|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts
|
|
Gross Amounts Not Offset
|
|
|
|
Recognized
|
|
on the Consolidated
|
|
|
|
on the
|
|
Balance Sheets
|
|
|
|
Consolidated
|
|
Financial
|
|
Cash
|
|
Net
|
|
Balance Sheets
|
|
Instruments (1)
|
|
Collateral (2)
|
|
Amount
|
|
(in thousands)
|
June 30, 2014
|
|
|
|
|
|
|
|
Interest rate swap derivative assets
|
$
|
10,632
|
|
|
$
|
(687
|
)
|
|
$
|
—
|
|
|
$
|
9,945
|
|
Foreign exchange derivative assets with correspondent banks
|
144
|
|
|
(56
|
)
|
|
—
|
|
|
88
|
|
Total
|
$
|
10,776
|
|
|
$
|
(743
|
)
|
|
$
|
—
|
|
|
$
|
10,033
|
|
|
|
|
|
|
|
|
|
Interest rate swap derivative liabilities
|
$
|
10,632
|
|
|
$
|
(687
|
)
|
|
$
|
(692
|
)
|
|
$
|
9,253
|
|
Foreign exchange derivative liabilities with correspondent banks
|
60
|
|
|
(56
|
)
|
|
—
|
|
|
4
|
|
Total
|
$
|
10,692
|
|
|
$
|
(743
|
)
|
|
$
|
(692
|
)
|
|
$
|
9,257
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
Interest rate swap derivative assets
|
$
|
5,098
|
|
|
$
|
(2,104
|
)
|
|
$
|
—
|
|
|
$
|
2,994
|
|
|
|
|
|
|
|
|
|
Interest rate swap derivative liabilities
|
$
|
5,098
|
|
|
$
|
(2,104
|
)
|
|
$
|
(730
|
)
|
|
$
|
2,264
|
|
|
|
(1)
|
For interest rate swap and foreign exchange derivative assets, amounts represent any derivative liability fair values that could be offset in the event of counterparty or customer default. For interest rate swap and foreign exchange derivative liabilities, amounts represent any derivative asset fair values that could be offset in the event of counterparty or customer default.
|
|
|
(2)
|
Amounts represent cash collateral posted on interest rate swap transactions with financial institution counterparties. Interest rate swaps with customers are collateralized by the underlying loans to those borrowers.
|
NOTE L – Commitments and Contingencies
Commitments
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.
Those financial instruments include commitments to extend credit and letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized on the Corporation’s consolidated balance sheets. Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the outstanding amount of those instruments.
The outstanding amounts of commitments to extend credit and letters of credit were as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
December 31, 2013
|
|
(in thousands)
|
Commitments to extend credit
|
$
|
4,362,988
|
|
|
$
|
4,379,578
|
|
Standby letters of credit
|
369,383
|
|
|
391,445
|
|
Commercial letters of credit
|
34,632
|
|
|
36,344
|
|
The Corporation records a reserve for unfunded lending commitments, which represents management’s estimate of losses associated with unused commitments to extend credit. See Note E, "Loans and Allowance for Credit Losses," for additional details.
Residential Lending
Residential mortgages are originated and sold by the Corporation and consist primarily of conforming, prime loans sold to government sponsored agencies, such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The Corporation also sells a portion of prime loans to non-government sponsored agency investors.
The Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan or
reimburse the investor for a credit loss incurred on a loan if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. As of
June 30, 2014
and
December 31, 2013
, total outstanding repurchase requests totaled
$680,000
and
$8.8 million
, respectively. During the first quarter of
2014
, the Corporation entered into a settlement agreement with a secondary market investor. Under this agreement, the Corporation agreed to pay this investor
$4.5 million
to settle all outstanding and potential future repurchase requests under a series of specified loan purchase agreements with that secondary market investor. The result of this settlement was a reduction to outstanding repurchase requests of
$7.5 million
and a reduction to reserves for repurchases of
$5.1 million
, resulting in a
$600,000
reduction of operating risk loss on the consolidated statements of income during the six months ended June 30, 2014.
From
2000
to
2011
, the Corporation sold loans to the Federal Home Loan Bank of Pittsburgh under its Mortgage Partnership Finance Program (MPF Program). No loans were sold under this program during the six months ended
June 30, 2014
or during 2013 or 2012. The Corporation provided a "credit enhancement" for residential mortgage loans sold under the MPF Program whereby it would assume credit losses in excess of a defined "First Loss Account" (FLA) balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding principal balance of loans sold. As of
June 30, 2014
, the unpaid principal balance of loans sold under the MPF Program was approximately
$165 million
. As of
June 30, 2014
and
December 31, 2013
, the reserve for estimated credit losses related to loans sold under the MPF Program was
$2.4 million
and
$2.5 million
, respectively. Required reserves are calculated based on delinquency status and estimated loss rates established through the Corporation's existing allowance for credit losses methodology.
As of
June 30, 2014
and
December 31, 2013
, the total reserve for losses on residential mortgage loans sold was
$3.3 million
and
$8.6 million
, respectively, including both reserves for credit losses under the MPF Program and reserves for representation and warranty exposures. Management believes that the reserves recorded as of
June 30, 2014
are adequate. However, declines in collateral values, the identification of additional loans to be repurchased, or a deterioration in the credit quality of loans sold under the MPF Program could necessitate additional reserves in the future.
Regulatory Matters
In July 2014, three wholly owned banking subsidiaries of the Corporation, Fulton Bank, N.A., Swineford National Bank and FNB Bank, N.A., each entered into a Stipulation and Consent to the Issuance of a Consent Order (Consent Order) with their primary Federal bank regulatory agency, the Office of the Comptroller of the Currency relating to identified deficiencies in a centralized Bank Secrecy Act and anti-money laundering compliance program, which was designed to comply with the requirements of the Bank Secrecy Act, the USA Patriot Act of 2001 and related anti-money laundering regulations (collectively, the "BSA/AML Requirements") as disclosed by the Corporation in a Current Report on Form 8-K filed with the Securities and Exchange Commission on July 18, 2014 (Form 8-K). The Consent Orders require, among other things, that the banking subsidiaries review, assess and take actions to strengthen and enhance their compliance programs related to the BSA/AML Requirements (BSA/AML Compliance Program). In addition, the Form 8-K disclosed that the Corporation and its wholly owned subsidiary, Lafayette Ambassador Bank (Lafayette), anticipate that they will enter into a consent cease and desist order (Cease and Desist Order) with their primary Federal bank regulatory agency, the Board of Governors of the Federal Reserve System, in the near future. It is anticipated that the Cease and Desist Order will require the Corporation and Lafayette to strengthen the BSA/AML Compliance Program and will impose requirements similar to those set forth in the Consent Orders. Further, because the Consent Orders and the anticipated Cease and Desist Order relate to the BSA/AML Compliance Program, which is operated jointly for all of the Corporation’s subsidiary banks, the Corporation anticipates that one or more of the Corporation’s other subsidiary banks may also become the subject or subjects of a regulatory enforcement action related to the BSA/AML Requirements, and the provisions of any such enforcement action may differ from those of the Consent Orders.
Other Contingencies
The Corporation and its subsidiaries are involved in various legal proceedings in the ordinary course of business of the Corporation. The Corporation periodically evaluates the possible impact of pending litigation matters based on, among other factors, the advice of counsel, available insurance coverage and recorded liabilities and reserves for probable legal liabilities and costs. In addition, from time to time, the Corporation is the subject of investigations or other forms of regulatory or governmental inquiry covering a range of possible issues and, in some cases, these may be part of similar reviews of the specified activities of other industry participants. These inquiries could lead to administrative, civil or criminal proceedings, and could possibly result in fines, penalties, restitution or the need to alter the Corporation’s business practices, and cause the Corporation to incur additional costs. The Corporation’s practice is to cooperate fully with regulatory and governmental investigations.
As of the date of this report, the Corporation believes that any liabilities, individually or in the aggregate, which may result from the final outcomes of pending proceedings will not have a material adverse effect on the financial condition, the operating results
and/or the liquidity of the Corporation. However, legal proceedings are often unpredictable, and the actual results of such proceedings cannot be determined with certainty.
NOTE M – Fair Value Measurements
FASB ASC Topic 820 establishes a fair value hierarchy for the inputs to valuation techniques used to measure assets and liabilities at fair value using the following three categories (from highest to lowest priority):
|
|
•
|
Level 1 – Inputs that represent quoted prices for identical instruments in active markets.
|
|
|
•
|
Level 2 – Inputs that represent quoted prices for similar instruments in active markets, or quoted prices for identical instruments in non-active markets. Also includes valuation techniques whose inputs are derived principally from observable market data other than quoted prices, such as interest rates or other market-corroborated means.
|
|
|
•
|
Level 3 – Inputs that are largely unobservable, as little or no market data exists for the instrument being valued.
|
The Corporation has categorized all assets and liabilities measured at fair value on both a recurring and nonrecurring basis into the above three levels.
The following tables present summaries of the Corporation’s assets and liabilities measured at fair value on a recurring basis and reported on the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in thousands)
|
Mortgage loans held for sale
|
$
|
—
|
|
|
$
|
36,079
|
|
|
$
|
—
|
|
|
$
|
36,079
|
|
Available for sale investment securities:
|
|
|
|
|
|
|
|
Equity securities
|
45,884
|
|
|
364
|
|
|
—
|
|
|
46,248
|
|
U.S. Government securities
|
—
|
|
|
525
|
|
|
—
|
|
|
525
|
|
U.S. Government sponsored agency securities
|
—
|
|
|
260
|
|
|
—
|
|
|
260
|
|
State and municipal securities
|
—
|
|
|
269,823
|
|
|
—
|
|
|
269,823
|
|
Corporate debt securities
|
—
|
|
|
92,558
|
|
|
8,095
|
|
|
100,653
|
|
Collateralized mortgage obligations
|
—
|
|
|
1,002,731
|
|
|
—
|
|
|
1,002,731
|
|
Mortgage-backed securities
|
—
|
|
|
930,605
|
|
|
—
|
|
|
930,605
|
|
Auction rate securities
|
—
|
|
|
—
|
|
|
146,931
|
|
|
146,931
|
|
Total available for sale investments
|
45,884
|
|
|
2,296,866
|
|
|
155,026
|
|
|
2,497,776
|
|
Other assets
|
16,306
|
|
|
13,056
|
|
|
—
|
|
|
29,362
|
|
Total assets
|
$
|
62,190
|
|
|
$
|
2,346,001
|
|
|
$
|
155,026
|
|
|
$
|
2,563,217
|
|
Other liabilities
|
$
|
16,242
|
|
|
$
|
12,399
|
|
|
$
|
—
|
|
|
$
|
28,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in thousands)
|
Mortgage loans held for sale
|
$
|
—
|
|
|
$
|
21,351
|
|
|
$
|
—
|
|
|
$
|
21,351
|
|
Available for sale investment securities:
|
|
|
|
|
|
|
|
Equity securities
|
46,201
|
|
|
—
|
|
|
—
|
|
|
46,201
|
|
U.S. Government securities
|
—
|
|
|
525
|
|
|
—
|
|
|
525
|
|
U.S. Government sponsored agency securities
|
—
|
|
|
726
|
|
|
—
|
|
|
726
|
|
State and municipal securities
|
—
|
|
|
284,849
|
|
|
—
|
|
|
284,849
|
|
Corporate debt securities
|
—
|
|
|
89,662
|
|
|
9,087
|
|
|
98,749
|
|
Collateralized mortgage obligations
|
—
|
|
|
1,032,398
|
|
|
—
|
|
|
1,032,398
|
|
Mortgage-backed securities
|
—
|
|
|
945,712
|
|
|
—
|
|
|
945,712
|
|
Auction rate securities
|
—
|
|
|
—
|
|
|
159,274
|
|
|
159,274
|
|
Total available for sale investments
|
46,201
|
|
|
2,353,872
|
|
|
168,361
|
|
|
2,568,434
|
|
Other assets
|
15,779
|
|
|
7,227
|
|
|
—
|
|
|
23,006
|
|
Total assets
|
$
|
61,980
|
|
|
$
|
2,382,450
|
|
|
$
|
168,361
|
|
|
$
|
2,612,791
|
|
Other liabilities
|
$
|
15,648
|
|
|
$
|
5,161
|
|
|
$
|
—
|
|
|
$
|
20,809
|
|
The valuation techniques used to measure fair value for the items in the preceding tables are as follows:
|
|
•
|
Mortgage loans held for sale
– This category consists of mortgage loans held for sale that the Corporation has elected to measure at fair value. Fair values as of
June 30, 2014
and
December 31, 2013
were measured based on the price that secondary market investors were offering for loans with similar characteristics.
|
|
|
•
|
Available for sale investment securities
– Included within this asset category are both equity and debt securities. Level 2 available for sale debt securities are valued by a third-party pricing service commonly used in the banking industry. The pricing service uses pricing models that vary based on asset class and incorporate available market information, including quoted prices of investment securities with similar characteristics. Because many fixed income securities do not trade on a daily basis, pricing models use available information, as applicable, through processes such as benchmark yield curves, benchmarking of like securities, sector groupings, and matrix pricing.
|
Standard market inputs include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, including market research publications. For certain security types, additional inputs may be used, or some of the standard market inputs may not be applicable.
Management tests the values provided by the pricing service by obtaining securities prices from an alternative third-party source and comparing the results. This test is done for approximately
75%
of the securities valued by the pricing service. Generally, differences by security in excess of
5%
are researched to reconcile the difference.
|
|
•
|
Equity securities
– Equity securities consist of common stocks of financial institutions (
$40.2 million
at
June 30, 2014
and
$40.6 million
at
December 31, 2013
) and other equity investments (
$6.0 million
at
June 30, 2014
and
$5.6 million
at
December 31, 2013
). These Level 1 investments are measured at fair value based on quoted prices for identical securities in active markets.
|
|
|
•
|
U.S. Government securities/U.S. Government sponsored agency securities/State and municipal securities/Collateralized mortgage obligations/Mortgage-backed securities
– These debt securities are classified as Level 2 investments. Fair values are determined by a third-party pricing service, as detailed above.
|
|
|
•
|
Corporate debt securities
– This category consists of subordinated debt issued by financial institutions (
$50.6 million
at
June 30, 2014
and
$50.3 million
at
December 31, 2013
), single-issuer trust preferred securities issued by financial institutions (
$43.2 million
at
June 30, 2014
and
$40.5 million
at
December 31, 2013
), pooled trust preferred securities issued by financial institutions (
$4.3 million
at
June 30, 2014
and
$5.3 million
at
December 31, 2013
) and other corporate debt issued by non-financial institutions (
$2.6 million
at
June 30, 2014
and
December 31, 2013
).
|
Level 2 investments include the Corporation’s holdings of subordinated debt, other corporate debt issued by non-financial institutions and
$39.4 million
and
$36.7 million
of single-issuer trust preferred securities held at
June 30, 2014
and
December 31, 2013
, respectively. The fair values for these corporate debt securities are determined by a third-party pricing service, as detailed above.
Level 3 investments include the Corporation’s investments in pooled trust preferred securities and certain single-issuer trust preferred securities (
$3.8 million
at
June 30, 2014
and
December 31, 2013
). The fair values of these securities were determined based on quotes provided by third-party brokers who determined fair values based predominantly on internal valuation models which were not indicative prices or binding offers. The Corporation’s third-party pricing service cannot derive fair values for these securities primarily due to inactive markets for similar investments. Level 3 values are tested by management primarily through trend analysis, by comparing current values to those reported at the end of the preceding calendar quarter, and determining if they are reasonable based on price and spread movements for this asset class.
|
|
•
|
Auction rate securities
– Due to their illiquidity, ARCs are classified as Level 3 investments and are valued through the use of an expected cash flows model prepared by a third-party valuation expert. The assumptions used in preparing the expected cash flows model include estimates for coupon rates, time to maturity and market rates of return. The most significant unobservable input to the expected cash flows model is an assumed return to market liquidity sometime within the next
five
years. If the assumed return to market liquidity was lengthened beyond the next
five
years, this would result in a decrease in the fair value of these ARCs. The Corporation believes that the trusts underlying the ARCs will self-liquidate as student loans are repaid. Level 3 values are tested by management through the performance of a trend analysis of the market price and discount rate. Changes in the price and discount rates are compared to changes in market data, including bond ratings, parity ratios, balances and delinquency levels.
|
|
|
•
|
Other assets
– Included within this category are the following:
|
|
|
•
|
Level 1 assets include mutual funds that are held in trust for employee deferred compensation plans (
$16.1 million
at
June 30, 2014
and
$15.3 million
at
December 31, 2013
) and the fair value of foreign currency exchange contracts (
$225,000
at
June 30, 2014
and
$522,000
at
December 31, 2013
). The mutual funds and foreign exchange prices used to measure these items at fair value are based on quoted prices for identical instruments in active markets.
|
|
|
•
|
Level 2 assets include the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors (
$2.4 million
at
June 30, 2014
and
$2.1 million
at
December 31, 2013
) and the fair value of interest rate swaps (
$10.6 million
at
June 30, 2014
and
$5.1 million
at
December 31, 2013
). The fair values of the Corporation’s interest rate locks, forward commitments and interest rate swaps represent the amounts that would be required to settle the derivative financial instruments at the balance sheet date. See Note I, "Derivative Financial Instruments," for additional information.
|
|
|
•
|
Other liabilities
– Included within this category are the following:
|
|
|
•
|
Level 1 liabilities include employee deferred compensation liabilities which represent amounts due to employees under deferred compensation plans (
$16.1 million
at
June 30, 2014
and
$15.3 million
at
December 31, 2013
) and the fair value of foreign currency exchange contracts (
$163,000
at
June 30, 2014
and
$391,000
at
December 31, 2013
). The fair value of these liabilities are determined in the same manner as the related assets, as described under the heading "Other assets" above.
|
|
|
•
|
Level 2 liabilities include the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors (
$1.8 million
at
June 30, 2014
and
$64,000
at
December 31, 2013
) and the fair value of interest rate swaps (
$10.6 million
at
June 30, 2014
and
$5.1 million
at
December 31, 2013
). The fair values of these liabilities are determined in the same manner as the related assets, as described under the heading "Other assets" above.
|
The following table presents the changes in the Corporation’s available for sale investment securities measured at fair value on a recurring basis using unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2014
|
|
Pooled Trust
Preferred
Securities
|
|
Single-issuer
Trust Preferred
Securities
|
|
ARCs
|
|
(in thousands)
|
Balance at March 31, 2014
|
$
|
5,659
|
|
|
$
|
3,820
|
|
|
$
|
147,713
|
|
Sales
|
(1,394
|
)
|
|
—
|
|
|
—
|
|
Unrealized adjustment to fair value (1)
|
38
|
|
|
(2
|
)
|
|
124
|
|
Settlements - calls
|
(28
|
)
|
|
—
|
|
|
(1,081
|
)
|
Discount accretion (2)
|
—
|
|
|
2
|
|
|
175
|
|
Balance at June 30, 2014
|
$
|
4,275
|
|
|
$
|
3,820
|
|
|
$
|
146,931
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2013
|
Balance at March 31, 2013
|
$
|
8,356
|
|
|
$
|
3,370
|
|
|
$
|
154,639
|
|
Sales
|
(3,286
|
)
|
|
—
|
|
|
—
|
|
Unrealized adjustment to fair value (1)
|
445
|
|
|
297
|
|
|
(172
|
)
|
Settlements - calls
|
(124
|
)
|
|
—
|
|
|
(2,066
|
)
|
Discount accretion (2)
|
—
|
|
|
3
|
|
|
191
|
|
Balance at June 30, 2013
|
$
|
5,391
|
|
|
$
|
3,670
|
|
|
$
|
152,592
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2014
|
|
Pooled Trust
Preferred
Securities
|
|
Single-issuer
Trust Preferred
Securities
|
|
ARCs
|
|
(in thousands)
|
Balance at December 31, 2013
|
$
|
5,306
|
|
|
$
|
3,781
|
|
|
$
|
159,274
|
|
Sales
|
(1,394
|
)
|
|
—
|
|
|
(11,912
|
)
|
Unrealized adjustment to fair value (1)
|
559
|
|
|
36
|
|
|
248
|
|
Settlements - calls
|
(200
|
)
|
|
—
|
|
|
(1,081
|
)
|
Discount accretion (2)
|
4
|
|
|
3
|
|
|
402
|
|
Balance at June 30, 2014
|
$
|
4,275
|
|
|
$
|
3,820
|
|
|
$
|
146,931
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2013
|
Balance at December 31, 2012
|
$
|
6,927
|
|
|
$
|
3,360
|
|
|
$
|
149,339
|
|
Sales
|
(3,286
|
)
|
|
—
|
|
|
—
|
|
Unrealized adjustment to fair value (1)
|
1,874
|
|
|
304
|
|
|
5,188
|
|
Settlements - calls
|
(124
|
)
|
|
—
|
|
|
(2,408
|
)
|
Discount accretion (2)
|
—
|
|
|
6
|
|
|
473
|
|
Balance at June 30, 2013
|
$
|
5,391
|
|
|
$
|
3,670
|
|
|
$
|
152,592
|
|
|
|
|
|
|
|
|
|
(1)
|
Pooled trust preferred securities, single-issuer trust preferred securities and ARCs are classified as available for sale investment securities; as such, the unrealized adjustment to fair value was recorded as an unrealized holding gain (loss) and included as a component of available for sale investment securities on the consolidated balance sheets.
|
|
|
(2)
|
Included as a component of net interest income on the consolidated statements of income.
|
Certain financial assets are not measured at fair value on an ongoing basis, but are subject to fair value measurement in certain circumstances, such as upon their acquisition or when there is evidence of impairment. The following table presents the Corporation’s financial assets measured at fair value on a nonrecurring basis and reported on the Corporation’s consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in thousands)
|
Net loans
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
134,643
|
|
|
$
|
134,643
|
|
Other financial assets
|
—
|
|
|
—
|
|
|
56,068
|
|
|
56,068
|
|
Total assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
190,711
|
|
|
$
|
190,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in thousands)
|
Net loans
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
138,666
|
|
|
$
|
138,666
|
|
Other financial assets
|
—
|
|
|
—
|
|
|
57,504
|
|
|
57,504
|
|
Total assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
196,170
|
|
|
$
|
196,170
|
|
The valuation techniques used to measure fair value for the items in the table above are as follows:
|
|
•
|
Net loans
– This category consists of loans that were evaluated for impairment under FASB ASC Section 310-10-35 and have been classified as Level 3 assets. The amount shown is the balance of impaired loans, net of the related allowance for loan losses. See Note E, "Loans and Allowance for Credit Losses," for additional details.
|
|
|
•
|
Other financial assets
– This category includes OREO (
$13.5 million
at
June 30, 2014
and
$15.1 million
at
December 31, 2013
) and MSRs (
$42.6 million
at
June 30, 2014
and
$42.5 million
at
December 31, 2013
), both classified as Level 3 assets.
|
Fair values for OREO were based on estimated selling prices less estimated selling costs for similar assets in active markets.
MSRs are initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are stratified and evaluated for impairment by comparing each stratum's carrying amount to its estimated fair value. Fair values are determined at the end of each quarter through a discounted cash flows valuation performed by a third-party valuation expert. Significant inputs to the valuation included expected net servicing income, the discount rate and the expected life of the underlying loans. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The weighted average annual constant prepayment rate and the weighted average discount rate used in the
June 30, 2014
valuation were
12.1%
and
9.1%
, respectively. Management tests the reasonableness of the significant inputs to the third-party valuation in comparison to market data.
As required by FASB ASC Section 825-10-50, the following table details the book values and estimated fair values of the Corporation’s financial instruments as of
June 30, 2014
and
December 31, 2013
. In addition, a general description of the methods and assumptions used to estimate such fair values is also provided.
Fair values of financial instruments are significantly affected by the assumptions used, principally the timing of future cash flows and discount rates. Because assumptions are inherently subjective in nature, the estimated fair values cannot be substantiated by comparison to independent market quotes and, in many cases, the estimated fair values could not necessarily be realized in an immediate sale or settlement of the instrument. The aggregate fair value amounts presented do not necessarily represent management’s estimate of the underlying value of the Corporation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
Book Value
|
|
Estimated
Fair Value
|
|
Book Value
|
|
Estimated
Fair Value
|
|
(in thousands)
|
FINANCIAL ASSETS
|
|
|
|
|
|
|
|
Cash and due from banks
|
$
|
258,837
|
|
|
$
|
258,837
|
|
|
$
|
218,540
|
|
|
$
|
218,540
|
|
Interest-bearing deposits with other banks
|
222,894
|
|
|
222,894
|
|
|
163,988
|
|
|
163,988
|
|
Federal Reserve Bank and Federal Home Loan Bank stock
|
82,624
|
|
|
82,624
|
|
|
84,173
|
|
|
84,173
|
|
Loans held for sale (1)
|
36,079
|
|
|
36,079
|
|
|
21,351
|
|
|
21,351
|
|
Available for sale investment securities (1)
|
2,497,776
|
|
|
2,497,776
|
|
|
2,568,434
|
|
|
2,568,434
|
|
Loans, net of unearned income (1)
|
12,839,511
|
|
|
12,744,881
|
|
|
12,782,220
|
|
|
12,688,774
|
|
Accrued interest receivable
|
42,116
|
|
|
42,116
|
|
|
44,037
|
|
|
44,037
|
|
Other financial assets (1)
|
155,336
|
|
|
155,336
|
|
|
146,933
|
|
|
146,933
|
|
FINANCIAL LIABILITIES
|
|
|
|
|
|
|
|
Demand and savings deposits
|
$
|
9,677,654
|
|
|
$
|
9,677,654
|
|
|
$
|
9,573,264
|
|
|
$
|
9,573,264
|
|
Time deposits
|
3,016,005
|
|
|
3,025,680
|
|
|
2,917,922
|
|
|
2,927,374
|
|
Short-term borrowings
|
1,008,307
|
|
|
1,008,307
|
|
|
1,258,629
|
|
|
1,258,629
|
|
Accrued interest payable
|
16,647
|
|
|
16,647
|
|
|
15,218
|
|
|
15,218
|
|
Other financial liabilities (1)
|
165,358
|
|
|
165,358
|
|
|
124,440
|
|
|
124,440
|
|
Federal Home Loan Bank advances and long-term debt
|
968,395
|
|
|
964,797
|
|
|
883,584
|
|
|
875,984
|
|
|
|
(1)
|
These financial instruments, or certain financial instruments within these categories, are measured at fair value on the Corporation’s consolidated balance sheets. Descriptions of the fair value determinations for these financial instruments are disclosed above.
|
For short-term financial instruments, defined as those with remaining maturities of
90
days or less, and excluding those recorded at fair value on the Corporation’s consolidated balance sheets, book value was considered to be a reasonable estimate of fair value.
The following instruments are predominantly short-term:
|
|
|
|
Assets
|
|
Liabilities
|
Cash and due from banks
|
|
Demand and savings deposits
|
Interest bearing deposits with other banks
|
|
Short-term borrowings
|
Accrued interest receivable
|
|
Accrued interest payable
|
Federal Reserve Bank and Federal Home Loan Bank stock represent restricted investments and are carried at cost on the consolidated balance sheets
.
Each of the Corporation’s subsidiary banks is a member of the Federal Home Loan Bank for the region encompassing the headquarters of the subsidiary bank. Memberships are maintained with the Atlanta, New York and Pittsburgh regional Federal Home Loan Banks (collectively referred to as the "FHLB").
Fair values for loans and time deposits were estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers and similar deposits would be issued to customers for the same remaining maturities. Fair values estimated in this manner do not fully incorporate an exit price approach to fair value, as defined in FASB ASC Topic 820.
The fair values of FHLB advances and long-term debt were estimated by discounting the remaining contractual cash flows using a rate at which the Corporation could issue debt with similar remaining maturities as of the balance sheet date. These borrowings would be categorized within Level 2 liabilities under FASB ASC Topic 820.
NOTE N – Common Stock Repurchase Plans
In
October 2013
, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation was authorized to repurchase up to
4.0 million
shares, or approximately
2.1%
of its outstanding shares, through
March 2014
. During the first quarter of 2014, the Corporation repurchased
4.0 million
shares under this repurchase plan at an average cost of
$12.45
per share, completing this repurchase program on February 19, 2014.
In
May 2014
, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation was authorized to repurchase up to
4.0 million
shares, or approximately
2.1%
of its outstanding shares, through
December 31, 2014
.
No
shares were repurchased under this repurchase plan during the three and
six months ended June 30,
2014
.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion) relates to Fulton Financial Corporation (the Corporation), a financial holding company registered under the Bank Holding Company Act of 1956 and incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly owned subsidiaries. Management’s Discussion should be read in conjunction with the consolidated financial statements and notes presented in this report.
FORWARD-LOOKING STATEMENTS
The Corporation has made, and may continue to make, certain forward-looking statements with respect to its financial condition and results of operations. Do not unduly rely on forward-looking statements. Forward-looking statements can be identified by the use of words such as "may," "should," "will," "could," "estimates," "predicts," "potential," "continue," "anticipates," "believes," "plans," "expects," "future," "intends" and similar expressions which are intended to identify forward-looking statements.
These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties, some of which are beyond the Corporation's control and ability to predict, that could cause actual results to differ materially from those expressed in the forward-looking statements. The Corporation undertakes no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Many factors could affect future financial results including, without limitation:
|
|
•
|
the impact of adverse changes in the economy and real estate markets, including protracted periods of low-growth and sluggish loan demand;
|
|
|
•
|
increases in non-performing assets, which may require the Corporation to increase the allowance for credit losses, charge-off loans and incur elevated collection and carrying costs related to such non-performing assets;
|
|
|
•
|
the effects of market interest rates, particularly a continuing period of low market interest rates, and relative balances of rate-sensitive assets to rate-sensitive liabilities, on net interest margin and net interest income;
|
|
|
•
|
capital and liquidity strategies, including the Corporation’s ability to comply with applicable capital and liquidity requirements (including the finalized Basel III capital standards), and the Corporation’s ability to generate capital internally or raise capital on favorable terms;
|
|
|
•
|
investment securities gains and losses, including other-than-temporary declines in the value of securities which may result in charges to earnings;
|
|
|
•
|
the impact of non-interest income growth, including the impact of potential regulatory changes;
|
|
|
•
|
the impact of increased regulatory scrutiny of the banking industry;
|
|
|
•
|
the effects of the increasing time and expense associated with regulatory compliance and risk management;
|
|
|
•
|
the additional time, expense and investment required to comply with, and the restrictions on potential growth and investment activities resulting from, the issuance of enforcement orders by federal bank regulatory agencies;
|
|
|
•
|
the Corporation’s ability to manage the uncertainty and lack of clear regulatory guidance associated with the delay in implementing many of the regulations mandated by the Dodd-Frank Act;
|
|
|
•
|
the impact of operational risk, i.e. the risk of loss resulting from human error, inadequate or failed internal processes and systems, outsourcing arrangements, compliance and legal risk and external events;
|
|
|
•
|
the Corporation’s ability to manage the level of non-interest expenses, including salaries and employee benefits expenses, operating risk losses, amortization of intangible assets and goodwill impairment;
|
|
|
•
|
the Corporation’s ability to keep pace with technological changes and to identify and to address cyber-security risks;
|
|
|
•
|
the effects of competition on rates of deposit, loan growth and net interest margin; and
|
|
|
•
|
any damage to the Corporation’s reputation resulting from developments related to any of the items identified above.
|
RESULTS OF OPERATIONS
Overview and Summary Financial Results
Fulton Financial Corporation is a financial holding company comprised of six wholly owned banking subsidiaries which provide a full range of retail and commercial financial services in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. The Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and/or maintaining or increasing the net interest margin, which is net interest income (fully taxable-equivalent, or FTE) as a percentage of average interest-earning assets. The Corporation also generates revenue through fees earned on the various
services and products offered to its customers and through gains on sales of assets, such as loans, investments, lines of business or properties. Offsetting these revenue sources are provisions for credit losses on loans, non-interest expenses and income taxes.
The following table presents a summary of the Corporation’s earnings and selected performance ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the
Three months ended
June 30
|
|
As of or for the
Six months ended
June 30
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Income before income taxes (in thousands)
|
$
|
53,096
|
|
|
$
|
53,751
|
|
|
$
|
109,113
|
|
|
$
|
104,718
|
|
Net income (in thousands)
|
$
|
39,596
|
|
|
$
|
40,582
|
|
|
$
|
81,379
|
|
|
$
|
79,809
|
|
Diluted net income per share
|
$
|
0.21
|
|
|
$
|
0.21
|
|
|
$
|
0.43
|
|
|
$
|
0.41
|
|
Return on average assets
|
0.94
|
%
|
|
0.97
|
%
|
|
0.97
|
%
|
|
0.97
|
%
|
Return on average equity
|
7.63
|
%
|
|
7.89
|
%
|
|
7.92
|
%
|
|
7.78
|
%
|
Net interest margin (1)
|
3.41
|
%
|
|
3.52
|
%
|
|
3.44
|
%
|
|
3.54
|
%
|
Non-performing assets to total assets
|
0.96
|
%
|
|
1.23
|
%
|
|
0.96
|
%
|
|
1.23
|
%
|
Annualized net charge-offs to average loans
|
0.28
|
%
|
|
0.56
|
%
|
|
0.27
|
%
|
|
0.59
|
%
|
|
|
(1)
|
Presented on an FTE basis, using a 35% Federal tax rate and statutory interest expense disallowances. See also the “Net Interest Income” section of Management’s Discussion.
|
Income before income taxes for the
second
quarter of
2014
decreased
$655,000
, or
1.2%
, compared to the
second
quarter of
2013
. For the first half of
2014
, income before taxes increased
$4.4 million
, or
4.2%
, compared to the same period in
2013
.
The Corporation's results for the three and
six
months ended
June 30, 2014
in comparison to the same periods in
2013
were most significantly impacted by improved asset quality, resulting in decreases in the provision for credit losses and lower net interest income and non-interest income, partially offset by decreases in non-interest expense.
Following is a summary of these and other noteworthy items for the
second
quarter of
2014
:
Asset Quality
- For the three and
six
months ended
June 30, 2014
, the Corporation's provision for credit losses decreased
$10.0 million
, or
74.1%
, and $22.5 million, or 78.9%, respectively, in comparison to the same periods in
2013
. These decreases were due to an overall improvement in asset quality.
Non-performing loans decreased $39.9 million, or 21.1%, since
June 30, 2013
. The total delinquency rate was 1.75% as of
June 30, 2014
, compared to 2.18% as of
June 30, 2013
. Annualized net charge-offs to average loans outstanding were 0.28% for the
second
quarter of 2014, compared to 0.56% for the
second
quarter of 2013.
Net Interest Income and Net Interest Margin
- For the three and
six
months ended
June 30, 2014
, net interest income decreased
$4.2 million
, or 3.2%, and $4.2 million, or 1.6%, respectively, in comparison to the same periods in
2013
. Net interest income for the three and
six
months ended
June 30, 2014
was negatively impacted by net interest margin compression as yields on interest-earning assets declined more significantly than the cost of interest-bearing liabilities in comparison to the same periods in 2013. The net interest margin for the
second
quarter of 2014 decreased
11
basis points, or
3.1%
, in comparison to the
second
quarter of
2013
. For the
six
months ended
June 30, 2014
, net interest margin decreased 10 basis points, or 2.8%, in comparison to the same period of
2013
.
Partially offsetting the impact of the decreasing yields was growth in average interest-earning assets. Average interest-earning assets increased
$38.9 million
, or
0.3%
, in the second quarter of 2014 in comparison to the same period of
2013
, mainly due to a
$267.2 million
, or
2.1%
, increase in average loans, partially offset by a $215.9 million, or 7.9%, decrease in investments. Average interest-earning assets during the first half of 2014 increased $194.7 million compared to the same period in 2013, primarily as a result of a $385.5 million, or 3.1%, increase in average loans, partially offset by a $201.4 million, or 7.3%, decrease in investments.
Non-interest Income
- For the three and
six
months ended
June 30, 2014
, non-interest income, excluding investment securities gains, decreased
$5.7 million
, or
11.5%
, and
$12.0 million
,
12.7%
, respectively, in comparison to the same periods in
2013
. The decreases in non-interest income were primarily due to decreases in mortgage banking income, as gains on sales of residential mortgages were impacted by lower refinancing volumes. Also contributing to the decreases in non-interest income were declines in service charges on deposits, particularly in overdraft fee income.
Non-interest Expense
- For the three and
six
months ended
June 30, 2014
, non-interest expense decreased
$956,000
, or
0.8%
, and $2.3 million, or 1.0%, respectively, in comparison to the same periods in
2013
. These decreases were primarily driven by decreases in other real estate owned (OREO) and repossession expense, due to improved asset quality, and decreases in operating risk losses,
partially offset by increases in other outside services as a result of consulting expense incurred primarily for risk management and regulatory compliance initiatives, as discussed under the heading, "Regulatory Compliance and Risk Management Matters" below.
During the first quarter of
2014
, the Corporation implemented a series of initiatives intended to reduce non-interest expenses by approximately $7.0 million in 2014. These initiatives included the consolidation of 13 branches, streamlining of subsidiary bank management structures and other employee compensation and benefit reductions.
The branch consolidations resulted in the transfer of deposits, employees and other branch resources to existing branch locations. During the first quarter of 2014, $2.1 million of expenses, consisting mainly of lease termination costs and the write-off of leasehold improvements, were incurred. During the three and six months ended June 30, 2014, $800,000 of expense reductions were recognized as a result of these consolidations. The Corporation estimates total expense reductions for the remainder of 2014 to be $1.6 million.
The streamlining of subsidiary bank management structures resulted in the elimination of five subsidiary bank divisional executive positions, while other employee compensation and benefit reductions resulted in changes to certain employee benefits plans, most notably an amendment to the Corporation's postretirement benefits plan (Postretirement Plan). During the first quarter of 2014, $1.1 million of net implementation gains were recognized. During the three and six months ended June, 30, 2014, $1.1 million and $2.2 million, respectively, of expense reductions were realized as a result of these actions. The Corporation estimates total expense reductions for the remainder of 2014 to be $2.4 million.
Regulatory Compliance and Risk Management Matters
- Virtually every aspect of the Corporation’s operations is subject to extensive regulation, and in recent years, a combination of financial reform legislation and heightened scrutiny by banking regulators have significantly increased expectations regarding what constitutes an effective risk and compliance management infrastructure. Bank regulators are scrutinizing banks through longer and more extensive bank examinations in both the safety and soundness and compliance areas.
To keep pace with these heightened expectations in the compliance area beginning in 2012 the Corporation has devoted substantial resources to improving its risk management framework and regulatory compliance programs, including those designed to comply with the requirements of the Bank Secrecy Act, the USA Patriot Act of 2001 and related anti-money laundering regulations (collectively, BSA/AML Requirements). The Corporation has made substantial progress in strengthening its risk management and regulatory compliance programs, including the addition of personnel and retention of third-party consultants that specialize in strengthening compliance programs addressing the BSA/AML Requirements. However, the pace of this progress has not been consistent with current regulatory expectations, and continuing deficiencies in compliance program elements related to the BSA/AML Requirements have been identified at the Corporation’s banking subsidiaries, and at the Corporation.
In July 2014, three of the Corporation’s banking subsidiaries, Fulton Bank, N.A., Swineford National Bank and FNB Bank, N.A., each entered into a Stipulation and Consent to the Issuance of a Consent Order (Consent Order) with their primary Federal bank regulatory agency, the Office of the Comptroller of the Currency, relating to identified deficiencies in a centralized compliance program (BSA/AML Compliance Program) designed to comply with the BSA/AML Requirements, as disclosed by the Corporation in a Current Report on Form 8-K filed with the Securities and Exchange Commission on July 18, 2014 (Form 8-K). The Consent Orders require, among other things, that the banking subsidiaries in question review, assess and take actions to strengthen and enhance the BSA/AML Compliance Program. In addition, the Form 8-K disclosed that the Corporation and its wholly owned subsidiary, Lafayette Ambassador Bank (Lafayette), anticipate that they will enter into a consent cease and desist order (Cease and Desist Order) with their primary Federal bank regulatory agency, the Board of Governors of the Federal Reserve System, in the near future. It is anticipated that the Cease and Desist Order will require the Corporation and Lafayette to strengthen the BSA/AML Compliance Program and will impose requirements similar to those set forth in the Consent Orders. Further, because the Consent Orders and the anticipated Cease and Desist Order relate to the BSA/AML Compliance Program, which is operated jointly for all of the Corporation’s subsidiary banks, the Corporation anticipates that one or more of the Corporation’s other subsidiary banks may also become the subject or subjects of a regulatory enforcement action related to the BSA/AML Requirements, and the provisions of any such enforcement action may differ from those of the Consent Orders.
In addition to requiring strengthening and enhancement of the BSA/AML Compliance Program, the Consent Orders, the anticipated Cease and Desist Order and other anticipated enforcement action or actions impose certain restrictions on expansion activities of the Corporation and its subsidiary banks. Further, any failure to comply with the requirements of any of these enforcement actions involving the Corporation or its subsidiary banks could result in further enforcement actions, the imposition of material restrictions on the activities of the Corporation or its subsidiary banks, or the assessment of fines or penalties.
Additional expenses and investments will be required as the Corporation further expands its hiring of personnel and use of outside professionals, such as consulting and legal services, and possibly for capital investments in operating systems to strengthen and
support the BSA/AML Compliance Program, as well as the Corporation’s broader compliance and risk management infrastructures. The expense and capital investment associated with all of these efforts, including in connection with the Consent Orders, the anticipated Cease and Desist Order and the anticipated enforcement action or actions involving the Corporation’s other subsidiary banks, could have a material adverse effect on the Corporation’s results of operations in future periods.
Quarter Ended
June 30, 2014
compared to the Quarter Ended
June 30, 2013
Net Interest Income
Fully-taxable equivalent (FTE) net interest income decreased
$4.2 million
to
$132.2 million
in the
second
quarter of
2014
, from
$136.4 million
in the
second
quarter of
2013
. This decrease was primarily due to an
11
basis point, or
3.1%
, decrease in the net interest margin, to
3.41%
for the
second
quarter of
2014
from
3.52%
for the
second
quarter of
2013
. The following table provides a comparative average balance sheet and net interest income analysis for the
second
quarter of
2014
as compared to the same period in
2013
. Interest income and yields are presented on an FTE basis, using a 35% Federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts. All dollar amounts are in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
2014
|
|
2013
|
ASSETS
|
Average
Balance
|
|
Interest (1)
|
|
Yield/
Rate
|
|
Average
Balance
|
|
Interest (1)
|
|
Yield/
Rate
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income (2)
|
$
|
12,795,747
|
|
|
$
|
134,387
|
|
|
4.21
|
%
|
|
$
|
12,528,562
|
|
|
$
|
138,002
|
|
|
4.42
|
%
|
Taxable investment securities (3)
|
2,211,004
|
|
|
12,418
|
|
|
2.25
|
|
|
2,410,004
|
|
|
14,516
|
|
|
2.41
|
|
Tax-exempt investment securities (3)
|
270,482
|
|
|
3,534
|
|
|
5.23
|
|
|
280,508
|
|
|
3,608
|
|
|
5.15
|
|
Equity securities (3)
|
33,922
|
|
|
419
|
|
|
4.95
|
|
|
40,778
|
|
|
471
|
|
|
4.63
|
|
Total investment securities
|
2,515,408
|
|
|
16,371
|
|
|
2.60
|
|
|
2,731,290
|
|
|
18,595
|
|
|
2.72
|
|
Loans held for sale
|
17,540
|
|
|
214
|
|
|
4.87
|
|
|
42,158
|
|
|
384
|
|
|
3.64
|
|
Other interest-earning assets
|
238,921
|
|
|
1,207
|
|
|
2.02
|
|
|
226,662
|
|
|
439
|
|
|
0.77
|
|
Total interest-earning assets
|
15,567,616
|
|
|
152,179
|
|
|
3.92
|
%
|
|
15,528,672
|
|
|
157,420
|
|
|
4.07
|
%
|
Noninterest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
198,291
|
|
|
|
|
|
|
206,090
|
|
|
|
|
|
Premises and equipment
|
224,586
|
|
|
|
|
|
|
225,915
|
|
|
|
|
|
Other assets
|
1,037,654
|
|
|
|
|
|
|
1,061,448
|
|
|
|
|
|
Less: Allowance for loan losses
|
(196,462
|
)
|
|
|
|
|
|
(221,541
|
)
|
|
|
|
|
Total Assets
|
$
|
16,831,685
|
|
|
|
|
|
|
$
|
16,800,584
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
$
|
2,914,887
|
|
|
$
|
904
|
|
|
0.12
|
%
|
|
$
|
2,718,679
|
|
|
$
|
872
|
|
|
0.13
|
%
|
Savings deposits
|
3,355,929
|
|
|
1,031
|
|
|
0.12
|
|
|
3,350,856
|
|
|
1,016
|
|
|
0.12
|
|
Time deposits
|
3,012,061
|
|
|
6,750
|
|
|
0.90
|
|
|
3,169,141
|
|
|
7,610
|
|
|
0.96
|
|
Total interest-bearing deposits
|
9,282,877
|
|
|
8,685
|
|
|
0.38
|
|
|
9,238,676
|
|
|
9,498
|
|
|
0.41
|
|
Short-term borrowings
|
1,047,684
|
|
|
540
|
|
|
0.21
|
|
|
1,313,424
|
|
|
700
|
|
|
0.21
|
|
Federal Home Loan Bank advances and long-term debt
|
894,511
|
|
|
10,779
|
|
|
4.83
|
|
|
889,186
|
|
|
10,815
|
|
|
4.87
|
|
Total interest-bearing liabilities
|
11,225,072
|
|
|
20,004
|
|
|
0.71
|
%
|
|
11,441,286
|
|
|
21,013
|
|
|
0.74
|
%
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
3,322,195
|
|
|
|
|
|
|
3,116,940
|
|
|
|
|
|
Other
|
202,520
|
|
|
|
|
|
|
179,875
|
|
|
|
|
|
Total Liabilities
|
14,749,787
|
|
|
|
|
|
|
14,738,101
|
|
|
|
|
|
Shareholders’ equity
|
2,081,898
|
|
|
|
|
|
|
2,062,483
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity
|
$
|
16,831,685
|
|
|
|
|
|
|
$
|
16,800,584
|
|
|
|
|
|
Net interest income/net interest margin (FTE)
|
|
|
132,175
|
|
|
3.41
|
%
|
|
|
|
136,407
|
|
|
3.52
|
%
|
Tax equivalent adjustment
|
|
|
(4,277
|
)
|
|
|
|
|
|
(4,342
|
)
|
|
|
Net interest income
|
|
|
$
|
127,898
|
|
|
|
|
|
|
$
|
132,065
|
|
|
|
|
|
(1)
|
Includes dividends earned on equity securities.
|
|
|
(2)
|
Includes non-performing loans.
|
|
|
(3)
|
Balances include amortized historical cost for available for sale securities; the related unrealized holding gains (losses) are included in other assets.
|
The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volume) and changes in rates for the three months ended
June 30
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 vs. 2013
Increase (Decrease) due
to change in
|
|
Volume
|
|
Rate
|
|
Net
|
|
(in thousands)
|
Interest income on:
|
|
|
|
|
|
Loans, net of unearned income
|
$
|
2,892
|
|
|
$
|
(6,507
|
)
|
|
$
|
(3,615
|
)
|
Taxable investment securities
|
(1,186
|
)
|
|
(912
|
)
|
|
(2,098
|
)
|
Tax-exempt investment securities
|
(130
|
)
|
|
56
|
|
|
(74
|
)
|
Equity securities
|
(83
|
)
|
|
31
|
|
|
(52
|
)
|
Loans held for sale
|
(272
|
)
|
|
102
|
|
|
(170
|
)
|
Other interest-earning assets
|
24
|
|
|
744
|
|
|
768
|
|
Total interest income
|
$
|
1,245
|
|
|
$
|
(6,486
|
)
|
|
$
|
(5,241
|
)
|
Interest expense on:
|
|
|
|
|
|
Demand deposits
|
$
|
62
|
|
|
$
|
(30
|
)
|
|
$
|
32
|
|
Savings deposits
|
2
|
|
|
13
|
|
|
15
|
|
Time deposits
|
(367
|
)
|
|
(493
|
)
|
|
(860
|
)
|
Short-term borrowings
|
(138
|
)
|
|
(22
|
)
|
|
(160
|
)
|
Federal Home Loan Bank advances and long-term debt
|
55
|
|
|
(91
|
)
|
|
(36
|
)
|
Total interest expense
|
$
|
(386
|
)
|
|
$
|
(623
|
)
|
|
$
|
(1,009
|
)
|
Note: Changes which are partially attributable to both volume and rate are allocated to the volume and rate components presented above based on the percentage of direct changes that are attributable to each component.
As summarized above, a 15 basis point, or
3.7%
, decrease in yields on average interest-earnings assets resulted in a
$6.5 million
decrease in FTE interest income, partially offset by a
$1.2 million
increase in FTE interest income as a result of a
$38.9 million
, or
0.3%
, increase in average interest-earning assets.
Average investments decreased
$215.9 million
, or
7.9%
, as portfolio cash flows were not fully reinvested. The average yield on investments decreased 12 basis points, or
4.4%
, to
2.60%
in the
second
quarter of 2014 from
2.72%
in the
second
quarter of 2013. A $1.7 million, or 51.1%, decrease in net premium amortization on mortgage-backed securities and collateralized mortgage obligations had a 17 basis point positive impact on the overall change in portfolio yield. This positive impact was more than offset by the impact of purchases of mortgage-backed securities and collateralized mortgage obligations at yields that were lower than the overall portfolio yield.
Average loans and average FTE yields, by type, are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
Increase (Decrease) in
|
|
2014
|
|
2013
|
|
Balance
|
|
Balance
|
|
Yield
|
|
Balance
|
|
Yield
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Real estate – commercial mortgage
|
$
|
5,138,537
|
|
|
4.36
|
%
|
|
$
|
4,758,060
|
|
|
4.72
|
%
|
|
$
|
380,477
|
|
|
8.0
|
%
|
Commercial – industrial, financial and agricultural
|
3,617,977
|
|
|
3.95
|
|
|
3,714,683
|
|
|
4.13
|
|
|
(96,706
|
)
|
|
(2.6
|
)
|
Real estate – home equity
|
1,735,767
|
|
|
4.18
|
|
|
1,732,704
|
|
|
4.24
|
|
|
3,063
|
|
|
0.2
|
|
Real estate – residential mortgage
|
1,339,034
|
|
|
3.97
|
|
|
1,308,713
|
|
|
4.09
|
|
|
30,321
|
|
|
2.3
|
|
Real estate – construction
|
588,176
|
|
|
4.17
|
|
|
617,577
|
|
|
4.09
|
|
|
(29,401
|
)
|
|
(4.8
|
)
|
Consumer
|
276,444
|
|
|
4.56
|
|
|
304,918
|
|
|
4.87
|
|
|
(28,474
|
)
|
|
(9.3
|
)
|
Leasing and other
|
99,812
|
|
|
8.83
|
|
|
91,907
|
|
|
8.92
|
|
|
7,905
|
|
|
8.6
|
|
Total
|
$
|
12,795,747
|
|
|
4.21
|
%
|
|
$
|
12,528,562
|
|
|
4.42
|
%
|
|
$
|
267,185
|
|
|
2.1
|
%
|
Average loans increased
$267.2 million
, or
2.1%
, compared to the
second
quarter of
2013
, mainly in commercial mortgages. The growth in commercial mortgages was driven by a combination of loans to new customers and increased borrowings from existing customers. The average yield on loans decreased 21 basis points, or
4.8%
, to
4.21%
in
2014
from
4.42%
in
2013
. The decrease in average yields on loans was attributable to repayments of higher-yielding loans and new loan production at lower rates.
Average other interest-earning assets increased
$12.3 million
, or
5.4%
, primarily due to an increase in average interest-bearing deposits with other banks. The average yield on other interest-earning assets increased 125 basis points, or
162.3%
, due to increases in dividends from Federal Home Loan Bank stock. Each of the Corporation’s subsidiary banks is a member of the Federal Home Loan Bank for the region encompassing the headquarters of the subsidiary bank. Memberships are maintained with the Atlanta, New York and Pittsburgh regional Federal Home Loan Banks (collectively referred to as the "FHLB").As of
June 30, 2014
, the Corporation held $63.4 million of FHLB stock.
Interest expense decreased
$1.0 million
, or
4.8%
, to
$20.0 million
in the
second
quarter of
2014
from
$21.0 million
in the
second
quarter of
2013
. Interest expense decreased
$623,000
due to a 3 basis point, or
4.1%
, decrease in the average cost of total interest-bearing liabilities. Total interest-bearing liabilities decreased
$216.2 million
, or
1.9%
, which resulted in an additional
$386,000
decrease in interest expense.
Average deposits and average interest rates, by type, are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
Increase (Decrease) in
|
|
2014
|
|
2013
|
|
Balance
|
|
Balance
|
|
Rate
|
|
Balance
|
|
Rate
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Noninterest-bearing demand
|
$
|
3,322,195
|
|
|
—
|
%
|
|
$
|
3,116,940
|
|
|
—
|
%
|
|
$
|
205,255
|
|
|
6.6
|
%
|
Interest-bearing demand
|
2,914,887
|
|
|
0.12
|
|
|
2,718,679
|
|
|
0.13
|
|
|
196,208
|
|
|
7.2
|
|
Savings
|
3,355,929
|
|
|
0.12
|
|
|
3,350,856
|
|
|
0.12
|
|
|
5,073
|
|
|
0.2
|
|
Total demand and savings
|
9,593,011
|
|
|
0.08
|
|
|
9,186,475
|
|
|
0.08
|
|
|
406,536
|
|
|
4.4
|
|
Time deposits
|
3,012,061
|
|
|
0.90
|
|
|
3,169,141
|
|
|
0.96
|
|
|
(157,080
|
)
|
|
(5.0
|
)
|
Total deposits
|
$
|
12,605,072
|
|
|
0.28
|
%
|
|
$
|
12,355,616
|
|
|
0.30
|
%
|
|
$
|
249,456
|
|
|
2.0
|
%
|
The
$406.5 million
, or
4.4%
, increase in total demand and savings accounts was primarily due to a $193.1 million, or 4.3%, increase in personal account balances and a $187.9 million, or 6.1%, increase in business account balances. The
$157.1 million
, or
5.0%
, decrease in average time deposits was primarily in accounts with balances less than $100,000 and with original maturity terms of less than three years.
The average cost of interest-bearing deposits decreased 3 basis points, or
7.3%
, to
0.38%
in
2014
from
0.41%
in
2013
, primarily due to a decrease in higher cost time deposits and an increase in lower cost interest-bearing savings and demand balances.
Average borrowings and interest rates, by type, are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
Increase (Decrease) in
|
|
2014
|
|
2013
|
|
Balance
|
|
Balance
|
|
Rate
|
|
Balance
|
|
Rate
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Short-term borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
Customer repurchase agreements
|
$
|
216,212
|
|
|
0.11
|
%
|
|
$
|
188,339
|
|
|
0.11
|
%
|
|
$
|
27,873
|
|
|
14.8
|
%
|
Customer short-term promissory notes
|
81,823
|
|
|
0.05
|
|
|
98,207
|
|
|
0.06
|
|
|
(16,384
|
)
|
|
(16.7
|
)
|
Total short-term customer funding
|
298,035
|
|
|
0.09
|
|
|
286,546
|
|
|
0.09
|
|
|
11,489
|
|
|
4.0
|
|
Federal funds purchased
|
444,429
|
|
|
0.22
|
|
|
776,603
|
|
|
0.25
|
|
|
(332,174
|
)
|
|
(42.8
|
)
|
Short-term FHLB advances (1)
|
305,220
|
|
|
0.30
|
|
|
250,275
|
|
|
0.23
|
|
|
54,945
|
|
|
22.0
|
|
Total short-term borrowings
|
1,047,684
|
|
|
0.21
|
|
|
1,313,424
|
|
|
0.21
|
|
|
(265,740
|
)
|
|
(20.2
|
)
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
524,782
|
|
|
4.07
|
|
|
519,638
|
|
|
4.14
|
|
|
5,144
|
|
|
1.0
|
|
Other long-term debt
|
369,729
|
|
|
5.90
|
|
|
369,548
|
|
|
5.90
|
|
|
181
|
|
|
—
|
|
Total long-term debt
|
894,511
|
|
|
4.83
|
|
|
889,186
|
|
|
4.87
|
|
|
5,325
|
|
|
0.6
|
|
Total borrowings
|
$
|
1,942,195
|
|
|
2.33
|
%
|
|
$
|
2,202,610
|
|
|
2.09
|
%
|
|
$
|
(260,415
|
)
|
|
(11.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Represents FHLB advances with an original maturity term of less than one year.
Total short-term borrowings decreased
$265.7 million
, or
20.2%
, primarily due to decreases in Federal funds purchased, partially offset by an increase in short-term FHLB advances. The decrease in short-term borrowings was driven by the decrease in average investment securities as the increase in average deposits kept pace with the growth in average loans.
The average cost of total borrowings increased 24 basis points, or 11.5%, to
2.33%
in
2014
from
2.09%
in
2013
, primarily due to the weighted average cost impact of a decrease in lower cost short-term borrowings, which were 53.9% of total borrowings in
2014
and 59.6% in
2013
.
Provision for Credit Losses
The provision for credit losses was
$3.5 million
for the
second
quarter of
2014
, a decrease of
$10.0 million
, or
74.1%
, from the
second
quarter of
2013
due to improvements in asset quality, as shown by a reduction in non-performing loans and overall delinquency rates.
The provision for credit losses is recognized as an expense in the consolidated statements of income and is the amount necessary to adjust the allowance for credit losses to its appropriate balance, as determined through the Corporation's allowance methodology. The Corporation determines the appropriate level of the allowance for credit losses based on many quantitative and qualitative factors, including, but not limited to: the size and composition of the loan portfolio, changes in risk ratings, changes in collateral values, delinquency levels, historical losses and economic conditions. See the "Financial Condition" section of Management's Discussion under the heading "Provision for Credit Losses and Allowance for Credit Losses" for details related to the Corporation's allowance and provision for credit losses.
Non-Interest Income
The following table presents the components of non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
Increase (Decrease)
|
|
2014
|
|
2013
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Service charges on deposit accounts:
|
|
|
|
|
|
|
|
Overdraft fees
|
$
|
5,542
|
|
|
$
|
7,624
|
|
|
$
|
(2,082
|
)
|
|
(27.3
|
)%
|
Cash management fees
|
3,293
|
|
|
2,970
|
|
|
323
|
|
|
10.9
|
|
Other
|
3,717
|
|
|
4,057
|
|
|
(340
|
)
|
|
(8.4
|
)
|
Total service charges on deposit accounts
|
12,552
|
|
|
14,651
|
|
|
(2,099
|
)
|
|
(14.3
|
)
|
Investment management and trust services
|
11,339
|
|
|
10,601
|
|
|
738
|
|
|
7.0
|
|
Other service charges and fees:
|
|
|
|
|
|
|
|
Merchant fees
|
3,843
|
|
|
3,600
|
|
|
243
|
|
|
6.8
|
|
Debit card income
|
2,435
|
|
|
2,374
|
|
|
61
|
|
|
2.6
|
|
Letter of credit fees
|
1,184
|
|
|
1,232
|
|
|
(48
|
)
|
|
(3.9
|
)
|
Commercial swap fees
|
994
|
|
|
252
|
|
|
742
|
|
|
294.4
|
|
Other
|
2,070
|
|
|
2,050
|
|
|
20
|
|
|
1.0
|
|
Total other service charges and fees
|
10,526
|
|
|
9,508
|
|
|
1,018
|
|
|
10.7
|
|
Mortgage banking income:
|
|
|
|
|
|
|
|
Gain on sales of mortgage loans
|
2,974
|
|
|
8,677
|
|
|
(5,703
|
)
|
|
(65.7
|
)
|
Mortgage servicing income
|
2,767
|
|
|
2,320
|
|
|
447
|
|
|
(19.3
|
)
|
Total mortgage banking income
|
5,741
|
|
|
10,997
|
|
|
(5,256
|
)
|
|
(47.8
|
)
|
Credit card income
|
2,353
|
|
|
2,134
|
|
|
219
|
|
|
10.3
|
|
Other income
|
1,249
|
|
|
1,560
|
|
|
(311
|
)
|
|
(19.9
|
)
|
Total, excluding investment securities gains
|
43,760
|
|
|
49,451
|
|
|
(5,691
|
)
|
|
(11.5
|
)
|
Investment securities gains
|
1,112
|
|
|
2,865
|
|
|
(1,753
|
)
|
|
(61.2)
|
Total
|
$
|
44,872
|
|
|
$
|
52,316
|
|
|
$
|
(7,444
|
)
|
|
(14.2
|
)%
|
The $2.1 million, or 27.3%, decrease in overdraft fee income included a $1.4 million decrease in fees assessed on personal accounts and a $735,000 decrease in fees assessed on commercial accounts. The overall decline in these fees resulted from a reduction in the number of overdraft fees assessed, partially driven by changes in customer behavior and a reduction in the maximum number of overdraft fees that may be assessed each day.
The $738,000, or 7.0%, increase in investment management and trust services income was due to a $507,000, or 10.8%, increase in brokerage revenue and a $231,000, or 3.9%, increase in trust commissions. These increases resulted from new trust business sales, improved market conditions that increased the values of existing assets under management and additional recurring revenue generated through the brokerage business due to growth in new accounts.
Commercial swap fees increased $742,000, or 294.4%, due to the current interest rate environment and the Corporation's continued roll-out of the product. For additional details see Note I, "Derivative Financial Instruments" in the notes to consolidated financial statements.
Gains on sales of mortgage loans decreased $5.7 million, or 65.7%, due to a $231.6 million, or 47.1%, decrease in new loan commitments and a 35.2% decrease in pricing spreads compared to the
second
quarter of
2013
. Both decreases resulted from an increase in mortgage interest rates in the second half of 2013. The decline in new loan commitments was mainly in refinancing volumes, which totaled approximately $66.6 million, or 25.7%, of new loan commitments, in the second quarter of
2014
compared to $234.9 million, or 47.8%, during the second quarter of
2013
.
Investment securities gains for the second quarter of 2014 were a result of net realized gains on sales of debt securities. The $2.9 million of investment securities gains for the second quarter of 2013 included $1.1 million of net realized gains on financial institution stocks and $1.8 million of realized gains on sales of debt securities. See Note D, "Investment Securities," in the Notes to Consolidated Financial Statements for additional details.
Non-Interest Expense
The following table presents the components of non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
Increase (Decrease)
|
|
2014
|
|
2013
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Salaries and employee benefits
|
$
|
63,623
|
|
|
$
|
63,490
|
|
|
$
|
133
|
|
|
0.2
|
%
|
Net occupancy expense
|
11,464
|
|
|
11,447
|
|
|
17
|
|
|
0.1
|
|
Other outside services
|
7,240
|
|
|
5,315
|
|
|
1,925
|
|
|
36.2
|
|
Data processing
|
4,331
|
|
|
4,509
|
|
|
(178
|
)
|
|
(3.9
|
)
|
Professional fees
|
3,559
|
|
|
3,395
|
|
|
164
|
|
|
4.8
|
|
Equipment expense
|
3,360
|
|
|
3,893
|
|
|
(533
|
)
|
|
(13.7
|
)
|
Software
|
3,209
|
|
|
3,094
|
|
|
115
|
|
|
3.7
|
|
FDIC insurance expense
|
2,615
|
|
|
3,001
|
|
|
(386
|
)
|
|
(12.9
|
)
|
Marketing
|
2,337
|
|
|
1,922
|
|
|
415
|
|
|
21.6
|
|
Telecommunications
|
1,787
|
|
|
1,736
|
|
|
51
|
|
|
2.9
|
|
Postage
|
1,339
|
|
|
1,206
|
|
|
133
|
|
|
11.0
|
|
Supplies
|
1,112
|
|
|
1,396
|
|
|
(284
|
)
|
|
(20.3
|
)
|
Other real estate owned and repossession expense
|
748
|
|
|
1,941
|
|
|
(1,193
|
)
|
|
(61.5
|
)
|
Operating risk loss
|
716
|
|
|
1,860
|
|
|
(1,144
|
)
|
|
(61.5
|
)
|
Intangible amortization
|
315
|
|
|
535
|
|
|
(220
|
)
|
|
(41.1
|
)
|
Other
|
8,419
|
|
|
8,390
|
|
|
29
|
|
|
0.3
|
|
Total
|
$
|
116,174
|
|
|
$
|
117,130
|
|
|
$
|
(956
|
)
|
|
(0.8
|
)%
|
Salaries and employee benefits increased $133,000, or 0.2%, due to a $146,000, or 0.3%, increase in salaries and a $13,000, or 0.11%, decrease in employee benefits. The increase in salaries resulted from normal merit increases. These increases were partially offset by a $2.5 million decrease in incentive compensation, a $371,000 decrease in stock-based compensation expense and lower salaries expense as a result of the cost savings initiatives executed in the first quarter of 2014. The decrease in employee benefits was primarily due to the Corporation's cost savings initiatives, which included the elimination and reduction of certain employee benefit plans, most notably a decrease in profit sharing contributions and an amendment to the Postretirement Plan, offset by an increase in healthcare expenses. For additional information related to the amendment to the Postretirement Plan, see Note H, "Employee Benefit Plans" in the Notes to Consolidated Financial Statements.
Other outside services increased $1.9 million, or 36.2%, due to an increase in consulting services related to the acceleration of risk management and compliance efforts, including those in connection with the enhancement of the Corporation’s program for compliance with the BSA/AML Requirements.
Equipment expense decreased $533,000, or 13.7%, due to a decrease in depreciation expense on office equipment, as assets related to significant information technology initiatives in prior years became fully depreciated.
OREO and repossession expense decreased $1.2 million, or 61.5%, primarily due to an increase in net gains on sales of properties and a decrease in valuation provisions.
The $1.1 million, or 61.5%, decrease in operating risk loss was due to a $679,000 decrease in charges related to debit card fraud losses and a $574,000 decrease in losses associated with previously sold residential mortgages.
Income Taxes
Income tax expense for the
second
quarter of
2014
was $13.5 million, a $331,000, or 2.5%, increase from $13.2 million for the
second
quarter of
2013
.
The Corporation’s effective tax rate was 25.4% in the second quarter of
2014
, as compared to 24.5% in the second quarter of
2013
. The effective rate is generally lower than the Federal statutory rate of 35% due to investments in tax-free municipal securities and credits earned from investments in partnerships that generate tax credits under various federal programs. The increase in the effective tax rate in comparison to the
second
quarter of
2013
was primarily due to a $488,000, net of federal tax, reduction in the valuation allowance for certain state deferred tax assets recognized through a credit to income tax expense in the
second
quarter of
2013
.
Six Months Ended
June 30, 2014
compared to the
Six Months Ended
June 30, 2013
Net Interest Income
FTE net interest income decreased
$4.3 million
, or
1.6%
, to
$266.0 million
in the first half of
2014
from
$270.3 million
in the first half of
2013
.
Net interest margin decreased 10 basis points, or
2.8%
, to
3.44%
for the first half of
2014
from
3.54%
for the first half of
2013
. The decrease in net interest margin was the result of a 15 basis point, or
3.7%
, decrease in yields on interest-earning assets, partially offset by a 6 basis point, or
7.9%
, decrease in funding costs.
The following table provides a comparative average balance sheet and net interest income analysis for the first half of
2014
as compared to the same period in
2013
. Interest income and yields are presented on an FTE basis, using a 35% Federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts. All dollar amounts are in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
2014
|
|
2013
|
ASSETS
|
Average
Balance
|
|
Interest (1)
|
|
Yield/
Rate
|
|
Average
Balance
|
|
Interest (1)
|
|
Yield/
Rate
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income (2)
|
$
|
12,779,145
|
|
|
$
|
269,131
|
|
|
4.24
|
%
|
|
$
|
12,393,670
|
|
|
$
|
274,950
|
|
|
4.47
|
%
|
Taxable investment securities (3)
|
2,234,259
|
|
|
25,684
|
|
|
2.30
|
|
|
2,415,562
|
|
|
27,913
|
|
|
2.31
|
|
Tax-exempt investment securities (3)
|
274,856
|
|
|
7,147
|
|
|
5.20
|
|
|
286,281
|
|
|
7,422
|
|
|
5.19
|
|
Equity securities (3)
|
33,922
|
|
|
848
|
|
|
5.03
|
|
|
42,565
|
|
|
981
|
|
|
4.64
|
|
Total investment securities
|
2,543,037
|
|
|
33,679
|
|
|
2.65
|
|
|
2,744,408
|
|
|
36,316
|
|
|
2.65
|
|
Loans held for sale
|
15,494
|
|
|
348
|
|
|
4.49
|
|
|
45,005
|
|
|
879
|
|
|
3.91
|
|
Other interest-earning assets
|
248,807
|
|
|
2,089
|
|
|
1.68
|
|
|
208,718
|
|
|
868
|
|
|
0.83
|
|
Total interest-earning assets
|
15,586,483
|
|
|
305,247
|
|
|
3.95
|
%
|
|
15,391,801
|
|
|
313,013
|
|
|
4.10
|
%
|
Noninterest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
198,962
|
|
|
|
|
|
|
204,308
|
|
|
|
|
|
Premises and equipment
|
225,436
|
|
|
|
|
|
|
226,189
|
|
|
|
|
|
Other assets
|
1,034,877
|
|
|
|
|
|
|
1,066,416
|
|
|
|
|
|
Less: Allowance for loan losses
|
(199,813
|
)
|
|
|
|
|
|
(224,682
|
)
|
|
|
|
|
Total Assets
|
$
|
16,845,945
|
|
|
|
|
|
|
$
|
16,664,032
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
$
|
2,929,965
|
|
|
$
|
1,813
|
|
|
0.12
|
%
|
|
$
|
2,712,292
|
|
|
$
|
1,749
|
|
|
0.13
|
%
|
Savings deposits
|
3,353,910
|
|
|
2,066
|
|
|
0.12
|
|
|
3,342,626
|
|
|
2,039
|
|
|
0.12
|
|
Time deposits
|
2,972,480
|
|
|
12,702
|
|
|
0.86
|
|
|
3,244,805
|
|
|
16,111
|
|
|
1.00
|
|
Total interest-bearing deposits
|
9,256,355
|
|
|
16,581
|
|
|
0.36
|
|
|
9,299,723
|
|
|
19,899
|
|
|
0.43
|
|
Short-term borrowings
|
1,127,872
|
|
|
1,173
|
|
|
0.21
|
|
|
1,173,550
|
|
|
1,209
|
|
|
0.21
|
|
FHLB advances and long-term debt
|
889,051
|
|
|
21,477
|
|
|
4.85
|
|
|
890,174
|
|
|
21,583
|
|
|
4.87
|
|
Total interest-bearing liabilities
|
11,273,278
|
|
|
39,231
|
|
|
0.70
|
%
|
|
11,363,447
|
|
|
42,691
|
|
|
0.76
|
%
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
3,283,027
|
|
|
|
|
|
|
3,043,268
|
|
|
|
|
|
Other
|
217,181
|
|
|
|
|
|
|
189,357
|
|
|
|
|
|
Total Liabilities
|
14,773,486
|
|
|
|
|
|
|
14,596,072
|
|
|
|
|
|
Shareholders’ equity
|
2,072,459
|
|
|
|
|
|
|
2,067,960
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity
|
$
|
16,845,945
|
|
|
|
|
|
|
$
|
16,664,032
|
|
|
|
|
|
Net interest income/net interest margin (FTE)
|
|
|
266,016
|
|
|
3.44
|
%
|
|
|
|
270,322
|
|
|
3.54
|
%
|
Tax equivalent adjustment
|
|
|
(8,553
|
)
|
|
|
|
|
|
(8,613
|
)
|
|
|
Net interest income
|
|
|
$
|
257,463
|
|
|
|
|
|
|
$
|
261,709
|
|
|
|
|
|
(1)
|
Includes dividends earned on equity securities.
|
|
|
(2)
|
Includes non-performing loans.
|
|
|
(3)
|
Balances include amortized historical cost for available for sale securities. The related unrealized holding gains (losses) are included in other assets.
|
The following table summarizes the changes in FTE interest income and expense for the first
six
months of
2014
as compared to the same period in
2013
due to changes in average balances (volume) and changes in rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 vs. 2013
Increase (Decrease) due
to change in
|
|
Volume
|
|
Rate
|
|
Net
|
|
(in thousands)
|
Interest income on:
|
|
|
|
|
|
Loans, net of unearned income
|
$
|
8,387
|
|
|
$
|
(14,206
|
)
|
|
$
|
(5,819
|
)
|
Taxable investment securities
|
(2,084
|
)
|
|
(145
|
)
|
|
(2,229
|
)
|
Tax-exempt investment securities
|
(297
|
)
|
|
22
|
|
|
(275
|
)
|
Equity securities
|
(210
|
)
|
|
77
|
|
|
(133
|
)
|
Loans held for sale
|
(645
|
)
|
|
114
|
|
|
(531
|
)
|
Other interest-earning assets
|
192
|
|
|
1,029
|
|
|
1,221
|
|
Total interest income
|
$
|
5,343
|
|
|
$
|
(13,109
|
)
|
|
$
|
(7,766
|
)
|
Interest expense on:
|
|
|
|
|
|
Demand deposits
|
$
|
137
|
|
|
$
|
(73
|
)
|
|
$
|
64
|
|
Savings deposits
|
7
|
|
|
20
|
|
|
27
|
|
Time deposits
|
(1,281
|
)
|
|
(2,128
|
)
|
|
(3,409
|
)
|
Short-term borrowings
|
(48
|
)
|
|
12
|
|
|
(36
|
)
|
FHLB advances and long-term debt
|
(27
|
)
|
|
(79
|
)
|
|
(106
|
)
|
Total interest expense
|
$
|
(1,212
|
)
|
|
$
|
(2,248
|
)
|
|
$
|
(3,460
|
)
|
A 15 basis point, or
3.7%
, decrease in average yields on interest-earning assets resulted in a
$13.1 million
decrease in FTE interest income, which was partially offset by a
$5.3 million
increase in FTE interest income resulting from a
$194.7 million
, or
1.3%
, increase in average interest-earning assets. Average investments decreased
$201.4 million
, or
7.3%
, as portfolio cash flows were not fully reinvested.
Average loans, by type, are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
Increase (Decrease) in
|
|
2014
|
|
2013
|
|
Balance
|
|
Balance
|
|
Yield
|
|
Balance
|
|
Yield
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Real estate – commercial mortgage
|
$
|
5,111,979
|
|
|
4.40
|
%
|
|
$
|
4,712,530
|
|
|
4.78
|
%
|
|
$
|
399,449
|
|
|
8.5
|
%
|
Commercial – industrial, financial and agricultural
|
3,627,471
|
|
|
3.99
|
|
|
3,688,767
|
|
|
4.19
|
|
|
(61,296
|
)
|
|
(1.7
|
)
|
Real estate – home equity
|
1,745,503
|
|
|
4.18
|
|
|
1,697,634
|
|
|
4.27
|
|
|
47,869
|
|
|
2.8
|
|
Real estate – residential mortgage
|
1,337,686
|
|
|
3.98
|
|
|
1,296,012
|
|
|
4.17
|
|
|
41,674
|
|
|
3.2
|
|
Real estate – construction
|
582,294
|
|
|
4.13
|
|
|
604,531
|
|
|
4.10
|
|
|
(22,237
|
)
|
|
(3.7
|
)
|
Consumer
|
275,682
|
|
|
4.69
|
|
|
305,199
|
|
|
4.94
|
|
|
(29,517
|
)
|
|
(9.7
|
)
|
Leasing and other
|
98,530
|
|
|
9.30
|
|
|
88,997
|
|
|
8.76
|
|
|
9,533
|
|
|
10.7
|
|
Total
|
$
|
12,779,145
|
|
|
4.24
|
%
|
|
$
|
12,393,670
|
|
|
4.47
|
%
|
|
$
|
385,475
|
|
|
3.1
|
%
|
The
$399.4 million
, or
8.5%
, increase in commercial mortgages was from both new and existing customers. The average yield on loans decreased 23 basis points, or
5.1%
, to
4.24%
in
2014
from
4.47%
in
2013
. The decrease in average yields on loans was attributable to repayments of higher-yielding loans and new loan production at lower rates.
Interest expense decreased
$3.5 million
, or
8.1%
, to
$39.2 million
in the first half of
2014
from
$42.7 million
in the first half of
2013
. Interest expense decreased
$2.2 million
as a result of a six basis point, or
7.9%
, decrease in the average cost of interest-bearing liabilities, primarily a result of a decrease in average costs of time deposits. A
$90.2 million
, or
0.8%
, decrease in interest-bearing liabilities resulted in an additional
$1.2 million
decrease in interest expense.
Average deposits, by type, are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
Increase (Decrease) in
|
|
2014
|
|
2013
|
|
Balance
|
|
Balance
|
|
Rate
|
|
Balance
|
|
Rate
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Noninterest-bearing demand
|
$
|
3,283,027
|
|
|
—
|
%
|
|
$
|
3,043,268
|
|
|
—
|
%
|
|
$
|
239,759
|
|
|
7.9
|
%
|
Interest-bearing demand
|
2,929,965
|
|
|
0.12
|
%
|
|
2,712,292
|
|
|
0.13
|
%
|
|
217,673
|
|
|
8.0
|
|
Savings
|
3,353,910
|
|
|
0.12
|
%
|
|
3,342,626
|
|
|
0.12
|
%
|
|
11,284
|
|
|
0.3
|
|
Total demand and savings
|
9,566,902
|
|
|
0.08
|
%
|
|
9,098,186
|
|
|
0.08
|
%
|
|
468,716
|
|
|
5.2
|
|
Time deposits
|
2,972,480
|
|
|
0.86
|
%
|
|
3,244,805
|
|
|
1.00
|
%
|
|
(272,325
|
)
|
|
(8.4
|
)
|
Total deposits
|
$
|
12,539,382
|
|
|
0.27
|
%
|
|
$
|
12,342,991
|
|
|
0.33
|
%
|
|
$
|
196,391
|
|
|
1.6
|
%
|
The
$468.7 million
, or
5.2%
, increase in total demand and savings account balances was primarily due to a $215.6 million, or 4.9%, increase in personal account balances, a $224.0 million, or 7.4%, increase in business account balances and a $46.5 million, or 2.9%, increase in municipal account balances. The
$272.3 million
, or
8.4%
, decrease in average time deposits was primarily in accounts with balances less than $100,000 and with original maturity terms of less than three years.
The average cost of interest-bearing deposits decreased seven basis points, or
16.3%
, to
0.36%
in
2014
from
0.43%
in
2013
, primarily
due to a decrease in higher cost time deposits and an increase in lower cost interest-bearing savings and demand balances.
The following table summarizes changes in average short-term borrowings and long-term debt, by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
Increase (Decrease) in
|
|
2014
|
|
2013
|
|
Balance
|
|
Balance
|
|
Rate
|
|
Balance
|
|
Rate
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Short-term borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
Customer repurchase agreements
|
$
|
201,866
|
|
|
0.11
|
%
|
|
$
|
176,788
|
|
|
0.11
|
%
|
|
$
|
25,078
|
|
|
14.2
|
%
|
Customer short-term promissory notes
|
91,856
|
|
|
0.06
|
%
|
|
105,086
|
|
|
0.05
|
%
|
|
(13,230
|
)
|
|
(12.6
|
)
|
Total short-term customer funding
|
293,722
|
|
|
0.09
|
%
|
|
281,874
|
|
|
0.09
|
%
|
|
11,848
|
|
|
4.2
|
|
Federal funds purchased
|
430,407
|
|
|
0.21
|
%
|
|
743,376
|
|
|
0.24
|
%
|
|
(312,969
|
)
|
|
(42.1
|
)
|
Short-term FHLB advances (1)
|
403,743
|
|
|
0.29
|
%
|
|
148,300
|
|
|
0.24
|
%
|
|
255,443
|
|
|
172.2
|
Total short-term borrowings
|
1,127,872
|
|
|
0.21
|
%
|
|
1,173,550
|
|
|
0.21
|
%
|
|
(45,678
|
)
|
|
(3.9
|
)
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
519,316
|
|
|
4.11
|
%
|
|
520,663
|
|
|
4.14
|
%
|
|
(1,347
|
)
|
|
(0.3
|
)
|
Other long-term debt
|
369,735
|
|
|
5.90
|
%
|
|
369,511
|
|
|
5.90
|
%
|
|
224
|
|
|
0.1
|
|
Total long-term debt
|
889,051
|
|
|
4.85
|
%
|
|
890,174
|
|
|
4.87
|
%
|
|
(1,123
|
)
|
|
(0.1
|
)
|
Total
|
$
|
2,016,923
|
|
|
2.26
|
%
|
|
$
|
2,063,724
|
|
|
2.22
|
%
|
|
$
|
(46,801
|
)
|
|
(2.3
|
)%
|
(1) Represents FHLB advances with an original maturity term of less than one year.
Total short-term borrowings decreased
$45.7 million
, or
3.9%
, primarily due to a decrease in Federal funds purchased, partially offset by an increase in short-term FHLB advances.
Provision for Credit Losses
The provision for credit losses was
$6.0 million
for the first half of
2014
, a decrease of
$22.5 million
, or
78.9%
, in comparison to the first half of
2013
, reflecting improvements in asset quality. For details related to the Corporation's allowance and provision for credit losses, see the "Financial Condition" section of Management's Discussion under the heading "Provision for Credit Losses and Allowance for Credit Losses."
Non-Interest Income
The following table presents the components of non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
Increase (Decrease)
|
|
2014
|
|
2013
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Service charges on deposit accounts:
|
|
|
|
|
|
|
|
Overdraft fees
|
$
|
10,839
|
|
|
$
|
15,085
|
|
|
$
|
(4,246
|
)
|
|
(28.1
|
)%
|
Cash management fees
|
6,398
|
|
|
5,802
|
|
|
596
|
|
|
10.3
|
|
Other
|
7,026
|
|
|
7,875
|
|
|
(849
|
)
|
|
(10.8
|
)
|
Total service charges on deposit accounts
|
24,263
|
|
|
28,762
|
|
|
(4,499
|
)
|
|
(15.6
|
)
|
Investment management and trust services
|
22,297
|
|
|
20,697
|
|
|
1,600
|
|
|
7.7
|
|
Other service charges and fees:
|
|
|
|
|
|
|
|
Merchant fees
|
6,566
|
|
|
6,674
|
|
|
(108
|
)
|
|
(1.6
|
)
|
Debit card income
|
4,645
|
|
|
4,458
|
|
|
187
|
|
|
4.2
|
|
Letter of credit fees
|
2,285
|
|
|
2,466
|
|
|
(181
|
)
|
|
(7.3
|
)
|
Commercial swap fees
|
2,007
|
|
|
539
|
|
|
1,468
|
|
|
272.4
|
|
Foreign currency processing income
|
618
|
|
|
676
|
|
|
(58
|
)
|
|
(8.6
|
)
|
Other
|
3,332
|
|
|
3,205
|
|
|
127
|
|
|
4.0
|
|
Total other service charges and fees
|
19,453
|
|
|
18,018
|
|
|
1,435
|
|
|
8.0
|
|
Mortgage banking income:
|
|
|
|
|
|
|
|
Gain on sales of mortgage loans
|
5,396
|
|
|
17,015
|
|
|
(11,619
|
)
|
|
(68.3
|
)
|
Mortgage servicing income
|
3,950
|
|
|
2,155
|
|
|
1,795
|
|
|
(83.3
|
)
|
Total mortgage banking income
|
9,346
|
|
|
19,170
|
|
|
(9,824
|
)
|
|
(51.2
|
)
|
Credit card income
|
4,524
|
|
|
4,306
|
|
|
218
|
|
|
5.1
|
|
Other income
|
2,383
|
|
|
3,284
|
|
|
(901
|
)
|
|
(27.4
|
)
|
Total, excluding investment securities gains
|
82,266
|
|
|
94,237
|
|
|
(11,971
|
)
|
|
(12.7
|
)
|
Investment securities gains
|
1,112
|
|
|
5,338
|
|
|
(4,226
|
)
|
|
(79.2
|
)
|
Total
|
$
|
83,378
|
|
|
$
|
99,575
|
|
|
$
|
(16,197
|
)
|
|
(16.3
|
)%
|
The $4.2 million, or 28.1%, decrease in overdraft fee income included a $2.8 million decrease in fees assessed on personal accounts and a $1.4 million decrease in fees assessed on commercial accounts. The overall decline in these fees resulted from a reduction in the number of overdraft items paid.
The $1.6 million, or 7.7%, increase in investment management and trust services income was primarily due to a $1.2 million, or 13.7%, increase in brokerage revenue and a $381,000, or 3.2%, increase in trust commissions. These increases resulted from new trust business sales, improved market conditions that increased the values of existing assets under management, and additional recurring revenue generated through the brokerage business due to growth in new accounts. The $1.5 million increase in commercial loan swap fees was due to the current interest rate environment and the Corporation's continued roll-out of the product.
Gains on sales of mortgage loans decreased $11.6 million, or 68.3%, due to a $553.6 million, or 55.1%, decrease in new loan commitments and a 29.4% decrease in pricing spreads compared to the prior year. Both decreases resulted from an increase in mortgage interest rates in the second half of 2013. The decline in new loan commitments was mainly in refinancing volumes, which were $130.1 million, or 28.8%, of new loan commitments in 2014 compared to $558.6 million, or 55.6%, during 2013.
Mortgage servicing income increased $1.8 million in comparison to 2013, primarily due to a $3.2 million decrease in amortization of mortgage servicing rights (MSRs) as prepayments slowed as mortgage rates increased, partially offset by the absence of a $2.0 million reversal of the valuation allowance for MSRs recorded in the second quarter of 2013.
Investment securities gains of $1.1 million was a result of net realized gains on the sales of debt securities. The $5.4 million of investment securities gains for first half 2013 included $2.2 million of net realized gains on financial institution stocks and $3.2 million of realized gains on the sales of debt securities.
Non-Interest Expense
The following table presents the components of non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
Increase (Decrease)
|
|
2014
|
|
2013
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Salaries and employee benefits
|
$
|
123,189
|
|
|
$
|
124,702
|
|
|
$
|
(1,513
|
)
|
|
(1.2
|
)%
|
Net occupancy expense
|
25,067
|
|
|
23,291
|
|
|
1,776
|
|
|
7.6
|
|
Other outside services
|
11,052
|
|
|
8,175
|
|
|
2,877
|
|
|
35.2
|
|
Data processing
|
8,127
|
|
|
8,412
|
|
|
(285
|
)
|
|
(3.4
|
)
|
Equipment expense
|
6,962
|
|
|
7,801
|
|
|
(839
|
)
|
|
(10.8
|
)
|
Professional fees
|
6,463
|
|
|
6,442
|
|
|
21
|
|
|
0.3
|
|
Software
|
6,134
|
|
|
5,842
|
|
|
292
|
|
|
5.0
|
|
FDIC insurance expense
|
5,304
|
|
|
5,848
|
|
|
(544
|
)
|
|
(9.3
|
)
|
Marketing
|
3,921
|
|
|
3,794
|
|
|
127
|
|
|
3.3
|
|
Telecommunications
|
3,606
|
|
|
3,540
|
|
|
66
|
|
|
1.9
|
|
Postage
|
2,599
|
|
|
2,470
|
|
|
129
|
|
|
5.2
|
|
Operating risk loss
|
2,544
|
|
|
3,626
|
|
|
(1,082
|
)
|
|
(29.8
|
)
|
Supplies
|
2,178
|
|
|
2,592
|
|
|
(414
|
)
|
|
(16.0
|
)
|
Other real estate owned and repossession expense
|
1,731
|
|
|
4,795
|
|
|
(3,064
|
)
|
|
(63.9
|
)
|
Intangible amortization
|
630
|
|
|
1,069
|
|
|
(439
|
)
|
|
(41.1
|
)
|
Other
|
16,221
|
|
|
15,667
|
|
|
554
|
|
|
3.5
|
|
Total
|
$
|
225,728
|
|
|
$
|
228,066
|
|
|
$
|
(2,338
|
)
|
|
(1.0
|
)%
|
Salaries and employee benefits decreased $1.5 million, or 1.2%, with salaries increasing $352,000, or 0.3%, and employee benefits decreasing $1.9 million, or 8.8%. The increase in salaries was primarily due to normal merit increases, partially offset by decreases in overtime and temporary employee expense related to lower residential mortgage volumes and the core processing system conversion in 2013, a decrease in incentive compensation and lower salaries expense as a result of the completion of the cost savings initiatives executed in the first quarter of 2014. The decrease in employee benefits was primarily due to the cost savings initiatives, which included the elimination and reduction of certain employee benefit plans, most notably a decrease in profit sharing contributions and an amendment to the Postretirement Plan, partially offset by an increase in healthcare expenses.
The $1.8 million, or 7.6%, increase in net occupancy expense was primarily due to an increase in snow removal costs in 2014, partially offset by savings from the Corporation's 2014 branch consolidations.
Other outside services increased $2.9 million, or 35.2%, due to an increase in consulting services related to the Corporation’s acceleration of risk management and compliance efforts.
The $839,000, or 10.8%, decrease in equipment expense was primarily due to a decrease in depreciation expense as certain assets became fully depreciated. FDIC insurance expense decreased $544,000, or 9.3%, due to a decrease in assessment rates based on improvements in subsidiary bank impaired asset levels.
The $1.1 million, or 29.8%, decrease in operating risk loss was due to a decrease in for losses associated with previously sold residential mortgages, primarily due to the Corporation entering into a settlement agreement with a secondary market investor during the first half of 2014 and a decrease in charges related to debit card fraud losses. See Note L "Commitments and Contingencies," in the notes to consolidated financial statements for additional details related to repurchases of previously sold residential mortgages.
Stationary and supplies decreased $414,000, or 16.0% due to one-time cost associated with the core systems conversion in 2013.
OREO and repossession expense decreased $3.1 million, or 63.9%, primarily due to an increase in net gains on sales of properties and a decrease in valuation provisions, which reflect the continued improvement in overall asset quality. The $439,000, or 41.1%, decrease in intangible amortization was primarily due to core deposit intangible assets, which are amortized on an accelerated basis.
Income Taxes
Income tax expense for the first
six
months of
2014
was $27.7 million, a $2.8 million, or 11.3%, increase from $24.9 million in 2013.
The Corporation’s effective tax rate was 25.4% in
2014
, as compared to 23.8% in
2013
. The effective rate is generally lower than the Federal statutory rate of 35% due to investments in tax-free municipal securities and tax credits earned from investments in partnerships that generate such credits under various federal programs.
The increase in the effective tax rate in comparison to the first
six
months of
2013
was due primarily to a $1.7 million ($1.1 million, net of federal tax) decrease in the valuation allowance for certain state deferred tax assets that was recorded as a credit to income tax expense in 2013.
FINANCIAL CONDITION
The table below presents condensed consolidated ending balance sheets for the Corporation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
June 30, 2014
|
|
December 31, 2013
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Assets
|
|
|
|
|
|
|
|
Cash and due from banks
|
$
|
258,837
|
|
|
$
|
218,540
|
|
|
$
|
40,297
|
|
|
18.4
|
%
|
Other interest-earning assets
|
305,518
|
|
|
248,161
|
|
|
57,357
|
|
|
23.1
|
|
Loans held for sale
|
36,079
|
|
|
21,351
|
|
|
14,728
|
|
|
69.0
|
|
Investment securities
|
2,497,776
|
|
|
2,568,434
|
|
|
(70,658
|
)
|
|
(2.8
|
)
|
Loans, net of allowance
|
12,647,826
|
|
|
12,579,440
|
|
|
68,386
|
|
|
0.5
|
|
Premises and equipment
|
225,168
|
|
|
226,021
|
|
|
(853
|
)
|
|
(0.4
|
)
|
Goodwill and intangible assets
|
532,432
|
|
|
533,076
|
|
|
(644
|
)
|
|
(0.1
|
)
|
Other assets
|
530,003
|
|
|
539,611
|
|
|
(9,608
|
)
|
|
(1.8
|
)
|
Total Assets
|
$
|
17,033,639
|
|
|
$
|
16,934,634
|
|
|
$
|
99,005
|
|
|
0.6
|
%
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
Deposits
|
$
|
12,693,659
|
|
|
$
|
12,491,186
|
|
|
$
|
202,473
|
|
|
1.6
|
%
|
Short-term borrowings
|
1,008,307
|
|
|
1,258,629
|
|
|
(250,322
|
)
|
|
(19.9
|
)
|
Long-term debt
|
968,395
|
|
|
883,584
|
|
|
84,811
|
|
|
9.6
|
|
Other liabilities
|
263,478
|
|
|
238,048
|
|
|
25,430
|
|
|
10.7
|
|
Total Liabilities
|
14,933,839
|
|
|
14,871,447
|
|
|
62,392
|
|
|
0.4
|
|
Total Shareholders’ Equity
|
2,099,800
|
|
|
2,063,187
|
|
|
36,613
|
|
|
1.8
|
|
Total Liabilities and Shareholders’ Equity
|
$
|
17,033,639
|
|
|
$
|
16,934,634
|
|
|
$
|
99,005
|
|
|
0.6
|
%
|
Cash and due from banks
Cash and due from banks increased $40.3 million, or 18.4%. Because of daily fluctuations that result in the normal course of business, cash is more appropriately analyzed in terms of average balances. On an average balance basis, cash and due from banks decreased $16.2 million, or 7.4%, from $219.2 million for the month of December, 2013 to $203.0 million for the month of June 2014.
Other interest-earning assets
The
$57.4 million
, or
23.1%
, increase in other interest-earning assets was due to an increase in interest-bearing deposits with other banks.
Investment Securities
The following table presents the carrying amount of investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
June 30, 2014
|
|
December 31, 2013
|
|
$
|
|
%
|
|
(dollars in thousands)
|
U.S. Government securities
|
$
|
525
|
|
|
$
|
525
|
|
|
—
|
|
|
—
|
%
|
U.S. Government sponsored agency securities
|
260
|
|
|
726
|
|
|
(466
|
)
|
|
(64.2
|
)
|
State and municipal securities
|
269,823
|
|
|
284,849
|
|
|
(15,026
|
)
|
|
(5.3
|
)
|
Corporate debt securities
|
100,653
|
|
|
98,749
|
|
|
1,904
|
|
|
1.9
|
|
Collateralized mortgage obligations
|
1,002,731
|
|
|
1,032,398
|
|
|
(29,667
|
)
|
|
(2.9
|
)
|
Mortgage-backed securities
|
930,605
|
|
|
945,712
|
|
|
(15,107
|
)
|
|
(1.6
|
)
|
Auction rate securities
|
146,931
|
|
|
159,274
|
|
|
(12,343
|
)
|
|
(7.7
|
)
|
Total debt securities
|
2,451,528
|
|
|
2,522,233
|
|
|
(70,705
|
)
|
|
(2.8
|
)
|
Equity securities
|
46,248
|
|
|
46,201
|
|
|
47
|
|
|
0.1
|
|
Total
|
$
|
2,497,776
|
|
|
$
|
2,568,434
|
|
|
$
|
(70,658
|
)
|
|
(2.8
|
)%
|
Total investment securities decreased
$70.7 million
, or
2.8%
, in comparison to
December 31, 2013
, mainly in collateralized mortgage obligations and mortgage-backed securities, as portfolio cash flows were not fully reinvested due to relatively low yields on current investment options. Cash flows that were reinvested during the first half of 2014 were used to purchase securities with average lives of approximately five years to provide for more structured cash flows, thereby limiting price and extension risk in a rising interest rate environment. State and municipal securities decreased primarily due to maturities that were not fully reinvested. The decrease in ARCs was primarily due to the sales of securities with a total book value of
$11.9 million
, resulting in no gain or loss.
The net pre-tax unrealized gain on available for sale investment securities was
$1.3 million
as of
June 30, 2014
, compared to a
$39.8 million
pre-tax unrealized loss as of
December 31, 2013
. The $41.1 million increase in investment portfolio value was due to a decrease in market interest rates, which caused the fair values of collateralized mortgage obligations and mortgage-backed securities to increase. See additional details regarding investment security price risk within Item 7A, "Quantitative and Qualitative Disclosures About Market Risk."
Loans, net of unearned income
The following table presents ending balances of loans outstanding, net of unearned income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
June 30, 2014
|
|
December 31, 2013
|
|
$
|
|
%
|
|
(in thousands)
|
|
|
Real-estate – commercial mortgage
|
$
|
5,128,734
|
|
|
$
|
5,101,922
|
|
|
$
|
26,812
|
|
|
0.5
|
%
|
Commercial – industrial, financial and agricultural
|
3,601,721
|
|
|
3,628,420
|
|
|
(26,699
|
)
|
|
(0.7
|
)
|
Real-estate – home equity
|
1,730,497
|
|
|
1,764,197
|
|
|
(33,700
|
)
|
|
(1.9
|
)
|
Real-estate – residential mortgage
|
1,361,976
|
|
|
1,337,380
|
|
|
24,596
|
|
|
1.8
|
|
Real-estate – construction
|
634,018
|
|
|
573,672
|
|
|
60,346
|
|
|
10.5
|
|
Consumer
|
280,557
|
|
|
283,124
|
|
|
(2,567
|
)
|
|
(0.9
|
)
|
Leasing and other
|
102,008
|
|
|
93,505
|
|
|
8,503
|
|
|
9.1
|
|
Loans, net of unearned income
|
$
|
12,839,511
|
|
|
$
|
12,782,220
|
|
|
$
|
57,291
|
|
|
0.4
|
%
|
The Corporation does not have a concentration of credit risk with any single borrower, industry or geographical location. The maximum total lending commitment to an individual borrower was $39.0 million as of
June 30, 2014
, which is below the Corporation's maximum lending limit. As of
June 30, 2014
, the Corporation had 60 relationships with total borrowing commitments between $20.0 million and $39.0 million.
Approximately
$5.8 billion
, or
44.9%
, of the loan portfolio was in commercial mortgage and construction loans as of
June 30, 2014
. The performance of these loans can be adversely impacted by fluctuations in real estate values. The Corporation limits its maximum non-owner occupied commercial real estate exposure to $28.0 million to any one borrower, and limits its exposure to any one development project to $15.0 million.
Construction loans include loans to commercial borrowers secured by residential real estate, loans to commercial borrowers secured by commercial real estate and other construction loans, which represent loans to individuals secured by residential real estate. The following table presents outstanding construction loans and their delinquency rates by these class segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
Balance
|
|
Delinquency Rate (1)
|
|
% of Total
|
|
Balance
|
|
Delinquency Rate (1)
|
|
% of Total
|
|
(dollars in thousands)
|
Commercial
|
$
|
335,195
|
|
|
0.6
|
%
|
|
52.9
|
%
|
|
$
|
269,497
|
|
|
0.8
|
%
|
|
47.0
|
%
|
Commercial - residential
|
229,809
|
|
|
8.0
|
|
|
36.2
|
|
|
235,369
|
|
|
8.2
|
|
|
41.0
|
|
Other
|
69,014
|
|
|
0.6
|
|
|
10.9
|
|
|
68,806
|
|
|
0.8
|
|
|
12.0
|
|
Total Real estate - construction
|
$
|
634,018
|
|
|
3.3
|
%
|
|
100.0
|
%
|
|
$
|
573,672
|
|
|
3.8
|
%
|
|
100.0
|
%
|
|
|
(1)
|
Represents all accruing loans 31 days or more past due and non-accrual loans as a percentage of total loans within each class segment.
|
Construction loans increased
$60.3 million
, or
10.5%
, in comparison to
December 31, 2013
. Geographically, the increase in construction loans was in the Pennsylvania ($30.6 million, or 10.6%) and Maryland ($24.6 million or 40.2%) markets.
The
$26.7 million
, or
0.7%
, decrease in commercial loans was due to a decrease in the Pennsylvania ($62.4 million, or 2.4%) market, partially offset by increases in the New Jersey ($31.4 million, or 6.3%) and Virginia ($12.2 million, or 8.5%) markets.
The following table summarizes the percentage of commercial loans, by industry:
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
Services
|
18.6
|
%
|
|
19.2
|
%
|
Manufacturing
|
13.7
|
|
|
13.5
|
|
Construction
|
11.0
|
|
|
10.0
|
|
Retail
|
10.4
|
|
|
11.0
|
|
Wholesale
|
9.4
|
|
|
9.7
|
|
Real estate (1)
|
7.9
|
|
|
7.0
|
|
Health care
|
7.7
|
|
|
8.1
|
|
Agriculture
|
4.9
|
|
|
5.8
|
|
Arts and entertainment
|
3.2
|
|
|
2.7
|
|
Transportation
|
2.2
|
|
|
2.5
|
|
Financial services
|
1.8
|
|
|
1.6
|
|
Other
|
9.2
|
|
|
8.9
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
(1)
|
Includes borrowers engaged in the business of: renting, leasing or managing real estate for others; selling and/or buying real estate for others; and appraising real estate.
|
Commercial loans and commercial mortgage loans also include shared national credits, which are participations in loans or loan commitments of at least $20 million that are shared by three or more banks. Below is a summary of the Corporation's outstanding purchased shared national credits:
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
(dollars in thousands)
|
Commercial - industrial, financial and agricultural
|
$
|
136,200
|
|
|
$
|
129,840
|
|
Real estate - commercial mortgage
|
137,740
|
|
|
87,868
|
|
|
$
|
273,940
|
|
|
$
|
217,708
|
|
Total shared national credits increased
$56.2 million
, or
25.8%
, in comparison to
December 31, 2013
. The Corporation's shared national credits are to borrowers located in its geographical markets and the increase was due to normal lending activities consistent
with the Corporation's underwriting policies. As of
June 30, 2014
and
December 31, 2013
, none of the shared national credits were past due.
The $24.6 million, or 1.8% increase in residential mortgages was due to the retention of certain 15-year fixed rate mortgages in the portfolio instead of selling those mortgages to third-party investors.
Provision for Credit Losses and Allowance for Credit Losses
The following table presents the activity in the allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
Six months ended June 30
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
(dollars in thousands)
|
Average balance of loans, net of unearned income
|
$
|
12,795,747
|
|
|
$
|
12,528,562
|
|
|
$
|
12,779,145
|
|
|
$
|
12,393,670
|
|
|
|
|
|
|
|
|
|
Balance of allowance for credit losses at beginning of period
|
$
|
199,006
|
|
|
$
|
221,527
|
|
|
$
|
204,917
|
|
|
$
|
225,439
|
|
Loans charged off:
|
|
|
|
|
|
|
|
Commercial – industrial, financial and agricultural
|
5,512
|
|
|
5,960
|
|
|
10,637
|
|
|
15,462
|
|
Real estate – commercial mortgage
|
2,141
|
|
|
5,193
|
|
|
3,527
|
|
|
9,326
|
|
Real estate – home equity
|
1,234
|
|
|
1,966
|
|
|
2,885
|
|
|
4,370
|
|
Real estate – residential mortgage
|
1,089
|
|
|
4,465
|
|
|
1,935
|
|
|
7,515
|
|
Consumer
|
449
|
|
|
433
|
|
|
1,200
|
|
|
983
|
|
Real estate – construction
|
218
|
|
|
2,597
|
|
|
432
|
|
|
4,583
|
|
Leasing and other
|
833
|
|
|
769
|
|
|
1,128
|
|
|
1,250
|
|
Total loans charged off
|
11,476
|
|
|
21,383
|
|
|
21,744
|
|
|
43,489
|
|
Recoveries of loans previously charged off:
|
|
|
|
|
|
|
|
Commercial – industrial, financial and agricultural
|
775
|
|
|
756
|
|
|
1,519
|
|
|
1,135
|
|
Real estate – commercial mortgage
|
430
|
|
|
1,505
|
|
|
474
|
|
|
2,569
|
|
Real estate – home equity
|
177
|
|
|
192
|
|
|
533
|
|
|
523
|
|
Real estate – residential mortgage
|
108
|
|
|
116
|
|
|
224
|
|
|
197
|
|
Consumer
|
402
|
|
|
406
|
|
|
611
|
|
|
912
|
|
Real estate – construction
|
158
|
|
|
744
|
|
|
382
|
|
|
1,415
|
|
Leasing and other
|
362
|
|
|
263
|
|
|
526
|
|
|
425
|
|
Total recoveries
|
2,412
|
|
|
3,982
|
|
|
4,269
|
|
|
7,176
|
|
Net loans charged off
|
9,064
|
|
|
17,401
|
|
|
17,475
|
|
|
36,313
|
|
Provision for credit losses
|
3,500
|
|
|
13,500
|
|
|
6,000
|
|
|
28,500
|
|
Balance of allowance for credit losses at end of period
|
$
|
193,442
|
|
|
$
|
217,626
|
|
|
$
|
193,442
|
|
|
$
|
217,626
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans (annualized)
|
0.28
|
%
|
|
0.56
|
%
|
|
0.27
|
%
|
|
0.59
|
%
|
The following table presents the components of the allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
December 31,
2013
|
|
(dollars in thousands)
|
Allowance for loan losses
|
$
|
191,685
|
|
|
$
|
202,780
|
|
Reserve for unfunded lending commitments
|
1,757
|
|
|
2,137
|
|
Allowance for credit losses
|
$
|
193,442
|
|
|
$
|
204,917
|
|
|
|
|
|
Allowance for credit losses to loans outstanding
|
1.51
|
%
|
|
1.60
|
%
|
For the three and
six
months ended
June 30, 2014
, the Corporation's provision for credit losses decreased
$10.0 million
, or
74.1%
, and
$22.5 million
, or
78.9%
, respectively, in comparison to the same periods in
2013
. The decreases in the provision for credit losses were due to improvements in credit quality, as shown by a reduction in non-performing loans and overall delinquency.
Net charge-offs decreased $
8.3 million
, or
47.9%
, to
$9.1 million
for the
second
quarter of
2014
, compared to
$17.4 million
for the
second
quarter of
2013
. The decrease in net charge-offs was primarily due to a
$3.4 million
, or 77.4%, decrease in residential mortgage net charge-offs, a
$2.0 million
, or
53.6%
, decrease in commercial mortgage net charge-offs and a
$1.8 million
, or
96.8%
, decrease in real estate - construction net charge-offs. Of the
$9.1 million
of net charge-offs recorded in the
second
quarter of
2014
, 65.8% were for loans originated in Pennsylvania and 24.6% were for loans originated in New Jersey.
During the first half
2014
, net charge-offs decreased
$18.8 million
, or
51.9%
, to
$17.5 million
for the first half of
2014
compared to
$36.3 million
for the same period of
2013
. The decrease in net charge-offs was primarily due to a
$5.6 million
, or
76.6%
, decrease in residential mortgage net charge-offs, a
$5.2 million
, or
36.4%
, decrease in commercial loan net charge-offs and a
$3.7 million
or
54.8%
, decrease in commercial mortgage net charge-offs. Of the
$17.5 million
of net charge-offs recorded during the first six months of
2014
, 69.3% and 24.1% were for loans originated in Pennsylvania and New Jersey, respectively.
The following table summarizes non-performing assets as of the indicated dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
June 30, 2013
|
|
December 31, 2013
|
|
(dollars in thousands)
|
Non-accrual loans
|
$
|
129,934
|
|
|
$
|
164,039
|
|
|
$
|
133,753
|
|
Loans 90 days past due and accruing
|
19,378
|
|
|
25,159
|
|
|
20,524
|
|
Total non-performing loans
|
149,312
|
|
|
189,198
|
|
|
154,277
|
|
Other real estate owned (OREO)
|
13,482
|
|
|
20,984
|
|
|
15,052
|
|
Total non-performing assets
|
$
|
162,794
|
|
|
$
|
210,182
|
|
|
$
|
169,329
|
|
Non-accrual loans to total loans
|
1.01
|
%
|
|
1.30
|
%
|
|
1.05
|
%
|
Non-performing assets to total assets
|
0.96
|
%
|
|
1.23
|
%
|
|
1.00
|
%
|
Allowance for credit losses to non-performing loans
|
129.56
|
%
|
|
115.03
|
%
|
|
132.82
|
%
|
The following table presents accruing loans whose terms have been modified under troubled debt restructurings (TDRs), by type, as of the indicated dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
June 30, 2013
|
|
December 31, 2013
|
|
(in thousands)
|
Real estate – residential mortgage
|
$
|
31,184
|
|
|
$
|
28,948
|
|
|
$
|
28,815
|
|
Real estate – commercial mortgage
|
19,398
|
|
|
24,828
|
|
|
19,758
|
|
Real estate – construction
|
8,561
|
|
|
10,599
|
|
|
10,117
|
|
Commercial – industrial, financial and agricultural
|
6,953
|
|
|
8,394
|
|
|
8,045
|
|
Real estate – home equity
|
2,815
|
|
|
1,549
|
|
|
1,365
|
|
Consumer
|
23
|
|
|
13
|
|
|
11
|
|
Total accruing TDRs
|
68,934
|
|
|
74,331
|
|
|
68,111
|
|
Non-accrual TDRs (1)
|
25,526
|
|
|
30,377
|
|
|
30,209
|
|
Total TDRs
|
$
|
94,460
|
|
|
$
|
104,708
|
|
|
$
|
98,320
|
|
(1) Included with non-accrual loans in the preceding table.
TDRs modified during the first half of
2014
and still outstanding as of
June 30, 2014
totaled
$14.6 million
. During the first half of
2014
, $2.6 million of TDRs that were modified within the previous 12 months had a payment default, which the Corporation defines as a single missed scheduled payment, subsequent to modification.
The following table presents the changes in non-accrual loans for the three and
six
months ended
June 30, 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial -
Industrial,
Financial and
Agricultural
|
|
Real Estate -
Commercial
Mortgage
|
|
Real Estate -
Construction
|
|
Real Estate -
Residential
Mortgage
|
|
Real Estate -
Home
Equity
|
|
Consumer
|
|
Leasing
|
|
Total
|
|
(in thousands)
|
Three months ended June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of non-accrual loans at March 31, 2014
|
$
|
38,518
|
|
|
$
|
42,384
|
|
|
$
|
19,935
|
|
|
$
|
21,319
|
|
|
$
|
11,548
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
133,705
|
|
Additions
|
9,662
|
|
|
6,841
|
|
|
668
|
|
|
3,218
|
|
|
3,181
|
|
|
449
|
|
|
407
|
|
|
24,426
|
|
Payments
|
(6,596
|
)
|
|
(4,331
|
)
|
|
(1,080
|
)
|
|
(1,119
|
)
|
|
(849
|
)
|
|
(1
|
)
|
|
—
|
|
|
(13,976
|
)
|
Charge-offs
|
(5,512
|
)
|
|
(2,141
|
)
|
|
(218
|
)
|
|
(1,089
|
)
|
|
(1,234
|
)
|
|
(449
|
)
|
|
(407
|
)
|
|
(11,050
|
)
|
Transfers to accrual status
|
—
|
|
|
—
|
|
|
—
|
|
|
(489
|
)
|
|
(155
|
)
|
|
—
|
|
|
—
|
|
|
(644
|
)
|
Transfers to OREO status
|
(92
|
)
|
|
(817
|
)
|
|
(69
|
)
|
|
(787
|
)
|
|
(762
|
)
|
|
—
|
|
|
—
|
|
|
(2,527
|
)
|
Balance of non-accrual loans as of June 30, 2014
|
$
|
35,980
|
|
|
$
|
41,936
|
|
|
$
|
19,236
|
|
|
$
|
21,053
|
|
|
$
|
11,729
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
129,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of non-accrual loans as of December 31, 2013
|
$
|
36,710
|
|
|
$
|
40,566
|
|
|
$
|
20,921
|
|
|
$
|
22,282
|
|
|
$
|
13,272
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
133,753
|
|
Additions
|
20,169
|
|
|
14,424
|
|
|
1,151
|
|
|
6,805
|
|
|
5,551
|
|
|
1,204
|
|
|
407
|
|
|
49,711
|
|
Payments
|
(9,510
|
)
|
|
(8,612
|
)
|
|
(2,335
|
)
|
|
(1,446
|
)
|
|
(1,380
|
)
|
|
(6
|
)
|
|
—
|
|
|
(23,289
|
)
|
Charge-offs
|
(10,637
|
)
|
|
(3,527
|
)
|
|
(432
|
)
|
|
(1,935
|
)
|
|
(2,885
|
)
|
|
(1,200
|
)
|
|
(407
|
)
|
|
(21,023
|
)
|
Transfers to accrual status
|
—
|
|
|
(54
|
)
|
|
—
|
|
|
(2,328
|
)
|
|
(1,558
|
)
|
|
—
|
|
|
—
|
|
|
(3,940
|
)
|
Transfers to OREO status
|
(752
|
)
|
|
(861
|
)
|
|
(69
|
)
|
|
(2,325
|
)
|
|
(1,271
|
)
|
|
—
|
|
|
—
|
|
|
(5,278
|
)
|
Balance of non-accrual loans as of June 30, 2014
|
$
|
35,980
|
|
|
$
|
41,936
|
|
|
$
|
19,236
|
|
|
$
|
21,053
|
|
|
$
|
11,729
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
129,934
|
|
Non-accrual loans decreased
$34.1 million
, or
20.8%
, in comparison to
June 30, 2013
and
$3.8 million
in comparison to
December 31, 2013
. Total non-accrual additions for the three and
six
months ended
June 30, 2014
were
$24.4 million
and
$49.7 million
, respectively, compared to additions for the three and
six
months ended
June 30, 2013
of $38.3 million and $83.6 million, respectively.
The following table summarizes non-performing loans, by type, as of the indicated dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
June 30, 2013
|
|
December 31, 2013
|
|
(in thousands)
|
Real estate – commercial mortgage
|
$
|
44,015
|
|
|
$
|
49,429
|
|
|
$
|
44,068
|
|
Commercial – industrial, financial and agricultural
|
38,163
|
|
|
57,219
|
|
|
38,021
|
|
Real estate – residential mortgage
|
27,887
|
|
|
30,660
|
|
|
31,347
|
|
Real estate – construction
|
20,268
|
|
|
29,964
|
|
|
21,267
|
|
Real estate – home equity
|
16,094
|
|
|
19,046
|
|
|
16,983
|
|
Leasing
|
60
|
|
|
100
|
|
|
48
|
|
Consumer
|
2,825
|
|
|
2,780
|
|
|
2,543
|
|
Total non-performing loans
|
$
|
149,312
|
|
|
$
|
189,198
|
|
|
$
|
154,277
|
|
Non-performing commercial mortgages decreased
$5.4 million
, or
11.0%
, in comparison to
June 30, 2013
. Geographically, the decrease was primarily in the Virginia ($5.2 million, or 76.9%) and Delaware ($2.9 million, or 78.0%) markets.
Non-performing commercial loans decreased
$19.1 million
, or
33.3%
, in comparison to
June 30, 2013
. Geographically, the decrease was primarily in the Pennsylvania ($16.8 million, or 40.9%) market.
Non-performing construction loans decreased
$9.7 million
, or
32.4%
, in comparison to
June 30, 2013
. Geographically, the decrease occurred primarily in the Maryland ($5.7 million, or 61.9%) and Pennsylvania ($2.7 million, or 19.3%) markets.
The following table summarizes the Corporation’s OREO, by property type, as of the indicated dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
June 30, 2013
|
|
December 31, 2013
|
|
(in thousands)
|
Residential properties
|
$
|
8,279
|
|
|
$
|
10,501
|
|
|
$
|
7,052
|
|
Commercial properties
|
3,262
|
|
|
5,800
|
|
|
5,586
|
|
Undeveloped land
|
1,941
|
|
|
4,683
|
|
|
2,414
|
|
Total OREO
|
$
|
13,482
|
|
|
$
|
20,984
|
|
|
$
|
15,052
|
|
The Corporation's ability to identify potential problem loans in a timely manner is important to maintaining an adequate allowance for credit losses. For commercial loans, commercial mortgages and construction loans to commercial borrowers, an internal risk rating process is used to monitor credit quality. For a description of the Corporation's risk ratings, see Note E, "Loans and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements. The evaluation of credit risk for residential mortgages, home equity loans, construction loans to individuals, consumer loans and lease receivables is based on aggregate payment history, through the monitoring of delinquency levels and trends.
Total internally risk rated loans were
$9.3 billion
as of
June 30, 2014
and $9.2 billion as of
December 31, 2013
. The following table presents internal risk ratings for commercial loans, commercial mortgages and construction loans to commercial borrowers with internal risk ratings of Special Mention (considered criticized loans) or Substandard or lower (considered classified loans), by class segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Mention
|
|
Increase (decrease)
|
|
Substandard or lower
|
|
Increase (decrease)
|
|
Total Criticized and Classified Loans
|
|
June 30, 2014
|
|
December 31, 2013
|
|
$
|
|
%
|
|
June 30, 2014
|
|
December 31, 2013
|
|
$
|
|
%
|
|
June 30, 2014
|
|
December 31, 2013
|
|
(dollars in thousands)
|
Real estate - commercial mortgage
|
$
|
115,220
|
|
|
$
|
141,013
|
|
|
$
|
(25,793
|
)
|
|
(18.3
|
)%
|
|
$
|
163,287
|
|
|
$
|
196,922
|
|
|
$
|
(33,635
|
)
|
|
(17.1
|
)%
|
|
$
|
278,507
|
|
|
$
|
337,935
|
|
Commercial - secured
|
128,824
|
|
|
111,613
|
|
|
17,211
|
|
|
15.4
|
|
|
126,790
|
|
|
125,382
|
|
|
1,408
|
|
|
1.1
|
|
|
255,614
|
|
|
236,995
|
|
Commercial -unsecured
|
23,681
|
|
|
11,666
|
|
|
12,015
|
|
|
103.0
|
|
|
5,272
|
|
|
2,755
|
|
|
2,517
|
|
|
91.4
|
|
|
28,953
|
|
|
14,421
|
|
Total Commercial - industrial, financial and agricultural
|
152,505
|
|
|
123,279
|
|
|
29,226
|
|
|
23.7
|
|
|
132,062
|
|
|
128,137
|
|
|
3,925
|
|
|
3.1
|
|
|
284,567
|
|
|
251,416
|
|
Construction - commercial residential
|
28,412
|
|
|
31,522
|
|
|
(3,110
|
)
|
|
(9.9
|
)
|
|
47,031
|
|
|
57,806
|
|
|
(10,775
|
)
|
|
(18.6
|
)
|
|
75,443
|
|
|
89,328
|
|
Construction - commercial
|
1,470
|
|
|
2,932
|
|
|
(1,462
|
)
|
|
(49.9
|
)
|
|
6,415
|
|
|
8,124
|
|
|
(1,709
|
)
|
|
(21.0
|
)
|
|
7,885
|
|
|
11,056
|
|
Total real estate - construction (excluding construction - other)
|
29,882
|
|
|
34,454
|
|
|
(4,572
|
)
|
|
(13.3
|
)
|
|
53,446
|
|
|
65,930
|
|
|
(12,484
|
)
|
|
(18.9
|
)
|
|
83,328
|
|
|
100,384
|
|
Total
|
$
|
297,607
|
|
|
$
|
298,746
|
|
|
$
|
(1,139
|
)
|
|
(0.4
|
)%
|
|
$
|
348,795
|
|
|
$
|
390,989
|
|
|
$
|
(42,194
|
)
|
|
(10.8
|
)%
|
|
$
|
646,402
|
|
|
$
|
689,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of total risk rated loans
|
3.2
|
%
|
|
3.2
|
%
|
|
|
|
|
|
3.8
|
%
|
|
4.2
|
%
|
|
|
|
|
|
7.0
|
%
|
|
7.4
|
%
|
As of
June 30, 2014
, total loans with risk ratings of Substandard or lower decreased
$42.2 million
, or
10.8%
, in comparison to
December 31, 2013
and $120.9 million, or 25.7%, in comparison to
June 30, 2013
. Special Mention loans decreased
$1.1 million
, or
0.4%
, in comparison to
December 31, 2013
and decreased $23.5 million, or 7.3%, in comparison to
June 30, 2013
.
The following table summarizes loan delinquency rates, by type, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
June 30, 2013
|
|
December 31, 2013
|
|
31-89
Days
|
|
≥ 90 Days (1)
|
|
Total
|
|
31-89
Days
|
|
≥ 90 Days (1)
|
|
Total
|
|
31-89
Days
|
|
≥ 90 Days (1)
|
|
Total
|
Real estate – commercial mortgage
|
0.30
|
%
|
|
0.86
|
%
|
|
1.16
|
%
|
|
0.47
|
%
|
|
1.01
|
%
|
|
1.48
|
%
|
|
0.38
|
%
|
|
0.87
|
%
|
|
1.25
|
%
|
Commercial – industrial, financial and agricultural
|
0.47
|
%
|
|
1.05
|
%
|
|
1.52
|
%
|
|
0.41
|
%
|
|
1.54
|
%
|
|
1.95
|
%
|
|
0.30
|
%
|
|
1.04
|
%
|
|
1.34
|
%
|
Real estate – construction
|
0.10
|
%
|
|
3.20
|
%
|
|
3.30
|
%
|
|
0.42
|
%
|
|
4.91
|
%
|
|
5.33
|
%
|
|
0.11
|
%
|
|
3.71
|
%
|
|
3.82
|
%
|
Real estate – residential mortgage
|
1.78
|
%
|
|
2.05
|
%
|
|
3.83
|
%
|
|
2.12
|
%
|
|
2.33
|
%
|
|
4.45
|
%
|
|
1.74
|
%
|
|
2.34
|
%
|
|
4.08
|
%
|
Real estate – home equity
|
0.68
|
%
|
|
0.93
|
%
|
|
1.61
|
%
|
|
0.68
|
%
|
|
1.08
|
%
|
|
1.76
|
%
|
|
0.91
|
%
|
|
0.96
|
%
|
|
1.87
|
%
|
Consumer, leasing and other
|
1.55
|
%
|
|
0.76
|
%
|
|
2.31
|
%
|
|
1.47
|
%
|
|
0.74
|
%
|
|
2.21
|
%
|
|
1.99
|
%
|
|
0.68
|
%
|
|
2.67
|
%
|
Total
|
0.58
|
%
|
|
1.17
|
%
|
|
1.75
|
%
|
|
0.68
|
%
|
|
1.50
|
%
|
|
2.18
|
%
|
|
0.61
|
%
|
|
1.20
|
%
|
|
1.81
|
%
|
Total dollars (in thousands)
|
$
|
74,955
|
|
|
$
|
149,312
|
|
|
$
|
224,267
|
|
|
$
|
85,869
|
|
|
$
|
189,198
|
|
|
$
|
275,067
|
|
|
$
|
77,667
|
|
|
$
|
154,277
|
|
|
$
|
231,944
|
|
|
|
(1)
|
Includes non-accrual loans.
|
The Corporation believes that the allowance for credit losses of $193.4 million as of
June 30, 2014
is sufficient to cover incurred losses in both the loan portfolio and the unfunded lending commitments as of that date and is appropriate based on applicable accounting standards.
Deposits and Borrowings
The following table presents ending deposits, by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase(Decrease)
|
|
June 30, 2014
|
|
December 31, 2013
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Noninterest-bearing demand
|
$
|
3,484,125
|
|
|
$
|
3,283,172
|
|
|
$
|
200,953
|
|
|
6.1
|
%
|
Interest-bearing demand
|
2,855,511
|
|
|
2,945,210
|
|
|
(89,699
|
)
|
|
(3.0
|
)
|
Savings
|
3,338,018
|
|
|
3,344,882
|
|
|
(6,864
|
)
|
|
(0.2
|
)
|
Total demand and savings
|
9,677,654
|
|
|
9,573,264
|
|
|
104,390
|
|
|
1.1
|
|
Time deposits
|
3,016,005
|
|
|
2,917,922
|
|
|
98,083
|
|
|
3.4
|
|
Total deposits
|
$
|
12,693,659
|
|
|
$
|
12,491,186
|
|
|
$
|
202,473
|
|
|
1.6
|
%
|
Non-interest bearing demand deposits increased
$201.0 million
, or
6.1%
, due primarily to a $168.9 million, or 7.0%, increase in business account balances and a $29.6 million, or 4.2%, increase in personal account balances.
Interest-bearing demand accounts decreased
$89.7 million
, or
3.0%
, primarily due to a $129.9 million, or 12.0%, seasonal decrease in municipal account balances partially offset by a $40.0 million, or 36.7%, increase in business account balances. The
$6.9 million
, or
0.2%
,decrease in savings account balances was due to a $53.0 million, or 7.0%, decrease in business account balances, partially offset by a $38.5 million, or 1.8%, increase in personal account balances. The
$98.1 million
, or
3.4%
, increase in time deposits was due to an increase in time deposits with original maturities of 4 to 5 years due to promotional efforts intended to lock in longer-term rates.
The following table summarizes the changes in ending borrowings, by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
June 30, 2014
|
|
December 31, 2013
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Short-term borrowings:
|
|
|
|
|
|
|
|
Customer repurchase agreements
|
$
|
212,930
|
|
|
$
|
175,621
|
|
|
$
|
37,309
|
|
|
21.2
|
%
|
Customer short-term promissory notes
|
86,366
|
|
|
100,572
|
|
|
(14,206
|
)
|
|
(14.1
|
)
|
Total short-term customer funding
|
299,296
|
|
|
276,193
|
|
|
23,103
|
|
|
8.4
|
|
Federal funds purchased
|
384,011
|
|
|
582,436
|
|
|
(198,425
|
)
|
|
(34.1
|
)
|
Short-term FHLB advances (1)
|
325,000
|
|
|
400,000
|
|
|
(75,000
|
)
|
|
(18.8
|
)
|
Total short-term borrowings
|
1,008,307
|
|
|
1,258,629
|
|
|
(250,322
|
)
|
|
(19.9
|
)
|
Long-term debt:
|
|
|
|
|
|
|
|
FHLB advances
|
598,661
|
|
|
513,854
|
|
|
84,807
|
|
|
16.5
|
|
Other long-term debt
|
369,734
|
|
|
369,730
|
|
|
4
|
|
|
—
|
|
Total long-term debt
|
968,395
|
|
|
883,584
|
|
|
84,811
|
|
|
9.6
|
|
Total borrowings
|
$
|
1,976,702
|
|
|
$
|
2,142,213
|
|
|
(165,511
|
)
|
|
(7.7
|
)%
|
|
|
|
|
|
|
|
|
(1) Represents FHLB advances with an original maturity term of less than one year.
The
$250.3 million
decrease in total short-term borrowings was primarily the result of a
$202.5 million
increase in deposits.
Other liabilities
Other liabilities increased
$25.4 million
, or
10.7%
, in comparison to
December 31, 2013
. The Corporation had $25.6 million of investment securities purchases executed prior to
June 30, 2014
, which had not settled at the end of the quarter, compared to $6.2 million of such payables as of
December 31, 2013
. Also contributing to the decrease in other liabilities was a reduction in reserves associated with the potential repurchase of previously sold residential mortgages.
Shareholders' Equity
Total shareholders’ equity increased
$36.6 million
, or
1.8%
, during the first
six
months of
2014
. The increase was due primarily to
$81.4 million
of net income and a
$26.7 million
increase in after-tax unrealized holding gains on available for sale investment securities, partially offset by
$49.8 million
of stock repurchases and
$30.2 million
of dividends on shares outstanding.
In October 2013, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation was authorized to repurchase up to 4.0 million shares, or approximately 2.1% of its outstanding shares, through March 2014. During the first quarter of 2014, the Corporation repurchased 4.0 million shares at an average cost of $12.45 per share, completing this repurchase program on February 19, 2014.
In
May 2014
, the Corporation announced that its board of directors had approved a share repurchase program pursuant to which the Corporation was authorized to repurchase up to
4.0 million
shares, or approximately
2.1%
of its outstanding shares, through
December 31, 2014
. No shares were repurchased under this repurchase program during the three and
six months ended June 30,
2014
, however, the Corporation intends to complete the share repurchase program by the end of the third quarter of 2014, as permitted by securities laws and other legal requirements, and subject to market conditions and other factors.
The Corporation and its subsidiary banks are subject to regulatory capital requirements administered by various banking regulators. Failure to meet minimum capital requirements could result in certain actions by regulators that could have a material effect on the Corporation’s financial statements. The regulations require that banks maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier I capital to average assets (as defined).
As of
June 30, 2014
, the Corporation and each of its bank subsidiaries met the minimum requirements. In addition, each of the Corporation’s bank subsidiaries’ capital ratios exceeded the amounts required to be considered "well capitalized" as defined in the regulations.
The following table summarizes the Corporation’s capital ratios in comparison to regulatory requirements:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
Regulatory
Minimum
for Capital
Adequacy
|
Total Capital (to Risk-Weighted Assets)
|
14.8
|
%
|
|
15.0
|
%
|
|
8.0
|
%
|
Tier I Capital (to Risk-Weighted Assets)
|
13.2
|
%
|
|
13.1
|
%
|
|
4.0
|
%
|
Tier I Capital (to Average Assets)
|
10.8
|
%
|
|
10.6
|
%
|
|
4.0
|
%
|
In July 2013, the Federal Reserve Board approved final rules (the "U.S. Basel III Capital Rules") establishing a new comprehensive capital framework for U.S. banking organizations and implementing the Basel Committee on Banking Supervision's December 2010 framework for strengthening international capital standards. The U.S. Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions.
The new minimum regulatory capital requirements established by the U.S. Basel III Capital Rules are effective for the Corporation beginning on January 1, 2015, and become fully phased in on January 1, 2019.
When fully phased in, the U.S. Basel III Capital Rules will require the Corporation and its bank subsidiaries to:
|
|
•
|
Meet a new minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets and a Tier 1 capital ratio of 6.00% of risk-weighted assets;
|
|
|
•
|
Continue to require the current minimum Total capital ratio of 8.00% of risk-weighted assets and the minimum Tier 1 leverage capital ratio of 4.00% of average assets;
|
|
|
•
|
Maintain a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements, which must be maintained to avoid restrictions on capital distributions and certain discretionary bonus payments; and
|
|
|
•
|
Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses as a result of which certain non-qualifying capital instruments, including cumulative preferred stock and trust preferred securities, will be excluded as a component of Tier 1 capital for institutions of the Corporation's size.
|
The U.S. Basel III Capital Rules use a standardized approach for risk weightings that expand the risk-weightings for assets and off balance sheet exposures from the current 0%, 20%, 50% and 100% categories to a much larger and more risk-sensitive number of categories, depending on the nature of the assets and resulting in higher risk weights for a variety of asset categories.
As of
June 30, 2014
, the Corporation believes its current capital levels would meet the fully-phased in minimum capital
requirements, including the capital conservation buffers, as prescribed in the U.S. Basel III Capital Rules.
Liquidity
The Corporation must maintain a sufficient level of liquid assets to meet the cash needs of its customers who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Liquidity is provided on a continuous basis through scheduled and unscheduled principal and interest payments on outstanding loans and investments and through the availability of deposits and borrowings. The Corporation also maintains secondary sources that provide liquidity on a secured and unsecured basis to meet short-term and long-term needs.
The Corporation maintains liquidity sources in the form of demand and savings deposits, time deposits, repurchase agreements and short-term promissory notes. The Corporation can access additional liquidity from these sources, if necessary, by increasing interest rates. The positive impact to liquidity resulting from higher interest rates could have a detrimental impact on the net interest margin and net income if rates on interest-earning assets do not have a corresponding increase.
Borrowing availability with the FHLB and the Federal Reserve Bank, along with Federal funds lines at various correspondent banks, provides the Corporation with additional liquidity.
Each of the Corporation’s subsidiary banks is a member of the FHLB and has access to FHLB overnight and term credit facilities. As of
June 30, 2014
, the Corporation had
$923.7 million
of short and long-term advances outstanding from the FHLB with an additional borrowing capacity of approximately $1.7 billion under these facilities. Advances from the FHLB are secured by qualifying commercial real estate and residential mortgage loans, investments and other assets.
As of
June 30, 2014
, the Corporation had aggregate availability under Federal funds lines of $1.6 billion, with
$384.0 million
of that amount outstanding. A combination of commercial real estate loans, commercial loans and securities are pledged to the Federal Reserve Bank of Philadelphia to provide access to Federal Reserve Bank Discount Window borrowings. As of
June 30, 2014
, the Corporation had $1.2 billion
of collateralized borrowing availability at the Discount Window, and no outstanding borrowings.
Liquidity must also be managed at the Fulton Financial Corporation parent company level. For safety and soundness reasons, banking regulations limit the amount of cash that can be transferred from subsidiary banks to the parent company in the form of loans and dividends. Generally, these limitations are based on the subsidiary banks’ regulatory capital levels and their net income. Management continues to monitor the liquidity and capital needs of the parent company and will implement appropriate strategies, as necessary, to remain adequately capitalized and to meet its cash needs.
The Corporation’s sources and uses of funds were discussed in general terms in the net interest income section of Management’s Discussion. The consolidated statements of cash flows provide additional information. The Corporation’s operating activities during the first
six
months of
2014
generated
$94.4 million
of cash, mainly due to net income, as adjusted for non-cash expenses, most notably depreciation and amortization of premises and equipment and a net increase in other liabilities, partially offset by net decrease in loans held for sale. Cash used in investing activities was
$14.8 million
, due mainly to an increase in loans and a net increase in short-term investments, partially offset by proceeds from the maturities and sales of investment securities in excess of purchases. Net cash used by financing activities was
$39.3 million
due to a net decrease in short-term borrowings, acquisitions of treasury stock and dividends paid on common shares, partially offset by increases in deposits and long-term debt.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. The types of market risk exposures generally faced by financial institutions include interest rate risk, equity market price risk, debt security market price risk, foreign currency risk and commodity price risk. Due to the nature of its operations, only equity market price risk, debt security market price risk and interest rate risk are significant to the Corporation.
Equity Market Price Risk
Equity market price risk is the risk that changes in the values of equity investments could have a material impact on the financial position or results of operations of the Corporation. As of
June 30, 2014
, equity investments consisted of
$40.2 million
of common stocks of publicly traded financial institutions, and
$6.0 million
of other equity investments.
The equity investments most susceptible to equity market price risk are the financial institutions stocks, which had a cost basis of approximately
$28.5 million
and a fair value of
$40.2 million
at
June 30, 2014
, including an investment in a single financial institution with a cost basis of
$20.0 million
and a fair value of
$28.2 million
. The fair value of this investment accounted for
70.2%
of the fair value of the common stocks of publicly traded financial institutions. No other investment within the financial institutions stock portfolio exceeded
5%
of the portfolio's fair value. In total, the financial institutions stock portfolio had gross unrealized gains of $11.8 million and gross unrealized losses of $5,000 as of
June 30, 2014
.
Management continuously monitors the fair value of its equity investments and evaluates current market conditions and operating results of the issuers. Periodic sale and purchase decisions are made based on this monitoring process. None of the Corporation’s equity securities are classified as trading.
In addition to its equity portfolio, investment management and trust services income may be impacted by fluctuations in the equity markets. A portion of this revenue is based on the value of the underlying investment portfolios, many of which include equity investments. If the values of those investment portfolios decrease, whether due to factors influencing U.S. equity markets in general or otherwise, the Corporation’s revenue would be negatively impacted. In addition, the Corporation’s ability to sell its brokerage services in the future will be dependent, in part, upon consumers’ level of confidence in financial markets.
Debt Security Market Price Risk
Debt security market price risk is the risk that changes in the values of debt securities, unrelated to interest rate changes, could have a material impact on the financial position or results of operations of the Corporation. The Corporation’s debt security investments consist primarily of U.S. government sponsored agency issued mortgage-backed securities and collateralized mortgage obligations, state and municipal securities, U.S. government debt securities, auction rate securities and corporate debt securities. All of the Corporation's investments in mortgage-backed securities and collateralized mortgage obligations have principal payments that are guaranteed by U.S. government sponsored agencies.
Municipal Securities
As of
June 30, 2014
, the Corporation had $269.8 million of securities issued by various municipalities. Ongoing uncertainty with respect to the financial strength of municipal bond insurers places much greater emphasis on the underlying strength of issuers. Continued pressure on local tax revenues of issuers due to adverse economic conditions could have an adverse impact on the underlying credit quality of issuers. The Corporation evaluates existing and potential holdings primarily based on the creditworthiness of the issuing municipality and then, to a lesser extent, on any underlying credit enhancement. Municipal securities can be supported by the general obligation of the issuing municipality, allowing the securities to be repaid by any means available to the issuing municipality. As of
June 30, 2014
, approximately 95% of municipal securities were supported by the general obligation of corresponding municipalities. Approximately 86% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.
Auction Rate Certificates
As of
June 30, 2014
, the Corporation’s investments in student loan auction rate certificates (ARCs), had a cost basis of
$158.5 million
and a fair value of
$146.9 million
.
ARCs are long-term securities that were structured to allow their sale in periodic auctions, resulting in both the treatment of ARCs as short-term instruments in normal market conditions and fair values that could be derived based on periodic auction prices. However, beginning in 2008, market auctions for these securities began to fail due to an insufficient number of buyers, resulting in an illiquid market. This illiquidity has resulted in recent market prices that represent forced liquidations or distressed sales and do not provide an accurate basis for fair value. Therefore, as of
June 30, 2014
, the fair values of the ARCs were derived using significant unobservable inputs based on an expected cash flows model which produced fair values which were materially different from those that would be expected from settlement of these investments in the illiquid market that presently exists. The expected cash flows model, prepared by a third-party valuation expert, produced fair values which assumed a return to market liquidity sometime within the next five years. The Corporation believes that the trusts underlying the ARCs will self-liquidate as student loans are repaid.
The credit quality of the underlying debt associated with ARCs is also a factor in the determination of their estimated fair value. As of
June 30, 2014
, approximately
$143 million
, or
97%
, of the ARCs were rated above investment grade, with approximately
$6 million
, or
4%
, AAA rated and
$102 million
, or
70%
, AA rated. Approximately
$4 million
, or
3%
, of ARCs were either not rated or rated below investment grade by at least one ratings agency. Of this amount, approximately
$3 million
, or
59%
, of the student loans underlying these ARCs have principal payments which are guaranteed by the federal government. In total, approximately
$145 million
, or
99%
, of the student loans underlying the ARCs have principal payments which are guaranteed by the federal government. As of
June 30, 2014
, all ARCs were current and making scheduled interest payments.
Corporate Debt Securities
The Corporation holds corporate debt securities in the form of pooled trust preferred securities, single-issuer trust preferred securities and subordinated debt issued by financial institutions, as presented in the following table as of
June 30, 2014
:
|
|
|
|
|
|
|
|
|
|
Amortized
cost
|
|
Estimated
fair value
|
|
(in thousands)
|
Single-issuer trust preferred securities
|
$
|
47,524
|
|
|
$
|
43,186
|
|
Subordinated debt
|
47,467
|
|
|
50,616
|
|
Pooled trust preferred securities
|
2,067
|
|
|
4,275
|
|
Corporate debt securities issued by financial institutions
|
$
|
97,058
|
|
|
$
|
98,077
|
|
The fair values for pooled trust preferred securities and certain single-issuer trust preferred securities were based on quotes provided by third-party brokers who determined fair values based predominantly on internal valuation models which were not indicative prices or binding offers.
The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of
$4.3 million
at
June 30, 2014
. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the
six
months ended
June 30, 2014
or
2013
.
Six
of the Corporation's
20
single-issuer trust preferred securities were rated below investment grade by at least one ratings agency, with an amortized cost of
$13.5 million
and an estimated fair value of
$12.1 million
as of
June 30, 2014
. All of the single-issuer trust preferred securities rated below investment grade were rated BB or Ba. Single-issuer trust preferred securities with an amortized cost of
$4.7 million
and an estimated fair value of
$3.8 million
at
June 30, 2014
were not rated by any ratings agency.
As of
June 30, 2014
, all
six
of the Corporation's pooled trust preferred securities with an amortized cost of
$2.1 million
and an estimated fair value of
$4.3 million
, were rated below investment grade by at least one ratings agency, with ratings ranging from C to Ca. The class of securities held by the Corporation was below the most senior tranche, with the Corporation’s interests being subordinate to other investors in the pools.
The amortized cost of pooled trust preferred securities is the purchase price of the securities, net of cumulative credit related other-than-temporary impairment charges, determined using an expected cash flows model. The most significant input to the expected cash flows model was the expected payment deferral rate for each pooled trust preferred security. The Corporation evaluates the financial metrics, such as capital ratios and non-performing asset ratios, of the individual financial institution issuers that comprise each pooled trust preferred security to estimate its expected deferral rate.
See Note D, "Investment Securities," in the Notes to Consolidated Financial Statements for further discussion related to other-than-temporary impairment evaluations for debt securities and Note M, "Fair Value Measurements," in the Notes to Consolidated Financial Statements for further discussion related to the fair values of debt securities.
Interest Rate Risk, Asset/Liability Management and Liquidity
Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on the Corporation’s liquidity position and could affect its ability to meet obligations and continue to grow. Second, movements in interest rates can create fluctuations in the Corporation’s net interest income and changes in the economic value of its equity.
The Corporation employs various management techniques to minimize its exposure to interest rate risk. An Asset/Liability Management Committee (ALCO), consisting of key financial and senior management personnel, meets on a regular basis. The ALCO is responsible for reviewing the interest rate sensitivity and liquidity positions of the Corporation, approving asset and liability management policies, and overseeing the formulation and implementation of strategies regarding balance sheet positions.
From a liquidity standpoint, the Corporation must maintain a sufficient level of liquid assets to meet the cash needs of its customers, who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Liquidity is provided on a continuous basis through scheduled and unscheduled principal and interest payments on outstanding loans and investments and through the availability of deposits and borrowings. The Corporation also maintains secondary sources that provide liquidity on a secured and unsecured basis to meet short-term and long-term needs.
The following table provides information about the Corporation’s interest rate sensitive financial instruments as of
June 30, 2014
. The table presents expected cash flows and weighted average rates for each of the Corporation's significant interest rate sensitive financial instruments, by expected maturity period. None of the Corporation’s financial instruments are classified as trading. All dollar amounts are in thousands.
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Expected Maturity Period
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Estimated
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Year 1
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Year 2
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Year 3
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Year 4
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Year 5
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Beyond
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Total
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Fair Value
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Fixed rate loans (1)
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$
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992,839
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$
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473,224
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$
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361,546
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$
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350,680
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$
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219,212
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$
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659,957
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$
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3,057,458
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$
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3,040,703
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Average rate
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3.90
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%
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4.55
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%
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4.42
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%
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4.69
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%
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4.63
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%
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3.98
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%
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4.22
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%
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Floating rate loans (1) (2)
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2,301,776
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1,441,538
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1,176,358
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1,006,320
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1,381,185
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2,471,625
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9,778,802
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9,700,927
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Average rate
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3.91
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%
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4.00
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%
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4.02
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%
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4.02
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%
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3.86
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%
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4.01
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%
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3.96
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%
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Fixed rate investments (3)
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410,452
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331,291
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272,851
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222,704
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188,435
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827,452
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2,253,185
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2,257,929
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Average rate
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2.55
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%
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2.62
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%
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2.77
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%
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2.65
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%
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2.64
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%
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2.84
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%
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2.71
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%
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Floating rate investments (3)
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26
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4,958
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163,409
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48
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35
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40,885
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209,361
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193,962
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Average rate
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1.20
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%
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0.93
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%
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1.06
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%
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1.75
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%
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2.18
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%
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2.58
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%
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1.36
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%
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Other interest-earning assets (4)
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258,973
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—
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—
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—
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—
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82,624
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341,597
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341,597
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Average rate
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0.85
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%
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—
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%
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—
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%
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—
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%
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—
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%
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4.58
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%
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1.74
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%
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Total
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$
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3,964,066
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$
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2,251,011
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$
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1,974,164
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$
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1,579,752
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$
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1,788,867
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$
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4,082,543
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$
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15,640,403
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$
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15,535,118
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Average rate
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3.57
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%
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3.91
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%
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3.67
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%
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3.98
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%
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3.82
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%
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3.76
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%
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3.75
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%
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Fixed rate deposits (5)
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$
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1,389,877
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$
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554,247
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$
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277,423
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$
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100,632
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$
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287,985
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$
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24,220
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$
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2,634,384
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$
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2,648,494
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Average rate
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0.63
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%
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1.20
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%
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1.27
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%
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1.45
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%
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2.09
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%
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1.83
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%
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1.02
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%
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Floating rate deposits (6)
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4,659,017
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698,491
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379,594
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356,878
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336,178
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144,992
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6,575,150
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6,570,715
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Average rate
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0.14
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%
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0.10
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%
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0.09
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%
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0.09
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%
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0.10
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%
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0.15
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%
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0.13
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%
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Fixed rate borrowings (7)
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187,361
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758
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551,564
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539
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50,565
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161,111
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951,898
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959,585
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Average rate
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3.66
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%
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4.41
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%
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4.49
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%
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4.67
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%
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1.87
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%
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6.18
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%
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4.47
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%
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Floating rate borrowings (8)
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1,008,308
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—
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—
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—
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—
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16,496
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1,024,804
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1,013,519
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Average rate
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0.21
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%
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—
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%
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—
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%
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—
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%
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—
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%
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2.36
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%
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0.24
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%
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Total
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$
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7,244,563
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$
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1,253,496
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$
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1,208,581
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$
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458,049
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$
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674,728
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$
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346,819
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$
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11,186,236
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$
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11,192,313
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Average rate
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0.34
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%
|
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0.59
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%
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2.37
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%
|
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0.40
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%
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1.08
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%
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3.17
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%
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0.72
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%
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(1)
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Amounts are based on contractual payments and maturities, adjusted for expected prepayments. Excludes $3.3 million of overdraft deposit balances.
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(2)
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Line of credit amounts are based on historical cash flows, with an average life of approximately 5 years.
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(3)
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Amounts are based on contractual maturities; adjusted for expected prepayments on mortgage-backed securities and collateralized mortgage obligations and expected calls on agency and municipal securities. Excludes equity securities as such investments do not have maturity dates.
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(4)
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Excludes Federal Reserve Bank and FHLB stock as such restricted investments do not have maturity dates.
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(5)
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Amounts are based on contractual maturities of time deposits.
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(6)
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Estimated based on history of deposit flows.
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(7)
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Amounts are based on contractual maturities of debt instruments, adjusted for possible calls. Amounts also include junior subordinated deferrable interest debentures.
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(8)
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Amounts include Federal Funds purchased, short-term promissory notes and securities sold under agreements to repurchase, which mature in less than 90 days, in addition to junior subordinated deferrable interest debentures.
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The preceding table and discussion addressed the liquidity implications of interest rate risk and focused on expected cash flows from financial instruments. Expected maturities, however, do not necessarily reflect the net interest impact of interest rate changes. Certain financial instruments, such as adjustable rate loans, have repricing periods that differ from expected cash flows periods.
Included within the
$9.8 billion
of floating rate loans above are $3.6 billion of loans, or 36.5% of the total, that float with the prime interest rate, $1.9 billion, or 19.0%, of loans that float with other interest rates, primarily the London Interbank Offered Rate (LIBOR), and $4.3 billion, or 44.5%, of adjustable rate loans. The $4.3 billion of adjustable rate loans include loans that are fixed rate instruments for a certain period of time, and then convert to floating rates.
The following table presents the percentage of adjustable rate loans, at
June 30, 2014
, stratified by the period until their next repricing:
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Percent of Total
Adjustable Rate
Loans
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One year
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29.4%
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Two years
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17.6
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Three years
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15.5
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Four years
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16.4
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Five years
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11.2
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Greater than five years
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9.9
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The Corporation uses three complementary methods to measure and manage interest rate risk. They are static gap analysis, simulation of net interest income, and estimates of economic value of equity. Using these measurements in tandem provides a reasonably comprehensive summary of the magnitude of the Corporation's interest rate risk, level of risk as time evolves, and exposure to changes in interest rates.
Static gap provides a measurement of repricing risk in the Corporation’s balance sheet as of a point in time. This measurement is accomplished through stratification of assets and liabilities into repricing periods. The sum of assets and liabilities in each of these periods are compared for mismatches within that maturity segment. Core deposits having no contractual maturities are placed into repricing periods based upon historical balance performance. Repricing for mortgage loans, mortgage-backed securities and collateralized mortgage obligations is based upon industry projections for prepayment speeds. The Corporation’s policy limits the cumulative six-month ratio of rate sensitive assets to rate sensitive liabilities (RSA/RSL) to a range of 0.85 to 1.15. As of
June 30, 2014
, the cumulative six-month ratio of RSA/RSL was 1.15.
Simulation of net interest income is performed for the next twelve-month period. A variety of interest rate scenarios are used to measure the effects of sudden and gradual movements upward and downward in the yield curve. These results are compared to the results obtained in a flat or unchanged interest rate scenario. Simulation of net interest income is used primarily to measure the Corporation’s short-term earnings exposure to rate movements. The Corporation’s policy limits the potential exposure of net interest income, in a non-parallel instantaneous shock, to 10% of the base case net interest income for a 100 basis point shock in interest rates, 15% for a 200 basis point shock and 20% for a 300 basis point shock. A "shock" is an immediate upward or downward movement of interest rates. The shocks do not take into account changes in customer behavior that could result in changes to mix and/or volumes in the balance sheet, nor do they account for competitive pricing over the forward 12-month period.
The following table summarizes the expected impact of interest rate shocks on net interest income (due to the current level of interest rates, the 200 and 300 basis point downward shock scenarios are not shown):
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Rate Shock (1)
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Annual change
in net interest income
|
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% Change
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+300 bp
|
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+ $ 47.8 million
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+9.4%
|
+200 bp
|
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+ $ 28.3 million
|
|
+5.6
|
+100 bp
|
|
+ $ 9.5 million
|
|
+1.9
|
–100 bp
|
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– $ 16.8 million
|
|
–3.3
|
|
|
(1)
|
These results include the effect of implicit and explicit floors that limit further reduction in interest rates.
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Economic value of equity estimates the discounted present value of asset cash flows and liability cash flows. Discount rates are based upon market prices for like assets and liabilities. Upward and downward shocks of interest rates are used to determine the comparative effect of such interest rate movements relative to the unchanged environment. This measurement tool is used primarily to evaluate the longer-term repricing risks and options in the Corporation’s balance sheet. The Corporation's policy limits the economic value of equity that may be at risk, in a non-parallel instantaneous shock, to 10% of the base case economic value of equity for a 100 basis point shock in interest rates, 20% for a 200 basis point shock and 30% for a 300 basis point shock. As of
June 30, 2014
, the Corporation was within policy limits for every 100 basis point shock.