|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2016
|
|
|
|
|
|
|
|
Interest rate swap derivative assets
|
$
|
82,888
|
|
|
$
|
(14
|
)
|
|
$
|
—
|
|
|
$
|
82,874
|
|
Foreign exchange derivative assets with correspondent banks
|
377
|
|
|
(359
|
)
|
|
(18
|
)
|
|
—
|
|
Total
|
$
|
83,265
|
|
|
$
|
(373
|
)
|
|
$
|
(18
|
)
|
|
$
|
82,874
|
|
|
|
|
|
|
|
|
|
Interest rate swap derivative liabilities
|
$
|
82,888
|
|
|
$
|
(14
|
)
|
|
$
|
(82,510
|
)
|
|
$
|
364
|
|
Foreign exchange derivative liabilities with correspondent banks
|
443
|
|
|
(359
|
)
|
|
—
|
|
|
84
|
|
Total
|
$
|
83,331
|
|
|
$
|
(373
|
)
|
|
$
|
(82,510
|
)
|
|
$
|
448
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
Interest rate swap derivative assets
|
$
|
32,970
|
|
|
$
|
(55
|
)
|
|
$
|
—
|
|
|
$
|
32,915
|
|
Foreign exchange derivative assets with correspondent banks
|
428
|
|
|
(147
|
)
|
|
—
|
|
|
281
|
|
Total
|
$
|
33,398
|
|
|
$
|
(202
|
)
|
|
$
|
—
|
|
|
$
|
33,196
|
|
|
|
|
|
|
|
|
|
Interest rate swap derivative liabilities
|
$
|
32,970
|
|
|
$
|
(55
|
)
|
|
$
|
(31,130
|
)
|
|
$
|
1,785
|
|
Foreign exchange derivative liabilities with correspondent banks
|
147
|
|
|
(147
|
)
|
|
—
|
|
|
—
|
|
Total
|
$
|
33,117
|
|
|
$
|
(202
|
)
|
|
$
|
(31,130
|
)
|
|
$
|
1,785
|
|
|
|
(1)
|
For derivative assets, amounts represent any derivative liability fair values that could be offset in the event of counterparty or customer default. For 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 received from the counterparty or posted by the Corporation.
|
NOTE 10 – 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 as of the dates indicated were as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31, 2015
|
|
(in thousands)
|
Commitments to extend credit
|
$
|
5,898,623
|
|
|
$
|
5,784,138
|
|
Standby letters of credit
|
362,506
|
|
|
374,729
|
|
Commercial letters of credit
|
37,836
|
|
|
39,529
|
|
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 5, "Loans and Allowance for Credit Losses," for additional details.
Residential Lending
Residential mortgages originated and sold by the Corporation 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 certain prime loans it originates to non-government sponsored agency investors.
The Corporation provides customary representations and warranties to government sponsored entities and investors that specify, among other things, that the loans have been underwritten to the standards established by the government sponsored entity or investor. The Corporation may be required to repurchase a loan, or reimburse the government sponsored entity or 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 both
June 30, 2016
and
December 31, 2015
, total outstanding repurchase requests totaled approximately
$543,000
.
From
2000
to
2011
, the Corporation sold loans to the Federal Home Loan Bank of Pittsburgh under its Mortgage Partnership Finance Program ("MPF Program"). 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," or "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, 2016
, the unpaid principal balance of loans sold under the MPF Program was approximately
$114 million
. As of
June 30, 2016
and
December 31, 2015
, the reserve for estimated credit losses related to loans sold under the MPF Program was
$2.1 million
and
$1.8 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 for residential mortgage loans.
As of
June 30, 2016
and
December 31, 2015
, the total reserve for losses on residential mortgage loans sold was
$2.8 million
and
$2.6 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, 2016
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, established through charges to earnings, in the future.
Legal Proceedings
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 of the Corporation. However, legal proceedings are often unpredictable, and it is possible that the ultimate resolution of any such matters, if unfavorable, may be material to the Corporation’s results of operations for any particular period, depending, in part, upon the size of the loss or liability imposed and the operating results for the applicable period.
BSA/AML Enforcement Orders
The Corporation and each of its bank subsidiaries are subject to regulatory enforcement orders issued during 2014 and 2015 by their respective federal and state bank regulatory agencies relating to identified deficiencies in the Corporation’s centralized Bank Secrecy Act and anti-money laundering compliance program (the "BSA/AML 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"). The regulatory enforcement orders, which are in the form of consent orders or orders to cease and desist issued upon consent ("Consent Orders"), generally require, among other things, that the Corporation and its bank subsidiaries undertake a number of required actions to strengthen and enhance the BSA/AML Compliance Program, and, in some cases, conduct retrospective reviews of past account activity and transactions, as well as certain reports filed in accordance with the BSA/AML Requirements, to determine whether suspicious activity and certain transactions in currency were
properly identified and reported in accordance with the BSA/AML Requirements. In addition to requiring strengthening and enhancement of the BSA/AML Compliance Program, while the Consent Orders remain in effect, the Corporation is subject to certain restrictions on expansion activities of the Corporation and its bank subsidiaries. Further, any failure to comply with the requirements of any of the Consent Orders involving the Corporation or its bank subsidiaries could result in further enforcement actions, the imposition of material restrictions on the activities of the Corporation or its bank subsidiaries, or the assessment of fines or penalties.
Fair Lending Investigation
During the second quarter of 2015, Fulton Bank, N.A. (the "Bank"), the Corporation’s largest bank subsidiary, received a letter from the U.S. Department of Justice (the "Department") indicating that the Department had initiated an investigation regarding potential violations of fair lending laws by the Bank in certain of its geographies. The Bank is cooperating with the Department and responding to the Department’s requests for information. Although the Corporation is not able to predict the outcome of the Department’s investigation, it could result in legal proceedings the resolution of which could potentially involve a settlement, fines or other remedial actions.
Agostino, et al. Litigation
Fulton Bank, N.A. (the "Bank"), the Corporation’s largest bank subsidiary, and
two
unrelated, third-party defendants, Ameriprise Financial Services, Inc. and Riverview Bank, have been named as defendants in a lawsuit brought on behalf of a group of
58
plaintiffs filed on March 31, 2016 in the Court of Common Pleas for Dauphin County, Pennsylvania (Agostino, et al. v. Ameriprise Financial Services, Inc., et al., No. 2016-CV-2048-CV). The plaintiffs in this action, who are individuals, trustees of certain irrevocable trusts or the executors of the estates of deceased individuals, were clients of Jeffrey M. Mottern, a now deceased attorney, who is alleged to have operated a Ponzi scheme which defrauded the plaintiffs over a period of years through the sale of fictitious, high-yielding investments or by otherwise misappropriating funds entrusted to Mr. Mottern. Mr. Mottern is alleged to have used the proceeds of these activities to engage in speculative securities trading, which incurred significant losses, and for Mr. Mottern’s personal expenses. The allegations against the Bank relate to a commercial checking account at the Bank maintained by Mr. Mottern in connection with Mr. Mottern’s law practice. The lawsuit alleges that the Bank is liable to the plaintiffs for failing to properly monitor Mr. Mottern’s checking account and detect Mr. Mottern’s fraudulent activity, and specifically alleges that the Bank aided and abetted Mr. Mottern’s: (1) fraud; (2) breach of fiduciary duty; (3) violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law; and (4) conversion. Similar claims have been asserted against Ameriprise Financial Services, Inc. and Riverview Bank, which allegedly maintained a personal brokerage account and a trust account for client or other third-party funds, respectively, for Mr. Mottern. The lawsuit seeks damages from the defendants, including the Bank, alleged to be in excess of
$11.3 million
, treble damages and attorneys’ fees with respect to alleged violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law, punitive damages, plus interest and costs. On April 29, 2016, the Bank filed a Notice of Removal to remove this lawsuit to the United States District Court for the Middle District of Pennsylvania. On May 25, 2016, the Bank filed a motion to dismiss the lawsuit for failure to state a claim. On May 31, 2016, the plaintiffs filed a motion to remand the lawsuit to the Court of Common Pleas for Dauphin County, Pennsylvania. On June 17, 2016, the Bank filed a brief opposing the motion to remand. The motion to remand is pending before the District Court and further briefing on the motion to dismiss has been stayed pending resolution of the motion to remand.
NOTE 11 – 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, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in thousands)
|
Mortgage loans held for sale
|
$
|
—
|
|
|
$
|
34,330
|
|
|
$
|
—
|
|
|
$
|
34,330
|
|
Available for sale investment securities:
|
|
|
|
|
|
|
|
Equity securities
|
20,689
|
|
|
—
|
|
|
—
|
|
|
20,689
|
|
U.S. Government sponsored agency securities
|
—
|
|
|
146
|
|
|
—
|
|
|
146
|
|
State and municipal securities
|
—
|
|
|
345,347
|
|
|
—
|
|
|
345,347
|
|
Corporate debt securities
|
—
|
|
|
88,416
|
|
|
3,131
|
|
|
91,547
|
|
Collateralized mortgage obligations
|
—
|
|
|
706,346
|
|
|
—
|
|
|
706,346
|
|
Mortgage-backed securities
|
—
|
|
|
1,267,763
|
|
|
—
|
|
|
1,267,763
|
|
Auction rate securities
|
—
|
|
|
—
|
|
|
97,886
|
|
|
97,886
|
|
Total available for sale investment securities
|
20,689
|
|
|
2,408,018
|
|
|
101,017
|
|
|
2,529,724
|
|
Other assets
|
16,873
|
|
|
85,911
|
|
|
—
|
|
|
102,784
|
|
Total assets
|
$
|
37,562
|
|
|
$
|
2,528,259
|
|
|
$
|
101,017
|
|
|
$
|
2,666,838
|
|
Other liabilities
|
$
|
16,541
|
|
|
$
|
84,722
|
|
|
$
|
—
|
|
|
$
|
101,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in thousands)
|
Mortgage loans held for sale
|
$
|
—
|
|
|
$
|
16,886
|
|
|
$
|
—
|
|
|
$
|
16,886
|
|
Available for sale investment securities:
|
|
|
|
|
|
|
|
Equity securities
|
21,514
|
|
|
—
|
|
|
—
|
|
|
21,514
|
|
U.S. Government sponsored agency securities
|
—
|
|
|
25,136
|
|
|
—
|
|
|
25,136
|
|
State and municipal securities
|
—
|
|
|
262,765
|
|
|
—
|
|
|
262,765
|
|
Corporate debt securities
|
—
|
|
|
93,619
|
|
|
3,336
|
|
|
96,955
|
|
Collateralized mortgage obligations
|
—
|
|
|
821,509
|
|
|
—
|
|
|
821,509
|
|
Mortgage-backed securities
|
—
|
|
|
1,158,835
|
|
|
—
|
|
|
1,158,835
|
|
Auction rate securities
|
—
|
|
|
—
|
|
|
98,059
|
|
|
98,059
|
|
Total available for sale investment securities
|
21,514
|
|
|
2,361,864
|
|
|
101,395
|
|
|
2,484,773
|
|
Other assets
|
16,129
|
|
|
34,465
|
|
|
—
|
|
|
50,594
|
|
Total assets
|
$
|
37,643
|
|
|
$
|
2,413,215
|
|
|
$
|
101,395
|
|
|
$
|
2,552,253
|
|
Other liabilities
|
$
|
15,914
|
|
|
$
|
33,010
|
|
|
$
|
—
|
|
|
$
|
48,924
|
|
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, 2016
and
December 31, 2015
were measured based on the price that secondary market investors were offering for loans with similar characteristics. See Note 9, "Derivative Financial Instruments" for details related to the Corporation’s election to measure assets and liabilities at fair value.
|
|
|
•
|
Available for sale investment securities
– Included in 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
80%
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 (
$19.8 million
at
June 30, 2016
and
$20.6 million
at
December 31, 2015
) and other equity investments (
$895,000
at
June 30, 2016
and
$914,000
at
December 31, 2015
). 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 (
$30.7 million
at
June 30, 2016
and
$40.8 million
at
December 31, 2015
), senior debt (
$18.7 million
at
June 30, 2016
and
$12.3 million
at December 31, 2015), single-issuer trust preferred securities issued by financial institutions (
$37.4 million
at
June 30, 2016
and
$39.1 million
at
December 31, 2015
), pooled trust preferred securities issued by financial institutions (
$706,000
at both
June 30, 2016
and
December 31, 2015
) and other corporate debt issued by non-financial institutions (
$4.0 million
at both
June 30, 2016
and
December 31, 2015
).
|
Level 2 investments include the Corporation’s holdings of subordinated debt, other corporate debt issued by non-financial institutions and
$35.0 million
and
$36.5 million
of single-issuer trust preferred securities held at
June 30, 2016
and
December 31, 2015
, 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 (
$706,000
at both
June 30, 2016
and
December 31, 2015
) and certain single-issuer trust preferred securities (
$2.4 million
at
June 30, 2016
and
$2.6 million
at
December 31, 2015
). 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 in 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 fair 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 in this category are the following:
|
|
•
|
Level 1 assets include mutual funds that are held in trust for employee deferred compensation plans (
$16.0 million
at
June 30, 2016
and
$15.6 million
at
December 31, 2015
) and the fair value of foreign currency exchange contracts (
$868,000
at
June 30, 2016
and
$547,000
at
December 31, 2015
). 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 (
$3.0 million
at
June 30, 2016
and
$1.5 million
at
December 31, 2015
) and the fair value of interest rate swaps (
$82.9 million
at
June 30, 2016
and
$33.0 million
at
December 31, 2015
). 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 9, "Derivative Financial Instruments," for additional information.
|
Other liabilities
– Included in this category are the following:
|
|
•
|
Level 1 liabilities include employee deferred compensation liabilities which represent amounts due to employees under deferred compensation plans (
$16.0 million
at
June 30, 2016
and
$15.6 million
at
December 31, 2015
) and the fair value of foreign currency exchange contracts (
$537,000
at
June 30, 2016
and
$331,000
at
December 31, 2015
). 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, 2016
and
$40,000
at
December 31, 2015
) and the fair value of interest rate swaps (
$82.9 million
at
June 30, 2016
and
$33.0 million
at
December 31, 2015
). 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, 2016
|
|
Pooled Trust
Preferred
Securities
|
|
Single-issuer
Trust Preferred
Securities
|
|
ARCs
|
|
(in thousands)
|
Balance at March 31, 2016
|
$
|
706
|
|
|
$
|
2,400
|
|
|
$
|
97,326
|
|
Unrealized adjustment to fair value
(1)
|
—
|
|
|
22
|
|
|
482
|
|
Discount accretion
(2)
|
—
|
|
|
3
|
|
|
78
|
|
Balance at June 30, 2016
|
$
|
706
|
|
|
$
|
2,425
|
|
|
$
|
97,886
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2015
|
Balance at March 31, 2015
|
$
|
1,084
|
|
|
$
|
3,820
|
|
|
$
|
98,932
|
|
Sales
|
(554
|
)
|
|
—
|
|
|
—
|
|
Unrealized adjustment to fair value
(1)
|
—
|
|
|
(2
|
)
|
|
(420
|
)
|
Discount accretion
(2)
|
—
|
|
|
2
|
|
|
94
|
|
Balance at June 30, 2015
|
$
|
530
|
|
|
$
|
3,820
|
|
|
$
|
98,606
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2016
|
|
Pooled Trust
Preferred
Securities
|
|
Single-issuer
Trust Preferred
Securities
|
|
ARCs
|
|
(in thousands)
|
Balance at December 31, 2015
|
$
|
706
|
|
|
$
|
2,630
|
|
|
$
|
98,059
|
|
Unrealized adjustment to fair value
(1)
|
—
|
|
|
(211
|
)
|
|
(350
|
)
|
Discount accretion
(2)
|
—
|
|
|
6
|
|
|
177
|
|
Balance at June 30, 2016
|
$
|
706
|
|
|
$
|
2,425
|
|
|
$
|
97,886
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2015
|
Balance at December 31, 2014
|
$
|
4,088
|
|
|
$
|
3,820
|
|
|
$
|
100,941
|
|
Sales
|
(3,633
|
)
|
|
—
|
|
|
—
|
|
Unrealized adjustment to fair value
(1)
|
190
|
|
|
(4
|
)
|
|
(88
|
)
|
Settlements - calls
|
(117
|
)
|
|
—
|
|
|
(2,446
|
)
|
Discount accretion
(2)
|
2
|
|
|
4
|
|
|
199
|
|
Balance at June 30, 2015
|
$
|
530
|
|
|
$
|
3,820
|
|
|
$
|
98,606
|
|
|
|
|
|
|
|
|
|
(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, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in thousands)
|
Net loans
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
128,174
|
|
|
$
|
128,174
|
|
Other financial assets
|
—
|
|
|
—
|
|
|
50,071
|
|
|
50,071
|
|
Total assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
178,245
|
|
|
$
|
178,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in thousands)
|
Net loans
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
138,491
|
|
|
$
|
138,491
|
|
Other financial assets
|
—
|
|
|
—
|
|
|
52,043
|
|
|
52,043
|
|
Total assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
190,534
|
|
|
$
|
190,534
|
|
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 5, "Loans and Allowance for Credit Losses," for additional details.
|
|
|
•
|
Other financial assets
– This category includes OREO (
$11.9 million
at
June 30, 2016
and
$11.1 million
at
December 31, 2015
) and MSRs (
$38.2 million
at
June 30, 2016
and
$40.9 million
at
December 31, 2015
), 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, 2016
valuation were
13.7%
and
10.1%
, 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, 2016
and
December 31, 2015
. In addition, a general description of the methods and assumptions used to estimate such fair values is also provided.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
Book Value
|
|
Estimated
Fair Value
|
|
Book Value
|
|
Estimated
Fair Value
|
|
(in thousands)
|
FINANCIAL ASSETS
|
|
|
|
|
|
|
|
Cash and due from banks
|
$
|
84,647
|
|
|
$
|
84,647
|
|
|
$
|
101,120
|
|
|
$
|
101,120
|
|
Interest-bearing deposits with other banks
|
348,232
|
|
|
348,232
|
|
|
230,300
|
|
|
230,300
|
|
Federal Reserve Bank and Federal Home Loan Bank stock
|
59,854
|
|
|
59,854
|
|
|
62,216
|
|
|
62,216
|
|
Loans held for sale
(1)
|
34,330
|
|
|
34,330
|
|
|
16,886
|
|
|
16,886
|
|
Available for sale investment securities
(1)
|
2,529,724
|
|
|
2,529,724
|
|
|
2,484,773
|
|
|
2,484,773
|
|
Net Loans
(1)
|
13,992,613
|
|
|
13,950,868
|
|
|
13,669,548
|
|
|
13,540,903
|
|
Accrued interest receivable
|
43,316
|
|
|
43,316
|
|
|
42,767
|
|
|
42,767
|
|
Other financial assets
(1)
|
226,808
|
|
|
226,808
|
|
|
166,920
|
|
|
166,920
|
|
FINANCIAL LIABILITIES
|
|
|
|
|
|
|
|
Demand and savings deposits
|
$
|
11,469,919
|
|
|
$
|
11,469,919
|
|
|
$
|
11,267,367
|
|
|
$
|
11,267,367
|
|
Time deposits
|
2,822,645
|
|
|
2,973,640
|
|
|
2,864,950
|
|
|
2,862,868
|
|
Short-term borrowings
|
722,214
|
|
|
722,214
|
|
|
497,663
|
|
|
497,663
|
|
Accrued interest payable
|
8,336
|
|
|
8,336
|
|
|
10,724
|
|
|
10,724
|
|
Other financial liabilities
(1)
|
274,104
|
|
|
274,104
|
|
|
190,927
|
|
|
190,927
|
|
Federal Home Loan Bank advances and long-term debt
|
965,552
|
|
|
993,194
|
|
|
949,542
|
|
|
959,315
|
|
|
|
(1)
|
These financial instruments, or certain financial instruments in 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.
|
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.
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 ("FHLB") stock represent restricted investments and are carried at cost on the consolidated balance sheets.
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 in Level 2 liabilities under FASB ASC Topic 820.
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. Statements relating to the "outlook" or "2016 outlook" contained herein are 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 conditions in the economy and capital markets on the performance of the Corporation’s loan portfolio and demand for the Corporation’s products and services;
|
|
|
•
|
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;
|
|
|
•
|
investment securities gains and losses, including other-than-temporary declines in the value of securities which may result in charges to earnings;
|
|
|
•
|
the effects of market interest rates, and the relative balances of rate-sensitive assets to rate-sensitive liabilities, on net interest margin and net interest income;
|
|
|
•
|
the effects of changes in interest rates on demand for the Corporation’s products and services;
|
|
|
•
|
the effects of changes in interest rates or disruptions in liquidity markets on the Corporation’s sources of funding;
|
|
|
•
|
the Corporation’s ability to manage liquidity, both at the holding company level and at its bank subsidiaries;
|
|
|
•
|
the impact of increased regulatory scrutiny of the banking industry;
|
|
|
•
|
the effects of the increasing amounts of time and expense associated with regulatory compliance and risk management;
|
|
|
•
|
the potential for negative consequences from regulatory violations, including potential supervisory actions and the assessment of fines and penalties;
|
|
|
•
|
the additional time, expense and investment required to comply with, and the restrictions on potential growth and investment activities resulting from, the existing enforcement orders applicable to the Corporation and its bank subsidiaries by federal and state bank regulatory agencies requiring improvement in compliance functions and other remedial actions, or any future enforcement orders;
|
|
|
•
|
the Corporation’s ability to manage the uncertainty associated with the delay in implementing many of the regulations mandated by the Dodd-Frank Act;
|
|
|
•
|
the effects of negative publicity on the Corporation’s reputation;
|
|
|
•
|
the effects of adverse outcomes in litigation and governmental or administrative proceedings;
|
|
|
•
|
the Corporation’s ability to successfully transform its business model;
|
|
|
•
|
the Corporation’s ability to achieve its growth plans;
|
|
|
•
|
the effects of competition on deposit rates and growth, loan rates and growth and net interest margin;
|
|
|
•
|
the Corporation’s ability to manage the level of non-interest expenses, including salaries and employee benefits expenses, operating risk losses and goodwill impairment;
|
|
|
•
|
the impact of operational risks, including the risk of human error, inadequate or failed internal processes and systems, computer and telecommunications systems failures, faulty or incomplete data and an inadequate risk management framework;
|
|
|
•
|
the impact of failures of third parties upon which the Corporation relies to perform in accordance with contractual arrangements;
|
|
|
•
|
the failure or circumvention of the Corporation’s system of internal controls;
|
|
|
•
|
the loss of, or failure to safeguard, confidential or proprietary information;
|
|
|
•
|
the Corporation’s failure to identify and to address cyber-security risks;
|
|
|
•
|
the Corporation’s ability to keep pace with technological changes;
|
|
|
•
|
the Corporation’s ability to attract and retain talented personnel;
|
|
|
•
|
capital and liquidity strategies, including the Corporation’s ability to comply with applicable capital and liquidity requirements, and the Corporation’s ability to generate capital internally or raise capital on favorable terms;
|
|
|
•
|
the Corporation’s reliance on its subsidiaries for substantially all of its revenues and its ability to pay dividends or other distributions;
|
|
|
•
|
the effects of any downgrade in the Corporation’s credit ratings on its borrowing costs or access to capital markets; and
|
|
|
•
|
the effects of changes in accounting policies, standards, and interpretations on the Corporation’s financial condition and results of operations.
|
RESULTS OF OPERATIONS
Overview and Outlook
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, investments and other interest-earning assets. and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and 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, 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
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net income (in thousands)
|
$
|
39,750
|
|
|
$
|
36,680
|
|
|
$
|
78,007
|
|
|
$
|
76,716
|
|
Diluted net income per share
|
$
|
0.23
|
|
|
$
|
0.21
|
|
|
$
|
0.45
|
|
|
$
|
0.43
|
|
Return on average assets
|
0.88
|
%
|
|
0.86
|
%
|
|
0.87
|
%
|
|
0.90
|
%
|
Return on average equity
|
7.65
|
%
|
|
7.24
|
%
|
|
7.56
|
%
|
|
7.64
|
%
|
Return on average tangible equity
(1)
|
10.26
|
%
|
|
9.83
|
%
|
|
10.17
|
%
|
0.1039
|
|
10.39
|
%
|
Net interest margin
(2)
|
3.20
|
%
|
|
3.20
|
%
|
|
3.22
|
%
|
|
3.24
|
%
|
Efficiency ratio
(1)
|
67.59
|
%
|
|
68.94
|
%
|
|
67.96
|
%
|
|
69.55
|
%
|
Non-performing assets to total assets
|
0.76
|
%
|
|
0.93
|
%
|
|
0.76
|
%
|
|
0.93
|
%
|
Annualized net charge-offs to average loans
|
0.10
|
%
|
|
0.38
|
%
|
|
0.15
|
%
|
|
0.23
|
%
|
|
|
(1)
|
Ratio represents a financial measure derived by methods other than Generally Accepted Accounting Principles ("GAAP"). See reconciliation of this non-GAAP financial measure to the most comparable GAAP measure under the heading, "Supplemental Reporting of Non-GAAP Based Financial Measures" at the end of this "Overview and Outlook" section.
|
|
|
(2)
|
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.
|
Net income for the three and
six
months ended
June 30, 2016
increased
$3.1 million
, or
8.4%
, and
$1.3 million
, or
1.7%
, respectively compared to the same periods in
2015
, mainly due to increases in net interest income and non-interest income, excluding investment securities gains, partially offset by increases in the provision for credit losses, decreases in investment securities gains and increases in non-interest expense.
The following is a summary of financial highlights for the three and
six
months ended
June 30, 2016
:
FTE Net Interest Income and Net Interest Margin
- For the three and
six
months ended
June 30, 2016
, FTE net interest income increased
$6.4 million
, or
5.1%
, and
$12.4 million
, or
4.8%
, respectively, in comparison to the same periods in
2015
. These increases were driven by growth in interest-earning assets, as net interest margin was generally stable.
Average interest-earning assets increased
$848.6 million
, or
5.3%
, in the
second
quarter of
2016
in comparison to the same period in
2015
, mainly due to a
$773.4 million
, or
5.9%
, increase in average loans and a
$164.3 million
, or
7.2%
, increase in average investment securities, partially offset by a
$82.2 million
, or
18.7%
, decrease in average other interest-earning assets. Average interest-bearing liabilities increased
$501.9 million
, or
4.5%
, primarily due to a
$539.7 million
, or
5.5%
, increase in average interest-bearing deposits and a
$23.7 million
, or
6.2%
, increase in average short-term borrowings, partially offset by a
$61.5 million
, or
6.0%
, decrease in average FHLB advances and average long-term debt. Additional funding to support the increase in average interest-earning assets was provided by a
$342.8 million
, or
9.2%
, increase in average noninterest-bearing deposits.
During the first half of
2016
, average interest-earning assets increased
$836.7 million
, or
5.3%
, compared to the same period in
2015
, mainly due to a
$765.4 million
, or
5.8%
, increase in average loans and a
$175.9 million
, or
7.7%
, increase in average investment securities, partially offset by a
$98.7 million
, or
21.6%
, decrease in average other interest-earning assets. Average interest-bearing liabilities increased
$498.2 million
, or
4.5%
, the net result of
$531.9 million
, or
5.5%
, increase in average interest-bearing deposits, and a
$79.7 million
, or
23.1%
, increase in average short-term borrowings, partially offset by
$113.4 million
, or
10.5%
, decrease in average FHLB advances and average long-term debt. Additional funding to support the increase in average interest-earning assets was provided by a
$324.1 million
, or
8.8%
, increase in average noninterest-bearing deposits.
Asset Quality
- The Corporation recorded a
$2.5 million
provision for credit losses for the three months ended
June 30, 2016
, compared to a
$2.2 million
provision for the same period in
2015
. For the
six months ended June 30, 2016
, the Corporation recorded a
$4.0 million
provision for credit losses compared to a
$1.5 million
negative provision in the same period of
2015
. The negative provision in 2015 was driven by an improvement in net charge-off levels, particularly among pooled impaired loans across all portfolio segments.
Annualized net charge-offs to average loans outstanding were
0.10%
for the
second
quarter of 2016, compared to
0.38%
for the
second
quarter of
2015
. Annualized net charge-offs to average loans outstanding were
0.15%
for the first half of 2016, compared to
0.23%
for the first half of
2015
. Non-performing assets decreased
$22.6 million
, or
13.9%
, as of
June 30, 2016
compared to
June 30, 2015
and were
0.76%
and
0.93%
of total assets as of
June 30, 2016
and
June 30, 2015
, respectively. The total delinquency rate was
1.30%
as of
June 30, 2016
, compared to
1.60%
as of
June 30, 2015
.
Non-interest Income
- For the three and
six
months ended
June 30, 2016
, non-interest income, excluding investment securities gains, increased
$2.0 million
, or
4.5%
, and
$3.6 million
, or
4.2%
, respectively, in comparison to the same periods in
2015
. The increases in both periods were primarily the result of increases in commercial interest rate swap fees and higher service charges on deposit accounts, partially offset by decreases in mortgage banking income resulting primarily from of a $1.7 million impairment charge on MSRs during the second quarter of 2016. See Note 6, "Mortgage Servicing Rights," in the Notes to Consolidated Financial Statements for additional details regarding the impairment charge.
Investment securities gains for the three and
six
months ended
June 30, 2016
were
$76,000
and
$1.0 million
, respectively, as compared to
$2.4 million
and
$6.6 million
for the same periods in
2015
.
Non-interest Expense
- For the three and
six
months ended
June 30, 2016
, non-interest expense increased
$3.3 million
, or
2.8%
, and
$5.2 million
, or
2.2%
, respectively, in comparison to the same periods in
2015
. The primary drivers of the net increases were higher salaries and employee benefits, partially offset by decreases in other expense categories, most notably other outside services.
2016 Outlook
Originally the Corporation provided its outlook for 2016 results in its Annual Report on Form 10-K for the year ended
December 31, 2015
. The following outlook for 2016 remains unchanged:
|
|
•
|
annual mid- to high- single digit growth rate in average loans and deposits;
|
|
|
•
|
provision for credit losses driven primarily by loan growth;
|
|
|
•
|
annual mid- to high- single digit growth rate in non-interest income, excluding the impact of securities gains;
|
|
|
•
|
annual low- to mid- single digit growth rate in non-interest expense (excluding, for comparison purposes, the impact of the loss on redemption of Trust Preferred Securities (TruPS) incurred in the third quarter of 2015); and
|
|
|
•
|
focus on utilizing capital to support growth and provide appropriate returns to shareholders.
|
The Corporation's original outlook expected net interest margin to be stable on an annual basis with modest quarterly volatility of plus or minus 0 to 3 basis points. This outlook has been updated as follows:
|
|
•
|
absent further market interest rate increases, low-single digit quarterly compression in net interest margin.
|
Supplemental Reporting of Non-GAAP Based Financial Measures
This Quarterly Report on Form 10-Q contains supplemental financial information, as detailed below, which has been derived by methods other than GAAP. The Corporation has presented these non-GAAP financial measures because it believes that these measures provide useful and comparative information to assess trends in the Corporation's results of operations. Presentation of these non-GAAP financial measures is consistent with how the Corporation evaluates its performance internally, and these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the Corporation's industry. Management believes that these non-GAAP financial measures, in addition to GAAP measures, are also useful to investors to evaluate the Corporation's results. Investors should recognize that the Corporation's presentation of these non-GAAP financial measures might not be comparable to similarly-titled measures of other companies. These non-GAAP financial measures should not be considered a substitute for GAAP basis measures, and the Corporation strongly encourages a review of its consolidated financial statements in their entirety. Following are reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measure as of and for the quarter and year to date ended
June 30
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the
Three months ended
June 30
|
|
As of or for the
Six months ended
June 30
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(in thousands)
|
Return on average tangible equity
|
Net income
|
$
|
39,750
|
|
|
$
|
36,680
|
|
|
$
|
78,007
|
|
|
$
|
76,716
|
|
Plus: Intangible amortization, net of tax
|
—
|
|
|
69
|
|
|
—
|
|
|
153
|
|
Numerator
|
$
|
39,750
|
|
|
$
|
36,749
|
|
|
$
|
78,007
|
|
|
$
|
76,869
|
|
|
|
|
|
|
|
|
|
Average common shareholders' equity
|
$
|
2,089,915
|
|
|
$
|
2,031,788
|
|
|
$
|
2,074,357
|
|
|
$
|
2,023,919
|
|
Less: Average goodwill and intangible assets
|
(531,556
|
)
|
|
(531,618
|
)
|
|
(561,556
|
)
|
|
(531,675
|
)
|
Average tangible shareholders' equity (denominator)
|
$
|
1,558,359
|
|
|
$
|
1,500,170
|
|
|
$
|
1,512,801
|
|
|
$
|
1,492,244
|
|
|
|
|
|
|
|
|
|
Return on average tangible equity, annualized
|
10.26
|
%
|
|
9.83
|
%
|
|
10.17
|
%
|
|
10.39
|
%
|
|
|
|
|
|
|
|
|
Efficiency ratio
|
|
|
|
|
|
|
|
Non-interest expense
|
$
|
121,637
|
|
|
$
|
118,354
|
|
|
$
|
242,050
|
|
|
$
|
236,832
|
|
Less: Intangible amortization
|
—
|
|
|
(106
|
)
|
|
—
|
|
|
(236
|
)
|
Numerator
|
$
|
121,637
|
|
|
$
|
118,248
|
|
|
$
|
242,050
|
|
|
$
|
236,596
|
|
|
|
|
|
|
|
|
|
Net interest income (fully taxable equivalent)
(1)
|
$
|
133,890
|
|
|
$
|
127,445
|
|
|
$
|
267,916
|
|
|
$
|
255,531
|
|
Plus: Total Non-interest income
|
46,137
|
|
|
46,489
|
|
|
89,274
|
|
|
91,226
|
|
Less: Investment securities gains, net
|
(76
|
)
|
|
(2,415
|
)
|
|
(1,023
|
)
|
|
(6,560
|
)
|
Denominator
|
$
|
179,951
|
|
|
$
|
171,519
|
|
|
$
|
356,167
|
|
|
$
|
340,197
|
|
|
|
|
|
|
|
|
|
Efficiency ratio
|
67.59
|
%
|
|
68.94
|
%
|
|
67.96
|
%
|
|
69.55
|
%
|
|
|
(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.
|
Quarter Ended
June 30, 2016
compared to the Quarter Ended
June 30, 2015
Net Interest Income
FTE net interest income increased
$6.4 million
, to
$133.9 million
, in the
second
quarter of
2016
, from
$127.4 million
in the
second
quarter of
2015
. This increase was due to an
$848.6 million
, or
5.3%
, increase in interest-earning assets. The net interest margin of
3.20%
for the
second
quarter of
2016
was flat compared to the
second
quarter of
2015
. The following table provides a comparative average balance sheet and net interest income analysis for those periods. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
2016
|
|
2015
|
|
Average
Balance
|
|
Interest (1)
|
|
Yield/
Rate
|
|
Average
Balance
|
|
Interest (1)
|
|
Yield/
Rate
|
ASSETS
|
(dollars in thousands)
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income
(2)
|
$
|
13,966,024
|
|
|
$
|
138,317
|
|
|
3.98
|
%
|
|
$
|
13,192,600
|
|
|
$
|
133,339
|
|
|
4.05
|
%
|
Taxable investment securities
(3)
|
2,127,780
|
|
|
11,159
|
|
|
2.10
|
|
|
2,048,558
|
|
|
10,944
|
|
|
2.14
|
|
Tax-exempt investment securities
(3)
|
314,851
|
|
|
3,570
|
|
|
4.54
|
|
|
216,355
|
|
|
2,894
|
|
|
5.35
|
|
Equity securities
(3)
|
14,220
|
|
|
185
|
|
|
5.23
|
|
|
27,618
|
|
|
379
|
|
|
5.50
|
|
Total investment securities
|
2,456,851
|
|
|
14,914
|
|
|
2.43
|
|
|
2,292,531
|
|
|
14,217
|
|
|
2.48
|
|
Loans held for sale
|
19,449
|
|
|
188
|
|
|
3.87
|
|
|
26,335
|
|
|
265
|
|
|
4.03
|
|
Other interest-earning assets
|
357,211
|
|
|
864
|
|
|
0.96
|
|
|
439,425
|
|
|
933
|
|
|
0.85
|
|
Total interest-earning assets
|
16,799,535
|
|
|
154,283
|
|
|
3.69
|
%
|
|
15,950,891
|
|
|
148,754
|
|
|
3.74
|
%
|
Noninterest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
100,860
|
|
|
|
|
|
|
104,723
|
|
|
|
|
|
Premises and equipment
|
227,517
|
|
|
|
|
|
|
226,569
|
|
|
|
|
|
Other assets
|
1,189,226
|
|
|
|
|
|
|
1,094,071
|
|
|
|
|
|
Less: Allowance for loan losses
|
(164,573
|
)
|
|
|
|
|
|
(176,085
|
)
|
|
|
|
|
Total Assets
|
$
|
18,152,565
|
|
|
|
|
|
|
$
|
17,200,169
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
$
|
3,454,031
|
|
|
$
|
1,527
|
|
|
0.18
|
%
|
|
$
|
3,152,697
|
|
|
$
|
987
|
|
|
0.13
|
%
|
Savings deposits
|
3,989,988
|
|
|
1,886
|
|
|
0.19
|
|
|
3,568,579
|
|
|
1,247
|
|
|
0.14
|
|
Time deposits
|
2,844,434
|
|
|
7,474
|
|
|
1.06
|
|
|
3,027,520
|
|
|
7,819
|
|
|
1.04
|
|
Total interest-bearing deposits
|
10,288,453
|
|
|
10,887
|
|
|
0.43
|
|
|
9,748,796
|
|
|
10,053
|
|
|
0.41
|
|
Short-term borrowings
|
403,669
|
|
|
217
|
|
|
0.21
|
|
|
379,988
|
|
|
103
|
|
|
0.11
|
|
Federal Home Loan Bank advances and long-term debt
|
965,526
|
|
|
9,289
|
|
|
3.86
|
|
|
1,026,987
|
|
|
11,153
|
|
|
4.35
|
|
Total interest-bearing liabilities
|
11,657,648
|
|
|
20,393
|
|
|
0.70
|
%
|
|
11,155,771
|
|
|
21,309
|
|
|
0.77
|
%
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
4,077,642
|
|
|
|
|
|
|
3,734,880
|
|
|
|
|
|
Other
|
327,360
|
|
|
|
|
|
|
277,730
|
|
|
|
|
|
Total Liabilities
|
16,062,650
|
|
|
|
|
|
|
15,168,381
|
|
|
|
|
|
Shareholders’ equity
|
2,089,915
|
|
|
|
|
|
|
2,031,788
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity
|
$
|
18,152,565
|
|
|
|
|
|
|
$
|
17,200,169
|
|
|
|
|
|
Net interest income/net interest margin (FTE)
|
|
|
133,890
|
|
|
3.20
|
%
|
|
|
|
127,445
|
|
|
3.20
|
%
|
Tax equivalent adjustment
|
|
|
(4,974
|
)
|
|
|
|
|
|
(4,525
|
)
|
|
|
Net interest income
|
|
|
$
|
128,916
|
|
|
|
|
|
|
$
|
122,920
|
|
|
|
|
|
(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
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 vs. 2015
Increase (Decrease) due
to change in
|
|
Volume
|
|
Rate
|
|
Net
|
|
(in thousands)
|
Interest income on:
|
|
|
|
|
|
Loans, net of unearned income
|
$
|
7,400
|
|
|
$
|
(2,422
|
)
|
|
$
|
4,978
|
|
Taxable investment securities
|
420
|
|
|
(205
|
)
|
|
215
|
|
Tax-exempt investment securities
|
1,163
|
|
|
(487
|
)
|
|
676
|
|
Equity securities
|
(176
|
)
|
|
(18
|
)
|
|
(194
|
)
|
Loans held for sale
|
(66
|
)
|
|
(11
|
)
|
|
(77
|
)
|
Other interest-earning assets
|
(183
|
)
|
|
114
|
|
|
(69
|
)
|
Total interest income
|
$
|
8,558
|
|
|
$
|
(3,029
|
)
|
|
$
|
5,529
|
|
Interest expense on:
|
|
|
|
|
|
Demand deposits
|
$
|
108
|
|
|
$
|
432
|
|
|
$
|
540
|
|
Savings deposits
|
159
|
|
|
480
|
|
|
639
|
|
Time deposits
|
(491
|
)
|
|
146
|
|
|
(345
|
)
|
Short-term borrowings
|
7
|
|
|
107
|
|
|
114
|
|
Federal Home Loan Bank advances and long-term debt
|
(647
|
)
|
|
(1,217
|
)
|
|
(1,864
|
)
|
Total interest expense
|
$
|
(864
|
)
|
|
$
|
(52
|
)
|
|
$
|
(916
|
)
|
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, the increase in average interest-earning assets, primarily loans, resulted in an
$8.6 million
increase in FTE interest income. This was partially offset by the impact of a
5
basis point, or
1.3%
, decrease in yields on average interest-earning assets, which resulted in a
$3.0 million
decrease in FTE interest income.
Average loans and average FTE yields, by type, are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
Increase (Decrease) in
|
|
2016
|
|
2015
|
|
Balance
|
|
Balance
|
|
Yield
|
|
Balance
|
|
Yield
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Real estate – commercial mortgage
|
$
|
5,557,680
|
|
|
4.00
|
%
|
|
$
|
5,210,540
|
|
|
4.15
|
%
|
|
$
|
347,140
|
|
|
6.7
|
%
|
Commercial – industrial, financial and agricultural
|
4,080,524
|
|
|
3.81
|
|
|
3,836,397
|
|
|
3.79
|
|
|
244,127
|
|
|
6.4
|
|
Real estate – home equity
|
1,656,140
|
|
|
4.10
|
|
|
1,695,171
|
|
|
4.11
|
|
|
(39,031
|
)
|
|
(2.3
|
)
|
Real estate – residential mortgage
|
1,399,851
|
|
|
3.78
|
|
|
1,356,464
|
|
|
3.82
|
|
|
43,387
|
|
|
3.2
|
|
Real estate – construction
|
820,881
|
|
|
3.81
|
|
|
698,685
|
|
|
3.97
|
|
|
122,196
|
|
|
17.5
|
|
Consumer
|
272,293
|
|
|
5.37
|
|
|
265,354
|
|
|
5.48
|
|
|
6,939
|
|
|
2.6
|
|
Leasing, other and overdrafts
|
178,655
|
|
|
6.22
|
|
|
129,989
|
|
|
6.94
|
|
|
48,666
|
|
|
37.4
|
|
Total
|
$
|
13,966,024
|
|
|
3.98
|
%
|
|
$
|
13,192,600
|
|
|
4.05
|
%
|
|
$
|
773,424
|
|
|
5.9
|
%
|
Average loans increased
$773.4 million
, or
5.9%
, compared to the
second
quarter of
2015
, the increase was mainly in commercial mortgage, commercial loans, construction loans and leasing, other and overdrafts. The average yield on loans decreased
7
basis points, or
1.7%
, to
3.98%
in
2016
from
4.05%
in
2015
. The growth in the loan portfolio was spread across a broad range of industries, largely in Pennsylvania markets and, to a lesser extent, the New Jersey market. The decrease in average yields on loans was attributable to repayments of higher-yielding loans, continued refinancing activity at lower rates, and new loan production at rates lower than the overall portfolio yield.
Average total interest-bearing liabilities increased
$501.9 million
, or
4.5%
, compared to the
second
quarter of
2015
. Interest expense decreased
$916,000
, or
4.3%
, to
$20.4 million
in the
second
quarter of
2016
primarily as a result of a change in the mix from higher cost time deposits and long-term debt to lower-cost deposits, as well as the refinancing of certain long-term debt. Average deposits and average interest rates, by type, are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
Increase (Decrease) in Balance
|
|
2016
|
|
2015
|
|
|
Balance
|
|
Rate
|
|
Balance
|
|
Rate
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Noninterest-bearing demand
|
$
|
4,077,642
|
|
|
—
|
%
|
|
$
|
3,734,880
|
|
|
—
|
%
|
|
$
|
342,762
|
|
|
9.2
|
%
|
Interest-bearing demand
|
3,454,031
|
|
|
0.18
|
|
|
3,152,697
|
|
|
0.13
|
|
|
301,334
|
|
|
9.6
|
|
Savings
|
3,989,988
|
|
|
0.19
|
|
|
3,568,579
|
|
|
0.14
|
|
|
421,409
|
|
|
11.8
|
|
Total demand and savings
|
11,521,661
|
|
|
0.12
|
|
|
10,456,156
|
|
|
0.09
|
|
|
1,065,505
|
|
|
10.2
|
|
Time deposits
|
2,844,434
|
|
|
1.06
|
|
|
3,027,520
|
|
|
1.04
|
|
|
(183,086
|
)
|
|
(6.0
|
)
|
Total deposits
|
$
|
14,366,095
|
|
|
0.30
|
%
|
|
$
|
13,483,676
|
|
|
0.30
|
%
|
|
$
|
882,419
|
|
|
6.5
|
%
|
The
$1.1 billion
, or
10.2%
, increase in total demand and savings accounts was primarily due to a $505.3 million, or 10.2%, increase in personal account balances, a $375.5 million, or 10.2%, increase in business account balances and a $189.2 million, or 10.6%, increase in municipal account balances. The cost of both demand and savings deposits and time deposits increased, however, due to a shift to lower-cost demand and savings deposits, the total cost of interest-bearing deposits remained unchanged at
0.30%
in the
second
quarter of
2016
compared to the
second
quarter of
2015
.
Average borrowings and interest rates, by type, are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
Increase (Decrease)
|
|
2016
|
|
2015
|
|
in Balance
|
|
Balance
|
|
Rate
|
|
Balance
|
|
Rate
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Short-term borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
Customer repurchase agreements
|
$
|
180,595
|
|
|
0.11
|
%
|
|
$
|
179,804
|
|
|
0.10
|
%
|
|
$
|
791
|
|
|
0.4
|
%
|
Customer short-term promissory notes
|
77,535
|
|
|
0.04
|
|
|
80,073
|
|
|
—
|
|
|
(2,538
|
)
|
|
(3.2
|
)
|
Total short-term customer funding
|
258,130
|
|
|
0.09
|
|
|
259,877
|
|
|
0.07
|
|
|
(1,747
|
)
|
|
(0.7
|
)
|
Federal funds purchased
|
138,012
|
|
|
0.43
|
|
|
108,078
|
|
|
0.17
|
|
|
29,934
|
|
|
27.7
|
|
Short-term FHLB advances
(1)
|
7,527
|
|
|
0.45
|
|
|
12,033
|
|
|
0.34
|
|
|
(4,506
|
)
|
|
(37.4
|
)
|
Total short-term borrowings
|
403,669
|
|
|
0.21
|
|
|
379,988
|
|
|
0.11
|
|
|
23,681
|
|
|
6.2
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
603,700
|
|
|
3.17
|
|
|
627,939
|
|
|
3.51
|
|
|
(24,239
|
)
|
|
(3.9
|
)
|
Other long-term debt
|
361,826
|
|
|
5.01
|
|
|
399,048
|
|
|
5.67
|
|
|
(37,222
|
)
|
|
(9.3
|
)
|
Total long-term debt
|
965,526
|
|
|
3.86
|
|
|
1,026,987
|
|
|
4.35
|
|
|
(61,461
|
)
|
|
(6.0
|
)
|
Total borrowings
|
$
|
1,369,195
|
|
|
2.78
|
%
|
|
$
|
1,406,975
|
|
|
3.20
|
%
|
|
$
|
(37,780
|
)
|
|
(2.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Represents FHLB advances with an original maturity term of less than one year.
Total short-term borrowings increased
$23.7 million
, or
6.2%
, as a result of increases in federal funds purchased. Average long-term debt decreased
$61.5 million
, or
6.0%
, partially due to FHLB advance maturities. In addition, in June 2015, the Corporation issued $150 million of subordinated debt at an effective rate of 4.69%. The proceeds of this issuance were used to redeem $150 million of trust preferred securities, with an effective rate of 6.52%, in July 2015. The net effect of these transactions was a $37.2 million decrease in average balances and a 0.66% decrease in the average rate on other long-term debt.
In the third quarter of 2015, the Corporation executed two transactions to restructure its long-term FHLB advances. First, $200 million of FHLB advances, with a weighted average rate of 4.45% and a maturity date in the first quarter of 2017, were refinanced with new advances maturing from September 2019 to December 2020, at a weighted average rate of 2.95%. This transaction reduced interest expense on a quarterly basis by approximately $750,000, beginning in the fourth quarter of 2015. Second, forward agreements were executed to refinance an additional $200 million of FHLB advances when the advances mature in December
2016. These forward agreements have maturity dates from March 2021 to December 2021 and the refinancing will reduce the weighted average rate on these advances from 4.03% to 2.40% and decrease interest expense on a quarterly basis by approximately $800,000, beginning in the first quarter of 2017.
Provision for Credit Losses
The provision for credit losses was
$2.5 million
for the
second
quarter of
2016
, an increase of
$311,000
from the
second
quarter of
2015
.
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)
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Service charges on deposit accounts:
|
|
|
|
|
|
|
|
Overdraft fees
|
$
|
5,384
|
|
|
$
|
5,353
|
|
|
$
|
31
|
|
|
0.6
|
%
|
Cash management fees
|
3,580
|
|
|
3,369
|
|
|
211
|
|
|
6.3
|
|
Other
|
3,932
|
|
|
3,915
|
|
|
17
|
|
|
0.4
|
|
Total service charges on deposit accounts
|
12,896
|
|
|
12,637
|
|
|
259
|
|
|
2.0
|
|
Investment management and trust services
|
11,247
|
|
|
11,011
|
|
|
236
|
|
|
2.1
|
|
Other service charges and fees:
|
|
|
|
|
|
|
|
Merchant fees
|
4,252
|
|
|
4,088
|
|
|
164
|
|
|
4.0
|
|
Commercial interest rate swap fees
|
2,751
|
|
|
1,026
|
|
|
1,725
|
|
|
168.1
|
|
Debit card income
|
2,719
|
|
|
2,626
|
|
|
93
|
|
|
3.5
|
|
Letter of credit fees
|
1,162
|
|
|
1,174
|
|
|
(12
|
)
|
|
(1.0
|
)
|
Other
|
2,099
|
|
|
2,074
|
|
|
25
|
|
|
1.2
|
|
Total other service charges and fees
|
12,983
|
|
|
10,988
|
|
|
1,995
|
|
|
18.2
|
|
Mortgage banking income:
|
|
|
|
|
|
|
|
Gains on sales of mortgage loans
|
4,440
|
|
|
4,428
|
|
|
12
|
|
|
0.3
|
|
Mortgage servicing income
|
(543
|
)
|
|
911
|
|
|
(1,454
|
)
|
|
(159.6
|
)
|
Total mortgage banking income
|
3,897
|
|
|
5,339
|
|
|
(1,442
|
)
|
|
(27.0
|
)
|
Credit card income
|
2,596
|
|
|
2,474
|
|
|
122
|
|
|
4.9
|
|
Other income
|
2,442
|
|
|
1,625
|
|
|
817
|
|
|
50.3
|
|
Total, excluding investment securities gains, net
|
46,061
|
|
|
44,074
|
|
|
1,987
|
|
|
4.5
|
|
Investment securities gains, net
|
76
|
|
|
2,415
|
|
|
(2,339
|
)
|
|
(96.9
|
)
|
Total
|
$
|
46,137
|
|
|
$
|
46,489
|
|
|
$
|
(352
|
)
|
|
(0.8
|
)%
|
Excluding investment securities gains, non-interest income increased $2.0 million, or 4.5%. Other service charges and fees increased $2.0 million, or 18.2%, driven mainly by a $1.7 million increase in commercial interest rate swap fees, as a larger portion of new loan originations were in loan types that were conducive to interest rate swaps during the second quarter of 2016, and by a $164,000 increase in merchant fee income resulting from higher transaction volumes in the second quarter of 2016. Service charges on deposits increased $259,000, or 2.0%, primarily due to higher cash management fees.
Investment management and trust services increased $236,000, or 2.1%, due to an increase in trust income partially offset by a decrease in brokerage revenue.
Gains on sales of mortgage loans were flat compared to the same period in 2015, as both new loan commitments and pricing spreads were fairly stable. Mortgage servicing income, excluding a $1.7 million impairment charge on MSRs recognized in the second quarter of 2016, increased $265,000, or 29.1%, compared to the second quarter of 2015. See Note 6, "Mortgage Servicing Rights," in the Notes to Consolidated Financial Statements for additional details regarding the impairment charge.
Investment securities gains decreased $2.3 million from the second quarter of 2015. See Note 4, "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)
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Salaries and employee benefits
|
$
|
70,029
|
|
|
$
|
65,067
|
|
|
$
|
4,962
|
|
|
7.6
|
%
|
Net occupancy expense
|
11,811
|
|
|
11,809
|
|
|
2
|
|
|
—
|
|
Other outside services
|
5,508
|
|
|
8,125
|
|
|
(2,617
|
)
|
|
(32.2
|
)
|
Data processing
|
5,476
|
|
|
4,894
|
|
|
582
|
|
|
11.9
|
|
Software
|
3,953
|
|
|
3,376
|
|
|
577
|
|
|
17.1
|
|
Professional fees
|
3,353
|
|
|
2,731
|
|
|
622
|
|
|
22.8
|
|
FDIC insurance expense
|
2,960
|
|
|
2,885
|
|
|
75
|
|
|
2.6
|
|
Equipment expense
|
2,872
|
|
|
3,335
|
|
|
(463
|
)
|
|
(13.9
|
)
|
Supplies and postage
|
2,706
|
|
|
2,726
|
|
|
(20
|
)
|
|
(0.7
|
)
|
Marketing
|
1,916
|
|
|
2,235
|
|
|
(319
|
)
|
|
(14.3
|
)
|
Telecommunications
|
1,459
|
|
|
1,617
|
|
|
(158
|
)
|
|
(9.8
|
)
|
Operating risk loss
|
986
|
|
|
674
|
|
|
312
|
|
|
46.3
|
|
Other real estate owned and repossession expense
|
365
|
|
|
129
|
|
|
236
|
|
|
182.9
|
|
Intangible amortization
|
—
|
|
|
106
|
|
|
(106
|
)
|
|
(100.0
|
)
|
Other
|
8,243
|
|
|
8,645
|
|
|
(402
|
)
|
|
(4.7
|
)
|
Total
|
$
|
121,637
|
|
|
$
|
118,354
|
|
|
$
|
3,283
|
|
|
2.8
|
%
|
The $5.0 million, or 7.6%, increase in salaries and employee benefits primarily resulted from a $4.2 million, or 7.6%, increase in salaries, resulting from higher average salaries per full-time equivalent (FTE) employee, normal merit increases and an increase in incentive compensation.
Outside services include fees paid to consultants and expenses for contracted or outsourced services. Consulting expenses can fluctuate based on the timing and need for such services. The $2.6 million, or 32.2%, decrease in expense in comparison to the second quarter of 2015 was largely due to the timing of expenses related to the Corporation’s BSA/AML compliance program remediation efforts and certain information technology and human resources initiatives.
The $1.2 million, or 14.0%, combined increase in data processing and software resulted from higher transaction volumes and contractual increases related to core processing systems, and the amortization of capitalized software investments.
Equipment expense decreased $463,000, or 13.9%, primarily due to lower depreciation expense when compared to the second quarter of 2015 as certain assets became fully depreciated. The $622,000, or 22.8%, increase in professional fees was driven by higher costs for legal services resulting from the timing of the need for such services. Marketing expense decreased $319,000, or 14.3%, compared to the second quarter of 2015 due to the timing of various marketing promotions.
The $312,000, or 46.3%, increase in operating risk loss was due to a $425,000 increase in losses associated with previously sold mortgages, partially offset by a $152,000 decrease in check card fraud losses.
Other real estate owned and repossession expense increased $236,000, or 182.9%, when compared to the second quarter of 2015. This increase was due to a $445,000 decrease in net gains on the sales of other real estate properties. This expense category can experience fluctuations from period to period based on the timing of sales of properties and payments of expenses, such as real estate taxes.
Income Taxes
Income tax expense for the
second
quarter of
2016
was $11.2 million, a
$1.0 million
, or
8.4%
, decrease from $12.2 million for the
second
quarter of
2015
.
The Corporation’s effective tax rate was 21.9% in the second quarter of 2016, as compared to 24.9% in the second quarter of 2015. The effective tax rate is generally lower than the federal statutory rate of 35% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities and credits earned from investments in partnerships that generate tax credits under various federal programs. The decrease in the effective rate from the second quarter of 2015 was driven by higher net low-income housing tax credits.
Six Months Ended June 30,
2016
compared to the
Six Months Ended June 30,
2015
Net Interest Income
FTE net interest income increased
$12.4 million
, or
4.8%
, to
$267.9 million
in the first six months of 2016 from
$255.5 million
in the same period of 2015. Net interest margin decreased
2
basis points to
3.22%
for the first six months of 2016 from
3.24%
for the first six months of 2015. The increase in FTE net interest income was due to an
$836.7 million
, or
5.3%
, increase in interest earning assets. The following table provides a comparative average balance sheet and net interest income analysis for those periods. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
2016
|
|
2015
|
|
Average
Balance
|
|
Interest (1)
|
|
Yield/
Rate
|
|
Average
Balance
|
|
Interest (1)
|
|
Yield/
Rate
|
ASSETS
|
(dollars in thousands)
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income
(2)
|
$
|
13,909,722
|
|
|
$
|
276,212
|
|
|
3.99
|
%
|
|
$
|
13,144,332
|
|
|
$
|
266,394
|
|
|
4.08
|
%
|
Taxable investment securities
(3)
|
2,154,187
|
|
|
23,162
|
|
|
2.15
|
|
|
2,027,170
|
|
|
22,226
|
|
|
2.19
|
|
Tax-exempt investment securities
(3)
|
287,123
|
|
|
6,708
|
|
|
4.67
|
|
|
222,684
|
|
|
6,106
|
|
|
5.48
|
|
Equity securities
(3)
|
14,303
|
|
|
403
|
|
|
5.67
|
|
|
29,901
|
|
|
829
|
|
|
5.58
|
|
Total investment securities
|
2,455,613
|
|
|
30,273
|
|
|
2.47
|
|
|
2,279,755
|
|
|
29,161
|
|
|
2.56
|
|
Loans held for sale
|
15,850
|
|
|
319
|
|
|
4.03
|
|
|
21,694
|
|
|
438
|
|
|
4.04
|
|
Other interest-earning assets
|
357,887
|
|
|
1,762
|
|
|
0.98
|
|
|
456,633
|
|
|
3,038
|
|
|
1.33
|
|
Total interest-earning assets
|
16,739,072
|
|
|
308,566
|
|
|
3.70
|
%
|
|
15,902,414
|
|
|
299,031
|
|
|
3.79
|
%
|
Noninterest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
99,654
|
|
|
|
|
|
|
104,996
|
|
|
|
|
|
Premises and equipment
|
226,901
|
|
|
|
|
|
|
226,480
|
|
|
|
|
|
Other assets
|
1,163,259
|
|
|
|
|
|
|
1,104,019
|
|
|
|
|
|
Less: Allowance for loan losses
|
(165,972
|
)
|
|
|
|
|
|
(179,985
|
)
|
|
|
|
|
Total Assets
|
$
|
18,062,914
|
|
|
|
|
|
|
$
|
17,157,924
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
$
|
3,446,193
|
|
|
$
|
3,021
|
|
|
0.18
|
%
|
|
$
|
3,144,358
|
|
|
$
|
1,970
|
|
|
0.13
|
%
|
Savings deposits
|
3,961,405
|
|
|
3,690
|
|
|
0.19
|
|
|
3,542,960
|
|
|
2,366
|
|
|
0.13
|
|
Time deposits
|
2,856,044
|
|
|
14,903
|
|
|
1.05
|
|
|
3,044,463
|
|
|
15,540
|
|
|
1.03
|
|
Total interest-bearing deposits
|
10,263,642
|
|
|
21,614
|
|
|
0.42
|
|
|
9,731,781
|
|
|
19,876
|
|
|
0.41
|
|
Short-term borrowings
|
424,535
|
|
|
485
|
|
|
0.23
|
|
|
344,797
|
|
|
180
|
|
|
0.10
|
|
FHLB advances and long-term debt
|
961,870
|
|
|
18,551
|
|
|
3.87
|
|
|
1,075,262
|
|
|
23,444
|
|
|
4.38
|
|
Total interest-bearing liabilities
|
11,650,047
|
|
|
40,650
|
|
|
0.70
|
%
|
|
11,151,840
|
|
|
43,500
|
|
|
0.78
|
%
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
4,022,764
|
|
|
|
|
|
|
3,698,661
|
|
|
|
|
|
Other
|
315,746
|
|
|
|
|
|
|
283,504
|
|
|
|
|
|
Total Liabilities
|
15,988,557
|
|
|
|
|
|
|
15,134,005
|
|
|
|
|
|
Shareholders’ equity
|
2,074,357
|
|
|
|
|
|
|
2,023,919
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity
|
$
|
18,062,914
|
|
|
|
|
|
|
$
|
17,157,924
|
|
|
|
|
|
Net interest income/net interest margin (FTE)
|
|
|
267,916
|
|
|
3.22
|
%
|
|
|
|
255,531
|
|
|
3.24
|
%
|
Tax equivalent adjustment
|
|
|
(9,946
|
)
|
|
|
|
|
|
(9,030
|
)
|
|
|
Net interest income
|
|
|
$
|
257,970
|
|
|
|
|
|
|
$
|
246,501
|
|
|
|
|
|
(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
2016
as compared to the same period in
2015
due to changes in average balances (volume) and changes in rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 vs. 2015
Increase (Decrease) due
to change in
|
|
Volume
|
|
Rate
|
|
Net
|
|
(in thousands)
|
Interest income on:
|
|
|
|
|
|
Loans, net of unearned income
|
$
|
15,654
|
|
|
$
|
(5,836
|
)
|
|
$
|
9,818
|
|
Taxable investment securities
|
1,349
|
|
|
(413
|
)
|
|
936
|
|
Tax-exempt investment securities
|
1,586
|
|
|
(984
|
)
|
|
602
|
|
Equity securities
|
(439
|
)
|
|
13
|
|
|
(426
|
)
|
Loans held for sale
|
(118
|
)
|
|
(1
|
)
|
|
(119
|
)
|
Other interest-earning assets
|
(575
|
)
|
|
(701
|
)
|
|
(1,276
|
)
|
Total interest income
|
$
|
17,457
|
|
|
$
|
(7,922
|
)
|
|
$
|
9,535
|
|
Interest expense on:
|
|
|
|
|
|
Demand deposits
|
$
|
194
|
|
|
$
|
857
|
|
|
$
|
1,051
|
|
Savings deposits
|
295
|
|
|
1,029
|
|
|
1,324
|
|
Time deposits
|
(953
|
)
|
|
316
|
|
|
(637
|
)
|
Short-term borrowings
|
46
|
|
|
259
|
|
|
305
|
|
FHLB advances and long-term debt
|
(2,326
|
)
|
|
(2,567
|
)
|
|
(4,893
|
)
|
Total interest expense
|
$
|
(2,744
|
)
|
|
$
|
(106
|
)
|
|
$
|
(2,850
|
)
|
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, the increase in FTE interest income was the result of an increase in average interest-earning assets, primarily loans, which resulted in a
$17.5 million
increase in FTE interest income, partially offset by a
$7.9 million
decrease due to lower yields on average interest-earning assets.
Average loans, by type, are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
Increase (Decrease)
|
|
2016
|
|
2015
|
|
in Balance
|
|
Balance
|
|
Yield
|
|
Balance
|
|
Yield
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Real estate – commercial mortgage
|
$
|
5,522,550
|
|
|
4.02
|
%
|
|
$
|
5,187,322
|
|
|
4.19
|
%
|
|
$
|
335,228
|
|
|
6.5
|
%
|
Commercial – industrial, financial and agricultural
|
4,087,897
|
|
|
3.80
|
|
|
3,803,475
|
|
|
3.83
|
|
|
284,422
|
|
|
7.5
|
|
Real estate – home equity
|
1,665,086
|
|
|
4.10
|
|
|
1,708,163
|
|
|
4.13
|
|
|
(43,077
|
)
|
|
(2.5
|
)
|
Real estate – residential mortgage
|
1,390,631
|
|
|
3.78
|
|
|
1,363,382
|
|
|
3.83
|
|
|
27,249
|
|
|
2.0
|
|
Real estate – construction
|
806,448
|
|
|
3.81
|
|
|
693,715
|
|
|
3.95
|
|
|
112,733
|
|
|
16.3
|
|
Consumer
|
267,794
|
|
|
5.44
|
|
|
262,265
|
|
|
5.37
|
|
|
5,529
|
|
|
2.1
|
|
Leasing, other and overdrafts
|
169,316
|
|
|
6.81
|
|
|
126,010
|
|
|
7.64
|
|
|
43,306
|
|
|
34.4
|
|
Total
|
$
|
13,909,722
|
|
|
3.99
|
%
|
|
$
|
13,144,332
|
|
|
4.08
|
%
|
|
$
|
765,390
|
|
|
5.8
|
%
|
Average loans increased
$765.4 million
, or
5.8%
, which contributed
$15.7 million
to the increase in FTE interest income. The average yield on loans decreased
9
basis points, or
2.2%
, to
3.99%
in 2016 from
4.08%
in 2015. The growth in the loan portfolio was primarily driven by the commercial mortgage and commercial portfolios, and was spread across a broad range of industries, largely in Pennsylvania markets and, to a lesser extent, the New Jersey market. The decrease in average yields on loans was attributable to repayments of higher-yielding loans, continued refinancing activity at lower rates, and new loan production at rates lower than the overall portfolio yield.
Average investment securities increased
$175.9 million
, or
7.7%
.
The yield on average investments decreased
9
basis points, or
3.5%
, to
2.47%
in 2016 from
2.56%
in 2015. The increase in average investment securities was partially offset by a
$98.7 million
, or
21.6%
, decrease in other interest-earning assets.
Interest expense decreased
$2.9 million
, or
6.6%
, to
$40.7 million
in the first six months of 2016 from
$43.5 million
in the first six months of 2015. Although total average interest-bearing liabilities increased
$498.2 million
, or
4.5%
, compared to the first six months of 2015, the funding mix became more concentrated in lower cost deposits and short-term borrowings. This shift and the impact of certain refinancing activities for FHLB advances and long-term debt drove the decrease in interest expense.
Average deposits, by type, are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
Increase (Decrease) in Balance
|
|
2016
|
|
2015
|
|
|
Balance
|
|
Rate
|
|
Balance
|
|
Rate
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Noninterest-bearing demand
|
$
|
4,022,764
|
|
|
—
|
%
|
|
$
|
3,698,661
|
|
|
—
|
%
|
|
$
|
324,103
|
|
|
8.8
|
%
|
Interest-bearing demand
|
3,446,193
|
|
|
0.18
|
|
|
3,144,358
|
|
|
0.13
|
|
|
301,835
|
|
|
9.6
|
|
Savings
|
3,961,405
|
|
|
0.19
|
|
|
3,542,960
|
|
|
0.13
|
|
|
418,445
|
|
|
11.8
|
|
Total demand and savings
|
11,430,362
|
|
|
0.12
|
|
|
10,385,979
|
|
|
0.08
|
|
|
1,044,383
|
|
|
10.1
|
|
Time deposits
|
2,856,044
|
|
|
1.05
|
|
|
3,044,463
|
|
|
1.03
|
|
|
(188,419
|
)
|
|
(6.2
|
)
|
Total deposits
|
$
|
14,286,406
|
|
|
0.30
|
%
|
|
$
|
13,430,442
|
|
|
0.30
|
%
|
|
$
|
855,964
|
|
|
6.4
|
%
|
The
$1.0 billion
, or
10.1%
, increase in total demand and savings account balances was primarily due to a $485.1 million, or 10.0%, increase in personal account balances, a $385.3 million, or 10.3%, increase in business account balances and a $176.7 million, or 10.2%, increase in municipal account balances. While the cost of both demand and savings deposits and time deposits increased, the shift to a higher concentration of lower-cost demand and savings deposits resulted in a total cost of interest-bearing deposits of
0.30%
for both the first six months of 2016 and 2015.
The following table summarizes changes in average short-term borrowings and long-term debt, by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
Increase (Decrease)
|
|
2016
|
|
2015
|
|
in Balance
|
|
Balance
|
|
Rate
|
|
Balance
|
|
Rate
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Short-term borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
Customer repurchase agreements
|
$
|
176,001
|
|
|
0.11
|
%
|
|
$
|
176,732
|
|
|
0.10
|
%
|
|
$
|
(731
|
)
|
|
(0.4
|
)%
|
Customer short-term promissory notes
|
75,774
|
|
|
0.04
|
|
|
83,148
|
|
|
0.02
|
|
|
(7,374
|
)
|
|
(8.9
|
)
|
Total short-term customer funding
|
251,775
|
|
|
0.09
|
|
|
259,880
|
|
|
0.07
|
|
|
(8,105
|
)
|
|
(3.1
|
)
|
Federal funds purchased
|
160,991
|
|
|
0.42
|
|
|
66,795
|
|
|
0.17
|
|
|
94,196
|
|
|
141.0
|
|
Short-term FHLB advances
(1)
|
11,769
|
|
|
0.46
|
|
|
18,122
|
|
|
0.30
|
|
|
(6,353
|
)
|
|
(35.1
|
)
|
Total short-term borrowings
|
424,535
|
|
|
0.23
|
|
|
344,797
|
|
|
0.10
|
|
|
79,738
|
|
|
23.1
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
600,026
|
|
|
3.18
|
|
|
642,736
|
|
|
3.50
|
|
|
(42,710
|
)
|
|
(6.6
|
)
|
Other long-term debt
|
361,844
|
|
|
5.00
|
|
|
432,526
|
|
|
5.68
|
|
|
(70,682
|
)
|
|
(16.3
|
)
|
Total long-term debt
|
961,870
|
|
|
3.87
|
|
|
1,075,262
|
|
|
4.38
|
|
|
(113,392
|
)
|
|
(10.5
|
)
|
Total borrowings
|
$
|
1,386,405
|
|
|
2.75
|
%
|
|
$
|
1,420,059
|
|
|
3.34
|
%
|
|
$
|
(33,654
|
)
|
|
(2.4
|
)%
|
(1) Represents FHLB advances with an original maturity term of less than one year.
Total borrowings decreased
$33.7 million
, or
2.4%
. The cost of borrowings decreased
59
basis points, or
17.7%
, as a result of lower-cost, short-term borrowings comprising a larger percentage of total borrowings.
Total long-term debt decreased
$113.4 million
, or
10.5%
, as the result of maturing FHLB advances and the maturity of $100.0 million of subordinated debt in April 2015. In addition, in June 2015, the Corporation issued $150 million of subordinated debt at an effective rate of 4.69%. The proceeds of this issuance were used to redeem $150 million of trust preferred securities, with an effective rate of 6.52%, in July 2015.
In the third quarter of 2015, the Corporation executed two transactions to restructure its long-term FHLB advances. First, $200 million of FHLB advances, with a weighted average rate of 4.45% and a maturity date in the first quarter of 2017, were refinanced with new advances maturing from September 2019 to December 2020, at a weighted average rate of 2.95%. This transaction reduced interest expense on a quarterly basis by approximately $750,000, beginning in the fourth quarter of 2015. Second, forward agreements were executed to refinance an additional $200 million of FHLB advances when the advances mature in December 2016. These forward agreements have maturity dates from March 2021 to December 2021 and the refinancing will reduce the weighted average rate on these advances from 4.03% to 2.40% and decrease interest expense on a quarterly basis by approximately $800,000, beginning in the first quarter of 2017.
Provision for Credit Losses
The provision for credit losses was
$4.0 million
for the first six months of 2016, an increase of
$5.5 million
in comparison to the first six months of 2015. In the first six months of 2015, a negative provision of
$1.5 million
was recorded, primarily due to an improvement in net charge-off levels, particularly among pooled impaired loans. 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)
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Service charges on deposit accounts:
|
|
|
|
|
|
|
|
Overdraft fees
|
$
|
10,656
|
|
|
$
|
10,154
|
|
|
$
|
502
|
|
|
4.9
|
%
|
Cash management fees
|
7,046
|
|
|
6,586
|
|
|
460
|
|
|
7.0
|
|
Other
|
7,752
|
|
|
7,466
|
|
|
286
|
|
|
3.8
|
|
Total service charges on deposit accounts
|
25,454
|
|
|
24,206
|
|
|
1,248
|
|
|
5.2
|
|
Investment management and trust services
|
22,235
|
|
|
21,900
|
|
|
335
|
|
|
1.5
|
|
Other service charges and fees:
|
|
|
|
|
|
|
|
Merchant fees
|
7,935
|
|
|
7,265
|
|
|
670
|
|
|
9.2
|
|
Debit card income
|
5,230
|
|
|
5,015
|
|
|
215
|
|
|
4.3
|
|
Commercial swap fees
|
4,193
|
|
|
1,837
|
|
|
2,356
|
|
|
128.3
|
|
Letter of credit fees
|
2,308
|
|
|
2,331
|
|
|
(23
|
)
|
|
(1.0
|
)
|
Other
|
4,067
|
|
|
3,903
|
|
|
164
|
|
|
4.2
|
|
Total other service charges and fees
|
23,733
|
|
|
20,351
|
|
|
3,382
|
|
|
16.6
|
|
Mortgage banking income:
|
|
|
|
|
|
|
|
Gains on sales of mortgage loans
|
7,110
|
|
|
7,961
|
|
|
(851
|
)
|
|
(10.7
|
)
|
Mortgage servicing income
|
817
|
|
|
2,066
|
|
|
(1,249
|
)
|
|
(60.5
|
)
|
Total mortgage banking income
|
7,927
|
|
|
10,027
|
|
|
(2,100
|
)
|
|
(20.9
|
)
|
Credit card income
|
5,020
|
|
|
4,709
|
|
|
311
|
|
|
6.6
|
|
Other income
|
3,882
|
|
|
3,473
|
|
|
409
|
|
|
11.8
|
|
Total, excluding investment securities gains, net
|
88,251
|
|
|
84,666
|
|
|
3,585
|
|
|
4.2
|
|
Investment securities gains, net
|
1,023
|
|
|
6,560
|
|
|
(5,537
|
)
|
|
(84.4
|
)
|
Total
|
$
|
89,274
|
|
|
$
|
91,226
|
|
|
$
|
(1,952
|
)
|
|
(2.1
|
)%
|
The $502,000, or 4.9%, increase in overdraft fee income during the six months ended June 30, 2016 in comparison to the same period during 2015 consisted of a $310,000 increase in fees assessed on commercial accounts and a $192,000 increase in fees assessed on personal accounts, due to higher volumes. Cash management fees increased $460,000, or 7.0%, compared to 2015 due to increased transaction volumes and fee increases in 2016.
The $670,000, or 9.2%, increase in merchant fee income and the $215,000, or 4.3%, increase in debit card income were due to an increase in the volumes of transactions in comparison to 2015. The $2.4 million increase in commercial interest rate swap fees were due to an increase in new loan volumes in comparison to 2015.
Gains on sales of mortgage loans decreased $851,000, or 10.7%, due to a $124.1 million, or 20.9%, decrease in new loan commitments, partially offset by a 12.9% increase in pricing spreads compared to the prior year. Mortgage servicing income, excluding a $1.7 million impairment charge on MSRs recognized in the second quarter of 2016, increased $470,000, or 22.7%. See Note 6, "Mortgage Servicing Rights," in the Notes to Consolidated Financial Statements for additional details regarding the impairment charge.
Gains on sales of investment securities decreased $5.5 million compared to the first six months of 2015. See Note 4, "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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
Increase (Decrease)
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Salaries and employee benefits
|
$
|
139,401
|
|
|
$
|
130,057
|
|
|
$
|
9,344
|
|
|
7.2
|
%
|
Net occupancy expense
|
24,031
|
|
|
25,501
|
|
|
(1,470
|
)
|
|
(5.8
|
)
|
Other outside services
|
11,564
|
|
|
13,875
|
|
|
(2,311
|
)
|
|
(16.7
|
)
|
Data processing
|
10,876
|
|
|
9,662
|
|
|
1,214
|
|
|
12.6
|
|
Software
|
7,874
|
|
|
6,694
|
|
|
1,180
|
|
|
17.6
|
|
Equipment expense
|
6,243
|
|
|
7,293
|
|
|
(1,050
|
)
|
|
(14.4
|
)
|
FDIC insurance expense
|
5,909
|
|
|
5,707
|
|
|
202
|
|
|
3.5
|
|
Professional fees
|
5,686
|
|
|
5,602
|
|
|
84
|
|
|
1.5
|
|
Supplies and postage
|
5,285
|
|
|
5,095
|
|
|
190
|
|
|
3.7
|
|
Marketing
|
3,540
|
|
|
3,468
|
|
|
72
|
|
|
2.1
|
|
Telecommunications
|
2,947
|
|
|
3,333
|
|
|
(386
|
)
|
|
(11.6
|
)
|
Operating risk loss
|
1,526
|
|
|
1,501
|
|
|
25
|
|
|
1.7
|
|
Other real estate owned and repossession expense
|
1,003
|
|
|
1,491
|
|
|
(488
|
)
|
|
(32.7
|
)
|
Intangible amortization
|
—
|
|
|
236
|
|
|
(236
|
)
|
|
(100.0
|
)
|
Other
|
16,165
|
|
|
17,317
|
|
|
(1,152
|
)
|
|
(6.7
|
)
|
Total
|
$
|
242,050
|
|
|
$
|
236,832
|
|
|
$
|
5,218
|
|
|
2.2
|
%
|
The $9.3 million, or 7.2%, increase in salaries and employee benefits during the six months ended June 30, 2016 in comparison to the same period during 2015 primarily resulted from an $8.4 million, or 7.8%, increase in salaries, resulting from higher average salaries per full-time equivalent (FTE) employee, normal merit increases and an increase in incentive compensation. Benefits expenses increased $930,000, or 4.3%, due to an increase in 401(k) matching expense, defined benefit plan expense, employee education and other employee benefits.
The $1.5 million, or 5.8%, decrease in occupancy expense was due to decreases in snow removal and utilities expenses when compared to the first six months of 2015. The $2.3 million, or 16.7%, decrease in other outside services in comparison to the first six months of 2015 was largely due to the timing of certain expenses related to the Corporation’s BSA/AML compliance program remediation efforts.
The $2.4 million, or 14.6%, combined increase in data processing and software resulted from higher transaction volumes and contractual increases related to core processing systems, and amortization of capitalized software investments.
Equipment expense decreased $1.1 million, or 14.4%, primarily due to lower depreciation expense when compared to the first six months of 2015 as certain assets became fully depreciated.
Other real estate owned and repossession expense decreased $488,000, or 32.7%, when compared to the first six months of 2015 due to decreases in repossession expense, maintenance expense and insurance expense on other real estate properties. This expense category can experience volatility from period to period based on the timing of foreclosures and sales of properties and payments of expenses, such as real estate taxes.
Other expense decreased $1.2 million, or 6.7%, due to lower state taxes and the timing of certain expense items, which can fluctuate from period to period.
Income Taxes
Income tax expense for the first six months of 2016 was $23.1 million, a $2.5 million, or 9.9%, decrease from $25.7 million in 2015.
The Corporation’s effective tax rate was 22.9% in the first six months of 2016, as compared to 25.1% in the first six months of 2015. The effective tax rate is generally lower than the federal statutory rate of 35% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities and credits earned from investments in partnerships that generate tax credits under various federal programs. The decrease in the effective rate from 2015 was driven by higher low-income housing tax credits.
FINANCIAL CONDITION
The table below presents condensed consolidated ending balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
June 30, 2016
|
|
December 31, 2015
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Assets
|
|
|
|
|
|
|
|
Cash and due from banks
|
$
|
84,647
|
|
|
$
|
101,120
|
|
|
$
|
(16,473
|
)
|
|
(16.3
|
)%
|
Other interest-earning assets
|
408,086
|
|
|
292,516
|
|
|
115,570
|
|
|
39.5
|
|
Loans held for sale
|
34,330
|
|
|
16,886
|
|
|
17,444
|
|
|
103.3
|
|
Investment securities
|
2,529,724
|
|
|
2,484,773
|
|
|
44,951
|
|
|
1.8
|
|
Loans, net of allowance
|
13,992,613
|
|
|
13,669,548
|
|
|
323,065
|
|
|
2.4
|
|
Premises and equipment
|
228,861
|
|
|
225,535
|
|
|
3,326
|
|
|
1.5
|
|
Goodwill and intangible assets
|
531,556
|
|
|
531,556
|
|
|
—
|
|
|
—
|
|
Other assets
|
670,218
|
|
|
592,784
|
|
|
77,434
|
|
|
13.1
|
|
Total Assets
|
$
|
18,480,035
|
|
|
$
|
17,914,718
|
|
|
$
|
565,317
|
|
|
3.2
|
%
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
Deposits
|
$
|
14,292,564
|
|
|
$
|
14,132,317
|
|
|
$
|
160,247
|
|
|
1.1
|
%
|
Short-term borrowings
|
722,214
|
|
|
497,663
|
|
|
224,551
|
|
|
45.1
|
|
Long-term debt
|
965,552
|
|
|
949,542
|
|
|
16,010
|
|
|
1.7
|
|
Other liabilities
|
392,708
|
|
|
293,302
|
|
|
99,406
|
|
|
33.9
|
|
Total Liabilities
|
16,373,038
|
|
|
15,872,824
|
|
|
500,214
|
|
|
3.2
|
|
Total Shareholders’ Equity
|
2,106,997
|
|
|
2,041,894
|
|
|
65,103
|
|
|
3.2
|
|
Total Liabilities and Shareholders’ Equity
|
$
|
18,480,035
|
|
|
$
|
17,914,718
|
|
|
$
|
565,317
|
|
|
3.2
|
%
|
Other Interest-earning Assets
The
$115.6 million
, or
39.5%
, increase in other interest-earning assets during the first six months of 2016 resulted from higher balances on deposit with the Federal Reserve Bank as funding provided by deposit and borrowings increases outpaced the growth in loans and investments.
Investment Securities
The following table presents the carrying amount of investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
June 30, 2016
|
|
December 31, 2015
|
|
$
|
|
%
|
|
(dollars in thousands)
|
U.S. Government sponsored agency securities
|
$
|
146
|
|
|
$
|
25,136
|
|
|
$
|
(24,990
|
)
|
|
(99.4
|
)%
|
State and municipal securities
|
345,347
|
|
|
262,765
|
|
|
82,582
|
|
|
31.4
|
|
Corporate debt securities
|
91,547
|
|
|
96,955
|
|
|
(5,408
|
)
|
|
(5.6
|
)
|
Collateralized mortgage obligations
|
706,346
|
|
|
821,509
|
|
|
(115,163
|
)
|
|
(14.0
|
)
|
Mortgage-backed securities
|
1,267,763
|
|
|
1,158,835
|
|
|
108,928
|
|
|
9.4
|
|
Auction rate securities
|
97,886
|
|
|
98,059
|
|
|
(173
|
)
|
|
(0.2
|
)
|
Total debt securities
|
2,509,035
|
|
|
2,463,259
|
|
|
45,776
|
|
|
1.9
|
|
Equity securities
|
20,689
|
|
|
21,514
|
|
|
(825
|
)
|
|
(3.8
|
)
|
Total
|
$
|
2,529,724
|
|
|
$
|
2,484,773
|
|
|
$
|
44,951
|
|
|
1.8
|
%
|
U.S. Government sponsored agency securities decreased
$25.0 million
, or
99.4%
, as the result of maturities. The proceeds were reinvested in municipal securities, which increased
$82.6 million
, or
31.4%
.
Collateralized mortgage obligations decreased
$115.2 million
, or
14.0%
, as the Corporation reduced its holdings in lower coupon investments due to volatility in market pricing. The proceeds were reinvested in mortgage-backed securities, which increased
$108.9 million
, or
9.4%
, in an effort to improve the portfolio yield.
Loans, net of Unearned Income
The following table presents ending balances of loans outstanding, net of unearned income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
June 30, 2016
|
|
December 31, 2015
|
|
$
|
|
%
|
|
(dollars in thousands)
|
|
|
Real estate – commercial mortgage
|
$
|
5,635,347
|
|
|
$
|
5,462,330
|
|
|
$
|
173,017
|
|
|
3.2
|
%
|
Commercial – industrial, financial and agricultural
|
4,099,177
|
|
|
4,088,962
|
|
|
10,215
|
|
|
0.2
|
|
Real estate – home equity
|
1,647,319
|
|
|
1,684,439
|
|
|
(37,120
|
)
|
|
(2.2
|
)
|
Real estate – residential mortgage
|
1,447,292
|
|
|
1,376,160
|
|
|
71,132
|
|
|
5.2
|
|
Real estate – construction
|
853,699
|
|
|
799,988
|
|
|
53,711
|
|
|
6.7
|
|
Consumer
|
278,071
|
|
|
268,588
|
|
|
9,483
|
|
|
3.5
|
|
Leasing, other and overdrafts
|
194,254
|
|
|
158,135
|
|
|
36,119
|
|
|
22.8
|
|
Loans, net of unearned income
|
$
|
14,155,159
|
|
|
$
|
13,838,602
|
|
|
$
|
316,557
|
|
|
2.3
|
%
|
Loans, net of unearned income increased
$316.6 million
, or
2.3%
, in comparison to December 31, 2015, with the increases spread all across the Corporation's geographic markets. Commercial mortgage loans increased
$173.0 million
, or
3.2%
, in comparison to
December 31, 2015
, with the growth occurring primarily in the Pennsylvania ($135.0 million, or 4.9%), New Jersey ($24.0 million, or 1.7%) and Virginia ($11.0 million, or 2.4%) markets. Real-estate residential mortgage loans increased
$71.1 million
, or
5.2%
, compared to
December 31, 2015
, with the growth occurring primarily in the Maryland ($41.0 million, or 22.3%) and Virginia ($33.0 million, or 14.7%) markets as the result of new portfolio product offerings that were introduced in 2015. Real-estate construction loans increased
$53.7 million
, or
6.7%
, in comparison to
December 31, 2015
, with the growth occurring primarily in the New Jersey ($27.0 million, or 17.1%), Delaware ($16.0 million, or 35.4%) and Pennsylvania ($11.0 million, or 2.4%) markets. Leasing, other and overdrafts increased compared to
December 31, 2015
as a result of a $36.1 million increase in the leasing portfolio.
Construction loans include loans to commercial borrowers secured by commercial real estate, loans to commercial borrowers secured by residential 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, 2016
|
|
December 31, 2015
|
|
Balance
|
|
Delinquency Rate (1)
|
|
% of Total
|
|
Balance
|
|
Delinquency Rate (1)
|
|
% of Total
|
|
(dollars in thousands)
|
Commercial
|
$
|
604,113
|
|
|
0.8
|
%
|
|
70.8
|
%
|
|
$
|
559,991
|
|
|
0.2
|
%
|
|
70.0
|
%
|
Commercial - residential
|
183,667
|
|
|
4.9
|
|
|
21.5
|
|
|
179,303
|
|
|
7.3
|
|
|
22.4
|
|
Other
|
65,919
|
|
|
3.8
|
|
|
7.7
|
|
|
60,694
|
|
|
1.1
|
|
|
7.6
|
|
Total Real estate - construction
|
$
|
853,699
|
|
|
1.9
|
%
|
|
100.0
|
%
|
|
$
|
799,988
|
|
|
1.8
|
%
|
|
100.0
|
%
|
|
|
(1)
|
Represents all accruing loans 30 days or more past due and non-accrual loans as a percentage of total loans in each class segment.
|
The Corporation does not have a significant concentration of credit risk with any single borrower, industry or geographical location. Approximately
$6.5 billion
, or
45.8%
, of the loan portfolio was in commercial mortgage and construction loans as of
June 30, 2016
. The Corporation's maximum total lending commitment to an individual borrower was $50.0 million as of
June 30, 2016
. In addition to its policy of limiting the maximum total lending commitment to any individual borrower to $50.0 million, the Corporation has established lower total lending limits for certain types of lending commitments, and lower total lending limits based on the Corporation's internal risk rating of an individual borrower at the time the lending commitment is approved. As of
June 30, 2016
, the Corporation had 113 relationships with total borrowing commitments between $20.0 million and $50.0 million.
The following table summarizes the industry concentrations within the commercial loan portfolio:
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
Services
|
21.9
|
%
|
|
22.6
|
%
|
Health care
|
11.2
|
|
|
10.6
|
|
Manufacturing
|
10.7
|
|
|
11.3
|
|
Construction
(1)
|
9.8
|
|
|
9.7
|
|
Retail
|
9.2
|
|
|
8.3
|
|
Wholesale
|
8.0
|
|
|
8.0
|
|
Real estate
(2)
|
7.7
|
|
|
7.3
|
|
Agriculture
|
4.8
|
|
|
5.1
|
|
Arts and entertainment
|
2.8
|
|
|
2.8
|
|
Transportation
|
2.7
|
|
|
2.7
|
|
Financial services
|
2.0
|
|
|
1.7
|
|
Other
|
9.2
|
|
|
9.9
|
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
|
(1)
|
Includes commercial loans to borrowers engaged in the construction industry.
|
|
|
(2)
|
Includes commercial loans to 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 $20.0 million that are shared by three or more banks. Below is a summary of the Corporation's outstanding purchased shared national credits:
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
(in thousands)
|
Commercial - industrial, financial and agricultural
|
$
|
162,712
|
|
|
$
|
152,830
|
|
Real estate - commercial mortgage
|
104,418
|
|
|
96,219
|
|
Total
|
$
|
267,130
|
|
|
$
|
249,049
|
|
Total shared national credits increased
$18.1 million
, or
7.3%
, in comparison to
December 31, 2015
. 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, 2016
, none of the shared national credits were past due compared to one credit totaling
$1.1 million
, or
0.4%
, of the total balance that was past due as of
December 31, 2015
.
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
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(dollars in thousands)
|
Average balance of loans, net of unearned income
|
$
|
13,966,024
|
|
|
$
|
13,192,600
|
|
|
$
|
13,909,722
|
|
|
$
|
13,144,332
|
|
|
|
|
|
|
|
|
|
Balance of allowance for credit losses at beginning of period
|
$
|
166,065
|
|
|
$
|
179,658
|
|
|
$
|
171,412
|
|
|
$
|
185,931
|
|
Loans charged off:
|
|
|
|
|
|
|
|
Commercial – industrial, financial and agricultural
|
4,625
|
|
|
11,166
|
|
|
10,813
|
|
|
13,029
|
|
Real estate – residential mortgage
|
340
|
|
|
783
|
|
|
1,408
|
|
|
2,064
|
|
Real estate – home equity
|
1,045
|
|
|
870
|
|
|
2,586
|
|
|
1,638
|
|
Real estate – commercial mortgage
|
1,474
|
|
|
1,642
|
|
|
2,056
|
|
|
2,351
|
|
Consumer
|
569
|
|
|
357
|
|
|
1,576
|
|
|
1,137
|
|
Real estate – construction
|
742
|
|
|
87
|
|
|
1,068
|
|
|
87
|
|
Leasing, other and overdrafts
|
1,951
|
|
|
467
|
|
|
2,394
|
|
|
830
|
|
Total loans charged off
|
10,746
|
|
|
15,372
|
|
|
21,901
|
|
|
21,136
|
|
Recoveries of loans previously charged off:
|
|
|
|
|
|
|
|
Commercial – industrial, financial and agricultural
|
2,931
|
|
|
1,471
|
|
|
5,250
|
|
|
2,257
|
|
Real estate – residential mortgage
|
420
|
|
|
187
|
|
|
556
|
|
|
346
|
|
Real estate – home equity
|
350
|
|
|
189
|
|
|
688
|
|
|
440
|
|
Real estate – commercial mortgage
|
1,367
|
|
|
451
|
|
|
2,192
|
|
|
887
|
|
Consumer
|
539
|
|
|
368
|
|
|
735
|
|
|
609
|
|
Real estate – construction
|
1,563
|
|
|
231
|
|
|
1,946
|
|
|
1,378
|
|
Leasing, other and overdrafts
|
108
|
|
|
70
|
|
|
189
|
|
|
241
|
|
Total recoveries
|
7,278
|
|
|
2,967
|
|
|
11,556
|
|
|
6,158
|
|
Net loans charged off
|
3,468
|
|
|
12,405
|
|
|
10,345
|
|
|
14,978
|
|
Provision for credit losses
|
2,511
|
|
|
2,200
|
|
|
4,041
|
|
|
(1,500
|
)
|
Balance of allowance for credit losses at end of period
|
$
|
165,108
|
|
|
$
|
169,453
|
|
|
$
|
165,108
|
|
|
$
|
169,453
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans (annualized)
|
0.10
|
%
|
|
0.38
|
%
|
|
0.15
|
%
|
|
0.23
|
%
|
The following table presents the components of the allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
|
(dollars in thousands)
|
Allowance for loan losses
|
$
|
162,546
|
|
|
$
|
169,054
|
|
Reserve for unfunded lending commitments
|
2,562
|
|
|
2,358
|
|
Allowance for credit losses
|
$
|
165,108
|
|
|
$
|
171,412
|
|
|
|
|
|
Allowance for credit losses to loans outstanding
|
1.17
|
%
|
|
1.24
|
%
|
The provision for credit losses for the
three months ended
June 30, 2016
was
$2.5 million
, an increase of
$311,000
in comparison to the same period in
2015
. For the
six months ended
June 30, 2016
, the provision for credit losses was
$4.0 million
, an increase of
$5.5 million
in comparison to the first six months of 2015. The increase in the provision for credit losses was largely due to a
negative provision recorded in the
six months ended
June 30, 2015
which was driven by an improvement in net charge-off levels, particularly among pooled impaired loans across all portfolio segments.
Net charge-offs decreased $
8.9 million
, or
72.0%
, to
$3.5 million
for the
second
quarter of
2016
, compared to
$12.4 million
for the
second
quarter of
2015
. Gross charge-offs decreased by $4.6 million and recoveries increased by $4.3 million. Of the
$3.5 million
of net charge-offs recorded in the
second
quarter of
2016
, the majority were for loans originated in New Jersey ($2.5 million) and Pennsylvania ($2.4 million) partially offset by net recoveries in Maryland ($1.2 million) and, to a lesser extent, Delaware and Virginia.
During the first half of
2016
, net charge-offs decreased $
4.6 million
, or
30.9%
, to
$10.3 million
compared to
$15.0 million
for the first half of
2015
. The decrease in net charge-offs was primarily due to an increase in recoveries during the first half of
2016
compared to the same period in the prior year. Of the
$10.3 million
of net charge-offs recorded in the first half of
2016
, the majority were for loans originated in Pennsylvania ($7.9 million) and New Jersey ($3.7 million) partially offset by net recoveries in Maryland ($1.0 million) and, to a lesser extent, Delaware and Virginia.
The following table summarizes non-performing assets as of the indicated dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
June 30, 2015
|
|
December 31, 2015
|
|
(dollars in thousands)
|
Non-accrual loans
|
$
|
111,742
|
|
|
$
|
129,152
|
|
|
$
|
129,523
|
|
Loans 90 days or more past due and still accruing
|
15,992
|
|
|
20,353
|
|
|
15,291
|
|
Total non-performing loans
|
127,734
|
|
|
149,505
|
|
|
144,814
|
|
Other real estate owned (OREO)
|
11,918
|
|
|
12,763
|
|
|
11,099
|
|
Total non-performing assets
|
$
|
139,652
|
|
|
$
|
162,268
|
|
|
$
|
155,913
|
|
Non-accrual loans to total loans
|
0.79
|
%
|
|
0.98
|
%
|
|
0.94
|
%
|
Non-performing assets to total assets
|
0.76
|
%
|
|
0.93
|
%
|
|
0.87
|
%
|
Allowance for credit losses to non-performing loans
|
129.26
|
%
|
|
113.34
|
%
|
|
118.37
|
%
|
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, 2016
|
|
June 30, 2015
|
|
December 31, 2015
|
|
(in thousands)
|
Real estate – residential mortgage
|
$
|
27,324
|
|
|
$
|
31,584
|
|
|
$
|
28,511
|
|
Real estate – commercial mortgage
|
17,808
|
|
|
17,482
|
|
|
17,563
|
|
Real estate – construction
|
3,086
|
|
|
4,482
|
|
|
3,942
|
|
Commercial – industrial, financial and agricultural
|
5,756
|
|
|
6,975
|
|
|
5,953
|
|
Real estate – home equity
|
7,173
|
|
|
3,084
|
|
|
4,556
|
|
Consumer
|
18
|
|
|
34
|
|
|
33
|
|
Total accruing TDRs
|
61,165
|
|
|
63,641
|
|
|
60,558
|
|
Non-accrual TDRs
(1)
|
24,887
|
|
|
27,230
|
|
|
31,035
|
|
Total TDRs
|
$
|
86,052
|
|
|
$
|
90,871
|
|
|
$
|
91,593
|
|
(1) Included with non-accrual loans in the preceding table.
TDRs modified during the first
six
months of
2016
and still outstanding as of
June 30, 2016
totaled
$6.5 million
. During the first
six
months of
2016
,
$3.7 million
of TDRs that were modified in 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, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of non-accrual loans at March 31, 2016
|
$
|
37,116
|
|
|
$
|
40,861
|
|
|
$
|
10,498
|
|
|
$
|
20,780
|
|
|
$
|
11,494
|
|
|
$
|
—
|
|
|
$
|
1,421
|
|
|
$
|
122,170
|
|
Additions
|
6,340
|
|
|
4,835
|
|
|
3,098
|
|
|
2,100
|
|
|
2,068
|
|
|
572
|
|
|
207
|
|
|
19,220
|
|
Payments
|
(2,888
|
)
|
|
(5,150
|
)
|
|
(2,396
|
)
|
|
(1,595
|
)
|
|
(1,086
|
)
|
|
(1
|
)
|
|
(20
|
)
|
|
(13,136
|
)
|
Charge-offs
|
(4,625
|
)
|
|
(1,474
|
)
|
|
(742
|
)
|
|
(340
|
)
|
|
(1,045
|
)
|
|
(569
|
)
|
|
(1,608
|
)
|
|
(10,403
|
)
|
Transfers to accrual status
|
—
|
|
|
(3,149
|
)
|
|
—
|
|
|
(150
|
)
|
|
(206
|
)
|
|
(2
|
)
|
|
—
|
|
|
(3,507
|
)
|
Transfers to OREO
|
(405
|
)
|
|
(411
|
)
|
|
(1,038
|
)
|
|
(226
|
)
|
|
(522
|
)
|
|
—
|
|
|
—
|
|
|
(2,602
|
)
|
Balance of non-accrual loans at June 30, 2016
|
$
|
35,538
|
|
|
$
|
35,512
|
|
|
$
|
9,420
|
|
|
$
|
20,569
|
|
|
$
|
10,703
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
111,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of non-accrual loans as of December 31, 2015
|
$
|
42,199
|
|
|
$
|
40,731
|
|
|
$
|
12,044
|
|
|
$
|
21,914
|
|
|
$
|
11,210
|
|
|
$
|
—
|
|
|
$
|
1,425
|
|
|
$
|
129,523
|
|
Additions
|
12,776
|
|
|
10,794
|
|
|
3,850
|
|
|
3,497
|
|
|
5,055
|
|
|
1,579
|
|
|
292
|
|
|
37,843
|
|
Payments
|
(8,219
|
)
|
|
(8,693
|
)
|
|
(4,368
|
)
|
|
(1,746
|
)
|
|
(1,452
|
)
|
|
(1
|
)
|
|
(24
|
)
|
|
(24,503
|
)
|
Charge-offs
|
(10,813
|
)
|
|
(2,056
|
)
|
|
(1,068
|
)
|
|
(1,408
|
)
|
|
(2,586
|
)
|
|
(1,576
|
)
|
|
(1,693
|
)
|
|
(21,200
|
)
|
Transfers to accrual status
|
—
|
|
|
(3,149
|
)
|
|
—
|
|
|
(310
|
)
|
|
(881
|
)
|
|
(2
|
)
|
|
—
|
|
|
(4,342
|
)
|
Transfers to OREO
|
(405
|
)
|
|
(2,115
|
)
|
|
(1,038
|
)
|
|
(1,378
|
)
|
|
(643
|
)
|
|
—
|
|
|
—
|
|
|
(5,579
|
)
|
Balance of non-accrual loans at June 30, 2016
|
$
|
35,538
|
|
|
$
|
35,512
|
|
|
$
|
9,420
|
|
|
$
|
20,569
|
|
|
$
|
10,703
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
111,742
|
|
Non-accrual loans decreased
$17.4 million
, or
13.5%
, and
$17.8 million
, or
13.7%
, in comparison to
June 30, 2015
and
December 31, 2015
, respectively.
The following table summarizes non-performing loans, by type, as of the indicated dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
June 30, 2015
|
|
December 31, 2015
|
|
(in thousands)
|
Real estate – commercial mortgage
|
$
|
35,704
|
|
|
$
|
49,932
|
|
|
$
|
41,170
|
|
Commercial – industrial, financial and agricultural
|
38,902
|
|
|
35,839
|
|
|
44,071
|
|
Real estate – residential mortgage
|
25,030
|
|
|
31,562
|
|
|
28,484
|
|
Real estate – home equity
|
14,173
|
|
|
14,632
|
|
|
14,683
|
|
Real estate – construction
|
11,879
|
|
|
14,884
|
|
|
12,460
|
|
Consumer
|
1,888
|
|
|
2,583
|
|
|
2,440
|
|
Leasing
|
158
|
|
|
73
|
|
|
1,506
|
|
Total non-performing loans
|
$
|
127,734
|
|
|
$
|
149,505
|
|
|
$
|
144,814
|
|
Non-performing loans decreased
$21.8 million
, or
14.6%
, and
$17.1 million
, or
11.8%
, in comparison to
June 30, 2015
and
December 31, 2015
, respectively. The decrease in non-performing loans was realized across all loan categories.
The following table summarizes the Corporation’s OREO, by property type, as of the indicated dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
June 30, 2015
|
|
December 31, 2015
|
|
(in thousands)
|
Residential properties
|
$
|
6,098
|
|
|
$
|
7,992
|
|
|
$
|
7,303
|
|
Commercial properties
|
3,686
|
|
|
2,123
|
|
|
2,167
|
|
Undeveloped land
|
2,134
|
|
|
2,648
|
|
|
1,629
|
|
Total OREO
|
$
|
11,918
|
|
|
$
|
12,763
|
|
|
$
|
11,099
|
|
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. The evaluation of credit risk for residential mortgages, home equity loans, construction loans to individuals, consumer loans and lease receivables is based on payment history, through the monitoring of delinquency levels and trends. For a description of the Corporation's risk ratings, see Note 5, "Loans and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements.
Total internally risk rated loans were
$10.5 billion
and
$10.3 billion
as of
June 30, 2016
and
December 31, 2015
, respectively. 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, 2016
|
|
December 31, 2015
|
|
$
|
|
%
|
|
June 30, 2016
|
|
December 31, 2015
|
|
$
|
|
%
|
|
June 30, 2016
|
|
December 31, 2015
|
|
(dollars in thousands)
|
Real estate - commercial mortgage
|
$
|
141,417
|
|
|
$
|
102,625
|
|
|
$
|
38,792
|
|
|
37.8
|
%
|
|
$
|
122,564
|
|
|
$
|
155,442
|
|
|
$
|
(32,878
|
)
|
|
(21.2
|
)%
|
|
$
|
263,981
|
|
|
$
|
258,067
|
|
Commercial - secured
|
95,330
|
|
|
92,711
|
|
|
2,619
|
|
|
2.8
|
|
|
130,180
|
|
|
136,710
|
|
|
(6,530
|
)
|
|
(4.8
|
)
|
|
225,510
|
|
|
229,421
|
|
Commercial -unsecured
|
2,467
|
|
|
2,761
|
|
|
(294
|
)
|
|
(10.6
|
)
|
|
3,421
|
|
|
3,346
|
|
|
75
|
|
|
2.2
|
|
|
5,888
|
|
|
6,107
|
|
Total Commercial - industrial, financial and agricultural
|
97,797
|
|
|
95,472
|
|
|
2,325
|
|
|
2.4
|
|
|
133,601
|
|
|
140,056
|
|
|
(6,455
|
)
|
|
(4.6
|
)
|
|
231,398
|
|
|
235,528
|
|
Construction - commercial residential
|
17,012
|
|
|
17,154
|
|
|
(142
|
)
|
|
(0.8
|
)
|
|
14,838
|
|
|
21,812
|
|
|
(6,974
|
)
|
|
(32.0
|
)
|
|
31,850
|
|
|
38,966
|
|
Construction - commercial
|
2,548
|
|
|
3,684
|
|
|
(1,136
|
)
|
|
(30.8
|
)
|
|
4,594
|
|
|
3,597
|
|
|
997
|
|
|
27.7
|
|
|
7,142
|
|
|
7,281
|
|
Total real estate - construction (excluding construction - other)
|
19,560
|
|
|
20,838
|
|
|
(1,278
|
)
|
|
(6.1
|
)
|
|
19,432
|
|
|
25,409
|
|
|
(5,977
|
)
|
|
(23.5
|
)
|
|
38,992
|
|
|
46,247
|
|
Total
|
$
|
258,774
|
|
|
$
|
218,935
|
|
|
$
|
39,839
|
|
|
18.2
|
%
|
|
$
|
275,597
|
|
|
$
|
320,907
|
|
|
$
|
(45,310
|
)
|
|
(14.1
|
)%
|
|
$
|
534,371
|
|
|
$
|
539,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of total risk rated loans
|
2.5
|
%
|
|
2.1
|
%
|
|
|
|
|
|
2.6
|
%
|
|
3.1
|
%
|
|
|
|
|
|
5.1
|
%
|
|
5.2
|
%
|
The following table summarizes loan delinquency rates, by type, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
June 30, 2015
|
|
December 31, 2015
|
|
30-89
Days
|
|
≥ 90 Days (1)
|
|
Total
|
|
30-89
Days
|
|
≥ 90 Days (1)
|
|
Total
|
|
30-89
Days
|
|
≥ 90 Days (1)
|
|
Total
|
Real estate – commercial mortgage
|
0.18
|
%
|
|
0.63
|
%
|
|
0.81
|
%
|
|
0.34
|
%
|
|
0.96
|
%
|
|
1.30
|
%
|
|
0.14
|
%
|
|
0.77
|
%
|
|
0.91
|
%
|
Commercial – industrial, financial and agricultural
|
0.30
|
%
|
|
0.95
|
%
|
|
1.25
|
%
|
|
0.22
|
%
|
|
0.93
|
%
|
|
1.15
|
%
|
|
0.21
|
%
|
|
1.06
|
%
|
|
1.27
|
%
|
Real estate – construction
|
0.54
|
%
|
|
1.39
|
%
|
|
1.93
|
%
|
|
0.02
|
%
|
|
2.04
|
%
|
|
2.06
|
%
|
|
0.28
|
%
|
|
1.59
|
%
|
|
1.87
|
%
|
Real estate – residential mortgage
|
0.97
|
%
|
|
1.73
|
%
|
|
2.70
|
%
|
|
1.53
|
%
|
|
2.30
|
%
|
|
3.83
|
%
|
|
1.33
|
%
|
|
2.07
|
%
|
|
3.40
|
%
|
Real estate – home equity
|
0.61
|
%
|
|
0.86
|
%
|
|
1.47
|
%
|
|
0.55
|
%
|
|
0.87
|
%
|
|
1.42
|
%
|
|
0.53
|
%
|
|
0.87
|
%
|
|
1.40
|
%
|
Consumer, leasing and other
|
1.03
|
%
|
|
0.43
|
%
|
|
1.46
|
%
|
|
1.29
|
%
|
|
0.65
|
%
|
|
1.94
|
%
|
|
1.36
|
%
|
|
0.92
|
%
|
|
2.28
|
%
|
Total
|
0.39
|
%
|
|
0.91
|
%
|
|
1.30
|
%
|
|
0.47
|
%
|
|
1.13
|
%
|
|
1.60
|
%
|
|
0.37
|
%
|
|
1.04
|
%
|
|
1.41
|
%
|
Total dollars (in thousands)
|
$
|
55,744
|
|
|
$
|
127,734
|
|
|
$
|
183,478
|
|
|
$
|
61,931
|
|
|
$
|
149,505
|
|
|
$
|
211,436
|
|
|
$
|
51,927
|
|
|
$
|
144,814
|
|
|
$
|
196,741
|
|
|
|
(1)
|
Includes non-accrual loans.
|
Management believes that the allowance for credit losses of
$165.1 million
as of
June 30, 2016
is sufficient to cover incurred losses in the loan portfolio and unfunded lending commitments as of that date and is appropriate based on applicable accounting standards.
Other Assets and Other Liabilities
The
$77.4 million
, or
13.1%
, increase in other assets and the
$99.4 million
, or
33.9%
, increase in other liabilities were driven by higher fair values for derivative financial instruments, mainly commercial loan interest rate swaps. See Note 9, "Derivative Financial Instruments," in the Notes to Consolidated Financial Statements for additional details.
Deposits and Borrowings
The following table presents ending deposits, by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
June 30, 2016
|
|
December 31, 2015
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Noninterest-bearing demand
|
$
|
4,125,375
|
|
|
$
|
3,948,114
|
|
|
$
|
177,261
|
|
|
4.5
|
%
|
Interest-bearing demand
|
3,358,536
|
|
|
3,451,207
|
|
|
(92,671
|
)
|
|
(2.7
|
)
|
Savings
|
3,986,008
|
|
|
3,868,046
|
|
|
117,962
|
|
|
3.0
|
|
Total demand and savings
|
11,469,919
|
|
|
11,267,367
|
|
|
202,552
|
|
|
1.8
|
|
Time deposits
|
2,822,645
|
|
|
2,864,950
|
|
|
(42,305
|
)
|
|
(1.5
|
)
|
Total deposits
|
$
|
14,292,564
|
|
|
$
|
14,132,317
|
|
|
$
|
160,247
|
|
|
1.1
|
%
|
Noninterest-bearing demand deposits increased
$177.3 million
, or
4.5%
, primarily as a result of increases in business account balances of $195.2 million, or 6.5%, and municipal account balances of $11.5 million, or 12.6%, partially offset by decreases in personal account balances of $16.6 million, or 2.0%, and other account balances of $12.9 million, or 27.5%.
The
$118.0 million
, or
3.0%
, increase in savings account balances was due to a $215.6 million, or 8.6%, increase in personal account balances partially offset by a decrease of $58.9 million, or 7.4%, in business account balances and a $38.7 million, or 6.7%, decrease in municipal account balances.
Interest-bearing demand accounts decreased
$92.7 million
, or
2.7%
, primarily due to a $58.8 million, or 2.9%, decrease in personal account balances, a $22.4 million, or 1.9%, decrease in municipal account balances and an $11.6 million, or 1.9%, decrease in business account balances.
The following table summarizes the changes in ending borrowings, by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
June 30, 2016
|
|
December 31, 2015
|
|
$
|
|
%
|
|
(dollars in thousands)
|
Short-term borrowings:
|
|
|
|
|
|
|
|
Customer repurchase agreements
|
$
|
168,521
|
|
|
$
|
111,496
|
|
|
$
|
57,025
|
|
|
51.1
|
%
|
Customer short-term promissory notes
|
69,509
|
|
|
78,932
|
|
|
(9,423
|
)
|
|
(11.9
|
)
|
Total short-term customer funding
|
238,030
|
|
|
190,428
|
|
|
47,602
|
|
|
25.0
|
|
Federal funds purchased
|
449,184
|
|
|
197,235
|
|
|
251,949
|
|
|
127.7
|
|
Short-term FHLB advances
(1)
|
35,000
|
|
|
110,000
|
|
|
(75,000
|
)
|
|
(68.2
|
)
|
Total short-term borrowings
|
722,214
|
|
|
497,663
|
|
|
224,551
|
|
|
45.1
|
|
Long-term debt:
|
|
|
|
|
|
|
|
FHLB advances
|
603,685
|
|
|
587,756
|
|
|
15,929
|
|
|
2.7
|
|
Other long-term debt
|
361,867
|
|
|
361,786
|
|
|
81
|
|
|
—
|
|
Total long-term debt
|
965,552
|
|
|
949,542
|
|
|
16,010
|
|
|
1.7
|
|
Total borrowings
|
$
|
1,687,766
|
|
|
$
|
1,447,205
|
|
|
$
|
240,561
|
|
|
16.6
|
%
|
|
|
|
|
|
|
|
|
(1) Represents FHLB advances with an original maturity term of less than one year.
The
$224.6 million
, or
45.1%
, increase in total short-term borrowings resulted from loan growth exceeding deposit growth during the first six months of 2016.
Shareholders' Equity
Total shareholders’ equity increased
$65.1 million
, or
3.2%
, during the first
six
months of
2016
. The increase was due primarily to
$78.0 million
of net income and a
$29.7 million
increase in other comprehensive income, partially offset by
$33.0 million
of common stock dividends and
$16.3 million
in treasury stock purchases.
Regulatory Capital
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. 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 became effective for the Corporation on January 1, 2015, and will be fully phased in on January 1, 2019.
The U.S. Basel III Capital Rules 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; and
|
|
|
•
|
Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses. Certain non-qualifying capital instruments, including cumulative preferred stock and TruPS, are being phased out as a component of Tier 1 capital for institutions of the Corporation's size.
|
When fully phased in on January 1, 2019, the Corporation and its bank subsidiaries will also be required to 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.
The U.S. Basel III Capital Rules use a standardized approach for risk weightings that expands the risk-weightings for assets and off-balance sheet exposures from the previous 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 off-balance sheet exposures and resulting in higher risk weights for a variety of asset categories.
As of
June 30, 2016
, the Corporation and each of its bank subsidiaries met the minimum requirements of the U.S. Basel III Capital Rules, and each of the Corporation’s bank subsidiaries’ capital ratios exceeded the amounts required to be considered "well capitalized" as defined in the regulations. As of
June 30, 2016
, the Corporation's capital levels also met the fully-phased in minimum capital requirements, including the capital conservation buffers, as prescribed in the U.S. Basel III Capital Rules.
The following table summarizes the Corporation’s capital ratios in comparison to regulatory requirements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
Regulatory
Minimum
for Capital
Adequacy
|
|
Fully Phased-in, with Capital Conservation Buffers
|
Total Capital (to Risk-Weighted Assets)
|
13.1
|
%
|
|
13.2
|
%
|
|
8.0
|
%
|
|
10.5
|
%
|
Tier I Capital (to Risk-Weighted Assets)
|
10.3
|
%
|
|
10.2
|
%
|
|
6.0
|
%
|
|
8.5
|
%
|
Common Equity Tier I (to Risk-Weighted Assets)
|
10.3
|
%
|
|
10.2
|
%
|
|
4.5
|
%
|
|
7.0
|
%
|
Tier I Capital (to Average Assets)
|
9.0
|
%
|
|
9.0
|
%
|
|
4.0
|
%
|
|
4.0
|
%
|
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 price risk and commodity price risk. Due to the nature of its operations, foreign currency price risk and commodity price risk are not significant to the Corporation.
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) 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.
The Corporation uses two complementary methods to measure and manage interest rate risk. They are 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.
Simulation of net interest income is performed for the next 12-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 take into account the potential effects of competition on the pricing of deposits and loans over the forward 12-month period.
Contractual maturities and repricing opportunities of loans are incorporated in the simulation model as are prepayment assumptions, maturity data and call options in the investment portfolio. Assumptions based on past experience are incorporated into the model for non-maturity deposit accounts. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model's simulated results due to timing, amount and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.
The following table summarizes the expected impact of abrupt interest rate changes on net interest income as of
June 30, 2016
(due to the current level of interest rates, the 200 and 300 basis point downward shock scenarios are not shown):
|
|
|
|
|
Rate Shock (1)
|
Annual change
in net interest income
|
|
% Change in net interest income
|
+300 bp
|
+ $73.3 million
|
|
14.1%
|
+200 bp
|
+ $49.1 million
|
|
9.43%
|
+100 bp
|
+ $22.5 million
|
|
4.3%
|
–100 bp
|
– $15.6 million
|
|
– 3.0%
|
|
|
(1)
|
These results include the effect of implicit and explicit interest rate floors that limit further reduction in interest rates.
|
Economic value of equity estimates the discounted present value of asset and liability cash flows. Discount rates are based upon market prices for like assets and liabilities. Abrupt changes or "shocks" in interest rates, both upward and downward, 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, 2016
, the Corporation was within economic value of equity policy limits for every 100 basis point shock.
Interest Rate Swaps
The Corporation enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Corporation simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. These interest rate swaps are derivative financial instruments that are recorded at their fair value in other assets and liabilities on the consolidated balance sheets. Changes in fair value during the period are recorded in other non-interest expense on the consolidated statements of income.
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 investments and outstanding loans 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 the rates of interest paid on those accounts and borrowings. The positive impact to liquidity resulting from paying higher interest rates could have a detrimental impact on the net interest margin and net income if rates on interest-earning assets do not experience a proportionate 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, 2016
, the Corporation had $638.7 million of short- and long-term advances outstanding from the FHLB with an additional borrowing capacity of approximately $2.8 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, 2016
, the Corporation had aggregate availability under federal funds lines of $1.1 billion with $449.2 million borrowed against that amount. 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, 2016
, the Corporation had $1.3 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 and Analysis. The consolidated statements of cash flows provide additional information. The Corporation’s operating activities during the first
six
months of 2016 generated
$74.1 million
of cash, mainly due to net income. Cash used in investing activities was
$447.0 million
, mainly due to net increases in loans and short-term investments. Net cash provided by financing activities was
$356.4 million
due to increases in deposits, short-term borrowings and additions to long-term debt, partially offset by cash dividends and purchases of treasury stock.
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, 2016
, equity investments consisted of
$19.8 million
of common stocks of publicly traded financial institutions and
$895,000
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
$13.4 million
and a fair value of
$19.8 million
at
June 30, 2016
, including an investment in a single financial
institution with a cost basis of
$7.4 million
and a fair value of
$10.4 million
. The fair value of this investment accounted for
52.5%
of the fair value of the common stocks of publicly traded financial institutions. No other investment in a single financial institution in the financial institutions stock portfolio exceeded
10%
of the portfolio's fair value. In total, net unrealized gains in this portfolio were approximately $6.5 million as of
June 30, 2016
.
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. or international securities 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, 2016
, the Corporation owned
$345.3 million
of municipal securities issued by various municipalities. Ongoing uncertainty with respect to the financial strength of municipal bond insurers places 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, 2016
, approximately 97% of municipal securities were supported by the general obligation of corresponding municipalities. Approximately 77% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.
Auction Rate Securities
As of
June 30, 2016
, the Corporation’s investments in student loan auction rate certificates (ARC), a type of auction rate securities, had a cost basis of
$106.9 million
and a fair value of
$97.9 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. Therefore, as of
June 30, 2016
, the fair values of the ARCs currently in the portfolio were derived using significant unobservable inputs based on an expected cash flows model which produced fair values that were materially different from those that would be expected from settlement of these investments in the current market. The expected cash flows model produced fair values which assumed a return to market liquidity sometime in 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 the ARCs is also a factor in the determination of their estimated fair value. As of
June 30, 2016
, all of the ARCs were rated above investment grade. All of the loans underlying the ARCs have principal payments that are guaranteed by the federal government. At
June 30, 2016
, 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, subordinated debt issued by financial institutions and senior debt. As of
June 30, 2016
, these securities had an amortized cost of
$95.4 million
and an estimated fair value of
$91.5 million
. The amortized cost of pooled trust preferred securities was $0 as of
June 30, 2016
.
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.
See "Note 4 - Investment Securities," in the Notes to Consolidated Financial Statements for further discussion related to the Corporation’s other-than-temporary impairment evaluations for debt securities, and see "Note 11 - Fair Value Measurements," in the Notes to Consolidated Financial Statements for further discussion related to the fair values of debt securities.