a percentage of our total loans of 61% remained in line with the loan type composition at December 31, 2013. During the third quarter of 2014, we originated $376 million of indirect auto loans, in line with our expectations.
Offsetting this growth was a decrease in our residential real estate loan portfolio of $87 million which reflected our strategy of selling certain newly originated residential real estate loans in the secondary market.
Included in the table above are acquired loans with a carrying value of $3.9 billion and $4.5 billion at September 30, 2014 and December 31, 2013, respectively. Such acquired loans were initially recorded at fair value with no carryover of any related allowance for loan losses.
We continue to expand our commercial lending activities by taking advantage of opportunities to move up market while remaining focused on credit discipline. Our enhanced specialty offerings in equipment financing, healthcare, and loan 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 third quarter of 2014 remain stable.
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, except for our residential real estate and credit cards portfolios which are assigned to a region based on the primary address of the consumer:
|
| | | | | | | | | | | | | | | | | | |
| (in millions) |
New York(1) | Western Pennsylvania | Eastern Pennsylvania | Connecticut and Western Massachusetts(1) | Other(2) | Total loans and leases |
| September 30, 2014 | | | | | | |
| Commercial: | | | | | | |
| Real estate | $ | 4,021 |
| $ | 900 |
| $ | 1,532 |
| $ | 1,560 |
| $ | — |
| $ | 8,014 |
|
| Business | 2,678 |
| 964 |
| 840 |
| 773 |
| 581 |
| 5,836 |
|
| Total commercial | 6,699 |
| 1,864 |
| 2,372 |
| 2,333 |
| 581 |
| 13,850 |
|
| Consumer: | | | | | | |
| Residential real estate | 1,221 |
| 140 |
| 293 |
| 1,707 |
| — |
| 3,361 |
|
| Home equity | 1,502 |
| 282 |
| 569 |
| 533 |
| — |
| 2,887 |
|
| Indirect auto | 713 |
| 40 |
| 36 |
| 372 |
| 913 |
| 2,074 |
|
| Credit cards | 253 |
| 32 |
| 14 |
| 14 |
| — |
| 313 |
|
| Other consumer | 189 |
| 49 |
| 33 |
| 15 |
| — |
| 286 |
|
| Total consumer | 3,878 |
| 543 |
| 945 |
| 2,641 |
| 913 |
| 8,920 |
|
| Total loans and leases | $ | 10,577 |
| $ | 2,407 |
| $ | 3,317 |
| $ | 4,974 |
| $ | 1,495 |
| $ | 22,770 |
|
| December 31, 2013 | | | | | | |
| Commercial: | | | | | | |
| Real estate | $ | 3,750 |
| $ | 890 |
| $ | 1,449 |
| $ | 1,688 |
| $ | 1 |
| $ | 7,778 |
|
| Business | 2,268 |
| 875 |
| 827 |
| 735 |
| 585 |
| 5,290 |
|
| Total commercial | 6,018 |
| 1,765 |
| 2,276 |
| 2,423 |
| 586 |
| 13,068 |
|
| Consumer: | | | | | | |
| Residential real estate | 1,246 |
| 133 |
| 282 |
| 1,788 |
| — |
| 3,448 |
|
| Home equity | 1,394 |
| 241 |
| 574 |
| 543 |
| — |
| 2,752 |
|
| Indirect auto | 538 |
| 12 |
| 13 |
| 290 |
| 691 |
| 1,544 |
|
| Credit cards | 274 |
| 31 |
| 12 |
| 9 |
| — |
| 325 |
|
| Other consumer | 206 |
| 53 |
| 36 |
| 7 |
| — |
| 302 |
|
| Total consumer | 3,658 |
| 468 |
| 917 |
| 2,637 |
| 691 |
| 8,371 |
|
| Total loans and leases | $ | 9,677 |
| $ | 2,233 |
| $ | 3,193 |
| $ | 5,060 |
| $ | 1,277 |
| $ | 21,440 |
|
| |
(1) | During the quarter ended March 31, 2014, approximately $246 million of commercial loans were transferred from our Connecticut and Western Massachusetts regions to our New York region in the above table. |
| |
(2) | 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. |
Our Western and Eastern Pennsylvania markets have exhibited steady growth with an increase in their commercial loan portfolios of $99 million and $96 million, or 8% and 6% annualized, respectively, from the end of 2013. Over the same period, our New York market also contributed to the growth, with a 10% 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 at the dates indicated:
|
| | | | | | | | | | | |
| | September 30, 2014 | | December 31, 2013 |
| (dollars in millions) | Amount | Count | | Amount | Count |
Commercial real estate loans by balance size:(1) | | | | | |
| Greater than or equal to $20 million | $ | 581 |
| 23 |
| | $ | 557 |
| 22 |
|
| $10 million to $20 million | 1,500 |
| 108 |
| | 1,358 |
| 99 |
|
| $5 million to $10 million | 1,508 |
| 213 |
| | 1,429 |
| 203 |
|
| $1 million to $5 million | 2,734 |
| 1,275 |
| | 2,700 |
| 1,247 |
|
Less than $1 million(2) | 1,691 |
| 6,976 |
| | 1,734 |
| 6,948 |
|
| Total commercial real estate loans | $ | 8,014 |
| 8,595 |
| | $ | 7,778 |
| 8,519 |
|
Commercial business loans by size:(1) | | | | | |
| Greater than or equal to $20 million | $ | 259 |
| 10 |
| | $ | 258 |
| 11 |
|
| $10 million to $20 million | 1,107 |
| 79 |
| | 920 |
| 67 |
|
| $5 million to $10 million | 1,230 |
| 174 |
| | 1,054 |
| 147 |
|
| $1 million to $5 million | 1,714 |
| 760 |
| | 1,599 |
| 706 |
|
Less than $1 million(2) | 1,526 |
| 31,540 |
| | 1,459 |
| 27,691 |
|
| Total commercial business loans | $ | 5,836 |
| 32,563 |
| | $ | 5,290 |
| 28,622 |
|
| |
(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 both September 30, 2014 and December 31, 2013, non-owner occupied commercial real estate represented 66% of the total commercial real estate balance. Loans for construction, acquisition and development increased $276 million from December 31, 2013 due to the funding of previously committed construction loans. A large portion of the increase related to multi-family projects in our footprint states, many of which involve the re-purposing of existing buildings, resulting in larger initial line draws. The table below provides the principal balance of our non-owner occupied commercial real estate loans by location and property type at the dates indicated:
|
| | | | | | | | | | | | | | | | | | |
| (in millions) | New York | Western Pennsylvania | Eastern Pennsylvania | Connecticut and Western Massachusetts | Other(1) | Total |
| September 30, 2014: | | | | | | |
| Non-owner occupied commercial real estate loans: | | | | | | |
| Construction, acquisition and development | $ | 368 |
| $ | 85 |
| $ | 146 |
| $ | 214 |
| $ | 210 |
| $ | 1,024 |
|
| Multifamily and apartments | 1,081 |
| 101 |
| 155 |
| 194 |
| 46 |
| 1,576 |
|
| Office and professional space | 501 |
| 74 |
| 93 |
| 258 |
| 105 |
| 1,030 |
|
| Retail | 310 |
| 47 |
| 108 |
| 203 |
| 114 |
| 783 |
|
| Warehouse and industrial | 113 |
| 16 |
| 48 |
| 94 |
| 18 |
| 289 |
|
| Other | 298 |
| 17 |
| 78 |
| 134 |
| 50 |
| 577 |
|
| Total non-owner occupied commercial real estate loans | 2,672 |
| 340 |
| 628 |
| 1,097 |
| 543 |
| 5,279 |
|
| Owner occupied commercial real estate loans | 1,180 |
| 390 |
| 474 |
| 398 |
| 293 |
| 2,734 |
|
| Total commercial real estate loans | $ | 3,852 |
| $ | 730 |
| $ | 1,102 |
| $ | 1,494 |
| $ | 836 |
| $ | 8,014 |
|
| December 31, 2013: | | | | | | |
| Non-owner occupied commercial real estate loans: | | | | | | |
| Construction, acquisition and development | $ | 306 |
| $ | 82 |
| $ | 48 |
| $ | 151 |
| $ | 160 |
| $ | 747 |
|
| Multifamily and apartments | 1,063 |
| 65 |
| 174 |
| 172 |
| 130 |
| 1,603 |
|
| Office and professional space | 527 |
| 70 |
| 73 |
| 318 |
| 97 |
| 1,086 |
|
| Retail | 371 |
| 50 |
| 107 |
| 231 |
| 114 |
| 873 |
|
| Warehouse and industrial | 125 |
| 27 |
| 62 |
| 97 |
| 27 |
| 338 |
|
| Other | 265 |
| 15 |
| 109 |
| 84 |
| 71 |
| 545 |
|
| Total non-owner occupied commercial real estate loans | 2,658 |
| 309 |
| 573 |
| 1,053 |
| 600 |
| 5,192 |
|
| Owner occupied commercial real estate loans | 1,045 |
| 371 |
| 536 |
| 390 |
| 244 |
| 2,586 |
|
| Total commercial real estate loans | $ | 3,703 |
| $ | 680 |
| $ | 1,108 |
| $ | 1,443 |
| $ | 843 |
| $ | 7,778 |
|
| |
(1) | Primarily consists of loans located in states bordering our footprint. |
The table below provides detail on commercial business loans and owner occupied commercial real estate loans by industry classification (as defined by the North American Industry Classification System) at the dates indicated: |
| | | | | | |
| (in millions) | September 30, 2014 | December 31, 2013 |
| Manufacturing | $ | 1,475 |
| $ | 1,389 |
|
| Health Care and Social Assistance | 1,215 |
| 1,120 |
|
| Real Estate and Rental and Leasing | 1,036 |
| 911 |
|
| Wholesale Trade | 604 |
| 639 |
|
| Retail Trade | 496 |
| 511 |
|
| Public Administration | 452 |
| 350 |
|
| Construction | 449 |
| 427 |
|
| Other Services (except Public Administration) | 388 |
| 324 |
|
| Finance and Insurance | 374 |
| 312 |
|
| Educational Services | 357 |
| 288 |
|
| Professional, Scientific, and Technical Services | 321 |
| 302 |
|
| Transportation and Warehousing | 251 |
| 240 |
|
| Administrative and Support and Waste Management and Remediation Services | 200 |
| 203 |
|
| Other | 953 |
| 859 |
|
| Total | $ | 8,571 |
| $ | 7,876 |
|
Home Equity Portfolio
Our home equity portfolio (loans and lines of credit) consists of both first-lien and junior-lien mortgage loans with underwriting criteria based on minimum credit scores, debt to income ratios, and LTV ratios. We offer closed-end home equity loans which are generally fixed-rate with principal and interest payments, and variable-rate home equity lines of credit. Within the home equity line of credit portfolio, the standard product has a 10 year draw period with a 20 year fully amortizing term upon utilization of the line. Interest-only draw periods are limited to 5 years, and are available at the request of the mortgagor. Applications are underwritten centrally in conjunction with an automated underwriting system.
Of the $2.9 billion and $2.8 billion home equity portfolio at September 30, 2014 and December 31, 2013, respectively, approximately $1.1 billion and $1.0 billion were in a first lien position for the respective periods. 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 September 30, 2014 and December 31, 2013.
The table below summarizes the principal balances of our home equity lines of credit by portfolio at the dates indicated: |
| | | | | | | | | | | | | | | | | | | |
| | September 30, 2014 | | December 31, 2013 |
| (in millions) | Interest only | Principal and interest | Total | | Interest only | Principal and interest | Total |
| Originated | $ | 323 |
| $ | 1,321 |
| $ | 1,644 |
| | $ | 308 |
| $ | 1,113 |
| $ | 1,421 |
|
| Acquired | 142 |
| 858 |
| 1,000 |
| | 151 |
| 880 |
| 1,031 |
|
| Total home equity lines of credit | $ | 465 |
| $ | 2,179 |
| 2,644 |
| | $ | 459 |
| $ | 1,993 |
| 2,452 |
|
| Home equity loans | | | 242 |
| | | | 300 |
|
| Total home equity portfolio | | | $ | 2,887 |
| | | | $ | 2,752 |
|
The principal and interest payment associated with the term structure will be higher than the interest-only payment, resulting in “maturity” risk. We have taken steps to mitigate such risk by (1) stressing each applicant based on principal and interest during underwriting and (2) placing draw restrictions on HELOCs in past due status.
We monitor the risk of junior lien HELOCs by monitoring the payment status on senior lien mortgages not owned or serviced by us, and obtaining refreshed credit scores on a regular basis.
The table below summarizes our home equity line of credit portfolio still in the draw period by draw period end date at September 30, 2014: |
| | | | | | | | | | | | |
| (in millions) | 2014 - 2016 | 2017 - 2018 | Thereafter | Total |
| In draw - interest only | $ | 104 |
| $ | 254 |
| $ | 107 |
| $ | 465 |
|
| In draw - principal and interest | 126 |
| 293 |
| 1,600 |
| 2,019 |
|
| Total | $ | 230 |
| $ | 547 |
| $ | 1,707 |
| $ | 2,484 |
|
Delinquency statistics for the HELOC portfolio are as follows at the dates indicated: |
| | | | | | | | | | | | | | | | | |
| | September 30, 2014 | | December 31, 2013 |
| | | Delinquencies | | | Delinquencies |
| (dollars in millions) | Balance | Amount | Percent of balance | | Balance | Amount | Percent of balance |
| HELOC status: | | | | | | | |
| Still in draw period | $ | 2,484 |
| $ | 34 |
| 1.4 | % | | $ | 2,276 |
| $ | 30 |
| 1.3 | % |
| Amortizing payment | 160 |
| 8 |
| 4.9 | % | | 176 |
| 7 |
| 3.8 |
|
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 under the heading “Critical Accounting Policies and Estimates” in Item 7 of our 2013 Annual Report on Form 10-K.
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 but 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 Total Aggregate Exposures ("TAEs") greater than $300 thousand and substandard or doubtful TAEs 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 TAEs are reviewed on a quarterly basis by either management's Criticized Loan Review Committee (for such TAEs greater than $2 million) or by a Senior Credit Manager (for such TAEs between $200 thousand and $2 million). QCARs for all special mention TAEs greater than $300 thousand are reviewed on a quarterly basis by either management's Classified Loan Review Committee (for such TAEs greater than $2 million) or by a Senior Credit Manager (for such TAEs between $300 thousand and $2 million). Special mention and substandard TAEs below $300 thousand and $200 thousand, respectively, are reviewed by a loan officer on a quarterly basis ensuring that the credit risk rating 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. On an ongoing basis, 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 Criticized and 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 credit risk 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, compliance with lending policies.
The following table details our allocation of our allowance for loan losses by loan category at the dates indicated or for the related quarters:
|
| | | | | | | | | | | |
| | September 30, 2014 | | December 31, 2013 |
| (dollars in millions) | 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 | $ | 54 |
| 35.2 | % | | $ | 48 |
| 36.3 | % |
| Business | 130 |
| 25.6 |
| | 119 |
| 24.7 |
|
| Total commercial | 184 |
| 60.8 |
| | 167 |
| 61.0 |
|
| Consumer: | | | | | |
| Residential real estate | 4 |
| 14.7 |
| | 3 |
| 16.1 |
|
| Home equity | 11 |
| 12.7 |
| | 10 |
| 12.8 |
|
| Indirect auto | 13 |
| 9.1 |
| | 10 |
| 7.2 |
|
| Credit cards | 13 |
| 1.4 |
| | 13 |
| 1.5 |
|
| Other consumer | 6 |
| 1.3 |
| | 6 |
| 1.4 |
|
| Total consumer | 47 |
| 39.2 |
| | 42 |
| 39.0 |
|
| Total | $ | 231 |
| 100.0 | % | | $ | 209 |
| 100.0 | % |
| Allowance for loan losses to total loans | 1.02 | % | | | 0.98 | % | |
| Provision to average total loans | 0.37 | % | | | 0.60 | % | |
| Allowance for loan losses to originated loans | 1.20 | % | | | 1.21 | % | |
| Provision to average originated loans | 0.42 | % | | | 0.68 | % | |
The following table presents the activity in our allowance for originated loan losses by portfolio segment for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Commercial | | Consumer | |
Originated loans (in millions) | Real estate | Business | | Residential | Home equity | Indirect auto | Credit cards | Other
consumer | Total |
| Nine months ended September 30, 2014 | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | |
| Balance at beginning of period | $ | 47 |
| $ | 120 |
| | $ | 2 |
| $ | 7 |
| $ | 10 |
| $ | 13 |
| $ | 6 |
| $ | 205 |
|
| Provision for loan losses | 13 |
| 23 |
| | 1 |
| 4 |
| 9 |
| 9 |
| 5 |
| 63 |
|
| Charge-offs | (8 | ) | (16 | ) | | (1 | ) | (3 | ) | (6 | ) | (10 | ) | (6 | ) | (51 | ) |
| Recoveries | 3 |
| 2 |
| | — |
| 1 |
| 1 |
| 1 |
| 1 |
| 10 |
|
| Balance at end of period | $ | 54 |
| $ | 129 |
| | $ | 2 |
| $ | 9 |
| $ | 13 |
| $ | 13 |
| $ | 6 |
| $ | 227 |
|
| Nine months ended September 30, 2013 | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | |
| Balance at beginning of period | $ | 38 |
| $ | 99 |
| | $ | 5 |
| $ | 5 |
| $ | 3 |
| $ | 7 |
| $ | 5 |
| $ | 161 |
|
| Provision for loan losses | 6 |
| 42 |
| | (2 | ) | 3 |
| 6 |
| 8 |
| 6 |
| 68 |
|
| Charge-offs | (6 | ) | (23 | ) | | (1 | ) | (2 | ) | (2 | ) | (2 | ) | (6 | ) | (43 | ) |
| Recoveries | 4 |
| 2 |
| | — |
| — |
| — |
| 1 |
| 1 |
| 9 |
|
| Balance at end of period | $ | 41 |
| $ | 119 |
| | $ | 2 |
| $ | 6 |
| $ | 8 |
| $ | 13 |
| $ | 6 |
| $ | 195 |
|
| Three months ended September 30, 2014 | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | |
| Balance at beginning of period | $ | 54 |
| $ | 124 |
| | $ | 2 |
| $ | 9 |
| $ | 12 |
| $ | 13 |
| $ | 5 |
| $ | 220 |
|
| Provision for loan losses | 3 |
| 9 |
| | — |
| — |
| 3 |
| 3 |
| 2 |
| 20 |
|
| Charge-offs | (2 | ) | (4 | ) | | — |
| (1 | ) | (2 | ) | (3 | ) | (2 | ) | (15 | ) |
| Recoveries | — |
| 1 |
| | — |
| — |
| — |
| — |
| — |
| 2 |
|
| Balance at end of period | $ | 54 |
| $ | 129 |
| | $ | 2 |
| $ | 9 |
| $ | 13 |
| $ | 13 |
| $ | 6 |
| $ | 227 |
|
| Three months ended September 30, 2013 | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | |
| Balance at beginning of period | $ | 43 |
| $ | 107 |
| | $ | 3 |
| $ | 6 |
| $ | 6 |
| $ | 13 |
| $ | 6 |
| $ | 182 |
|
| Provision for loan losses | (3 | ) | 22 |
| | — |
| 1 |
| 3 |
| 2 |
| 2 |
| 25 |
|
| Charge-offs | (2 | ) | (10 | ) | | — |
| — |
| (1 | ) | (2 | ) | (2 | ) | (18 | ) |
| Recoveries | 3 |
| — |
| | — |
| — |
| — |
| — |
| 1 |
| 5 |
|
| Balance at end of period | $ | 41 |
| $ | 119 |
| | $ | 2 |
| $ | 6 |
| $ | 8 |
| $ | 13 |
| $ | 6 |
| $ | 195 |
|
The following table presents the activity in our allowance for loan losses for our acquired loan portfolio for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Commercial | | Consumer | |
Acquired loans (in millions) | Real estate | Business | | Residential | Home equity | Credit cards | Other
consumer | Total |
| Nine months ended September 30, 2014 | | | | | | | | |
| Allowance for loan losses: | | | | | | | | |
| Balance at beginning of period | $ | — |
| $ | — |
| | $ | 1 |
| $ | 3 |
| $ | — |
| $ | — |
| $ | 4 |
|
| Provision for loan losses | 1 |
| — |
| | 1 |
| 3 |
| — |
| — |
| 5 |
|
| Charge-offs | (1 | ) | — |
| | — |
| (3 | ) | — |
| — |
| (4 | ) |
| Balance at end of period | $ | — |
| $ | — |
| | $ | 1 |
| $ | 3 |
| $ | — |
| $ | — |
| $ | 5 |
|
| Nine months ended September 30, 2013 | | | | | | | | |
| Allowance for loan losses: | | | | | | | | |
| Balance at beginning of period | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | 1 |
| $ | 2 |
|
| Provision for loan losses | 2 |
| — |
| | 1 |
| 2 |
| — |
| (1 | ) | 4 |
|
| Charge-offs | (2 | ) | — |
| | — |
| — |
| — |
| (1 | ) | (2 | ) |
| Balance at end of period | $ | — |
| $ | — |
| | $ | 1 |
| $ | 2 |
| $ | — |
| $ | — |
| $ | 3 |
|
| Three months ended September 30, 2014 | | | | | | | | |
| Allowance for loan losses: | | | | | | | | |
| Balance at beginning of period | $ | — |
| $ | — |
| | $ | 1 |
| $ | 3 |
| $ | — |
| $ | — |
| $ | 4 |
|
| Provision for loan losses | — |
| — |
| | 1 |
| — |
| — |
| — |
| 1 |
|
| Charge-offs | — |
| — |
| | — |
| — |
| — |
| — |
| — |
|
| Balance at end of period | $ | — |
| $ | — |
| | $ | 1 |
| $ | 3 |
| $ | — |
| $ | — |
| $ | 5 |
|
| Three months ended September 30, 2013 | | | | | | | | |
| Allowance for loan losses: | | | | | | | | |
| Balance at beginning of period | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | 1 |
| $ | 1 |
|
| Provision for loan losses | — |
| — |
| | 1 |
| 2 |
| — |
| (1 | ) | 2 |
|
| Charge-offs | — |
| — |
| | — |
| — |
| — |
| — |
| — |
|
| Balance at end of period | $ | — |
| $ | — |
| | $ | 1 |
| $ | 2 |
| $ | — |
| $ | — |
| $ | 3 |
|
As of September 30, 2014 and December 31, 2013, we had a liability for unfunded commitments of $15 million and $13 million, respectively. For the three and nine months ended September 30, 2014, we recognized a provision for credit loss related to our unfunded loan commitments of $0.4 million and $1.2 million, respectively. Our total unfunded commitments amounted to $10.7 billion at September 30, 2014.
Our net charge-offs of $46 million for the nine months ended September 30, 2014 were $9 million higher than our net charge-offs of $36 million for the nine months ended September 30, 2013. The period over period increase was driven primarily by the maturation of our indirect auto and credit cards portfolios. In the prior period, most charge offs in our acquired credit card portfolio were applied against the credit mark. Also contributing to the period over period change were $3 million in charge offs related to our acquired home equity portfolio. This was partially offset by a $1 million recovery in our commercial real estate portfolio, and the charge off of two large credits in the in our commercial business portfolio in the third quarter of 2013. Total net charge-offs for the third quarter of 2014 represented 0.23% of average total loans compared with 0.25% of average total loans in the second quarter of 2014. Excluding our acquired loans, our net charge-off ratio for originated loans was 0.27% for the third quarter of 2014 compared to 0.30% for the second quarter of 2014.
The following table details our total net charge-offs by loan category for the periods indicated:
|
| | | | | | | | | | | |
| | Nine months ended September 30, |
| | 2014 | | 2013 |
| (dollars in millions) | Net charge-offs | Percent of average loans | | Net charge-offs | Percent of average loans |
| Commercial: | | | | | |
| Real estate | $ | 6 |
| 0.11 | % | | $ | 4 |
| 0.07 | % |
| Business | 14 |
| 0.34 |
| | 22 |
| 0.57 |
|
| Total commercial | 20 |
| 0.20 |
| | 26 |
| 0.27 |
|
| Consumer: | | | | | |
| Residential real estate | 1 |
| 0.02 |
| | 1 |
| 0.03 |
|
| Home equity | 5 |
| 0.26 |
| | 2 |
| 0.09 |
|
| Indirect auto | 5 |
| 0.39 |
| | 1 |
| 0.21 |
|
| Credit cards | 9 |
| 3.72 |
| | 2 |
| 0.74 |
|
| Other consumer | 5 |
| 2.39 |
| | 5 |
| 2.01 |
|
| Total consumer | 25 |
| 0.39 |
| | 11 |
| 0.18 |
|
| Total | $ | 46 |
| 0.28 | % | | $ | 36 |
| 0.24 | % |
Our nonperforming loans increased to $199 million from $188 million at December 31, 2013 and $175 million at September 30, 2013. New nonperforming loans during the third quarter of 2014 were $41 million, compared to $53 million in the prior quarter. During the quarter ended September 30, 2014, $7 million of nonperforming loans returned to accruing status, and there were $14 million in paydowns and transfers to real estate owned. Nonperforming loans comprised 0.88% of total loans at September 30, 2014 compared to 0.87% at December 31, 2013. Excluding our acquired loans, our nonperforming loans were 0.91% of originated loans at September 30, 2014 compared to 0.93% of originated loans at December 31, 2013.
Nonperforming assets to total assets were 0.58%, up three basis points from the prior quarter, reflecting the increase in nonperforming loans. The composition of our nonperforming loans and total nonperforming assets consisted of the following at the dates indicated:
|
| | | | | | |
| | September 30, | December 31, |
| (dollars in millions) | 2014(1) | 2013(1) |
| Nonperforming loans: | | |
| Commercial: | | |
| Real estate | $ | 57 |
| $ | 54 |
|
| Business | 43 |
| 51 |
|
| Total commercial | 101 |
| 105 |
|
| Consumer: | | |
| Residential real estate | 36 |
| 31 |
|
| Home equity | 45 |
| 39 |
|
| Indirect auto | 12 |
| 6 |
|
| Other consumer | 5 |
| 6 |
|
| Total consumer | 99 |
| 82 |
|
| Total nonperforming loans | 199 |
| 188 |
|
| Real estate owned | 20 |
| 25 |
|
Total nonperforming assets (2) | $ | 220 |
| $ | 212 |
|
Loans 90 days past due and still accruing interest (3) | $ | 109 |
| $ | 113 |
|
| Total nonperforming assets as a percentage of total assets | 0.58 | % | 0.56 | % |
| Total nonaccruing loans as a percentage of total loans | 0.88 | % | 0.87 | % |
| Total nonaccruing originated loans as a percentage of total originated loans | 0.91 | % | 0.93 | % |
| Allowance for loan losses to nonaccruing loans | 116.0 | % | 111.6 | % |
| |
(1) | Includes $29 million and $30 million of nonperforming acquired lines of credit, primarily in home equity, at September 30, 2014 and December 31, 2013, respectively. |
| |
(2) | Nonperforming assets do not include $69 million and $52 million of performing renegotiated loans that are accruing interest at September 30, 2014 and December 31, 2013, 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. |
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. Early stage delinquencies (loans that are 30 to 89 days past due) of $53 million at September 30, 2014 in our originated loan portfolio increased from $51 million at December 31, 2013. Our acquired loans that were 30 to 89 days past due decreased $22 million from $58 million as of December 31, 2013 to $36 million as of September 30, 2014.
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 |
| | September 30, 2014 | December 31, 2013 | | September 30, 2014 | December 31, 2013 | | September 30, 2014 | December 31, 2013 | | September 30, 2014 | December 31, 2013 |
| Originated loans | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | |
| Real estate | 0.1 | % | 0.1 | % | | 0.1 | % | — | % | | 0.6 | % | 0.4 | % | | 0.7 | % | 0.5 | % |
| Business | 0.1 |
| 0.1 |
| | — |
| 0.1 |
| | 0.2 |
| 0.4 |
| | 0.3 |
| 0.6 |
|
| Total commercial | 0.1 |
| 0.1 |
| | — |
| — |
| | 0.4 |
| 0.4 |
| | 0.6 |
| 0.5 |
|
| Consumer: | | | | | | | | | | | |
| Residential real estate | 0.2 |
| 0.3 |
| | — |
| 0.1 |
| | 1.1 |
| 1.1 |
| | 1.3 |
| 1.6 |
|
| Home equity | 0.2 |
| 0.2 |
| | 0.1 |
| 0.1 |
| | 0.8 |
| 0.8 |
| | 1.0 |
| 1.1 |
|
| Indirect auto | 0.8 |
| 0.8 |
| | 0.2 |
| 0.2 |
| | 0.2 |
| 0.2 |
| | 1.2 |
| 1.2 |
|
| Credit cards | 0.6 |
| 0.6 |
| | 0.3 |
| 0.4 |
| | 0.8 |
| 0.9 |
| | 1.6 |
| 1.8 |
|
| Other consumer | 1.1 |
| 1.1 |
| | 0.4 |
| 0.4 |
| | 0.9 |
| 0.9 |
| | 2.4 |
| 2.4 |
|
| Total consumer | 0.4 |
| 0.5 |
| | 0.1 |
| 0.2 |
| | 0.7 |
| 0.8 |
| | 1.3 |
| 1.4 |
|
| Total | 0.2 | % | 0.2 | % | | 0.1 | % | 0.1 | % | | 0.5 | % | 0.5 | % | | 0.8 | % | 0.8 | % |
| Acquired loans | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | |
| Real estate | 0.4 | % | 0.5 | % | | 0.1 | % | 0.5 | % | | 2.9 | % | 2.6 | % | | 3.4 | % | 3.7 | % |
| Business | 0.3 |
| 0.4 |
| | — |
| 0.1 |
| | 2.1 |
| 2.0 |
| | 2.5 |
| 2.6 |
|
| Total commercial | 0.4 |
| 0.5 |
| | 0.1 |
| 0.4 |
| | 2.7 |
| 2.5 |
| | 3.2 |
| 3.4 |
|
| Consumer: | | | | | | | | | | | |
| Residential real estate | 1.1 |
| 1.2 |
| | 0.5 |
| 0.7 |
| | 4.7 |
| 4.1 |
| | 6.3 |
| 6.1 |
|
| Home equity | 0.5 |
| 0.6 |
| | 0.3 |
| 0.3 |
| | 1.8 |
| 1.8 |
| | 2.6 |
| 2.7 |
|
| Total consumer | 0.8 |
| 1.0 |
| | 0.4 |
| 0.5 |
| | 3.4 |
| 3.1 |
| | 4.6 |
| 4.7 |
|
| Total | 0.6 | % | 0.8 | % | | 0.3 | % | 0.5 | % | | 3.2 | % | 2.9 | % | | 4.1 | % | 4.2 | % |
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 |
| | September 30,
2014 | December 31,
2013 |
| Originated loans: | | |
| Pass | 93.9 | % | 94.6 | % |
Criticized:(1) | | |
| Accrual | 5.3 |
| 4.6 |
|
| Nonaccrual | 0.8 |
| 0.8 |
|
| Total criticized | 6.1 |
| 5.4 |
|
| Total | 100.0 | % | 100.0 | % |
| Acquired loans: | | |
| Pass | 88.2 | % | 88.2 | % |
Criticized:(1) | | |
| Accrual | 11.4 |
| 11.3 |
|
| Nonaccrual | 0.4 |
| 0.5 |
|
| Total criticized | 11.8 |
| 11.8 |
|
| 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, 2013. |
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 |
| | September 30,
2014 | December 31,
2013 |
| Originated loans by refreshed FICO score: | | |
| Over 700 | 78.6 | % | 76.0 | % |
| 660-700 | 11.2 |
| 12.2 |
|
| 620-660 | 5.2 |
| 5.8 |
|
| 580-620 | 2.3 |
| 2.5 |
|
| Less than 580 | 2.2 |
| 2.4 |
|
No score(1) | 0.5 |
| 1.1 |
|
| Total | 100.0 | % | 100.0 | % |
| Acquired loans by refreshed FICO score: | | |
| Over 700 | 73.1 | % | 72.7 | % |
| 660-700 | 7.7 |
| 8.1 |
|
| 620-660 | 5.0 |
| 4.4 |
|
| 580-620 | 3.7 |
| 3.6 |
|
| Less than 580 | 4.2 |
| 4.3 |
|
No score(1) | 6.3 |
| 6.9 |
|
| 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 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 $100 million and $125 million as of September 30, 2014 and December 31, 2013, respectively. In addition, we maintain an allowance for loan losses on our acquired loans, if necessary, for losses in excess of any remaining credit discount.
The following table provides information about our acquired loan portfolio by acquisition at the dates indicated or for the related quarters:
|
| | | | | | | | | | | | | | | |
| (dollars in millions) | HSBC | NewAlliance | Harleysville | National City | Total |
| September 30, 2014 | | | | | |
| Provision for loan losses | $ | — |
| $ | — |
| $ | 1 |
| $ | — |
| $ | 1 |
|
| Net charge-offs | — |
| — |
| — |
| — |
| — |
|
| Net charge-offs to average loans | — | % | — | % | 0.23 | % | — | % | 0.05 | % |
| Nonperforming loans | $ | 7 |
| $ | 10 |
| $ | 10 |
| $ | 2 |
| $ | 29 |
|
Total loans (1) | 814 |
| 2,171 |
| 814 |
| 229 |
| 4,028 |
|
| Allowance for acquired loan losses | — |
| — |
| 4 |
| — |
| 5 |
|
Credit related discount (2) | 19 |
| 57 |
| 20 |
| 4 |
| 100 |
|
| Credit related discount as percentage of loans | 2.30 | % | 2.65 | % | 2.40 | % | 1.91 | % | 2.49 | % |
Criticized loans (3) | $ | 28 |
| $ | 150 |
| $ | 64 |
| $ | 25 |
| $ | 268 |
|
Classified loans (4) | 24 |
| 80 |
| 58 |
| 18 |
| 180 |
|
Greater than 90 days past due and accruing (5) | 11 |
| 53 |
| 32 |
| 10 |
| 106 |
|
| December 31, 2013 |
| | | | |
| Provision for loan losses | $ | — |
| $ | — |
| $ | 3 |
| $ | — |
| $ | 3 |
|
| Net charge-offs | — |
| — |
| 2 |
| — |
| 2 |
|
| Net charge-offs to average loans | — | % | — | % | 1.01 | % | — | % | 0.21 | % |
| Nonperforming loans | $ | 6 |
| $ | 7 |
| $ | 14 |
| $ | 3 |
| $ | 30 |
|
Total loans (1) | 872 |
| 2,585 |
| 957 |
| 228 |
| 4,643 |
|
| Allowance for acquired loan losses | — |
| — |
| 4 |
| — |
| 4 |
|
Credit related discount (2) | 23 |
| 69 |
| 24 |
| 9 |
| 125 |
|
| Credit related discount as percentage of loans | 2.59 | % | 2.68 | % | 2.50 | % | 4.14 | % | 2.70 | % |
Criticized loans (3) | $ | 32 |
| $ | 147 |
| $ | 95 |
| $ | 33 |
| $ | 308 |
|
Classified loans (4) | 26 |
| 83 |
| 82 |
| 22 |
| 211 |
|
Greater than 90 days past due and accruing(5) | 10 |
| 55 |
| 36 |
| 9 |
| 110 |
|
| |
(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, 2013. |
| |
(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, 2013. |
| |
(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 at the dates indicated or for the related quarters:
|
| | | | | | |
| (dollars in millions) | September 30,
2014 | December 31,
2013 |
| Provision for loan losses | $ | 20 |
| $ | 28 |
|
| Net charge-offs | 13 |
| 18 |
|
| Net charge-offs to average loans | 0.27 | % | 0.43 | % |
| Nonperforming loans | $ | 171 |
| $ | 157 |
|
| Nonperforming loans to total loans | 0.91 | % | 0.93 | % |
| Total loans | $ | 18,842 |
| $ | 16,922 |
|
| Allowance for originated loan losses | 227 |
| 205 |
|
| Allowance for originated loan losses to total originated loans | 1.20 | % | 1.21 | % |
| Criticized loans | $ | 822 |
| $ | 677 |
|
Classified loans(1) | 470 |
| 452 |
|
Greater than 90 days past due and accruing (2) | 2 |
| 3 |
|
| |
(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, 2013. |
| |
(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 $22 million from December 31, 2013 to $231 million at September 30, 2014 as our total provision for loan losses of $68 million exceeded our total net charge-offs of $46 million. The ratio of our total allowance for loan losses to total loans of 1.02% at September 30, 2014 compared to 0.98% as of December 31, 2013. Excluding acquired loans, the ratio of our allowance for originated loan losses to total originated loans was 1.20% at September 30, 2014 and remained consistent with that measure at December 31, 2013.
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 $124 million at September 30, 2014 from $108 million at December 31, 2013 and $123 million at September 30, 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, rate reduction, or loans restructured in a Chapter 7 bankruptcy. 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 $69 million and $52 million at September 30, 2014 and December 31, 2013, 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 $3.8 billion and $3.7 billion at September 30, 2014 and December 31, 2013, respectively. Our liability for estimated repurchase obligations on loans sold, which is included in other liabilities in our Consolidated Statements of Condition, was $6 million and $9 million at September 30, 2014 and December 31, 2013, respectively. Reserve release, net of new provision in the amount of $1 million and $0.1 million, was included in mortgage banking revenue during the nine months ended September 30, 2014 and 2013, respectively.
The delinquencies as a percentage of loans serviced were as follows at the dates indicated:
|
| | | | |
| | September 30,
2014 | December 31,
2013 |
| 30 to 59 days past due | 0.21 | % | 0.30 | % |
| 60 to 89 days past due | 0.08 |
| 0.11 |
|
| Greater than 90 days past due | 0.67 |
| 0.72 |
|
| Total past due loans | 0.96 | % | 1.13 | % |
Investment Securities Portfolio
The fair value of our total investment securities portfolio was comprised of the following at the dates indicated:
|
| | | | | | | | | | | |
| | September 30, 2014 | | December 31, 2013 |
| (dollars in millions) | Fair
value | % of total
portfolio | | Fair
value | % of total
portfolio |
| Collateralized mortgage obligations | $ | 6,114 |
| 53.0 | % | | $ | 4,895 |
| 42.9 | % |
| Commercial mortgage-backed securities | 1,608 |
| 14.0 |
| | 1,831 |
| 16.1 |
|
| Collateralized loan obligations | 1,050 |
| 9.1 |
| | 1,431 |
| 12.5 |
|
| Corporate debt | 829 |
| 7.2 |
| | 872 |
| 7.6 |
|
| Asset-backed securities | 687 |
| 6.0 |
| | 905 |
| 7.9 |
|
| Other residential mortgage-backed securities | 481 |
| 4.2 |
| | 578 |
| 5.1 |
|
| States and political subdivisions | 489 |
| 4.2 |
| | 529 |
| 4.6 |
|
| U.S. government agencies and sponsored enterprises | 222 |
| 1.9 |
| | 317 |
| 2.8 |
|
| Other | 22 |
| 0.2 |
| | 33 |
| 0.3 |
|
| U.S. Treasury | 20 |
| 0.2 |
| | 20 |
| 0.2 |
|
| Total investment securities | $ | 11,521 |
| 100.0 | % | | $ | 11,411 |
| 100.0 | % |
Our holdings in residential mortgage-backed securities were 57% and 48% of our total investment securities portfolio at September 30, 2014 and December 31, 2013, respectively. At September 30, 2014, all of our residential mortgage-backed securities in our available for sale portfolio were issued by Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”), or Federal Home Loan Mortgage Corporation (“FHLMC”) and at December 31, 2013, 99% were issued by those GNMA, FNMA, or 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. At September 30, 2014 and December 31, 2013, 12% and 16%, respectively, of our investment securities were variable rate.
The net unamortized purchase premiums on our CMO portfolio amounted to $72 million, or 1.2% of the portfolio, at September 30, 2014 and $58 million, or 1.2% of the portfolio, at December 31, 2013. The net unamortized purchase premiums on our other residential mortgage-backed securities decreased to $10 million, or 2.1% of the portfolio, at September 30, 2014, from $13 million, or 2.3% of the portfolio, at December 31, 2013.
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. During the third quarter, certain portions of our CMO portfolio experienced higher than expected prepayments given increases in home sales and lower mortgage rates.
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 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 |
| September 30, 2014 | | | | | | | |
| Securities backed by U.S. Treasury and U.S. government sponsored enterprises: | | | | | | | |
| Collateralized mortgage obligations | $ | 4,491 |
| $ | 4,422 |
| $ | 4,422 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| Residential mortgage-backed securities | 2,155 |
| 2,173 |
| 2,173 |
| — |
| — |
| — |
| — |
|
| Debt securities | 238 |
| 243 |
| 232 |
| 11 |
| — |
| — |
| — |
|
| Total | 6,884 |
| 6,837 |
| 6,827 |
| 11 |
| — |
| — |
| — |
|
| Commercial mortgage-backed securities | 1,550 |
| 1,608 |
| 952 |
| 463 |
| 193 |
| — |
| — |
|
| Collateralized loan obligations | 1,026 |
| 1,050 |
| 713 |
| 307 |
| 30 |
| — |
| — |
|
| Asset-backed securities | 677 |
| 687 |
| 583 |
| 104 |
| — |
| — |
| — |
|
| Corporate debt | 824 |
| 829 |
| — |
| 103 |
| 194 |
| 530 |
| 1 |
|
| States and political subdivisions | 478 |
| 489 |
| 281 |
| 189 |
| 6 |
| — |
| 13 |
|
| Other | 22 |
| 22 |
| — |
| — |
| — |
| — |
| 22 |
|
| Total investment securities | $ | 11,461 |
| $ | 11,521 |
| $ | 9,356 |
| $ | 1,176 |
| $ | 424 |
| $ | 530 |
| $ | 36 |
|
| December 31, 2013 | | | | | | | |
| Securities backed by U.S. Treasury and U.S. government sponsored enterprises: | | | | | | | |
| Collateralized mortgage obligations | $ | 4,985 |
| $ | 4,882 |
| $ | 4,882 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| Residential mortgage-backed securities | 574 |
| 578 |
| 578 |
| — |
| — |
| — |
| — |
|
| Debt securities | 332 |
| 338 |
| 326 |
| 11 |
| — |
| — |
| — |
|
| Total | 5,891 |
| 5,798 |
| 5,786 |
| 11 |
| — |
| — |
| — |
|
| Commercial mortgage-backed securities | 1,759 |
| 1,831 |
| 1,027 |
| 549 |
| 255 |
| — |
| — |
|
| Collateralized loan obligations | 1,392 |
| 1,431 |
| 1,024 |
| 376 |
| 31 |
| — |
| — |
|
| Asset-backed securities | 896 |
| 905 |
| 689 |
| 216 |
| — |
| — |
| — |
|
| Corporate debt | 863 |
| 872 |
| — |
| 147 |
| 185 |
| 535 |
| 4 |
|
| States and political subdivisions | 516 |
| 529 |
| 303 |
| 202 |
| 16 |
| — |
| 9 |
|
| Other | 45 |
| 45 |
| 1 |
| 15 |
| 5 |
| — |
| 25 |
|
| Total investment securities | $ | 11,362 |
| $ | 11,411 |
| $ | 8,831 |
| $ | 1,515 |
| $ | 492 |
| $ | 535 |
| $ | 38 |
|
The weighted average credit rating of our portfolio was AA at September 30, 2014 and December 31, 2013.
Our Credit Portfolio Oversight Committee (the "Committee") meets monthly to analyze and monitor our 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, 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 CMBS portfolio had an amortized cost of $1.6 billion at September 30, 2014. The net unamortized premiums on our CMBS portfolio amounted to $40 million, or 2.6% of the portfolio at September 30, 2014 and $64 million, or 3.8% of the portfolio at December 31, 2013. Gross unrealized losses on our CMBS portfolio amounted to $0.5 million and $2 million at September 30, 2014 and December 31, 2013, respectively. Securities in our CMBS portfolio have significant credit enhancement that provides us protection from default, and 88% of this portfolio was rated A or higher at September 30, 2014. 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: |
| | | | | | | | | | | |
| | September 30, 2014 | | December 31, 2013 |
Credit enhancement(1) | Amortized cost | % of total CMBS portfolio | | Amortized cost | % of total CMBS portfolio |
| | (dollars in millions) |
| 30+% | $ | 1,146 |
| 74 | % | | $ | 1,299 |
| 74 | % |
| 25 - 30% | 236 |
| 15 |
| | 268 |
| 15 |
|
| 20 - 25% | 148 |
| 10 |
| | 177 |
| 10 |
|
| 18 - 20% | 21 |
| 1 |
| | 16 |
| 1 |
|
| Total | $ | 1,550 |
| 100 | % | | $ | 1,759 |
| 100 | % |
| |
(1) | Credit enhancement is calculated by dividing the remaining unpaid principal balance of bonds subordinated to the bonds we own plus any overcollateralization remaining in the securitization structure by the remaining unpaid principal balance of all bonds in the securitization structure. |
Our collateralized loan obligation ("CLO") portfolio had an amortized cost of $1.0 billion at September 30, 2014. Gross unrealized losses on our CLO portfolio amounted to $1 million and $2 million at September 30, 2014 and December 31, 2013, respectively. Our CLO portfolio is predominantly variable rate and returns an approximate 3.2% yield at a credit quality level we believe superior to middle market lending. The collateral underlying our CLOs consists of over 95% senior secured loans, and over 90% of the obligors are domiciled in the United States. Over 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, 97% of our CLO portfolio was rated A or higher at September 30, 2014 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):
|
| | | | | | | | | | | |
| | September 30, 2014 | | December 31, 2013 |
Credit Enhancement(1) | Amortized cost | % of total CLO portfolio | | Amortized cost | % of total CLO portfolio |
| | (dollars in millions) |
| 40+% | $ | 93 |
| 9 | % | | $ | 87 |
| 6 | % |
| 35 - 40% | 209 |
| 20 |
| | 221 |
| 16 |
|
| 30 - 35% | 93 |
| 9 |
| | 222 |
| 16 |
|
| 25 - 30% | 206 |
| 21 |
| | 346 |
| 25 |
|
| 20 - 25% | 167 |
| 16 |
| | 136 |
| 10 |
|
| 15 - 20% | 225 |
| 22 |
| | 341 |
| 24 |
|
| 10 - 15% | 32 |
| 3 |
| | 39 |
| 3 |
|
| 0 - 10% | — |
| — |
| | — |
| — |
|
| Total | $ | 1,026 |
| 100 | % | | $ | 1,392 |
| 100 | % |
| |
(1) | Credit enhancement is calculated by dividing the remaining unpaid principal balance of bonds subordinated to the bonds we own plus any overcollateralization remaining in the securitization structure by the remaining unpaid principal balance of all bonds in the securitization structure. |
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 actual investment, loan, and deposit balances; our available collateralized wholesale borrowings; our reputation; and our credit rating. A significant change in our financial performance, our ability to maintain our deposit levels, the amount of our available collateralized wholesale borrowings, or credit rating could reduce the availability, or increase the cost, of our funding sources.
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 is FHLB advances, of which we had $4.5 billion outstanding at September 30, 2014.
While core deposits and loan and investment securities repayments are principal sources of liquidity, funding diversification is another key element of liquidity management. We are rated by Moody’s, Standard and Poor’s (“S&P”), and Fitch Ratings (“Fitch”). Credit ratings relate to our ability to issue debt securities and the cost to borrow money, and should not be viewed as an indication of future stock performance or a recommendation to buy, sell, or hold securities. Among other factors, the credit ratings are based on financial strength, credit quality and concentrations in the loan portfolio, the level and volatility of earnings, capital adequacy, the quality of management, the liquidity of the balance sheet, the availability of a significant base of core deposits, and our ability to access a broad array of wholesale funding sources. Adverse changes in these factors could result in a negative change in credit ratings and impact not only the ability to raise funds in the capital markets but also the cost of these funds. Ratings are subject to revision or withdrawal at any time and each rating should be evaluated independently.
We have included credit rating information in the table below because significant changes in ratings classifications for debt we issue could result in increased liquidity risk for us. The following table presents our credit ratings by agency as of September 30, 2014:
|
| | | |
| | Moody's | S&P | Fitch |
| Senior unsecured | Ba1 | BBB | BBB- |
| Subordinated debt | Ba2 | BBB- | BB+ |
In March 2014, Moody's downgraded our long-term issuer rating and subsequent to our third quarter earnings release on October 24, 2014, both S&P and Fitch placed our long-term issuer rating on credit watch negative. We expect the outcome of the S&P and Fitch rating actions to be concluded in the fourth quarter of 2014. Since we do not have any plans to issue additional long-term debt currently, we do not expect the actions of the rating
agencies to have a material impact on our business. Our asset quality metrics remain stable and favorable relative to our peers and our Bank and subsidiaries remain well-capitalized under current regulatory guidelines.
We have a total collateralized wholesale borrowing capacity of approximately $9.5 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 $4.9 billion was available as of September 30, 2014, which includes $0.9 billion of availability at the Federal Reserve's discount window.
Uses of liquidity
The primary uses of our liquidity are to provide for repayments of deposits and borrowings, support our operating activities, and fund loans or obtain other assets.
In addition to cash flow from operations, deposits and borrowings, our funding is provided from the principal and interest payments that we receive from our loans and investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, our deposit balances and loan prepayments are greatly influenced by the level of interest rates, the economic environment and local competitive conditions.
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 $10.7 billion and $9.5 billion at September 30, 2014 and December 31, 2013, 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, our unused commercial lines of credit amounted to $3.6 billion and $3.4 billion at September 30, 2014 and December 31, 2013, respectively, and our unused home equity and other consumer lines of credit increased to $5.3 billion at September 30, 2014 from $4.9 billion at December 31, 2013. 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 $294 million and $297 million at September 30, 2014 and December 31, 2013, 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 were $159 million and $168 million at September 30, 2014 and December 31, 2013, 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 common and preferred 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 it holds at the Bank and interest-bearing demand accounts at correspondent banks, all of which totaled $382 million at September 30, 2014. As of September 30, 2014, the Company has in excess of eight quarters of cash liquidity to maintain the current dividends to common and preferred stockholders 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. In addition, Federal Reserve guidance sets forth the supervisory expectation that bank holding companies will inform and consult with Federal Reserve staff in advance of issuing a dividend that exceeds earnings for the quarter and should not pay dividends in a rolling four quarter period in an amount that exceeds net income for that period. 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.
While the size of the goodwill charge does not adversely impact our capital ratios, it does impact our regulatory dividend capacity formula. Simply stated, even though the non-cash goodwill charge does not impact cash flow for dividends, the size of the charge does require that we get regulatory approval from the OCC to make distributions from the Bank to the Company and obtain a no objection from the Federal Reserve to pay the Company dividend to our common and preferred stockholders in the future. We have received approval from the OCC and no objection from the Federal Reserve to pay dividends this quarter, which were declared on October 24, 2014.
Based on current estimates, we expect to need quarterly approval from the OCC until the first quarter of 2017 based on their calculation formula and to seek no objection from the Federal Reserve until the fourth quarter of 2015 based on their calculation formula. While we cannot be assured that the OCC will approve and the Federal Reserve will not object to our quarterly dividend requests going forward, based on conversations with the regulators and barring any unforeseen future developments that would materially impact our profitability, we believe that we can maintain our holding company common and preferred dividend payments at their current levels.
The Bank paid dividends of $80 million and $125 million to the Company during the nine months ended September 30, 2014 and 2013, respectively.
Deposits
The following table illustrates the composition of our deposits at the dates indicated: |
| | | | | | | | | | | | | | |
| | September 30, 2014 | | December 31, 2013 | Increase (decrease) |
| (dollars in millions) | Amount | Percent | | Amount | Percent |
| Core deposits: | | | | | | |
| Savings | $ | 3,459 |
| 12.5 | % | | $ | 3,667 |
| 13.8 | % | $ | (208 | ) |
| Interest-bearing checking | 5,055 |
| 18.3 |
| | 4,744 |
| 17.8 |
| 312 |
|
| Money market deposits | 9,894 |
| 35.7 |
| | 9,740 |
| 36.5 |
| 155 |
|
| Noninterest-bearing | 5,309 |
| 19.2 |
| | 4,866 |
| 18.2 |
| 443 |
|
| Total core deposits | 23,717 |
| 85.7 |
| | 23,016 |
| 86.3 |
| 701 |
|
| Certificates | 3,953 |
| 14.3 |
| | 3,649 |
| 13.7 |
| 304 |
|
| Total deposits | $ | 27,670 |
| 100.0 | % | | $ | 26,665 |
| 100.0 | % | $ | 1,005 |
|
The table below contains selected information on the composition of our deposits by geographic region at the dates indicated: |
| | | | | | | | | | | | | | | |
| (In millions) | New
York(1) | Western
Pennsylvania | Eastern
Pennsylvania | Connecticut
and Western
Massachusetts | Total deposits |
| September 30, 2014 | | | | | |
| Core deposits: | | | | | |
| Savings | $ | 2,211 |
| $ | 165 |
| $ | 219 |
| $ | 863 |
| $ | 3,459 |
|
| Interest-bearing checking | 3,068 |
| 655 |
| 712 |
| 622 |
| 5,055 |
|
| Money market deposits | 6,326 |
| 1,199 |
| 952 |
| 1,418 |
| 9,894 |
|
| Noninterest-bearing | 3,278 |
| 713 |
| 616 |
| 702 |
| 5,309 |
|
| Total core deposits | 14,882 |
| 2,732 |
| 2,499 |
| 3,605 |
| 23,717 |
|
| Certificates | 2,498 |
| 451 |
| 296 |
| 708 |
| 3,953 |
|
| Total deposits | $ | 17,380 |
| $ | 3,183 |
| $ | 2,795 |
| $ | 4,313 |
| $ | 27,670 |
|
| December 31, 2013 | | | | | |
| Core deposits: | | | | | |
| Savings | $ | 2,342 |
| $ | 162 |
| $ | 221 |
| $ | 942 |
| $ | 3,667 |
|
| Interest-bearing checking | 2,812 |
| 640 |
| 656 |
| 636 |
| 4,744 |
|
| Money market deposits | 6,283 |
| 1,151 |
| 927 |
| 1,378 |
| 9,740 |
|
| Noninterest-bearing | 2,949 |
| 704 |
| 562 |
| 651 |
| 4,866 |
|
| Total core deposits | 14,385 |
| 2,657 |
| 2,366 |
| 3,608 |
| 23,016 |
|
| Certificates | 2,036 |
| 481 |
| 353 |
| 779 |
| 3,649 |
|
| Total deposits | $ | 16,421 |
| $ | 3,138 |
| $ | 2,719 |
| $ | 4,387 |
| $ | 26,665 |
|
| |
(1) | Includes brokered money market deposits of $414 million and $336 million at September 30, 2014 and December 31, 2013, respectively, and brokered certificates of deposit of $1.2 billion and $739 million at September 30, 2014 and December 31, 2013, respectively. |
Our total deposits increased $1.0 billion, or 5% annualized, from December 31, 2013 to $27.7 billion at September 30, 2014. Our strategic focus remains on efforts to grow our customer base, re-position our account mix and introduce new products and services that further enhance our value proposition to customers. Recent investments in mobile banking and remote deposit capture have further enhanced customers’ ability to transact in the delivery channel of their choice while at the same time lowering our cost to acquire and serve such customers. Current and anticipated investments as part of our Strategic Investment Plan in new digital features and functionalities such as online account opening will further enhance customers’ ability to do business with us across all delivery channels.
Transactional deposits, which include interest-bearing and noninterest bearing checking balances, increased $754 million, or 10% annualized, from December 31, 2013. Transaction deposits currently represent 37% of our deposit base, up from 36% a year ago. Interest-bearing checking and money market balances increased from December 31, 2013 and June 30, 2014 driven by promotional campaigns and resulting strength in checking account sales, particularly in our New York markets. Noninterest-bearing checking balances increased $443 million from December 31, 2013, driven by increased commercial deposit generation.
As of September 30, 2014, brokered certificates of deposit increased $498 million to $1.2 billion from December 31, 2013 and $510 million from September 30, 2013 as we increased the use of them as a funding source. The terms on these brokered certificates of deposit are between six months and 18 months with interest rates ranging between 0.35% and 0.60%.
The average cost of interest-bearing deposits for the three months ended September 30, 2014 of 0.24% was unchanged from the three months ended June 30, 2014 and increased one basis point from the quarter ended September 30, 2013.
Loan Maturity and Repricing Schedule
The following table sets forth certain information at September 30, 2014 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. At September 30, 2014 and December 31, 2013, 49.5% and 47.1%, respectively, of loans were variable rate and expected to reprice within a year unencumbered by floors. 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 | $ | 4,683 |
| $ | 2,006 |
| $ | 157 |
| $ | 6,846 |
|
| Construction | 1,146 |
| 7 |
| 15 |
| 1,168 |
|
| Business | 4,649 |
| 980 |
| 208 |
| 5,836 |
|
| Total commercial | 10,478 |
| 2,992 |
| 379 |
| 13,850 |
|
| Consumer: | | | | |
| Residential real estate | 970 |
| 1,531 |
| 860 |
| 3,361 |
|
| Home equity | 2,335 |
| 399 |
| 152 |
| 2,887 |
|
| Indirect auto | 757 |
| 1,290 |
| 27 |
| 2,074 |
|
| Credit cards | 313 |
| — |
| — |
| 313 |
|
| Other consumer | 165 |
| 83 |
| 38 |
| 286 |
|
| Total consumer | 4,540 |
| 3,302 |
| 1,078 |
| 8,920 |
|
| Total loans and leases | $ | 15,018 |
| $ | 6,295 |
| $ | 1,457 |
| $ | 22,770 |
|
For the loans reported in the preceding table, the following sets forth at September 30, 2014, the dollar amount of all of our fixed-rate and adjustable-rate loans due after September 30, 2015:
|
| | | | | | | | | |
| (in millions) | Fixed | Adjustable | Total |
| Commercial: | | | |
| Real estate | $ | 848 |
| $ | 1,315 |
| $ | 2,163 |
|
| Construction | 22 |
| — |
| 22 |
|
| Business | 1,090 |
| 97 |
| 1,187 |
|
| Total commercial | 1,960 |
| 1,412 |
| 3,372 |
|
| Consumer: | | | |
| Residential real estate | 1,365 |
| 1,027 |
| 2,391 |
|
| Home equity | 551 |
| — |
| 551 |
|
| Indirect auto | 1,317 |
| — |
| 1,317 |
|
| Other consumer | 120 |
| 1 |
| 121 |
|
| Total consumer | 3,352 |
| 1,028 |
| 4,380 |
|
| Total loans and leases | $ | 5,312 |
| $ | 2,440 |
| $ | 7,752 |
|
The following table sets forth at September 30, 2014, the dollar amount of all of our fixed-rate loans due after September 30, 2015 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 | $ | 620 |
| $ | 209 |
| $ | 141 |
| $ | 545 |
| $ | 27 |
| $ | 1,542 |
|
| 2 to 3 years | 478 |
| 179 |
| 110 |
| 396 |
| 23 |
| 1,185 |
|
| 3 to 5 years | 550 |
| 276 |
| 148 |
| 349 |
| 31 |
| 1,353 |
|
| Total 1 to 5 years | 1,647 |
| 663 |
| 399 |
| 1,290 |
| 81 |
| 4,080 |
|
| 5 to 10 years | 277 |
| 389 |
| 133 |
| 27 |
| 24 |
| 848 |
|
| More than 10 years | 37 |
| 313 |
| 19 |
| — |
| 15 |
| 383 |
|
| Total | $ | 1,960 |
| $ | 1,365 |
| $ | 551 |
| $ | 1,317 |
| $ | 120 |
| $ | 5,312 |
|
The following table sets forth at September 30, 2014, the dollar amount of all of our adjustable-rate loans due after September 30, 2015 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 | $ | 461 |
| $ | 378 |
| $ | 1 |
| $ | 840 |
|
| 2 to 3 years | 370 |
| 239 |
| — |
| 610 |
|
| 3 to 5 years | 515 |
| 250 |
| — |
| 765 |
|
| Total 1 to 5 years | 1,346 |
| 867 |
| 1 |
| 2,214 |
|
| 5 to 10 years | 66 |
| 157 |
| — |
| 223 |
|
| More than 10 years | — |
| 2 |
| — |
| 2 |
|
| Total | $ | 1,412 |
| $ | 1,027 |
| $ | 1 |
| $ | 2,440 |
|
Our primary investing activities are the origination of loans, the purchase of investment securities, and the acquisition of banking and financial services companies.
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.
The primary tool we use to assess our exposure to interest rate risk is a quantitative modeling technique that simulates the effects of variations in interest rates on net interest income. These monthly simulations 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) employing interest rate swaps; (ii) 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; (iii) selling the majority of 30 year fixed-rate, conforming residential mortgage loans into the secondary market without recourse; (iv) investing in securities with predictable cash flows; (v) growing core deposits; and (vi) utilizing wholesale borrowings to support cash flow needs and help match asset repricing.
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 prudently manage the bank’s exposure to changes in the interest rate environment and resultant impacts on earnings and capital.
Net Interest Income Sensitivity
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. These estimates require us to make certain assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain 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) |
| | | September 30, 2014 | | December 31, 2013 |
Changes in interest rates(1) | Net interest income | % change | | Net interest income | % change |
| | | (dollars in millions) |
| + 200 basis points (gradual) | $ | 48 |
| 4.5 | % | | $ | 45 |
| 4.2 | % |
| + 100 basis points (gradual) | 25 |
| 2.3 |
| | 22 |
| 2.0 |
|
| - 50 basis points (gradual) | (14 | ) | (1.3 | ) | | (6 | ) | (0.6 | ) |
| |
(1) | Our ERMC 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 9% at September 30, 2014. |
A key assumption in assessing interest rate risk exposure is the degree of price reactivity of non-maturity deposits to changes in short-term interest rates. Our deposit price reactivity assumptions are derived from our historical data and have been adjusted for expected customer and competitor behaviors which differ from those observed in the historical data set. Overall deposit price reactivity includes a faster reactivity assumption than historical models and therefore lowers net interest income. Our deposit price reactivity assumptions differ by product and customer type. For example, money market demand deposits have exhibited faster repricing sensitivity to short-term rate changes than other products, such as regular savings accounts. Also considered are industry tendencies such as repricing lags, and the link between assumed price reactivity and customer retention. A more rapid increase in rates or a higher correlation between market rate changes and deposit pricing changes than what we have modeled would increase deposit price sensitivity, and thus, lower net interest income in rising rate environments.
Economic Value of Equity (EVE) Sensitivity
In addition to the Net Interest Income Sensitivity approach, our interest rate risk position is also evaluated using an Economic Value of Equity ("EVE") approach. The assessment of both short-term earnings (Net Interest Income Sensitivity) and long-term valuation (EVE) approaches provides a more comprehensive analysis of interest rate risk exposure than Net Interest Income Sensitivity alone.
The EVE calculation represents a hypothetical valuation of equity, and is defined as the present value of projected asset cash flows less the present value of projected liability cash flows plus the current market value of any off balance sheet positions. EVE values only the current balance sheet positions and therefore does not incorporate the growth assumptions inherent in the Net Interest Income Sensitivity approach. All positions are evaluated in a current rate and parallel shock scenarios, which range from (100) bps to +300 bps.
The key indicator of interest rate risk is the EVE profile, which measures the percentage change in the hypothetical equity value versus the base rate scenario. The profile reflects the duration gap between assets, liabilities and off balance sheet positions. The impacts of embedded options are incorporated, including applicable caps / floors, behavioral assumptions on mortgage positions and reactivity assumptions on deposits. Governance limits define the tolerable degree of duration mismatch in rising rate environments.
| |
| • | A negative EVE percentage in a rising rate scenario indicates that asset duration exceeds liability duration. Future liability repricing and refunding may have a detrimental impact on net interest income. |
| |
| • | A positive EVE percentage in a rising rate scenario indicates that liability duration exceeds asset duration. Future asset repricing and reinvestment may have a beneficial impact on net interest income. |
| |
| • | The converse of the above would apply to falling rate environments. |
The following table shows our EVE sensitivity profile the dates indicated:
|
| | | | |
| | Change in EVE |
| | Calculated increase (decrease) |
| Changes in interest rates | September 30, 2014 | December 31, 2013 |
| - 100 basis points | (0.8 | )% | 2.4 | % |
| + 100 basis points | (3.4 | ) | (4.8 | ) |
+ 200 basis points (1) | (8.8 | ) | (11.0 | ) |
+ 300 basis points (2) | (14.7 | ) | (17.5 | ) |
| |
(1) | Our ERMC has established a policy limiting the adverse change to -20% under this scenario. |
| |
(2) | Our ERMC has established a policy limiting the adverse change to -30% under this scenario. |
Our EVE measures became slightly less liability sensitive during 2014 as a result of the combination of growth in variable rate commercial loans and longer duration funding in the form of brokered certificates of deposits and borrowings as compared to December 31, 2013.
The EVE profile is useful as an indicator of longer term interest rate risk exposure. However, the measure is subject to limitations, as it does not factor in variables such as balance sheet growth, changes in balance sheet composition, adjustments to pricing spreads or strategic responses to changing interest rate environments. Also, the shocked rates represent stress scenarios, generating exposures which may overstate actual experience. Actual rate changes would be expected to be more gradual, with changes in yield curve relationships, and would thereby produce lesser impacts to future net interest income.
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. Operational losses may result from internal fraud; external fraud; employment practices and workplace safety; clients, products, and business practices; damage to physical assets; business disruption and systems failures; and execution, delivery, and process management. These events may include, but are not limited to, third party attempts to disrupt or penetrate our critical systems (for example, 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 ERM framework and internal control processes. Within this framework, our business lines have direct and primary responsibility and accountability for accessing, identifying, controlling, and monitoring operational risks embedded in their business activities. Risk assessment and the regular monitoring of significant operating risks is performed by business units with oversight from Risk Management. Risk Management provides oversight and establishes internal policies and reviews procedures to assist business unit’s assessment, monitoring and mitigation of operational risks. 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 to the operational risk management process. The most significant operational risks we face are reported and reviewed by the ERMC and the Board Risk Committee. In addition, Risk Management is responsible for establishing compliance and operational risk program standards and policies, and works with the business unit to perform risk assessments on the business lines' controls to ensure adherence to laws and regulations.
The ERMC provides oversight of the Operational Risk Committee, our risk management functions and reviews our system of internal controls. ERMC reports to the Risk Committee of our Board of Directors on its activities.
Capital
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.
As of September 30, 2014, 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.).
The noncash $1.1 billion goodwill impairment charge did not adversely affect our capital ratios. Our Tier 1 risk-based capital ratio on a consolidated basis was 9.80% and 9.57% at September 30, 2014 and June 30, 2014, respectively. Our Tier 1 common capital ratio was 8.17% and 7.92% at September 30, 2014 and June 30, 2014, respectively. This 25 basis points increase reflected normal operating earnings, the impact of deferred taxes on the goodwill impairment charge, the impact of the $45 million reserve towards our estimated exposure from remediation related to a self-identified process issue that affects certain customer deposit accounts, and normal balance sheet growth. Even though the goodwill charge does not impact cash flow for dividends, we are required to obtain regulatory approval from the OCC to make distributions from the Bank to the Company and consult with the Federal Reserve before paying the Company dividend to our common and preferred stockholders. We have received approval from the OCC and the Federal Reserve did not object to or express concerns regarding our third quarter dividends, which were declared on October 24, 2014. Based on current estimates, we expect to seek
approval from the OCC to pay quarterly dividends until the first quarter of 2017 and consult with the Federal Reserve regarding quarterly dividend payments until the fourth quarter of 2015 based on their calculation formula.
While we cannot be assured that the OCC will approve and the Fed will not object to our quarterly dividend requests going forward, based on conversations with the regulators and barring any unforeseen future developments that would materially impact our profitability, we believe that we can maintain our holding company common and preferred dividend payments at their current levels.
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, and becomes effective for us in January 2015, we have analyzed the impact of the finalized requirements. Based on our preliminary interpretation of the rules and our planned reduction of asset-backed securities and collateralized loan obligations that will be subject to significant risk weighting increases under Basel III, we estimated that our reported Tier 1 common ratio, on a fully phased in basis, would be five to ten basis points lower than our current level 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.
During the first nine months of 2014, our stockholders’ equity decreased $904 million driven primarily by our net loss of $790 million, $85 million, or $0.24 per share, in common stock dividends, and $23 million in preferred stock dividends.
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 the OCC, respectively. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Such quantitative measures are also subject to qualitative judgment of the regulators regarding components, risk weightings, and other factors.
The capital amounts, ratios, and requirements for First Niagara Financial Group, Inc. and First Niagara Bank, N.A. are as follows at the dates indicated:
|
| | | | | | | | | | | |
| | Actual | | Minimum amount to be |
| (dollars in millions) | Amount | Ratio | | well-capitalized |
| First Niagara Financial Group, Inc.: | | | | | |
| September 30, 2014: | | | | | |
| Leverage ratio | $ | 2,716 |
| 7.32 | % | | $ | 1,855 |
| 5.00 | % |
| Tier 1 risk-based capital | 2,716 |
| 9.80 |
| | 1,663 |
| 6.00 |
|
| Total risk-based capital | 3,261 |
| 11.76 |
| | 2,773 |
| 10.00 |
|
| Tier 1 common capital | 2,265 |
| 8.17 |
| | N/A |
| N/A |
|
| June 30, 2014: | | | | | |
| Leverage ratio | $ | 2,614 |
| 7.33 | % | | 1,783 |
| 5.00 | % |
| Tier 1 risk-based capital | 2,614 |
| 9.57 |
| | 1,639 |
| 6.00 |
|
| Total risk-based capital | 3,150 |
| 11.53 |
| | 2,732 |
| 10.00 |
|
| Tier 1 common capital | 2,162 |
| 7.92 |
| | N/A |
| N/A |
|
| First Niagara Bank, N.A.: | | | | | |
| September 30, 2014: | | | | | |
| Leverage ratio | $ | 2,877 |
| 7.76 | % | | $ | 1,854 |
| 5.00 | % |
| Tier 1 risk-based capital | 2,877 |
| 10.39 |
| | 1,661 |
| 6.00 |
|
| Total risk-based capital | 3,123 |
| 11.28 |
| | 2,769 |
| 10.00 |
|
| June 30, 2014: | | | | | |
| Leverage ratio | $ | 2,776 |
| 7.79 | % | | $ | 1,782 |
| 5.00 | % |
| Tier 1 risk-based capital | 2,776 |
| 10.18 |
| | 1,636 |
| 6.00 |
|
| Total risk-based capital | 3,013 |
| 11.05 |
| | 2,727 |
| 10.00 |
|
Impact of New Accounting Standards
In January 2014, the FASB issued guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The low-income housing tax credit program is designed to encourage private capital investment in the construction and rehabilitation of low-income housing. The guidance becomes effective for us on January 1, 2015 with early adoption permitted. We have not early adopted this guidance and we do not expect this to have a significant impact on our financial statements.
In January 2014, the FASB issued guidance on when a creditor should reclassify a collateralized mortgage loan such that the loan should be derecognized and the collateral asset recognized. The objective of the guidance is to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The guidance becomes effective for us on January 1, 2015 with early adoption permitted. We have not early adopted this guidance and we do not expect this to have a significant impact on our financial statements.
In April 2014, the FASB issued guidance that will change the requirements for reporting discontinued operations. The new guidance will require that a disposal of an entity or a group of components of an entity be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The guidance becomes effective for us on January 1, 2015 with early adoption permitted.
In May 2014, the FASB issued guidance that improves the revenue recognition requirements for contracts with customers. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. The guidance becomes effective for us on January 1, 2017, and we are currently evaluating the impact on our financial statements.
In June 2014, the FASB issued guidance that clarifies the accounting for share-based payments granted to employees in which the terms of the award provide that a performance target, that affects vesting, could be achieved after the requisite service period. The amendments require that those performance targets should be treated as performance conditions. The guidance becomes effective on January 1, 2016, with early adoption permitted, and we are currently evaluating the impact on our financial statements.
In August 2014, the FASB issued guidance that requires a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal plus interest) expected to be recovered from the guarantor. The guidance becomes effective for us on January 1, 2015, and we do not expect this to have a significant impact on our financial statements.
In August 2014, the FASB issued guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted, and we do not expect this to have a significant impact on our financial statements.
Pending FASB Rule Proposals
The FASB currently has two projects underway that could have a meaningful impact on bank financial statements and capital levels. The first project, which addresses the amount and timing of loss recognition for loans and investment securities, would generally result in an increase in overall allowance levels and lower capital levels. This project has been exposed for public comment three times since 2010. The most recent exposure draft did not contain an effective date, and the FASB has not indicated when they expect to issue a final standard or the final effective date.
The second project relates to leases and requires an operating lease to be recognized on the balance sheet as a "right to use" asset and as a corresponding liability representing the obligation to pay rent. This project would result in an increase to assets and liabilities recognized and therefore increase risk-weighted assets for regulatory capital purposes. This project has been exposed for public comment twice since 2010. The most recent exposure draft did not contain an effective date, and the FASB has not indicated when they expect to issue a final standard or the final effective date.
We are evaluating the projects as proposed and the possible range of impacts and will determine any impact of these projects to capital or future earnings once the final rules are issued.
|
| |
| ITEM 1. | Financial Statements |
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Condition (unaudited)
(in millions, except share and per share amounts)
|
| | | | | | |
| | September 30,
2014 | December 31,
2013 |
| ASSETS |
| Cash and cash equivalents | $ | 451 |
| $ | 463 |
|
| Investment securities: | | |
| Available for sale, at fair value (amortized cost of $6,109 and $7,319 in 2014 and 2013; includes pledged securities that can be sold or repledged of $60 and $303 in 2014 and 2013) | 6,198 |
| 7,423 |
|
| Held to maturity, at amortized cost (fair value of $5,323 and $3,988 in 2014 and 2013; includes pledged securities that can be sold or repledged of $254 and $388 in 2014 and 2013) | 5,352 |
| 4,042 |
|
| Federal Home Loan Bank and Federal Reserve Bank common stock, at amortized cost | 390 |
| 469 |
|
| Loans held for sale | 31 |
| 50 |
|
| Loans and leases (net of allowance for loan losses of $231 and $209 in 2014 and 2013) | 22,538 |
| 21,230 |
|
| Bank owned life insurance | 423 |
| 415 |
|
| Premises and equipment, net | 399 |
| 418 |
|
| Goodwill | 1,350 |
| 2,449 |
|
| Core deposit and other intangibles, net | 74 |
| 94 |
|
| Other assets | 759 |
| 574 |
|
| Total assets | $ | 37,966 |
| $ | 37,628 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
| Liabilities: | | |
| Deposits | $ | 27,670 |
| $ | 26,665 |
|
| Short-term borrowings | 4,929 |
| 4,822 |
|
| Long-term borrowings | 734 |
| 734 |
|
| Other | 544 |
| 414 |
|
| Total liabilities | 33,876 |
| 32,635 |
|
| 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 2014 and 2013 | 338 |
| 338 |
|
| Common stock, $0.01 par value, 500,000,000 shares authorized; 366,002,045 shares issued in 2014 and 2013 | 4 |
| 4 |
|
| Additional paid-in capital | 4,229 |
| 4,235 |
|
| (Accumulated deficit) retained earnings | (369 | ) | 536 |
|
| Accumulated other comprehensive income | 48 |
| 62 |
|
| Common stock held by employee stock ownership plan, 1,867,918 and 2,001,373 shares in 2014 and 2013 | (16 | ) | (17 | ) |
| Treasury stock, at cost, 10,579,100 and 12,060,739 shares in 2014 and 2013 | (144 | ) | (165 | ) |
| Total stockholders’ equity | 4,090 |
| 4,993 |
|
| Total liabilities and stockholders’ equity | $ | 37,966 |
| $ | 37,628 |
|
See accompanying notes to consolidated financial statements.
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (unaudited)
(in millions, except per share amounts)
|
| | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2014 | 2013 | | 2014 | 2013 |
| Interest income: | | | | | |
| Loans and leases | $ | 212 |
| $ | 215 |
| | $ | 632 |
| $ | 631 |
|
| Investment securities and other | 92 |
| 92 |
| | 274 |
| 269 |
|
| Total interest income | 304 |
| 307 |
| | 906 |
| 900 |
|
| Interest expense: | | | | | |
| Deposits | 14 |
| 13 |
| | 39 |
| 40 |
|
| Borrowings | 17 |
| 16 |
| | 51 |
| 47 |
|
| Total interest expense | 31 |
| 29 |
| | 90 |
| 87 |
|
| Net interest income | 273 |
| 278 |
| | 816 |
| 813 |
|
| Provision for credit losses | 21 |
| 28 |
| | 69 |
| 73 |
|
| Net interest income after provision for credit losses | 252 |
| 250 |
| | 747 |
| 740 |
|
| Noninterest income: | | | | | |
| Deposit service charges | 20 |
| 27 |
| | 67 |
| 78 |
|
| Insurance commissions | 18 |
| 18 |
| | 51 |
| 52 |
|
| Merchant and card fees | 13 |
| 12 |
| | 37 |
| 36 |
|
| Wealth management services | 15 |
| 15 |
| | 47 |
| 43 |
|
| Mortgage banking | 4 |
| 2 |
| | 13 |
| 16 |
|
| Capital markets income | 4 |
| 5 |
| | 10 |
| 16 |
|
| Lending and leasing | 4 |
| 5 |
| | 13 |
| 13 |
|
| Bank owned life insurance | 3 |
| 4 |
| | 12 |
| 11 |
|
| Other income | (7 | ) | 3 |
| | (18 | ) | 11 |
|
| Total noninterest income | 75 |
| 91 |
| | 233 |
| 276 |
|
| Noninterest expense: | | | | | |
| Salaries and employee benefits | 116 |
| 115 |
| | 352 |
| 347 |
|
| Occupancy and equipment | 27 |
| 27 |
| | 84 |
| 83 |
|
| Technology and communications | 31 |
| 29 |
| | 93 |
| 86 |
|
| Marketing and advertising | 8 |
| 6 |
| | 24 |
| 16 |
|
| Professional services | 14 |
| 10 |
| | 39 |
| 29 |
|
| Amortization of intangibles | 7 |
| 8 |
| | 21 |
| 33 |
|
| Federal deposit insurance premiums | 10 |
| 9 |
| | 28 |
| 28 |
|
| Restructuring charges | 2 |
| — |
| | 13 |
| — |
|
| Goodwill impairment | 1,100 |
| — |
| | 1,100 |
| — |
|
| Deposit account remediation | 45 |
| — |
| | 45 |
| — |
|
| Other expense | 36 |
| 28 |
| | 92 |
| 83 |
|
| Total noninterest expense | 1,397 |
| 231 |
| | 1,890 |
| 704 |
|
| (Loss) income before income taxes | (1,069 | ) | 110 |
| | (910 | ) | 312 |
|
| Income tax (benefit) | (146 | ) | 31 |
| | (120 | ) | 95 |
|
| Net (loss) income | (923 | ) | 79 |
| | (790 | ) | 218 |
|
| Preferred stock dividend | 8 |
| 8 |
| | 23 |
| 23 |
|
| Net (loss) income available to common stockholders | $ | (931 | ) | $ | 72 |
| | $ | (813 | ) | $ | 195 |
|
| (Loss) earnings per share: | | | | | |
| Basic | $ | (2.66 | ) | $ | 0.20 |
| | $ | (2.32 | ) | $ | 0.55 |
|
| Diluted | $ | (2.66 | ) | $ | 0.20 |
| | $ | (2.32 | ) | $ | 0.55 |
|
| Weighted average common shares outstanding: | | | | | |
| Basic | 350 |
| 350 |
| | 350 |
| 349 |
|
| Diluted | 350 |
| 351 |
| | 350 |
| 350 |
|
| Dividends per common share | $ | 0.08 |
| $ | 0.08 |
| | $ | 0.24 |
| $ | 0.24 |
|
See accompanying notes to financial statements.
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive (Loss) Income (unaudited)
(in millions)
|
| | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2014 | 2013 | | 2014 | 2013 |
| Net (loss) income | $ | (923 | ) | $ | 79 |
| | $ | (790 | ) | $ | 218 |
|
| Other comprehensive (loss) income, net of income taxes: | | | | | |
| Securities available for sale: | | | | | |
| Net unrealized losses arising during the year | (31 | ) | (7 | ) | | (9 | ) | (96 | ) |
| Reclassification adjustment for net unrealized holding gains on securities transferred between available for sale and held to maturity during the year | — |
| — |
| | — |
| (34 | ) |
| Net unrealized losses on securities available for sale | (31 | ) | (7 | ) | | (9 | ) | (130 | ) |
| Net unrealized holding gains on securities transferred between available for sale and held to maturity: | | | | | |
| Net unrealized holding gains on securities transferred during the year | — |
| — |
| | — |
| 34 |
|
| Less: amortization of net unrealized holding gains to income during the year | (2 | ) | (4 | ) | | (6 | ) | (10 | ) |
| Net unrealized holding (losses) gains on securities transferred during the year | (2 | ) | (4 | ) | | (6 | ) | 24 |
|
| Net unrealized gains on interest rate swaps designated as cash flow hedges arising during the year | — |
| — |
| | — |
| 1 |
|
| Amortization of net loss related to pension and post-retirement plans | — |
| — |
| | 1 |
| — |
|
| Total other comprehensive loss | (33 | ) | (11 | ) | | (14 | ) | (105 | ) |
| Total comprehensive (loss) income | $ | (956 | ) | $ | 68 |
| | $ | (804 | ) | $ | 112 |
|
See accompanying notes to consolidated financial statements.
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
(in millions, except share and per share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred
stock | Common
stock | Additional
paid-in
capital | Retained earnings (accumulated deficit) | Accumulated
other
comprehensive
income | Common
stock
held by
ESOP | Treasury
stock | Total |
| Balances at January 1, 2014 | $ | 338 |
| $ | 4 |
| $ | 4,235 |
| $ | 536 |
| $ | 62 |
| $ | (17 | ) | $ | (165 | ) | $ | 4,993 |
|
| Net loss | — |
| — |
| — |
| (790 | ) | — |
| — |
| — |
| (790 | ) |
| Total other comprehensive loss, net | — |
| — |
| — |
| — |
| (14 | ) | — |
| — |
| (14 | ) |
| ESOP shares committed to be released (133,455 shares) | — |
| — |
| — |
| — |
| — |
| 1 |
| — |
| 1 |
|
| Stock-based compensation activity (1,481,639 shares) | — |
| — |
| (6 | ) | (8 | ) | — |
| — |
| 21 |
| 7 |
|
| Preferred stock dividends | — |
| — |
| — |
| (23 | ) | — |
| — |
| — |
| (23 | ) |
| Common stock dividends of $0.24 per share | — |
| — |
| — |
| (85 | ) | — |
| — |
| — |
| (85 | ) |
| Balances at September 30, 2014 | $ | 338 |
| $ | 4 |
| $ | 4,229 |
| $ | (369 | ) | $ | 48 |
| $ | (16 | ) | $ | (144 | ) | $ | 4,090 |
|
| Balances at January 1, 2013 | $ | 338 |
| $ | 4 |
| $ | 4,231 |
| $ | 399 |
| $ | 157 |
| $ | (18 | ) | $ | (184 | ) | $ | 4,927 |
|
| Net Income | — |
| — |
| — |
| 218 |
| — |
| — |
| — |
| 218 |
|
| Total other comprehensive loss, net | — |
| — |
| — |
| — |
| (105 | ) | — |
| — |
| (105 | ) |
| ESOP shares committed to be released (133,455 shares) | — |
| — |
| — |
| — |
| — |
| 1 |
| — |
| 1 |
|
| Stock-based compensation activity (1,352,295 shares) | — |
| — |
| 1 |
| (15 | ) | — |
| — |
| 19 |
| 5 |
|
| Preferred stock dividends | — |
| — |
| — |
| (23 | ) | — |
| — |
| — |
| (23 | ) |
| Common stock dividends of $0.24 per share | — |
| — |
| — |
| (84 | ) | — |
| — |
| — |
| (84 | ) |
| Balances at September 30, 2013 | $ | 338 |
| $ | 4 |
| $ | 4,232 |
| $ | 494 |
| $ | 52 |
| $ | (17 | ) | $ | (165 | ) | $ | 4,938 |
|
See accompanying notes to consolidated financial statements.
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
(in millions) |
| | | | | | |
| | Nine months ended September 30, |
| | 2014 | 2013 |
| Cash flows from operating activities: | | |
| Net (loss) income | $ | (790 | ) | $ | 218 |
|
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | |
| Goodwill impairment | 1,100 |
| — |
|
| Amortization of fees and discounts, net | 34 |
| 41 |
|
| Provision for credit losses | 69 |
| 73 |
|
| Depreciation of premises and equipment | 43 |
| 40 |
|
| Amortization of intangibles | 21 |
| 33 |
|
| Origination of loans held for sale | (468 | ) | (1,113 | ) |
| Proceeds from sales of loans held for sale | 493 |
| 1,200 |
|
| ESOP and stock based-compensation expense | 10 |
| 8 |
|
| Deferred income tax benefit | (156 | ) | (3 | ) |
| Other, net | 103 |
| 104 |
|
| Net cash provided by operating activities | 458 |
| 600 |
|
| Cash flows from investing activities: | | |
| Proceeds from sales of securities available for sale | 165 |
| 478 |
|
| Proceeds from maturities of securities available for sale | 326 |
| 147 |
|
| Principal payments received on securities available for sale | 789 |
| 1,006 |
|
| Purchases of securities available for sale | (77 | ) | (1,461 | ) |
| Principal payments received on securities held to maturity | 552 |
| 697 |
|
| Purchases of securities held to maturity | (1,878 | ) | (225 | ) |
| Proceeds from maturities of securities held to maturity | 5 |
| — |
|
| Proceeds from sales of (payments for purchases of) Federal Home Loan Bank and Federal Reserve Bank common stock | 79 |
| (17 | ) |
| Net increase in loans and leases | (1,344 | ) | (1,403 | ) |
| Purchases of premises and equipment | (32 | ) | (51 | ) |
| Other, net | (59 | ) | (19 | ) |
| Net cash used in investing activities | (1,474 | ) | (849 | ) |
| Cash flows from financing activities: | | |
| Net increase (decrease) in deposits | 1,007 |
| (701 | ) |
| Proceeds from short-term borrowings, net | 107 |
| 1,186 |
|
| Repayments of long-term borrowings | (1 | ) | (1 | ) |
| Dividends paid on noncumulative preferred stock | (23 | ) | (23 | ) |
| Dividends paid on common stock | (85 | ) | (84 | ) |
| Other, net | — |
| (1 | ) |
| Net cash provided by financing activities | 1,005 |
| 376 |
|
| Net (decrease) increase in cash and cash equivalents | (12 | ) | 127 |
|
| Cash and cash equivalents at beginning of period | 463 |
| 431 |
|
| Cash and cash equivalents at end of period | $ | 451 |
| $ | 558 |
|
| Supplemental disclosures | | |
| Cash paid during the period for: | | |
| Income taxes | $ | 36 |
| $ | 25 |
|
| Interest expense | 90 |
| 92 |
|
| Other noncash activity: | | |
| Securities available for sale purchased not settled | 9 |
| 35 |
|
| Securities held to maturity purchased not settled | 1 |
| 16 |
|
| Securities transferred from available for sale to held to maturity (at fair value) | — |
| 3,001 |
|
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements (unaudited)
(in millions, 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 2013 Annual Report on Form 10-K. Results for the nine months ended September 30, 2014 do not necessarily reflect the results that may be expected for the year ending December 31, 2014. 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. 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 |
| September 30, 2014 | cost | gains | losses | value |
| Investment securities available for sale: | | | | |
| Debt securities: | | | | |
| States and political subdivisions | $ | 478 |
| $ | 11 |
| $ | — |
| $ | 489 |
|
| U.S. Treasury | 20 |
| — |
| — |
| 20 |
|
| U.S. government sponsored enterprises | 151 |
| 5 |
| — |
| 155 |
|
| Corporate | 824 |
| 15 |
| (10 | ) | 829 |
|
| Total debt securities | 1,473 |
| 31 |
| (10 | ) | 1,493 |
|
| Mortgage-backed securities: | | | | |
| Residential mortgage-backed securities: | | | | |
| Government National Mortgage Association | 36 |
| 1 |
| (1 | ) | 36 |
|
| Federal National Mortgage Association | 107 |
| 5 |
| — |
| 112 |
|
| Federal Home Loan Mortgage Corporation | 123 |
| 5 |
| — |
| 128 |
|
| Collateralized mortgage obligations: | | | | |
| Federal National Mortgage Association | 729 |
| 1 |
| (23 | ) | 707 |
|
| Federal Home Loan Mortgage Corporation | 367 |
| — |
| (11 | ) | 356 |
|
| Total collateralized mortgage obligations | 1,096 |
| 1 |
| (34 | ) | 1,062 |
|
| Total residential mortgage-backed securities | 1,362 |
| 12 |
| (35 | ) | 1,338 |
|
| Commercial mortgage-backed securities, non-agency issued | 1,550 |
| 58 |
| — |
| 1,608 |
|
| Total mortgage-backed securities | 2,912 |
| 70 |
| (36 | ) | 2,946 |
|
| Collateralized loan obligations, non-agency issued | 1,026 |
| 25 |
| (1 | ) | 1,050 |
|
| Asset-backed securities collateralized by: | | | | |
| Student loans | 258 |
| 8 |
| — |
| 265 |
|
| Credit cards | 62 |
| — |
| — |
| 62 |
|
| Auto loans | 229 |
| 2 |
| — |
| 231 |
|
| Other | 128 |
| 1 |
| (1 | ) | 128 |
|
| Total asset-backed securities | 677 |
| 11 |
| (1 | ) | 687 |
|
| Other | 22 |
| — |
| — |
| 22 |
|
| Total securities available for sale | $ | 6,109 |
| $ | 138 |
| $ | (48 | ) | $ | 6,198 |
|
| Investment securities held to maturity: | | | | |
| Debt securities, U.S. government agencies | $ | 67 |
| $ | — |
| $ | — |
| $ | 67 |
|
| Residential mortgage-backed securities: | | | | |
| Government National Mortgage Association | 12 |
| — |
| — |
| 13 |
|
| Federal National Mortgage Association | 125 |
| 1 |
| (1 | ) | 124 |
|
| Federal Home Loan Mortgage Corporation | 68 |
| — |
| — |
| 68 |
|
| Collateralized mortgage obligations: | | | | |
| Government National Mortgage Association | 1,875 |
| 23 |
| (9 | ) | 1,888 |
|
| Federal National Mortgage Association | 1,586 |
| 2 |
| (33 | ) | 1,555 |
|
| Federal Home Loan Mortgage Corporation | 1,618 |
| 18 |
| (27 | ) | 1,608 |
|
| Total collateralized mortgage obligations | 5,079 |
| 42 |
| (70 | ) | 5,051 |
|
| Total residential mortgage-backed securities | 5,285 |
| 43 |
| (72 | ) | 5,256 |
|
| Total securities held to maturity | $ | 5,352 |
| $ | 43 |
| $ | (72 | ) | $ | 5,323 |
|
|
| | | | | | | | | | | | |
| | Amortized | Unrealized | Unrealized | Fair |
| December 31, 2013 | cost | gains | losses | value |
| Investment securities available for sale: | | | | |
| Debt securities: | | | | |
| States and political subdivisions | $ | 516 |
| $ | 14 |
| $ | — |
| $ | 529 |
|
| U.S. Treasury | 20 |
| — |
| — |
| 20 |
|
| U.S. government sponsored enterprises | 306 |
| 7 |
| (1 | ) | 312 |
|
| Corporate | 863 |
| 19 |
| (11 | ) | 872 |
|
| Total debt securities | 1,705 |
| 40 |
| (12 | ) | 1,734 |
|
| Mortgage-backed securities: | | | | |
| Residential mortgage-backed securities: | | | | |
| Government National Mortgage Association | 41 |
| 1 |
| (2 | ) | 40 |
|
| Federal National Mortgage Association | 134 |
| 5 |
| — |
| 139 |
|
| Federal Home Loan Mortgage Corporation | 154 |
| 5 |
| — |
| 159 |
|
| Collateralized mortgage obligations: | | | | |
| Federal National Mortgage Association | 797 |
| — |
| (36 | ) | 761 |
|
| Federal Home Loan Mortgage Corporation | 396 |
| — |
| (17 | ) | 379 |
|
| Non-agency issued | 12 |
| 1 |
| — |
| 13 |
|
| Total collateralized mortgage obligations | 1,205 |
| 1 |
| (54 | ) | 1,152 |
|
| Total residential mortgage-backed securities | 1,534 |
| 12 |
| (56 | ) | 1,490 |
|
| Commercial mortgage-backed securities, non-agency issued | 1,759 |
| 74 |
| (2 | ) | 1,831 |
|
| Total mortgage-backed securities | 3,294 |
| 85 |
| (58 | ) | 3,321 |
|
| Collateralized loan obligations, non-agency issued | 1,392 |
| 40 |
| (2 | ) | 1,431 |
|
| Asset-backed securities collateralized by: | | | | |
| Student loans | 306 |
| 6 |
| — |
| 312 |
|
| Credit cards | 73 |
| — |
| (1 | ) | 73 |
|
| Auto loans | 331 |
| 4 |
| — |
| 335 |
|
| Other | 186 |
| 1 |
| (1 | ) | 186 |
|
| Total asset-backed securities | 896 |
| 11 |
| (2 | ) | 905 |
|
| Other | 33 |
| 1 |
| — |
| 33 |
|
| Total securities available for sale | $ | 7,319 |
| $ | 178 |
| $ | (74 | ) | $ | 7,423 |
|
| Investment securities held to maturity: | | | | |
| Debt securities, U.S. government agencies | $ | 5 |
| $ | — |
| $ | — |
| $ | 5 |
|
| Residential mortgage-backed securities: | | | | |
| Government National Mortgage Association | 17 |
| — |
| — |
| 17 |
|
| Federal National Mortgage Association | 146 |
| — |
| (3 | ) | 143 |
|
| Federal Home Loan Mortgage Corporation | 81 |
| — |
| (1 | ) | 81 |
|
| Collateralized mortgage obligations: | | | | |
| Government National Mortgage Association | 1,713 |
| 26 |
| (12 | ) | 1,727 |
|
| Federal National Mortgage Association | 1,074 |
| — |
| (47 | ) | 1,027 |
|
| Federal Home Loan Mortgage Corporation | 1,007 |
| 12 |
| (30 | ) | 989 |
|
| Total collateralized mortgage obligations | 3,793 |
| 39 |
| (90 | ) | 3,742 |
|
| Total residential mortgage-backed securities | 4,037 |
| 40 |
| (94 | ) | 3,983 |
|
| Total securities held to maturity | $ | 4,042 |
| $ | 40 |
| $ | (94 | ) | $ | 3,988 |
|
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 | |
| September 30, 2014 | value | losses | Count | | value | losses | Count | | value | losses | Count |
| Investment securities available for sale: | | | | | | | | | | | |
| Debt securities: | | | | | | | | | | | |
| States and political subdivisions | $ | 14 |
| $ | — |
| 19 |
| | $ | 1 |
| $ | — |
| 6 |
| | $ | 16 |
| $ | — |
| 25 |
|
| U.S. government sponsored enterprises | 1 |
| — |
| 4 |
| | 42 |
| — |
| 4 |
| | 43 |
| — |
| 8 |
|
| Corporate | 206 |
| (4 | ) | 133 |
| | 108 |
| (6 | ) | 69 |
| | 313 |
| (10 | ) | 202 |
|
| Total debt securities | 221 |
| (4 | ) | 156 |
| | 150 |
| (6 | ) | 79 |
| | 371 |
| (10 | ) | 235 |
|
| Mortgage-backed securities: | | | | | | | | | | | |
| Residential mortgage-backed securities: | | | | | | | | | | | |
| Government National Mortgage Association | — |
| — |
| — |
| | 19 |
| (1 | ) | 5 |
| | 19 |
| (1 | ) | 5 |
|
| Collateralized mortgage obligations: | | | | | | | | | | | |
| Federal National Mortgage Association | 113 |
| (1 | ) | 8 |
| | 527 |
| (22 | ) | 31 |
| | 640 |
| (23 | ) | 39 |
|
| Federal Home Loan Mortgage Corporation | 117 |
| (3 | ) | 6 |
| | 223 |
| (8 | ) | 12 |
| | 340 |
| (11 | ) | 18 |
|
| Total collateralized mortgage obligations | 231 |
| (4 | ) | 14 |
| | 750 |
| (30 | ) | 43 |
| | 981 |
| (34 | ) | 57 |
|
| Total residential mortgage-backed securities | 231 |
| (4 | ) | 14 |
| | 769 |
| (31 | ) | 48 |
| | 999 |
| (35 | ) | 62 |
|
| Commercial mortgage-backed securities, non-agency issued | 21 |
| — |
| 5 |
| | 24 |
| — |
| 3 |
| | 45 |
| — |
| 8 |
|
| Total mortgage-backed securities | 252 |
| (4 | ) | 19 |
| | 793 |
| (32 | ) | 51 |
| | 1,044 |
| (36 | ) | 70 |
|
| Collateralized loan obligations, non-agency issued | 71 |
| — |
| 12 |
| | 128 |
| (1 | ) | 12 |
| | 199 |
| (1 | ) | 24 |
|
| Asset-backed securities collateralized by: | | | | | | | | | | | |
| Student loans | 20 |
| — |
| 3 |
| | 3 |
| — |
| 2 |
| | 23 |
| — |
| 5 |
|
| Credit card | — |
| — |
| — |
| | 8 |
| — |
| 1 |
| | 8 |
| — |
| 1 |
|
| Auto loans | 3 |
| — |
| 2 |
| | — |
| — |
| — |
| | 3 |
| — |
| 2 |
|
| Other | — |
| — |
| — |
| | 53 |
| (1 | ) | 5 |
| | 53 |
| (1 | ) | 5 |
|
| Total asset-backed securities | 23 |
| — |
| 5 |
| | 64 |
| (1 | ) | 8 |
| | 87 |
| (1 | ) | 13 |
|
| Other | 12 |
| — |
| 1 |
| | 9 |
| — |
| 3 |
| | 21 |
| — |
| 4 |
|
| Total securities available for sale in an unrealized loss position | $ | 579 |
| $ | (9 | ) | 193 |
| | $ | 1,144 |
| $ | (39 | ) | 153 |
| | $ | 1,722 |
| $ | (48 | ) | 346 |
|
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or longer | | Total |
| | Fair | Unrealized | | | Fair | Unrealized | | | Fair | Unrealized | |
| September 30, 2014 | value | losses | Count | | value | losses | Count | | value | losses | Count |
| Investment securities held to maturity: | | | | | | | | | | | |
| Debt securities, U.S. government agencies | $ | 52 |
| $ | — |
| 7 |
| | $ | — |
| $ | — |
| — |
| | $ | 52 |
| $ | — |
| 7 |
|
| Residential mortgage-backed securities: | | | | | | | | | | | |
| Government National Mortgage Association | 5 |
| — |
| 1 |
| | 3 |
| — |
| 2 |
| | 7 |
| — |
| 3 |
|
| Federal National Mortgage Association | 11 |
| — |
| 2 |
| | 67 |
| (1 | ) | 16 |
| | 79 |
| (1 | ) | 18 |
|
| Federal Home Loan Mortgage Corporation | 26 |
| — |
| 7 |
| | 21 |
| — |
| 6 |
| | 47 |
| — |
| 13 |
|
| Collateralized mortgage obligations: | | | | | | | | | | | |
| Government National Mortgage Association | 801 |
| (8 | ) | 78 |
| | 51 |
| (1 | ) | 12 |
| | 852 |
| (9 | ) | 90 |
|
| Federal National Mortgage Association | 529 |
| (4 | ) | 36 |
| | 654 |
| (29 | ) | 34 |
| | 1,182 |
| (33 | ) | 70 |
|
| Federal Home Loan Mortgage Corporation | 621 |
| (8 | ) | 43 |
| | 431 |
| (19 | ) | 24 |
| | 1,052 |
| (27 | ) | 67 |
|
| Total collateralized mortgage obligations | 1,950 |
| (20 | ) | 157 |
| | 1,136 |
| (50 | ) | 70 |
| | 3,086 |
| (70 | ) | 227 |
|
| Total residential mortgage-backed securities | 1,992 |
| (20 | ) | 167 |
| | 1,227 |
| (52 | ) | 94 |
| | 3,219 |
| (72 | ) | 261 |
|
| Total securities held to maturity in an unrealized loss position | $ | 2,044 |
| $ | (20 | ) | 174 |
| | $ | 1,227 |
| $ | (52 | ) | 94 |
| | $ | 3,271 |
| $ | (72 | ) | 268 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or longer | | Total |
| | Fair | Unrealized | | | Fair | Unrealized | | | Fair | Unrealized | |
| December 31, 2013 | value | losses | Count | | value | losses | Count | | value | losses | Count |
| Investment securities available for sale: | | | | | | | | | | | |
| Debt securities: | | | | | | | | | | | |
| States and political subdivisions | $ | 13 |
| $ | — |
| 25 |
| | $ | 3 |
| $ | — |
| 7 |
| | $ | 16 |
| $ | — |
| 32 |
|
| U.S. government sponsored enterprises | 71 |
| (1 | ) | 11 |
| | 2 |
| — |
| 2 |
| | 73 |
| (1 | ) | 13 |
|
| Corporate | 232 |
| (8 | ) | 165 |
| | 74 |
| (2 | ) | 23 |
| | 306 |
| (11 | ) | 188 |
|
| Total debt securities | 315 |
| (9 | ) | 201 |
| | 79 |
| (2 | ) | 32 |
| | 394 |
| (12 | ) | 233 |
|
| Mortgage-backed securities: | | | | | | | | | | | |
| Residential mortgage-backed securities: | | | | | | | | | | | |
| Government National Mortgage Association | — |
| — |
| — |
| | 19 |
| (2 | ) | 6 |
| | 19 |
| (2 | ) | 6 |
|
| Federal National Mortgage Association | — |
| — |
| 3 |
| | — |
| — |
| 3 |
| | 1 |
| — |
| 6 |
|
| Collateralized mortgage obligations: | | | | | | | | | | | |
| Federal National Mortgage Association | 744 |
| (36 | ) | 41 |
| | — |
| — |
| — |
| | 744 |
| (36 | ) | 41 |
|
| Federal Home Loan Mortgage Corporation | 361 |
| (17 | ) | 19 |
| | — |
| — |
| — |
| | 361 |
| (17 | ) | 19 |
|
| Non-agency issued | 1 |
| — |
| 3 |
| | — |
| — |
| — |
| | 1 |
| — |
| 3 |
|
| Total collateralized mortgage obligations | 1,106 |
| (54 | ) | 63 |
| | — |
| — |
| — |
| | 1,106 |
| (54 | ) | 63 |
|
| Total residential mortgage-backed securities | 1,106 |
| (54 | ) | 66 |
| | 19 |
| (2 | ) | 9 |
| | 1,125 |
| (56 | ) | 75 |
|
| Commercial mortgage-backed securities, non-agency issued | 158 |
| (2 | ) | 15 |
| | 12 |
| — |
| 3 |
| | 170 |
| (2 | ) | 18 |
|
| Total mortgage-backed securities | 1,264 |
| (56 | ) | 81 |
| | 32 |
| (2 | ) | 12 |
| | 1,296 |
| (58 | ) | 93 |
|
| Collateralized loan obligations, non-agency issued | 261 |
| (2 | ) | 28 |
| | 3 |
| — |
| 1 |
| | 264 |
| (2 | ) | 29 |
|
| Asset-backed securities collateralized by: | | | | | | | | | | | |
| Student loans | 67 |
| — |
| 8 |
| | — |
| — |
| — |
| | 67 |
| — |
| 8 |
|
| Credit card | 36 |
| (1 | ) | 4 |
| | — |
| — |
| — |
| | 36 |
| (1 | ) | 4 |
|
| Auto loans | 25 |
| — |
| 5 |
| | — |
| — |
| — |
| | 25 |
| — |
| 5 |
|
| Other | 72 |
| (1 | ) | 11 |
| | — |
| — |
| — |
| | 72 |
| (1 | ) | 11 |
|
| Total asset-backed securities | 200 |
| (2 | ) | 28 |
| | — |
| — |
| — |
| | 200 |
| (2 | ) | 28 |
|
| Other | 14 |
| — |
| 3 |
| | 8 |
| — |
| 2 |
| | 22 |
| — |
| 5 |
|
| Total securities available for sale in an unrealized loss position | $ | 2,054 |
| $ | (69 | ) | 341 |
| | $ | 122 |
| $ | (5 | ) | 47 |
| | $ | 2,176 |
| $ | (74 | ) | 388 |
|
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or longer | | Total |
| | Fair | Unrealized | | | Fair | Unrealized | | | Fair | Unrealized | |
| December 31, 2013 | value | losses | Count | | value | losses | Count | | value | losses | Count |
| Investment securities held to maturity: | | | | | | | | | | | |
| Debt securities, U.S. government agencies | $ | 5 |
| $ | — |
| 1 |
| | $ | — |
| $ | — |
| — |
| | $ | 5 |
| $ | — |
| 1 |
|
| Residential mortgage-backed securities: | | | | | | | | | | | |
| Government National Mortgage Association | 11 |
| — |
| 4 |
| | — |
| — |
| — |
| | 11 |
| — |
| 4 |
|
| Federal National Mortgage Association | 119 |
| (3 | ) | 30 |
| | — |
| — |
| — |
| | 119 |
| (3 | ) | 30 |
|
| Federal Home Loan Mortgage Corporation | 59 |
| (1 | ) | 15 |
| | — |
| — |
| — |
| | 59 |
| (1 | ) | 15 |
|
| Collateralized mortgage obligations: | | | | | | | | | | | |
| Government National Mortgage Association | 520 |
| (12 | ) | 58 |
| | — |
| — |
| — |
| | 520 |
| (12 | ) | 58 |
|
| Federal National Mortgage Association | 1,011 |
| (47 | ) | 59 |
| | — |
| — |
| — |
| | 1,011 |
| (47 | ) | 59 |
|
| Federal Home Loan Mortgage Corporation | 629 |
| (30 | ) | 35 |
| | 22 |
| (1 | ) | 1 |
| | 652 |
| (30 | ) | 36 |
|
| Total collateralized mortgage obligations | 2,160 |
| (89 | ) | 152 |
| | 22 |
| (1 | ) | 1 |
| | 2,182 |
| (90 | ) | 153 |
|
| Total residential mortgage-backed securities | 2,348 |
| (94 | ) | 201 |
| | 22 |
| (1 | ) | 1 |
| | 2,371 |
| (94 | ) | 202 |
|
| Total securities held to maturity in an unrealized loss position | $ | 2,353 |
| $ | (94 | ) | 202 |
| | $ | 22 |
| $ | (1 | ) | 1 |
| | $ | 2,376 |
| $ | (94 | ) | 203 |
|
We have assessed the securities in an unrealized loss position at September 30, 2014 and at December 31, 2013 and determined that the declines in fair value below amortized cost were temporary.
The Volcker Rule provisions of the Dodd-Frank Act restrict our ability to hold debt securities issued by Collateralized Loan Obligations ("CLOs") where our investment in these debt securities is deemed to be an ownership interest in a CLO and the CLO itself does not qualify for an exclusion in the final rule for loan securitizations. On April 7, 2014, the Federal Reserve announced that it intends to grant banking entities two additional one year extensions, which together would extend until July 21, 2017, the time period for institutions to conform their ownership interests in and sponsorship of CLOs to the final Volcker Rule.
For our CLOs subject to the Volcker Rule in an unrealized loss position, we believe it is more likely than not that we will be able to hold these securities to recovery, which could be maturity as the Federal Reserve announcement extends the conformance period to July 2017 and we believe that other structural remedies are available to us to allow us to continue holding the bonds after the conformance period.
In making the determination that the declines in fair value below amortized cost for the remainder of the portfolio were temporary, we considered some or all of 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.
Scheduled contractual maturities of our investment securities at September 30, 2014 were as follows: |
| | | | | | |
| | Amortized cost | Fair value |
| Debt securities: | | |
| Within one year | $ | 102 |
| $ | 103 |
|
| After one year through five years | 817 |
| 839 |
|
| After five years through ten years | 601 |
| 600 |
|
| After ten years | 20 |
| 19 |
|
| Total debt securities | 1,540 |
| 1,561 |
|
| Mortgage-backed securities | 8,196 |
| 8,202 |
|
| Collateralized loan obligations | 1,026 |
| 1,050 |
|
| Asset-backed securities | 677 |
| 687 |
|
| Other | 22 |
| 22 |
|
| | $ | 11,461 |
| $ | 11,521 |
|
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 increased to 3.7 years at September 30, 2014 from 3.5 years at December 31, 2013.
Note 2. 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, indirect auto, credit cards, and other consumer loans.
Our loans and leases receivable consisted of the following at the dates indicated:
|
| | | | | | | | | | | | | | | | | | | |
| | September 30, 2014 | | December 31, 2013 |
| | Originated | Acquired | Total | | Originated | Acquired | Total |
| Commercial: | | | | | | | |
| Real estate | $ | 5,742 |
| $ | 1,122 |
| $ | 6,864 |
| | $ | 5,527 |
| $ | 1,387 |
| $ | 6,914 |
|
| Construction | 1,148 |
| 2 |
| 1,150 |
| | 828 |
| 36 |
| 864 |
|
| Business | 5,468 |
| 368 |
| 5,836 |
| | 4,876 |
| 414 |
| 5,290 |
|
| Total commercial | 12,358 |
| 1,492 |
| 13,850 |
| | 11,231 |
| 1,838 |
| 13,068 |
|
| Consumer: | | | | | | | |
| Residential real estate | 2,030 |
| 1,330 |
| 3,361 |
| | 1,902 |
| 1,546 |
| 3,448 |
|
| Home equity | 1,781 |
| 1,105 |
| 2,887 |
| | 1,618 |
| 1,134 |
| 2,752 |
|
| Indirect auto | 2,074 |
| — |
| 2,074 |
| | 1,544 |
| — |
| 1,544 |
|
| Credit cards | 313 |
| — |
| 313 |
| | 325 |
| — |
| 325 |
|
| Other consumer | 286 |
| — |
| 286 |
| | 302 |
| — |
| 302 |
|
| Total consumer | 6,484 |
| 2,436 |
| 8,920 |
| | 5,691 |
| 2,680 |
| 8,371 |
|
| Total loans and leases | 18,842 |
| 3,928 |
| 22,770 |
| | 16,922 |
| 4,517 |
| 21,440 |
|
| Allowance for loan losses | (227 | ) | (5 | ) | (231 | ) | | (205 | ) | (4 | ) | (209 | ) |
| Total loans and leases, net | $ | 18,615 |
| $ | 3,923 |
| $ | 22,538 |
| | $ | 16,717 |
| $ | 4,514 |
| $ | 21,230 |
|
As of September 30, 2014 and December 31, 2013, we had a liability for unfunded loan commitments of $15 million and $13 million, respectively. For the nine months ended September 30, 2014 and 2013, we recognized provision for credit losses related to our unfunded loan commitments of $1 million.
Of the $2.9 billion and $2.8 billion home equity portfolio at September 30, 2014 and December 31, 2013, respectively, $1.1 billion and $1.0 billion were in a first lien position at September 30, 2014 and December 31, 2013, respectively. 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 September 30, 2014 and December 31, 2013.
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 were as follows at the dates indicated:
|
| | | | | | |
| | September 30,
2014 | December 31,
2013 |
| Credit impaired acquired loans evaluated individually for future credit losses | | |
| Outstanding principal balance | $ | 13 |
| $ | 18 |
|
| Carrying amount | 8 |
| 12 |
|
| Acquired loans evaluated collectively for future credit losses | | |
| Outstanding principal balance | 2,718 |
| 3,301 |
|
| Carrying amount | 2,661 |
| 3,233 |
|
| Other acquired loans | | |
| Outstanding principal balance | 1,296 |
| 1,321 |
|
| Carrying amount | 1,260 |
| 1,273 |
|
| Total acquired loans | | |
| Outstanding principal balance | 4,028 |
| 4,640 |
|
| Carrying amount | 3,928 |
| 4,517 |
|
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, 2013 | $ | (1,057 | ) |
| Net reclassifications from nonaccretable yield | (15 | ) |
| Accretion | 199 |
|
Other (1) | 22 |
|
| Balance at December 31, 2013 | (851 | ) |
| Reclassifications from nonaccretable yield | (5 | ) |
| Accretion | 108 |
|
Other (1) | 55 |
|
| Balance at September 30, 2014 | $ | (693 | ) |
| |
(1) | Includes changes in expected cash flows from changes in interest rate and prepayment assumptions. |
During the nine months ended September 30, 2014 and 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 $55 million and $22 million, respectively. These changes did not materially impact our interest income or net interest margin.
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.
Beginning in the second quarter of 2014, we raised our threshold for evaluating commercial loans individually for impairment from $200 thousand to $1 million. Impaired loans to commercial borrowers with outstandings less than $1 million are pooled and measured for impairment collectively. Additionally, all loans modified in a troubled debt restructuring ("TDR"), regardless of dollar size, are considered impaired. The impact of this change to our allowance for loan losses was not significant. This change is being implemented on a prospective basis, accordingly, prior period financial disclosures have not been revised.
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 | |
| Originated loans | Real estate | Business | | Residential | Home equity | Indirect auto | Credit cards | Other
consumer | Total |
| Nine months ended September 30, 2014 | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | |
| Balance at beginning of period | $ | 47 |
| $ | 120 |
| | $ | 2 |
| $ | 7 |
| $ | 10 |
| $ | 13 |
| $ | 6 |
| $ | 205 |
|
| Provision for loan losses | 13 |
| 23 |
| | 1 |
| 4 |
| 9 |
| 9 |
| 5 |
| 63 |
|
| Charge-offs | (8 | ) | (16 | ) | | (1 | ) | (3 | ) | (6 | ) | (10 | ) | (6 | ) | (51 | ) |
| Recoveries | 3 |
| 2 |
| | — |
| 1 |
| 1 |
| 1 |
| 1 |
| 10 |
|
| Balance at end of period | $ | 54 |
| $ | 129 |
| | $ | 2 |
| $ | 9 |
| $ | 13 |
| $ | 13 |
| $ | 6 |
| $ | 227 |
|
| Allowance for loan losses: | | | | | | | | | |
| Individually evaluated for impairment | $ | 2 |
| $ | 2 |
| | $ | 1 |
| $ | 1 |
| $ | — |
| $ | — |
| $ | — |
| $ | 6 |
|
| Collectively evaluated for impairment | 53 |
| 127 |
| | 1 |
| 7 |
| 13 |
| 13 |
| 5 |
| 221 |
|
| Total | $ | 54 |
| $ | 129 |
| | $ | 2 |
| $ | 9 |
| $ | 13 |
| $ | 13 |
| $ | 6 |
| $ | 227 |
|
| Loans receivable: | | | | | | | | | |
| Balance at end of period | | | | | | | | | |
| Individually evaluated for impairment | $ | 66 |
| $ | 59 |
| | $ | 21 |
| $ | 7 |
| $ | 3 |
| $ | — |
| $ | 2 |
| $ | 158 |
|
| Collectively evaluated for impairment | 6,824 |
| 5,409 |
| | 2,009 |
| 1,775 |
| 2,071 |
| 313 |
| 284 |
| 18,684 |
|
| Total | $ | 6,890 |
| $ | 5,468 |
| | $ | 2,030 |
| $ | 1,781 |
| $ | 2,074 |
| $ | 313 |
| $ | 286 |
| $ | 18,842 |
|
| Nine months ended September 30, 2013 | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | |
| Balance at beginning of period | $ | 38 |
| $ | 99 |
| | $ | 5 |
| $ | 5 |
| $ | 3 |
| $ | 7 |
| $ | 5 |
| $ | 161 |
|
| Provision for loan losses | 6 |
| 42 |
| | (2 | ) | 3 |
| 6 |
| 8 |
| 6 |
| 68 |
|
| Charge-offs | (6 | ) | (23 | ) | | (1 | ) | (2 | ) | (2 | ) | (2 | ) | (6 | ) | (43 | ) |
| Recoveries | 4 |
| 2 |
| | — |
| — |
| — |
| 1 |
| 1 |
| 9 |
|
| Balance at end of period | $ | 41 |
| $ | 119 |
| | $ | 2 |
| $ | 6 |
| $ | 8 |
| $ | 13 |
| $ | 6 |
| $ | 195 |
|
| Allowance for loan losses: | | | | | | | | | |
| Individually evaluated for impairment | $ | 2 |
| $ | 5 |
| | $ | 1 |
| $ | 2 |
| $ | — |
| $ | — |
| $ | — |
| $ | 10 |
|
| Collectively evaluated for impairment | 39 |
| 115 |
| | 1 |
| 3 |
| 8 |
| 13 |
| 6 |
| 185 |
|
| Total | $ | 41 |
| $ | 119 |
| | $ | 2 |
| $ | 6 |
| $ | 8 |
| $ | 13 |
| $ | 6 |
| $ | 195 |
|
| Loans receivable: | | | | | | | | | |
| Balance at end of period | | | | | | | | | |
| Individually evaluated for impairment | $ | 82 |
| $ | 58 |
| | $ | 20 |
| $ | 6 |
| $ | 1 |
| $ | — |
| $ | 2 |
| $ | 170 |
|
| Collectively evaluated for impairment | 6,012 |
| 4,683 |
| | 1,862 |
| 1,531 |
| 1,338 |
| 312 |
| 304 |
| 16,042 |
|
| Total | $ | 6,094 |
| $ | 4,741 |
| | $ | 1,883 |
| $ | 1,537 |
| $ | 1,339 |
| $ | 312 |
| $ | 306 |
| $ | 16,212 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Commercial | | Consumer | |
| Originated loans | Real estate | Business | | Residential | Home equity | Indirect auto | Credit cards | Other
consumer | Total |
| Three months ended September 30, 2014 | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | |
| Balance at beginning of period | $ | 54 |
| $ | 124 |
| | $ | 2 |
| $ | 9 |
| $ | 12 |
| $ | 13 |
| $ | 5 |
| $ | 220 |
|
| Provision for loan losses | 3 |
| 9 |
| | — |
| — |
| 3 |
| 3 |
| 2 |
| 20 |
|
| Charge-offs | (2 | ) | (4 | ) | | — |
| (1 | ) | (2 | ) | (3 | ) | (2 | ) | (15 | ) |
| Recoveries | — |
| 1 |
| | — |
| — |
| — |
| — |
| — |
| 2 |
|
| Balance at end of period | $ | 54 |
| $ | 129 |
| | $ | 2 |
| $ | 9 |
| $ | 13 |
| $ | 13 |
| $ | 6 |
| $ | 227 |
|
| Three months ended September 30, 2013 | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | |
| Balance at beginning of period | $ | 43 |
| $ | 107 |
| | $ | 3 |
| $ | 6 |
| $ | 6 |
| $ | 13 |
| $ | 6 |
| $ | 182 |
|
| Provision for loan losses | (3 | ) | 22 |
| | — |
| 1 |
| 3 |
| 2 |
| 2 |
| 25 |
|
| Charge-offs | (2 | ) | (10 | ) | | — |
| — |
| (1 | ) | (2 | ) | (2 | ) | (18 | ) |
| Recoveries | 3 |
| — |
| | — |
| — |
| — |
| — |
| 1 |
| 5 |
|
| Balance at end of period | $ | 41 |
| $ | 119 |
| | $ | 2 |
| $ | 6 |
| $ | 8 |
| $ | 13 |
| $ | 6 |
| $ | 195 |
|
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 | |
| Acquired loans | Real estate | Business | | Residential | Home equity | Credit cards | Other
consumer | Total |
| Nine months ended September 30, 2014 | | | | | | | | |
| Allowance for loan losses: | | | | | | | | |
| Balance at beginning of period | $ | — |
| $ | — |
| | $ | 1 |
| $ | 3 |
| $ | — |
| $ | — |
| $ | 4 |
|
| Provision for loan losses | 1 |
| — |
| | 1 |
| 3 |
| — |
| — |
| 5 |
|
| Charge-offs | (1 | ) | — |
| | — |
| (3 | ) | — |
| — |
| (4 | ) |
| Recoveries | — |
| — |
| | — |
| — |
| — |
| — |
| — |
|
| Balance at end of period | $ | — |
| $ | — |
| | $ | 1 |
| $ | 3 |
| $ | — |
| $ | — |
| $ | 5 |
|
| Allowance for loan losses: | | | | | | | | |
| Individually evaluated for impairment | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| Collectively evaluated for impairment | — |
| — |
| | 1 |
| 3 |
| — |
| — |
| 5 |
|
| Total | $ | — |
| $ | — |
| | $ | 1 |
| $ | 3 |
| $ | — |
| $ | — |
| $ | 5 |
|
| Loans receivable: | | | | | | | | |
| Balance at end of period | | | | | | | | |
| Individually evaluated for impairment | $ | — |
| $ | 2 |
| | $ | — |
| $ | 4 |
| $ | — |
| $ | — |
| $ | 6 |
|
| Collectively evaluated for impairment | — |
| 285 |
| | — |
| 968 |
| — |
| — |
| 1,253 |
|
| Loans acquired with deteriorated credit quality | 1,124 |
| 81 |
| | 1,330 |
| 133 |
| — |
| — |
| 2,668 |
|
| Total | $ | 1,124 |
| $ | 368 |
| | $ | 1,330 |
| $ | 1,105 |
| $ | — |
| $ | — |
| $ | 3,928 |
|
| Nine months ended September 30, 2013 | | | | | | | | |
| Allowance for loan losses: | | | | | | | | |
| Balance at beginning of period | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | 1 |
| $ | 2 |
|
| Provision for loan losses | 2 |
| — |
| | 1 |
| 2 |
| — |
| (1 | ) | 4 |
|
| Charge-offs | (2 | ) | — |
| | — |
| — |
| — |
| (1 | ) | (2 | ) |
| Recoveries | — |
| — |
| | — |
| — |
| — |
| — |
| — |
|
| Balance at end of period | $ | — |
| $ | — |
| | $ | 1 |
| $ | 2 |
| $ | — |
| $ | — |
| $ | 3 |
|
| Allowance for loan losses: | | | | | | | | |
| Individually evaluated for impairment | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| Collectively evaluated for impairment | — |
| — |
| | 1 |
| 2 |
| — |
| — |
| 3 |
|
| Total | $ | — |
| $ | — |
| | $ | 1 |
| $ | 2 |
| $ | — |
| $ | — |
| $ | 3 |
|
| Loans receivable: | | | | | | | | |
| Balance at end of period | | | | | | | | |
| Individually evaluated for impairment | $ | 1 |
| $ | 9 |
| | $ | — |
| $ | 3 |
| $ | — |
| $ | — |
| $ | 14 |
|
| Collectively evaluated for impairment | — |
| 339 |
| | — |
| 975 |
| — |
| 4 |
| 1,318 |
|
| Loans acquired with deteriorated credit quality | 1,603 |
| 115 |
| | 1,637 |
| 191 |
| — |
| — |
| 3,546 |
|
| Total | $ | 1,604 |
| $ | 464 |
| | $ | 1,637 |
| $ | 1,170 |
| $ | — |
| $ | 4 |
| $ | 4,878 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | Commercial | | Consumer | |
| Acquired loans | Real estate | Business | | Residential | Home equity | Credit cards | Other
consumer | Total |
| Three months ended September 30, 2014 | | | | | | | | |
| Allowance for loan losses: | | | | | | | | |
| Balance at beginning of period | $ | — |
| $ | — |
| | $ | 1 |
| $ | 3 |
| $ | — |
| $ | — |
| $ | 4 |
|
| Provision for loan losses | — |
| — |
| | 1 |
| — |
| — |
| — |
| 1 |
|
| Charge-offs | — |
| — |
| | — |
| — |
| — |
| — |
| — |
|
| Recoveries | — |
| — |
| | — |
| — |
| — |
| — |
| — |
|
| Balance at end of period | $ | — |
| $ | — |
| | $ | 1 |
| $ | 3 |
| $ | — |
| $ | — |
| $ | 5 |
|
| Three months ended September 30, 2013 | | | | | | | | |
| Allowance for loan losses: | | | | | | | | |
| Balance at beginning of period | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | 1 |
| $ | 1 |
|
| Provision for loan losses | — |
| — |
| | 1 |
| 2 |
| — |
| (1 | ) | 2 |
|
| Charge-offs | — |
| — |
| | — |
| — |
| — |
| — |
| — |
|
| Recoveries | — |
| — |
| | — |
| — |
| — |
| — |
| — |
|
| Balance at end of period | $ | — |
| $ | — |
| | $ | 1 |
| $ | 2 |
| $ | — |
| $ | — |
| $ | 3 |
|
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:
|
| | | | | | | | | | | | | | | | | | | |
| | September 30, 2014 | | December 31, 2013 |
| | Originated | Acquired | Total | | Originated | Acquired | Total |
| Commercial: | | | | | | | |
| Real estate | $ | 57 |
| $ | — |
| $ | 57 |
| | $ | 53 |
| $ | 1 |
| $ | 54 |
|
| Business | 37 |
| 7 |
| 43 |
| | 42 |
| 9 |
| 51 |
|
| Total commercial | 94 |
| 7 |
| 101 |
| | 95 |
| 10 |
| 105 |
|
| Consumer: | | | | | | | |
| Residential real estate | 36 |
| — |
| 36 |
| | 31 |
| — |
| 31 |
|
| Home equity | 23 |
| 22 |
| 45 |
| | 18 |
| 20 |
| 39 |
|
| Indirect auto | 12 |
| — |
| 12 |
| | 6 |
| — |
| 6 |
|
| Other consumer | 5 |
| — |
| 5 |
| | 6 |
| — |
| 6 |
|
| Total consumer | 77 |
| 22 |
| 99 |
| | 62 |
| 20 |
| 82 |
|
| Total | $ | 171 |
| $ | 29 |
| $ | 199 |
| | $ | 157 |
| $ | 30 |
| $ | 188 |
|
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 | | Nine months ended |
| | September 30, | | September 30, |
| | 2014 | 2013 | | 2014 | 2013 |
| | | | | | |
| Additional interest income that would have been recorded if nonperforming loans had performed in accordance with original terms | $ | 2 |
| $ | 2 |
| | $ | 6 |
| $ | 5 |
|
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 75% and 69% of the loans’ contractual principal balance at September 30, 2014 and December 31, 2013, respectively.
|
| | | | | | | | | | | | | | | | | | | |
| | September 30, 2014 | | December 31, 2013 |
| Originated loans | Recorded investment | Unpaid principal balance | Related allowance | | Recorded investment | Unpaid principal balance | Related allowance |
| With no related allowance recorded: | | | | | | | |
| Commercial: | | | | | | | |
| Real estate | $ | 21 |
| $ | 40 |
| $ | — |
| | $ | 48 |
| $ | 63 |
| $ | — |
|
| Business | 32 |
| 52 |
| — |
| | 55 |
| 84 |
| — |
|
| Total commercial | 52 |
| 92 |
| — |
| | 103 |
| 146 |
| — |
|
| Consumer: | | | | | | | |
| Residential real estate | 14 |
| 15 |
| — |
| | 12 |
| 12 |
| — |
|
| Home equity | 3 |
| 4 |
| — |
| | 4 |
| 5 |
| — |
|
| Indirect auto | 1 |
| 1 |
| — |
| | 1 |
| 1 |
| — |
|
| Other consumer | 1 |
| 1 |
| — |
| | 1 |
| 1 |
| — |
|
| Total consumer | 19 |
| 22 |
| — |
| | 18 |
| 20 |
| — |
|
| Total | $ | 72 |
| $ | 114 |
| $ | — |
| | $ | 121 |
| $ | 166 |
| $ | — |
|
| With a related allowance recorded: | | | | | | | |
| Commercial: | | | | | | | |
| Real estate | $ | 45 |
| $ | 45 |
| $ | 2 |
| | $ | 24 |
| $ | 35 |
| $ | 4 |
|
| Business | 28 |
| 29 |
| 2 |
| | 4 |
| 6 |
| 2 |
|
| Total commercial | 72 |
| 74 |
| 4 |
| | 28 |
| 41 |
| 5 |
|
| Consumer: | | | | | | | |
| Residential real estate | 7 |
| 8 |
| 1 |
| | 8 |
| 9 |
| 1 |
|
| Home equity | 3 |
| 4 |
| 1 |
| | 4 |
| 5 |
| 3 |
|
| Indirect auto | 2 |
| 2 |
| — |
| | 1 |
| 1 |
| — |
|
| Other consumer | 1 |
| 1 |
| — |
| | 1 |
| 1 |
| — |
|
| Total consumer | 14 |
| 15 |
| 2 |
| | 14 |
| 16 |
| 4 |
|
| Total | $ | 86 |
| $ | 89 |
| $ | 6 |
| | $ | 42 |
| $ | 57 |
| $ | 9 |
|
| Total | | | | | | | |
| Commercial: | | | | | | | |
| Real estate | $ | 66 |
| $ | 85 |
| $ | 2 |
| | $ | 72 |
| $ | 97 |
| $ | 4 |
|
| Business | 59 |
| 80 |
| 2 |
| | 59 |
| 90 |
| 2 |
|
| Total commercial | 125 |
| 166 |
| 4 |
| | 131 |
| 187 |
| 5 |
|
| Consumer: | | | | | | | |
| Residential real estate | 21 |
| 23 |
| 1 |
| | 20 |
| 21 |
| 1 |
|
| Home equity | 7 |
| 8 |
| 1 |
| | 8 |
| 10 |
| 3 |
|
| Indirect auto | 3 |
| 4 |
| — |
| | 1 |
| 2 |
| — |
|
| Other consumer | 2 |
| 3 |
| — |
| | 3 |
| 3 |
| — |
|
| Total consumer | 33 |
| 37 |
| 2 |
| | 32 |
| 36 |
| 4 |
|
| Total | $ | 158 |
| $ | 203 |
| $ | 6 |
| | $ | 163 |
| $ | 222 |
| $ | 9 |
|
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.
|
| | | | | | | | | | | | | | | | | | | |
| | September 30, 2014 | | December 31, 2013 |
| Acquired loans | Recorded
investment | Unpaid
principal
balance | Related
allowance | | Recorded
investment | Unpaid principal balance | Related
allowance |
| Commercial: | | | | | | | |
| Real estate | $ | — |
| $ | — |
| $ | — |
| | $ | 1 |
| $ | 4 |
| $ | — |
|
| Business | 2 |
| 3 |
| — |
| | 7 |
| 8 |
| — |
|
| Total commercial | 2 |
| 3 |
| — |
| | 8 |
| 12 |
| — |
|
| Consumer: | | | | | | | |
| Residential real estate | — |
| — |
| — |
| | — |
| — |
| — |
|
| Home equity | 4 |
| 6 |
| — |
| | 1 |
| 2 |
| — |
|
| Other consumer | — |
| — |
| — |
| | — |
| — |
| — |
|
| Total consumer | 4 |
| 6 |
| — |
| | 1 |
| 2 |
| — |
|
Total(1) | $ | 6 |
| $ | 8 |
| $ | — |
| | $ | 10 |
| $ | 14 |
| $ | — |
|
| |
(1) | Includes 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:
|
| | | | | | | | | | | | | |
| | 2014 | | 2013 |
| Originated loans | Average recorded investment | Interest income recognized | | Average recorded investment | Interest income recognized |
| Nine months ended September 30, | | | | | |
| Commercial: | | | | | |
| Real estate | $ | 68 |
| $ | 1 |
| | $ | 88 |
| $ | 1 |
|
| Business | 56 |
| 1 |
| | 59 |
| 1 |
|
| Total commercial | 124 |
| 2 |
| | 147 |
| 2 |
|
| Consumer: | | | | | |
| Residential real estate | 21 |
| — |
| | 23 |
| — |
|
| Home equity | 7 |
| — |
| | 6 |
| — |
|
| Indirect auto | 3 |
| — |
| | 1 |
| — |
|
| Other consumer | 3 |
| — |
| | 3 |
| — |
|
| Total consumer | 34 |
| — |
| | 33 |
| — |
|
| Total | $ | 157 |
| $ | 2 |
| | $ | 181 |
| $ | 2 |
|
| Three months ended September 30, | | | | | |
| Commercial: | | | | | |
| Real estate | $ | 64 |
| $ | — |
| | $ | 88 |
| $ | — |
|
| Business | 59 |
| — |
| | 60 |
| — |
|
| Total commercial | 124 |
| 1 |
| | 148 |
| 1 |
|
| Consumer: | | | | | |
| Residential real estate | 21 |
| — |
| | 21 |
| — |
|
| Home equity | 7 |
| — |
| | 6 |
| — |
|
| Indirect auto | 2 |
| — |
| | 1 |
| — |
|
| Other consumer | 2 |
| — |
| | 2 |
| — |
|
| Total consumer | 33 |
| — |
| | 30 |
| — |
|
| Total | $ | 156 |
| $ | 1 |
| | $ | 178 |
| $ | 1 |
|
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: |
| | | | | | | | | | | | | |
| | 2014 | | 2013 |
| Acquired loans | Average
recorded
investment | Interest
income
recognized | | Average
recorded
investment | Interest
income
recognized |
| Nine months ended September 30, | | | | | |
| Commercial: | | | | | |
| Real estate | $ | — |
| $ | — |
| | $ | 1 |
| $ | — |
|
| Business | 2 |
| — |
| | 10 |
| — |
|
| Total commercial | 2 |
| — |
| | 11 |
| — |
|
| Consumer: | | | | | |
| Residential real estate | — |
| — |
| | — |
| — |
|
| Home equity | 4 |
| — |
| | 3 |
| — |
|
| Other consumer | — |
| — |
| | — |
| — |
|
| Total consumer | 4 |
| — |
| | 3 |
| — |
|
Total(1) | $ | 6 |
| $ | — |
| | $ | 14 |
| $ | — |
|
| Three months ended September 30, | | | | | |
| Commercial: | | | | | |
| Real estate | $ | — |
| $ | — |
| | $ | 1 |
| $ | — |
|
| Business | 4 |
| — |
| | 8 |
| — |
|
| Total commercial | 4 |
| — |
| | 9 |
| — |
|
| Consumer: | | | | | |
| Residential real estate | — |
| — |
| | — |
| — |
|
| Home equity | 4 |
| — |
| | 3 |
| — |
|
| Other consumer | — |
| — |
| | — |
| — |
|
| Total consumer | 4 |
| — |
| | 3 |
| — |
|
Total(1) | $ | 8 |
| $ | — |
| | $ | 12 |
| $ | — |
|
| |
(1) | Includes 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 $1 million 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 |
| September 30, 2014 | | | |
| Nonaccrual loans | $ | 101 |
| $ | 99 |
| $ | 199 |
|
| Plus: Accruing TDRs | 62 |
| 7 |
| 69 |
|
| Less: Smaller balance nonaccrual loans evaluated collectively when determining the allowance for loan losses | (36 | ) | (69 | ) | (105 | ) |
Total impaired loans(1) | $ | 127 |
| $ | 37 |
| $ | 164 |
|
| December 31, 2013: | | | |
| Nonaccrual loans | $ | 105 |
| $ | 82 |
| $ | 188 |
|
| Plus: Accruing TDRs | 45 |
| 8 |
| 52 |
|
| Less: Smaller balance nonaccrual loans evaluated collectively when determining the allowance for loan losses | (11 | ) | (57 | ) | (67 | ) |
Total impaired loans(1) | $ | 139 |
| $ | 33 |
| $ | 172 |
|
| |
(1) | Includes 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) |
| September 30, 2014 | | | | | | | |
| Originated loans | | | | | | | |
| Commercial: | | | | | | | |
| Real estate | $ | 8 |
| $ | 5 |
| $ | 39 |
| $ | 51 |
| $ | 6,838 |
| $ | 6,890 |
| $ | — |
|
| Business | 5 |
| 1 |
| 13 |
| 18 |
| 5,450 |
| 5,468 |
| — |
|
| Total commercial | 12 |
| 5 |
| 51 |
| 69 |
| 12,288 |
| 12,358 |
| — |
|
| Consumer: | | | | | | | |
| Residential real estate | 4 |
| 1 |
| 22 |
| 27 |
| 2,003 |
| 2,030 |
| — |
|
| Home equity | 3 |
| 1 |
| 15 |
| 18 |
| 1,763 |
| 1,781 |
| — |
|
| Indirect auto | 17 |
| 3 |
| 5 |
| 25 |
| 2,049 |
| 2,074 |
| — |
|
| Credit cards | 2 |
| 1 |
| 2 |
| 5 |
| 307 |
| 313 |
| 2 |
|
| Other consumer | 3 |
| 1 |
| 3 |
| 7 |
| 279 |
| 286 |
| — |
|
| Total consumer | 28 |
| 8 |
| 47 |
| 82 |
| 6,402 |
| 6,484 |
| 2 |
|
| Total | $ | 41 |
| $ | 13 |
| $ | 98 |
| $ | 152 |
| $ | 18,690 |
| $ | 18,842 |
| $ | 2 |
|
| Acquired loans | | | | | | | |
| Commercial: | | | | | | | |
| Real estate | $ | 4 |
| $ | 1 |
| $ | 33 |
| $ | 38 |
| $ | 1,086 |
| $ | 1,124 |
| $ | 33 |
|
| Business | 1 |
| — |
| 8 |
| 9 |
| 359 |
| 368 |
| 5 |
|
| Total commercial | 6 |
| 1 |
| 41 |
| 47 |
| 1,445 |
| 1,492 |
| 37 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| | 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) |
| Consumer: | | | | | | | |
| Residential real estate | 14 |
| 6 |
| 63 |
| 83 |
| 1,247 |
| 1,330 |
| 63 |
|
| Home equity | 5 |
| 3 |
| 20 |
| 29 |
| 1,076 |
| 1,105 |
| 6 |
|
| Total consumer | 19 |
| 10 |
| 83 |
| 112 |
| 2,323 |
| 2,436 |
| 69 |
|
| Total | $ | 25 |
| $ | 11 |
| $ | 124 |
| $ | 160 |
| $ | 3,768 |
| $ | 3,928 |
| $ | 106 |
|
| December 31, 2013 | | | | | | | |
| Originated loans | | | | | | | |
| Commercial: | | | | | | | |
| Real estate | $ | 5 |
| $ | 2 |
| $ | 27 |
| $ | 34 |
| $ | 6,321 |
| $ | 6,354 |
| $ | — |
|
| Business | 4 |
| 3 |
| 20 |
| 28 |
| 4,849 |
| 4,876 |
| — |
|
| Total commercial | 9 |
| 5 |
| 47 |
| 61 |
| 11,169 |
| 11,231 |
| — |
|
| Consumer: | | | | | | | |
| Residential real estate | 6 |
| 2 |
| 21 |
| 30 |
| 1,872 |
| 1,902 |
| — |
|
| Home equity | 3 |
| 2 |
| 12 |
| 17 |
| 1,601 |
| 1,618 |
| — |
|
| Indirect auto | 12 |
| 2 |
| 3 |
| 18 |
| 1,526 |
| 1,544 |
| — |
|
| Credit cards | 2 |
| 1 |
| 3 |
| 6 |
| 319 |
| 325 |
| 3 |
|
| Other consumer | 3 |
| 1 |
| 3 |
| 7 |
| 295 |
| 302 |
| — |
|
| Total consumer | 27 |
| 9 |
| 43 |
| 79 |
| 5,613 |
| 5,691 |
| 3 |
|
| Total | $ | 36 |
| $ | 15 |
| $ | 90 |
| $ | 140 |
| $ | 16,782 |
| $ | 16,922 |
| $ | 3 |
|
| Acquired loans | | | | | | | |
| Commercial: | | | | | | | |
| Real estate | $ | 8 |
| $ | 8 |
| $ | 37 |
| $ | 52 |
| $ | 1,371 |
| $ | 1,423 |
| $ | 36 |
|
| Business | 2 |
| 1 |
| 8 |
| 11 |
| 403 |
| 414 |
| 5 |
|
| Total commercial | 10 |
| 8 |
| 45 |
| 63 |
| 1,774 |
| 1,838 |
| 41 |
|
| Consumer: | | | | | | | |
| Residential real estate | 19 |
| 11 |
| 64 |
| 94 |
| 1,452 |
| 1,546 |
| 64 |
|
| Home equity | 7 |
| 4 |
| 20 |
| 31 |
| 1,103 |
| 1,134 |
| 5 |
|
| Total consumer | 26 |
| 15 |
| 84 |
| 125 |
| 2,555 |
| 2,680 |
| 70 |
|
| Total | $ | 35 |
| $ | 23 |
| $ | 130 |
| $ | 188 |
| $ | 4,330 |
| $ | 4,517 |
| $ | 110 |
|
| |
(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 |
| September 30, 2014 | | | | |
| Originated loans: | | | | |
| Pass | $ | 6,507 |
| $ | 5,108 |
| $ | 11,614 |
| 93.9 | % |
Criticized:(1) | | | | |
| Accrual | 326 |
| 323 |
| 649 |
| 5.3 |
|
| Nonaccrual | 57 |
| 37 |
| 94 |
| 0.8 |
|
| Total criticized | 383 |
| 360 |
| 743 |
| 6.1 |
|
| Total | $ | 6,890 |
| $ | 5,468 |
| $ | 12,358 |
| 100.0 | % |
| Acquired loans: | | | | |
| Pass | $ | 1,009 |
| $ | 306 |
| $ | 1,315 |
| 88.2 | % |
Criticized:(1) | | | | |
| Accrual | 115 |
| 56 |
| 170 |
| 11.4 |
|
| Nonaccrual | — |
| 7 |
| 7 |
| 0.4 |
|
| Total criticized | 115 |
| 62 |
| 177 |
| 11.8 |
|
| Total | $ | 1,124 |
| $ | 368 |
| $ | 1,492 |
| 100.0 | % |
| December 31, 2013 | | | | |
| Originated loans: | | | | |
| Pass | $ | 6,028 |
| $ | 4,590 |
| $ | 10,618 |
| 94.6 | % |
Criticized:(1) | | | | |
| Accrual | 273 |
| 244 |
| 517 |
| 4.6 |
|
| Nonaccrual | 53 |
| 42 |
| 95 |
| 0.8 |
|
| Total criticized | 327 |
| 286 |
| 612 |
| 5.4 |
|
| Total | $ | 6,354 |
| $ | 4,876 |
| $ | 11,231 |
| 100.0 | % |
| Acquired loans: | | | | |
| Pass | $ | 1,260 |
| $ | 359 |
| $ | 1,619 |
| 88.2 | % |
Criticized:(1) | | | | |
| Accrual | 162 |
| 46 |
| 208 |
| 11.3 |
|
| Nonaccrual | 1 |
| 9 |
| 10 |
| 0.5 |
|
| Total criticized | 163 |
| 55 |
| 218 |
| 11.8 |
|
| Total | $ | 1,423 |
| $ | 414 |
| $ | 1,838 |
| 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, 2013. |
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 | Indirect auto | Credit cards | Other consumer | Total | Percent of total |
| September 30, 2014 | | | | | | | |
| Originated loans by refreshed FICO score: | | | | | | | |
| Over 700 | $ | 1,781 |
| $ | 1,473 |
| $ | 1,454 |
| $ | 216 |
| $ | 171 |
| $ | 5,096 |
| 78.6 | % |
| 660-700 | 120 |
| 171 |
| 338 |
| 52 |
| 47 |
| 729 |
| 11.2 |
|
| 620-660 | 57 |
| 72 |
| 161 |
| 23 |
| 24 |
| 337 |
| 5.2 |
|
| 580-620 | 33 |
| 31 |
| 60 |
| 11 |
| 14 |
| 149 |
| 2.3 |
|
| Less than 580 | 32 |
| 31 |
| 61 |
| 7 |
| 12 |
| 143 |
| 2.2 |
|
No score(1) | 8 |
| 2 |
| — |
| 3 |
| 18 |
| 32 |
| 0.5 |
|
| Total | $ | 2,030 |
| $ | 1,781 |
| $ | 2,074 |
| $ | 313 |
| $ | 286 |
| $ | 6,484 |
| 100.0 | % |
| Acquired loans by refreshed FICO score: | | | | | | | |
| Over 700 | $ | 920 |
| $ | 861 |
| $ | — |
| $ | — |
| $ | — |
| $ | 1,782 |
| 73.1 | % |
| 660-700 | 96 |
| 91 |
| — |
| — |
| — |
| 187 |
| 7.7 |
|
| 620-660 | 62 |
| 59 |
| — |
| — |
| — |
| 121 |
| 5.0 |
|
| 580-620 | 51 |
| 40 |
| — |
| — |
| — |
| 91 |
| 3.7 |
|
| Less than 580 | 66 |
| 36 |
| — |
| — |
| — |
| 102 |
| 4.2 |
|
No score(1) | 135 |
| 19 |
| — |
| — |
| — |
| 154 |
| 6.3 |
|
| Total | $ | 1,330 |
| $ | 1,105 |
| $ | — |
| $ | — |
| $ | — |
| $ | 2,436 |
| 100.0 | % |
| December 31, 2013 | | | | | | | |
| Originated loans by refreshed FICO score: | | | | | | | |
| Over 700 | $ | 1,609 |
| $ | 1,327 |
| $ | 993 |
| $ | 223 |
| $ | 173 |
| $ | 4,324 |
| 76.0 | % |
| 660-700 | 128 |
| 158 |
| 304 |
| 53 |
| 53 |
| 696 |
| 12.2 |
|
| 620-660 | 56 |
| 69 |
| 149 |
| 25 |
| 28 |
| 328 |
| 5.8 |
|
| 580-620 | 32 |
| 30 |
| 55 |
| 12 |
| 14 |
| 142 |
| 2.5 |
|
| Less than 580 | 38 |
| 30 |
| 43 |
| 8 |
| 15 |
| 135 |
| 2.4 |
|
No score(1) | 39 |
| 3 |
| — |
| 4 |
| 20 |
| 66 |
| 1.1 |
|
| Total | $ | 1,902 |
| $ | 1,618 |
| $ | 1,544 |
| $ | 325 |
| $ | 302 |
| $ | 5,691 |
| 100.0 | % |
| Acquired loans by refreshed FICO score: | | | | | | | |
| Over 700 | $ | 1,074 |
| $ | 874 |
| $ | — |
| $ | — |
| $ | — |
| $ | 1,948 |
| 72.7 | % |
| 660-700 | 115 |
| 103 |
| — |
| — |
| — |
| 218 |
| 8.1 |
|
| 620-660 | 61 |
| 57 |
| — |
| — |
| — |
| 119 |
| 4.4 |
|
| 580-620 | 57 |
| 39 |
| — |
| — |
| — |
| 95 |
| 3.6 |
|
| Less than 580 | 75 |
| 40 |
| — |
| — |
| — |
| 114 |
| 4.3 |
|
No score(1) | 164 |
| 21 |
| — |
| — |
| — |
| 185 |
| 6.9 |
|
| Total | $ | 1,546 |
| $ | 1,134 |
| $ | — |
| $ | — |
| $ | — |
| $ | 2,680 |
| 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 about our TDRs at the dates indicated:
|
| | | | | | |
| | September 30,
2014 | December 31,
2013 |
| Aggregate recorded investment of impaired loans with terms modified through a troubled debt restructuring: | | |
| Accruing interest | $ | 69 |
| $ | 52 |
|
| Nonaccrual | 55 |
| 56 |
|
Total troubled debt restructurings (1) | $ | 124 |
| $ | 108 |
|
| |
(1) | Includes 87 and 40 acquired loans that were restructured with a recorded investment of $4 million and $1 million at September 30, 2014 and December 31, 2013, respectively. |
The modifications made to loans classified as TDRs typically consist of an extension of the payment terms, providing for a period with interest-only payments with deferred principal payments, 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 |
| Nine months ended September 30, 2014 | | | | |
| Commercial: | | | | |
| Commercial real estate | | | | |
| Extension of term | 5 |
| $ | 14 |
| $ | 1 |
| $ | — |
|
| Extension of term and rate reduction | 3 |
| 1 |
| — |
| — |
|
| Commercial business | | | | |
| Extension of term | 13 |
| 28 |
| 6 |
| 1 |
|
| Extension of term and rate reduction | 2 |
| — |
| — |
| — |
|
| Total commercial | 23 |
| 43 |
| 7 |
| 2 |
|
| Consumer: | | | | |
| Residential real estate | | | | |
| Extension of term | 4 |
| — |
| — |
| — |
|
| Rate reduction | 2 |
| — |
| — |
| — |
|
| Deferral of principal and extension of term | 7 |
| 1 |
| — |
| — |
|
| Extension of term and rate reduction | 7 |
| — |
| — |
| — |
|
| Chapter 7 bankruptcy | 14 |
| 1 |
| — |
| — |
|
| Home equity | | | | |
| Extension of term | 3 |
| — |
| — |
| — |
|
| Deferral of principal and extension of term | 2 |
| — |
| — |
| — |
|
| Extension of term and rate reduction | 7 |
| — |
| — |
| — |
|
| Chapter 7 Bankruptcy | 79 |
| 3 |
| — |
| — |
|
| Indirect auto | | | | |
| Chapter 7 Bankruptcy | 192 |
| 3 |
| — |
| — |
|
| Other consumer | | | | |
| Chapter 7 Bankruptcy | 33 |
| — |
| — |
| — |
|
| Total consumer | 350 |
| 10 |
| — |
| — |
|
| Total | 373 |
| $ | 53 |
| $ | 7 |
| $ | 2 |
|
| | | | | |
|
| | | | | | | | | | | |
| Type of Concession | Count | Postmodification recorded investment(1) | Premodification allowance for loan losses | Postmodification allowance for loan losses |
| Nine months ended September 30, 2013 | | | | |
| Commercial: | | | | |
| Commercial real estate | | | | |
| Extension of term | 5 |
| $ | 9 |
| $ | 1 |
| $ | 1 |
|
| Deferral of principal | 1 |
| 8 |
| — |
| — |
|
| Extension of term and rate reduction | 6 |
| 16 |
| 1 |
| — |
|
| Commercial business | | | | |
| Extension of term | 9 |
| 10 |
| 2 |
| — |
|
| Extension of term and rate reduction | 7 |
| 1 |
| — |
| — |
|
| Total commercial | 28 |
| 44 |
| 4 |
| 1 |
|
| Consumer: | | | | |
| Residential real estate | | | | |
| Extension of term | 2 |
| — |
| — |
| — |
|
| Rate reduction | 3 |
| — |
| — |
| — |
|
| Deferral of principal and extension of term | 4 |
| — |
| — |
| — |
|
| Extension of term and rate reduction | 10 |
| 2 |
| — |
| — |
|
| Chapter 7 Bankruptcy | 12 |
| 1 |
| — |
| — |
|
| Home equity | | | | |
| Deferral of principal and extension of term | 1 |
| — |
| — |
| — |
|
| Rate reduction | 2 |
| — |
| — |
| — |
|
| Extension of term and rate reduction | 2 |
| — |
| — |
| — |
|
| Chapter 7 Bankruptcy | 50 |
| 2 |
| — |
| — |
|
| Indirect auto | | | | |
| Chapter 7 Bankruptcy | 73 |
| 2 |
| — |
| — |
|
| Other consumer | | | | |
| Rate reduction | 1 |
| — |
| — |
| — |
|
| Extension of term and rate reduction | 1 |
| — |
| — |
| — |
|
| Chapter 7 Bankruptcy | 39 |
| — |
| — |
| — |
|
| Total consumer | 200 |
| 7 |
| — |
| — |
|
| Total | 228 |
| $ | 52 |
| $ | 4 |
| $ | 2 |
|
| |
(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 September 30, 2014 | | | | |
| Commercial: | | | | |
| Commercial business | | | | |
| Extension of term | 7 |
| $ | 1 |
| — |
| — |
|
| Total commercial | 7 |
| 1 |
| — |
| — |
|
| Consumer: | | | | |
| Residential real estate | | | | |
| Extension of term | 1 |
| — |
| — |
| — |
|
| Extension of term and rate reduction | 3 |
| — |
| — |
| — |
|
| Chapter 7 Bankruptcy | 2 |
| — |
| — |
| — |
|
| Home equity | | | | |
| Extension of term | 2 |
| — |
| — |
| — |
|
| Extension of term and rate reduction | 2 |
| — |
| — |
| — |
|
| Chapter 7 Bankruptcy | 20 |
| 1 |
| — |
| — |
|
| Indirect Auto | | | | |
| Chapter 7 Bankruptcy | 35 |
| 1 |
| — |
| — |
|
| Other consumer | | | | |
| Chapter 7 Bankruptcy | 7 |
| — |
| — |
| — |
|
| Total consumer | 72 |
| 2 |
| — |
| — |
|
| Total | 79 |
| $ | 4 |
| $ | — |
| $ | — |
|
| Three months ended September 30, 2013 | | | | |
| Commercial: | | | | |
| Commercial real estate | | | | |
| Extension of term | 1 |
| $ | 3 |
| $ | — |
| $ | — |
|
| Commercial business | | | | |
| Extension of term | 5 |
| 3 |
| — |
| — |
|
| Extension of term and rate reduction | 6 |
| 1 |
| — |
| — |
|
| Total commercial | 12 |
| 7 |
| 1 |
| — |
|
| Consumer: | | | | |
| Residential real estate | | | | |
| Extension of term | 1 |
| $ | — |
| $ | — |
| $ | — |
|
| Deferral of principal and extension of term | 2 |
| — |
| — |
| — |
|
| Extension of term and rate reduction | 4 |
| — |
| — |
| — |
|
| Chapter 7 Bankruptcy | 4 |
| — |
| — |
| — |
|
| Home equity | | | | |
| Rate reduction | 1 |
| — |
| — |
| — |
|
| Deferral of principal and extension of term | 1 |
| — |
| — |
| — |
|
| Extension of term and rate reduction | 1 |
| — |
| — |
| — |
|
| Chapter 7 Bankruptcy | 17 |
| 1 |
| — |
| — |
|
| Indirect auto | | | | |
| Chapter 7 Bankruptcy | 27 |
| 1 |
| — |
| — |
|
| Other consumer | | | | |
| Rate reduction | 1 |
| — |
| — |
| — |
|
| Extension of term and rate reduction | 1 |
| — |
| — |
| — |
|
| Chapter 7 Bankruptcy | 13 |
| — |
| — |
| — |
|
| Total consumer | 73 |
| 2 |
| — |
| — |
|
| Total | 85 |
| $ | 9 |
| $ | 1 |
| $ | — |
|
| |
(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 was $2 million and $0.1 million for the nine months ended September 30, 2014 and 2013, respectively.
Residential Mortgage Banking
The following table provides information about our residential mortgage banking activities at the dates indicated:
|
| | | | | | |
| | September 30, |
| | 2014 | 2013 |
| Mortgages serviced for others | $ | 3,796 |
| $ | 3,574 |
|
| Mortgage servicing asset recorded for loans serviced for others, net | 36 |
| 34 |
|
Note 3. Goodwill
The following table shows information regarding our goodwill for the periods indicated:
|
| | | | | | | | | |
| | Banking | Financial
services | Consolidated
total |
| Balances at January 1, 2013 | $ | 2,416 |
| $ | 68 |
| $ | 2,484 |
|
Purchase accounting adjustments(1) | (35 | ) | — |
| (35 | ) |
| Balances at December 31, 2013 | 2,381 |
| 68 |
| 2,449 |
|
| Acquisitions | — |
| 1 |
| 1 |
|
| Impairment | (1,100 | ) | — |
| (1,100 | ) |
| Balances at September 30, 2014 | $ | 1,281 |
| $ | 69 |
| $ | 1,350 |
|
(1) Establishment of deferred tax assets in connection with the HSBC Branch Acquisition and our National City Bank branch acquisition.
We perform our annual impairment test of goodwill on November 1st of each year or more often if events or circumstances have changed significantly from the annual test date.
For the period ending September 30, 2014, we concluded it was more likely than not that the fair value of our Banking reporting unit was less than its carrying value including goodwill, given our current expectations regarding the macroeconomic and industry environment, including our view of future interest rates and our current stock price range. Accordingly, we performed a Step 1 review for possible goodwill impairment in advance of our annual impairment testing date.
Under Step 1 of the goodwill impairment review, we calculated the fair value of the Banking reporting unit using a market approach, and compared the fair value to carrying value to identify potential impairment. Under Step 1, we determined that the carrying value of our Banking reporting unit exceeded its fair value. For Step 2, we compared the implied fair value of the Banking reporting unit's goodwill with the carrying amount of the goodwill for the Banking reporting unit.
Based on our assessments under both Steps 1 and 2, we have recorded an impairment of our Banking reporting unit goodwill of $1.1 billion during the quarter ended September 30, 2014.
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) |
| September 30, 2014 | | | | | |
| Derivatives designated as hedging instruments: | | | | | |
| Interest rate swap agreements | $ | 7 |
| $ | — |
| | $ | 28 |
| $ | 1 |
|
| Derivatives not designated as hedging instruments: | | | | | |
| Interest rate swap agreements | 3,336 |
| 68 |
| | 3,357 |
| 69 |
|
| Total derivatives | $ | 3,342 |
| $ | 68 |
| | $ | 3,385 |
| $ | 70 |
|
| December 31, 2013 | | | | | |
| Derivatives designated as hedging instruments: | | | | | |
| Interest rate swap agreements | $ | 22 |
| $ | — |
| | $ | 13 |
| $ | 1 |
|
| Derivatives not designated as hedging instruments: | | | | | |
| Interest rate swap agreements | 3,092 |
| 76 |
| | 3,094 |
| 76 |
|
| Total derivatives | $ | 3,114 |
| $ | 76 |
| | $ | 3,107 |
| $ | 77 |
|
| |
(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. |
Some of our interest rate swaps for which we had master netting arrangements with the counterparty were in a net liability position of $55 million and $49 million at September 30, 2014 and December 31, 2013, respectively. We offset $69 million and $76 million of liabilities with $14 million and $27 million of assets in our Consolidated Statement of Financial Condition at September 30, 2014 and December 31, 2013, respectively, 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 $80 million and $43 million at September 30, 2014 and December 31, 2013, respectively.
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 nine months ended September 30, 2014 and 2013.
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 September 30, 2014, we did not have any derivatives classified as cash flow hedges. At September 30, 2014, there was a $5 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 certain information about amounts recognized for our derivative financial instruments designated in cash flow hedging relationships for the periods indicated. |
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| Cash Flow Hedges | 2014 | | 2013 | | 2014 | | 2013 | |
| Interest rate swap agreements: | | | | | | | | |
| Amount of gain on derivatives recognized in other comprehensive income, net of tax | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| |
| Amount of (loss) on derivatives reclassified from other comprehensive income to income | — |
| (1) | — |
| (1) | (1 | ) | (1) | (1 | ) | (1) |
| | | | | | | | | |
| |
(1) | 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 $7 million and $14 million for the nine months ended September 30, 2014 and 2013, respectively, included in Capital Markets income in our Consolidated Statements of Operations.
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 September 30, | | Nine months ended September 30, |
| | 2014 | 2013 | | 2014 | 2013 |
| Net (loss) income available to common stockholders | $ | (931 | ) | $ | 72 |
| | $ | (813 | ) | $ | 195 |
|
| Less income allocable to unvested restricted stock awards | — |
| — |
| | 1 |
| 1 |
|
| Net (loss) income allocable to common stockholders | $ | (931 | ) | $ | 71 |
| | $ | (813 | ) | $ | 194 |
|
| Weighted average common shares outstanding: | | | | | |
| Total shares issued | 366 |
| 366 |
| | 366 |
| 366 |
|
| Unallocated employee stock ownership plan shares | (2 | ) | (2 | ) | | (2 | ) | (2 | ) |
| Unvested restricted stock awards | (3 | ) | (2 | ) | | (3 | ) | (2 | ) |
| Treasury shares | (11 | ) | (12 | ) | | (11 | ) | (13 | ) |
| Total basic weighted average common shares outstanding | 350 |
| 350 |
| | 350 |
| 349 |
|
| Effect of dilutive stock-based awards | — |
| 1 |
| | — |
| 1 |
|
| Total diluted weighted average common shares outstanding | 350 |
| 351 |
| | 350 |
| 350 |
|
| Basic (loss) earnings per common share | $ | (2.66 | ) | $ | 0.20 |
| | $ | (2.32 | ) | $ | 0.55 |
|
| Diluted (loss) earnings per common share | $ | (2.66 | ) | $ | 0.20 |
| | $ | (2.32 | ) | $ | 0.55 |
|
| Anti-dilutive stock-based awards excluded from the diluted weighted average common share calculations | 11 |
| 11 |
| | 11 |
| 11 |
|
Note 6. Other Comprehensive Loss
The following table presents the activity in our Other Comprehensive Loss for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | Pretax | Income
taxes | Net | | Pretax | Income
taxes | Net | |
| 2014 | | | | | | | | |
| Securities available for sale: | | | | | | | | |
| Net unrealized holding losses arising during the period | $ | (51 | ) | $ | (19 | ) | $ | (31 | ) | | $ | (14 | ) | $ | (5 | ) | $ | (9 | ) | |
| Net unrealized holding gains on securities transferred between available for sale and held to maturity: | | | | | | | | |
| Amortization of net unrealized holding gains to income during the period | (3 | ) | (1 | ) | (2 | ) | (1) | (10 | ) | (4 | ) | (6 | ) | (1) |
| Interest rate swaps designated as cash flow hedges: | | | | | | | | |
| Reclassification adjustment for realized losses included in net income | — |
| — |
| — |
| (2) | 1 |
| — |
| — |
| (2) |
| Amortization of net loss related to pension and post-retirement plans | — |
| — |
| — |
| | 1 |
| — |
| 1 |
| |
| Total other comprehensive loss | $ | (54 | ) | $ | (20 | ) | $ | (33 | ) | | $ | (23 | ) | $ | (9 | ) | $ | (14 | ) | |
| | | | | | | | | |
| 2013 | | | | | | | | |
| Securities available for sale: | | | | | | | | |
| Net unrealized holding losses arising during the period | $ | (12 | ) | $ | (4 | ) | $ | (7 | ) | | $ | (156 | ) | $ | (60 | ) | $ | (96 | ) | |
| Reclassification adjustment for net unrealized holding gains on securities transferred between available for sale and held to maturity | — |
| — |
| — |
| | (55 | ) | (21 | ) | (34 | ) | |
| Net unrealized losses on securities available for sale | (12 | ) | (4 | ) | (7 | ) | | (211 | ) | (81 | ) | (130 | ) | |
| Net unrealized holding gains on securities transferred between available for sale and held to maturity: | | | | | | | | |
| Net unrealized holding gains transferred during the period | — |
| — |
| — |
| | 55 |
| 21 |
| 34 |
| |
| Amortization of net unrealized holding gains to income during the period | (6 | ) | (2 | ) | (4 | ) | (1) | (16 | ) | (6 | ) | (10 | ) | (1) |
| Net unrealized holding (losses) gains on securities transferred during the period | (6 | ) | (2 | ) | (4 | ) | | 39 |
| 15 |
| 24 |
| |
| Interest rate swaps designated as cash flow hedges: | | | | | | | | |
| Reclassification adjustment for realized losses included in net income | — |
| — |
| — |
|
| 1 |
| — |
| 1 |
| (2) |
| Total other comprehensive loss | $ | (18 | ) | $ | (7 | ) | $ | (11 | ) | | $ | (171 | ) | $ | (65 | ) | $ | (105 | ) | |
| | | | | | | | | |
| |
(1) | Included in Interest income on investment securities and other in our Consolidated Statement of Operations. |
| |
(2) | Included in Interest expense on borrowings in our Consolidated Statement of Operations. |
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 gains (losses) on
securities transferred from
available for sale to
held to maturity | Unrealized loss on
interest rate
swaps designated as
cash flow hedges | Pension and postretirement plans | Total |
| Balance, January 1, 2014 | $ | 64 |
| $ | 20 |
| $ | (6 | ) | $ | (16 | ) | $ | 62 |
|
| Period change, net of tax | (9 | ) | (6 | ) | — |
| 1 |
| (14 | ) |
| Balance, September 30, 2014 | $ | 55 |
| $ | 14 |
| $ | (5 | ) | $ | (16 | ) | $ | 48 |
|
| Balance, January 1, 2013 | $ | 207 |
| $ | (2 | ) | $ | (6 | ) | $ | (41 | ) | $ | 157 |
|
| Period change, net of tax | (130 | ) | 24 |
| 1 |
| — |
| (105 | ) |
| Balance, September 30, 2013 | $ | 77 |
| $ | 22 |
| $ | (6 | ) | $ | (41 | ) | $ | 52 |
|
During the next twelve months, we expect to reclassify $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. We determine the fair value using third party pricing services, including brokers. As of September 30, 2014, none of our investment securities were priced utilizing broker quotes. 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 Operations 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 Operations.
There were no loans held for sale for which we elected the fair value option that were nonaccrual or 90 or more days past due as of September 30, 2014 or December 31, 2013. The table below presents information about our loans held for sale for which we elected the fair value option at the dates indicated:
|
| | | | | | |
| | September 30,
2014 | December 31,
2013 |
| Fair value carrying amount | $ | 30 |
| $ | 50 |
|
| Aggregate unpaid principal balance | 29 |
| 49 |
|
| Fair value carrying amount less aggregate unpaid principal balance | $ | 1 |
| $ | 1 |
|
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 |
| September 30, 2014 | | | | |
| Assets: | | | | |
| Investment securities available for sale: | | | | |
| Debt securities: | | | | |
| States and political subdivisions | $ | 489 |
| $ | — |
| $ | 489 |
| $ | — |
|
| U.S. Treasury | 20 |
| 20 |
| — |
| — |
|
| U.S. government sponsored enterprises | 155 |
| — |
| 155 |
| — |
|
| Corporate | 829 |
| — |
| 824 |
| 4 |
|
| Total debt securities | 1,493 |
| 20 |
| 1,469 |
| 4 |
|
| Mortgage-backed securities: | | | | |
| Residential mortgage-backed securities: | | | | |
| Government National Mortgage Association | 36 |
| — |
| 36 |
| — |
|
| Federal National Mortgage Association | 112 |
| — |
| 112 |
| — |
|
| Federal Home Loan Mortgage Corporation | 128 |
| — |
| 128 |
| — |
|
| Collateralized mortgage obligations: |
| | | |
| Federal National Mortgage Association | 707 |
| — |
| 707 |
| — |
|
| Federal Home Loan Mortgage Corporation | 356 |
| — |
| 356 |
| — |
|
| Total collateralized mortgage obligations | 1,062 |
| — |
| 1,062 |
| — |
|
| Total residential mortgage-backed securities | 1,338 |
| — |
| 1,338 |
| — |
|
| Commercial mortgage-backed securities, non-agency issued | 1,608 |
| — |
| 1,608 |
| — |
|
| Total mortgage-backed securities | 2,946 |
| — |
| 2,946 |
| — |
|
| Collateralized loan obligations, non-agency issued | 1,050 |
| — |
| 1,050 |
| — |
|
| Asset-backed securities collateralized by: | | | | |
| Student loans | 265 |
| — |
| 265 |
| — |
|
| Credit cards | 62 |
| — |
| 62 |
| — |
|
| Auto loans | 231 |
| — |
| 231 |
| — |
|
| Other | 128 |
| — |
| 128 |
| — |
|
| Total asset-backed securities | 687 |
| — |
| 687 |
| — |
|
| Other | 22 |
| 21 |
| 1 |
| — |
|
| Total securities available for sale | 6,198 |
| 42 |
| 6,152 |
| 4 |
|
Loans held for sale (1) | 30 |
| — |
| 30 |
| — |
|
| Derivatives | 54 |
| — |
| 54 |
| — |
|
| Total assets | $ | 6,282 |
| $ | 42 |
| $ | 6,236 |
| $ | 4 |
|
| Liabilities: | | | | |
| Derivatives | $ | 56 |
| $ | — |
| $ | 56 |
| $ | — |
|
| |
(1) | Represents loans for which we have elected the fair value option. |
|
| | | | | | | | | | | | |
| | Fair Value Measurements |
| | Total | Level 1 | Level 2 | Level 3 |
| December 31, 2013 | | | | |
| Assets: | | | | |
| Investment securities available for sale: | | | | |
| Debt securities: | | | | |
| States and political subdivisions | $ | 529 |
| $ | — |
| $ | 529 |
| $ | — |
|
| U.S. Treasury | 20 |
| 20 |
| — |
| — |
|
| U.S. government sponsored enterprises | 312 |
| — |
| 312 |
| — |
|
| Corporate | 872 |
| — |
| 868 |
| 4 |
|
| Total debt securities | 1,734 |
| 20 |
| 1,709 |
| 4 |
|
| Mortgage-backed securities: | | | | |
| Residential mortgage-backed securities: | | | | |
| Government National Mortgage Association | 40 |
| — |
| 40 |
| — |
|
| Federal National Mortgage Association | 139 |
| — |
| 139 |
| — |
|
| Federal Home Loan Mortgage Corporation | 159 |
| — |
| 159 |
| — |
|
| Collateralized mortgage obligations: | | | | |
| Federal National Mortgage Association | 761 |
| — |
| 761 |
| — |
|
| Federal Home Loan Mortgage Corporation | 379 |
| — |
| 379 |
| — |
|
| Non-agency issued | 13 |
| — |
| 13 |
| — |
|
| Total collateralized mortgage obligations | 1,152 |
| — |
| 1,152 |
| — |
|
| Total residential mortgage-backed securities | 1,490 |
| — |
| 1,490 |
| — |
|
| Commercial mortgage-backed securities, non-agency issued | 1,831 |
| — |
| 1,831 |
| — |
|
| Total mortgage-backed securities | 3,321 |
| — |
| 3,321 |
| — |
|
| Collateralized loan obligations, non-agency issued | 1,431 |
| — |
| 1,431 |
| — |
|
| Asset-backed securities collateralized by: | | | | |
| Student loans | 312 |
| — |
| 312 |
| — |
|
| Credit cards | 73 |
| — |
| 73 |
| — |
|
| Auto loans | 335 |
| — |
| 335 |
| — |
|
| Other | 186 |
| — |
| 186 |
| — |
|
| Total asset-backed securities | 905 |
| — |
| 905 |
| — |
|
| Other | 33 |
| 22 |
| 10 |
| — |
|
| Total securities available for sale | 7,423 |
| 43 |
| 7,376 |
| 4 |
|
Loans held for sale (1) | 50 |
| — |
| 50 |
| — |
|
| Derivatives | 49 |
| — |
| 49 |
| — |
|
| Total assets | $ | 7,522 |
| $ | 43 |
| $ | 7,476 |
| $ | 4 |
|
| Liabilities: | | | | |
| Derivatives | $ | 50 |
| $ | — |
| $ | 50 |
| $ | — |
|
| |
(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) |
| Nine months ended September 30, 2014 | | | | | |
| Collateral dependent impaired loans | $ | 11 |
| $ | — |
| $ | 10 |
| $ | 1 |
| $ | — |
|
| Nine months ended September 30, 2013 | | | | | |
| Collateral dependent impaired loans | $ | 24 |
| $ | — |
| $ | 14 |
| $ | 10 |
| $ | — |
|
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 nine months ended September 30, 2014, we recorded an increase of $0.3 million to our specific allowance as a result of adjusting the fair value of the collateral for certain collateral dependent impaired loans to $11 million at September 30, 2014, which is included in our provision for credit losses. During the nine months ended September 30, 2013 we recorded an increase of $0.4 million to our specific allowance as a result of adjusting the fair value of the collateral for certain collateral dependent impaired loans to $24 million at September 30, 2013, 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:
|
| | | | | | | | | | | | | |
| | Nine months ended September 30, |
| | 2014 | | 2013 |
| | Trust
preferred
securities | | Trust
preferred
securities | Collateralized
loan obligations | Total |
| Balance at beginning of period | $ | 4 |
| | $ | 14 |
| $ | 1,545 |
| $ | 1,559 |
|
| Purchases | — |
| | — |
| 73 |
| 73 |
|
| Settlements | — |
| | (9 | ) | (159 | ) | (168 | ) |
| Gains included in other comprehensive income | — |
| | 1 |
| 7 |
| 8 |
|
| Losses included in earnings | — |
| | (1 | ) | — |
| (1 | ) |
| Balance at end of period | $ | 4 |
| | $ | 5 |
| $ | 1,466 |
| $ | 1,471 |
|
Due to the lack of observable market data, we have classified our trust preferred securities, which are included in corporate debt securities, in Level 3 of the fair value hierarchy.
Our collateralized loan obligations ("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. In 2013, the markets for such securities were generally characterized by low trading volumes and wide bid-ask spreads, all driven by more limited market participants. Although estimated prices were generally obtained for such securities, the level of market observable assumptions used was 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. At September 30, 2013, our CLOs were classified in level 3 of the fair value hierarchy as fair values utilized significant unobservable inputs because observable market data was not available to incorporate into the pricing. The securities were 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 considered 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. During the fourth quarter of 2013, we transferred our CLOs from level 3 to level 2 of the fair value hierarchy based on increased trading activity and price transparency.
As of September 30, 2014 and December 31, 2013, the fair values of our trust preferred securities are based upon third party pricing without adjustment.
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:
|
| | | | | | | | | | | | | | | | | | | |
| | September 30, 2014 | | | December 31, 2013 | |
| | Carrying value | Estimated fair
value | Fair value
level | | Carrying value | Estimated fair
value | Fair value
level |
| Financial assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 451 |
| $ | 451 |
| 1 |
| | | $ | 463 |
| $ | 463 |
| 1 |
| |
| Investment securities available for sale | 6,198 |
| 6,198 |
| 1,2,3 |
| (1) | | 7,423 |
| 7,423 |
| 1,2,3 |
| (1) |
| Investment securities held to maturity | 5,352 |
| 5,323 |
| 2 |
| | | 4,042 |
| 3,988 |
| 2 |
| |
| Federal Home Loan Bank and Federal Reserve Bank common stock | 390 |
| 390 |
| 2 |
| | | 469 |
| 469 |
| 2 |
| |
| Loans held for sale | 31 |
| 31 |
| 2 |
| | | 50 |
| 50 |
| 2 |
| |
| Loans and leases, net | 22,538 |
| 22,807 |
| 2,3 |
| (2) | | 21,230 |
| 21,774 |
| 2,3 |
| (2) |
| Derivatives | 54 |
| 54 |
| 2 |
| | | 49 |
| 49 |
| 2 |
| |
| Accrued interest receivable | 106 |
| 106 |
| 2 |
| | | 103 |
| 103 |
| 2 |
| |
| Financial liabilities: | | | | | | | | | |
| Deposits | $ | 27,670 |
| $ | 27,683 |
| 2 |
| | | $ | 26,665 |
| $ | 26,695 |
| 2 |
| |
| Borrowings | 5,662 |
| 5,710 |
| 2 |
| | | 5,556 |
| 5,599 |
| 2 |
| |
| Derivatives | 56 |
| 56 |
| 2 |
| | | 50 |
| 50 |
| 2 |
| |
| Accrued interest payable | 12 |
| 12 |
| 2 |
| | | 10 |
| 10 |
| 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 $10 million and $20 million of collateral dependent impaired loans without significant adjustments made to appraised values at September 30, 2014 and December 31, 2013, 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 or when measuring goodwill for impairment.
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 September 30, 2014 | | | |
| Net interest income | $ | 273 |
| $ | — |
| $ | 273 |
|
| Provision for credit losses | 21 |
| — |
| 21 |
|
| Net interest income after provision for credit losses | 252 |
| — |
| 252 |
|
| Noninterest income | 57 |
| 18 |
| 75 |
|
| Amortization of intangibles | 6 |
| 1 |
| 7 |
|
| Goodwill impairment | 1,100 |
| — |
| 1,100 |
|
| Other noninterest expense | 276 |
| 14 |
| 290 |
|
| (Loss) income before income taxes | (1,073 | ) | 3 |
| (1,069 | ) |
| Income tax (benefit) expense | (147 | ) | 1 |
| (146 | ) |
| Net (loss) income | $ | (925 | ) | $ | 2 |
| $ | (923 | ) |
| Three months ended September 30, 2013 | | | |
| Net interest income | $ | 278 |
| $ | — |
| $ | 278 |
|
| Provision for credit losses | 28 |
| — |
| 28 |
|
| Net interest income after provision for credit losses | 250 |
| — |
| 250 |
|
| Noninterest income | 74 |
| 18 |
| 91 |
|
| Amortization of intangibles | 7 |
| 1 |
| 8 |
|
| Other noninterest expense | 210 |
| 13 |
| 223 |
|
| Income before income taxes | 106 |
| 4 |
| 110 |
|
| Income tax expense | 30 |
| 1 |
| 31 |
|
| Net income | $ | 77 |
| $ | 2 |
| $ | 79 |
|
| Nine months ended September 30, 2014 | | | |
| Net interest income | $ | 816 |
| $ | — |
| $ | 816 |
|
| Provision for credit losses | 69 |
| — |
| 69 |
|
| Net interest income after provision for credit losses | 747 |
| — |
| 747 |
|
| Noninterest income | 182 |
| 51 |
| 233 |
|
| Amortization of intangibles | 19 |
| 2 |
| 21 |
|
| Goodwill impairment | 1,100 |
| — |
| 1,100 |
|
| Other noninterest expense | 726 |
| 43 |
| 769 |
|
| (Loss) income before income taxes | (916 | ) | 6 |
| (910 | ) |
| Income tax (benefit) expense | (122 | ) | 2 |
| (120 | ) |
| Net (loss) income | $ | (794 | ) | $ | 4 |
| $ | (790 | ) |
| Nine months ended September 30, 2013 | | | |
| Net interest income | $ | 813 |
| $ | — |
| $ | 813 |
|
| Provision for credit losses | 73 |
| — |
| 73 |
|
| Net interest income after provision for credit losses | 740 |
| — |
| 740 |
|
| Noninterest income | 224 |
| 52 |
| 276 |
|
| Amortization of intangibles | 30 |
| 3 |
| 33 |
|
| Other noninterest expense | 632 |
| 39 |
| 671 |
|
| Income before income taxes | 302 |
| 10 |
| 312 |
|
| Income tax expense | 91 |
| 4 |
| 95 |
|
| Net income | $ | 211 |
| $ | 6 |
| $ | 218 |
|
Note 9. Condensed Parent Company Only Financial Statements
The following condensed statements of condition, the related condensed statements of income, and cash flows should be read in conjunction with our Consolidated Financial Statements and related notes:
|
| | | | | | |
| Condensed Statements of Condition | September 30,
2014 | December 31,
2013 |
| Assets: | | |
| Cash and cash equivalents | $ | 382 |
| $ | 390 |
|
| Investment securities available for sale | 1 |
| 3 |
|
| Loan receivable from ESOP | 21 |
| 21 |
|
| Investment in subsidiary | 4,361 |
| 5,255 |
|
| Deferred taxes | 31 |
| 34 |
|
| Other assets | 16 |
| 13 |
|
| Total assets | $ | 4,812 |
| $ | 5,715 |
|
| Liabilities and Stockholders’ Equity: | |
| |
|
| Accounts payable and other liabilities | $ | 12 |
| $ | 13 |
|
| Borrowings | 710 |
| 709 |
|
| Stockholders’ equity | 4,090 |
| 4,993 |
|
| Total liabilities and stockholders’ equity | $ | 4,812 |
| $ | 5,715 |
|
|
| | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| Condensed Statements of Operations | 2014 | 2013 | | 2014 | 2013 |
| Interest income | $ | — |
| $ | — |
| | $ | 1 |
| $ | 1 |
|
| Dividends received from subsidiary | — |
| 50 |
| | 80 |
| 125 |
|
| Total interest and dividend income | — |
| 50 |
| | 81 |
| 126 |
|
| Interest expense | 12 |
| 12 |
| | 36 |
| 36 |
|
| Net interest income | (12 | ) | 38 |
| | 45 |
| 90 |
|
| Noninterest income | — |
| — |
| | 3 |
| 1 |
|
| Noninterest expense | 7 |
| 6 |
| | 22 |
| 23 |
|
| Income before income taxes and undisbursed income of subsidiary | (19 | ) | 32 |
| | 25 |
| 68 |
|
| Income tax benefit | (8 | ) | (6 | ) | | (21 | ) | (22 | ) |
| Income before undisbursed income of subsidiary | (10 | ) | 39 |
| | 47 |
| 91 |
|
| Undisbursed (loss) income of subsidiary | (913 | ) | 41 |
| | (836 | ) | 127 |
|
| Net (loss) income | (923 | ) | 79 |
| | (790 | ) | 218 |
|
| Preferred stock dividend | 8 |
| 8 |
| | 23 |
| 23 |
|
| Net (loss) income available to common stockholders | $ | (931 | ) | $ | 72 |
| | $ | (813 | ) | $ | 195 |
|
| | | | | | |
| Net (loss) income | $ | (923 | ) | $ | 79 |
| | $ | (790 | ) | $ | 218 |
|
Other comprehensive loss(1) | (33 | ) | (11 | ) | | (14 | ) | (105 | ) |
| Total comprehensive (loss) income | $ | (956 | ) | $ | 68 |
| | $ | (804 | ) | $ | 112 |
|
| |
(1) | See Consolidated Statements of Comprehensive (Loss) Income for other comprehensive loss detail. |
|
| | | | | | |
| | Nine months ended September 30, |
| Condensed Statements of Cash Flows | 2014 | 2013 |
| Cash flows from operating activities: | | |
| Net (loss) income | $ | (790 | ) | $ | 218 |
|
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | |
| Undisbursed loss (income) of subsidiaries | 836 |
| (127 | ) |
| Stock-based compensation expense | 9 |
| 7 |
|
| Deferred income tax expense (benefit) | 2 |
| (17 | ) |
| Decrease in other assets | (5 | ) | 3 |
|
| Decrease in other liabilities | (1 | ) | (9 | ) |
| Net cash provided by operating activities | 51 |
| 75 |
|
| Cash flows from investing activities: | | |
| Principal payments received on securities available for sale | — |
| 1 |
|
| Purchases of securities available for sale | — |
| (2 | ) |
| Proceeds from sales of securities available for sale | 2 |
| — |
|
| Other, net | 1 |
| — |
|
| Net cash provided by (used in) investing activities | 3 |
| (1 | ) |
| Cash flows from financing activities: | | |
| Return of capital from subsidiary | 45 |
| — |
|
| Dividends paid on preferred stock | (23 | ) | (23 | ) |
| Dividends paid on common stock | (85 | ) | (84 | ) |
| Net cash used in financing activities | (62 | ) | (107 | ) |
| Net decrease in cash and cash equivalents | (8 | ) | (34 | ) |
| Cash and cash equivalents at beginning of period | 390 |
| 415 |
|
| Cash and cash equivalents at end of period | $ | 382 |
| $ | 381 |
|
|
| |
| 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 September 30, 2014 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 September 30, 2014.
During the quarter ended September 30, 2014, 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 2013 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 third quarter of 2014. |
|
| |
| ITEM 3. | Defaults Upon Senior Securities |
Not applicable.
|
| |
| ITEM 4. | Mine Safety Disclosures |
Not applicable.
(a) Executive Change in Control Severance Plan
In order to reduce the administrative burden associated with issuing and maintaining individual change in control agreements, and to ensure uniformity in severance benefits for executive officers, on November 6, 2014, the Compensation Committee of the Board of Directors of First Niagara Financial Group, Inc. (the “Company”) and the Compensation Committee of the Board of Directors of First Niagara Bank, N.A. (the “Bank”) adopted the First Niagara Bank Executive Change in Control Severance Plan (the “CIC Plan”), and entered into cancellation agreements with certain of our executive officers, including our Named Executive Officers, to terminate their existing change in control agreements (the “Agreements”) with us. Both the CIC Plan and the cancellation agreements will take effect on January 1, 2015. The severance benefits that executive officers, including our Named Executive Officers (the “CIC Participants”), are entitled to receive under the CIC Plan are substantially identical to the severance benefits they would have been entitled to receive under the Agreements, the form of which has been previously disclosed.
For purposes of the CIC Plan, a “Change in Control” is generally defined to mean (a) the acquisition of 30% or more of the common stock of the Company or the Bank; (b) certain changes in the composition of the Board of Directors of the Company or the Bank within a 24-month period; or (c) approval by the stockholders of the Company or the Bank, respectively, of a plan of dissolution or liquidation, a sale of all or substantially all of the Company’s or the Bank’s assets, respectively, or an agreement to merge, consolidate or reorganize, that results in less than 50% of the outstanding voting securities of the resulting entity being owned by the stockholders of the Company or the Bank, respectively. And a qualifying termination means a termination of employment by a Participant for Good Reason (as defined in the CIC Plan) or by us without Cause (as defined in the CIC Plan) within 24 months following a Change in Control.
If the payments or benefits to a CIC Participant would be treated as excess parachute payments for purposes of Section 280G of the Code, the payments and benefits may be reduced so that the CIC Participant is not subject to excise tax on such payments or benefits, but in no event is a CIC Participant entitled to be grossed-up for any income or excise taxes imposed on a CIC Participant with respect to the payments and benefits provided by the CIC Plan.
We will file a copy of the CIC Plan as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2014.
(b) Director Resignation Policy
On October 29, 2014, the Board of Directors (the “Board”) of First Niagara Financial Group, Inc. (the “Company”) revised the Company’s Corporate Governance Guidelines, effective immediately, to incorporate a director resignation policy for directors in uncontested elections (the “Director Resignation Policy”).
The Director Resignation Policy provides that in any uncontested election of directors, any nominee for director who receives a greater number of votes “withheld” from his or her election than votes “for” such election shall promptly tender his or her resignation to the Governance/Nominating Committee following certification of the shareholder vote. The Company’s Governance/Nominating Committee will promptly consider the resignation offer and will recommend to the Board whether to accept it. In making its recommendation, the Governance/Nominating Committee will consider all factors it deems relevant. The Board will act on the Governance/Nominating Committee’s recommendation within 90 days following certification of the shareholder vote. Following the Board’s decision, the Company will promptly disclose, in a Form 8-K, its decision whether to accept the resignation as tendered and will provide an explanation of how the decision was reached and, if applicable, the reasons for rejecting the tendered resignation.
The foregoing description of the Director Resignation Policy does not purport to be complete and is qualified in its entirety by the full text of the policy as set forth in the Company’s Corporate Governance Guidelines, which is available on the Company’s website and incorporated herein by reference.
The following exhibits are filed herewith:
|
| |
| Exhibits | |
| 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 Operations, (iii) the Consolidated Statements of Comprehensive (Loss) 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: November 10, 2014 | By: | /s/ Gary M. Crosby |
| | | Gary M. Crosby |
| | | President and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | |
| Date: November 10, 2014 | By: | /s/ Gregory W. Norwood |
| | | Gregory W. Norwood |
| | | Senior Executive Vice President and Chief Financial Officer |
| | | (Principal Financial Officer) |
