Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-31343

 

 

Associated Banc-Corp

(Exact name of registrant as specified in its charter)

 

 

 

Wisconsin   39-1098068
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

433 Main Street, Green Bay, Wisconsin   54301
(Address of principal executive offices)   (Zip Code)

(920) 491-7500

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares outstanding of registrant’s common stock, par value $0.01 per share, at April 30, 2014, was 159,454,049.

 

 

 


ASSOCIATED BANC-CORP

TABLE OF CONTENTS

 

     Page
No.
 
PART I. Financial Information   

Item 1. Financial Statements (Unaudited):

  

Consolidated Balance Sheets — March 31, 2014 and December 31, 2013

     3   

Consolidated Statements of Income — Three Months Ended March 31, 2014 and 2013

     4   

Consolidated Statements of Comprehensive Income —Three Months Ended March 31, 2014 and 2013

     5   

Consolidated Statements of Changes in Stockholders’ Equity — Three Months Ended March  31, 2014 and 2013

     6   

Consolidated Statements of Cash Flows — Three Months Ended March 31, 2014 and 2013

     7   

Notes to Consolidated Financial Statements

     8   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     49   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     76   

Item 4. Controls and Procedures

     76   
PART II. Other Information   

Item 1. Legal Proceedings

     77   

Item 1A. Risk Factors

     77   

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

     78   

Item 6. Exhibits

     78   

Signatures

     79   

 

2


PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements:

ASSOCIATED BANC-CORP

Consolidated Balance Sheets

 

     March 31,
2014
(Unaudited)
       December 31,
2013

(Audited)
 
     (In Thousands, except share and per share data)  

ASSETS

       

Cash and due from banks

   $ 526,951        $ 455,482  

Interest-bearing deposits in other financial institutions

     92,071          126,018  

Federal funds sold and securities purchased under agreements to resell

     4,400          20,745  

Investment securities held to maturity, at amortized cost

     193,759          175,210  

Investment securities available for sale, at fair value

     5,277,908          5,250,585  

Federal Home Loan Bank and Federal Reserve Bank stocks, at cost

     181,360          181,249  

Loans held for sale

     46,529          64,738  

Loans

     16,441,444          15,896,261  

Allowance for loan losses

     (267,916        (268,315
  

 

 

      

 

 

 

Loans, net

     16,173,528          15,627,946  

Premises and equipment, net

     269,257          270,890  

Goodwill

     929,168          929,168  

Other intangible assets, net

     72,629          74,464  

Trading assets

     40,822          43,728  

Other assets

     997,815          1,006,697  
  

 

 

      

 

 

 

Total assets

   $ 24,806,197        $ 24,226,920  
  

 

 

      

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

       

Noninterest-bearing demand deposits

   $ 4,478,981        $ 4,626,312  

Interest-bearing deposits

     13,030,946          12,640,855  
  

 

 

      

 

 

 

Total deposits

     17,509,927          17,267,167  

Federal funds purchased and securities sold under agreements to repurchase

     939,254          475,442  

Other short-term funding

     308,652          265,484  

Long-term funding

     2,932,040          3,087,267  

Trading liabilities

     43,450          46,470  

Accrued expenses and other liabilities

     171,850          193,800  
  

 

 

      

 

 

 

Total liabilities

     21,905,173          21,335,630  

Stockholders’ equity

       

Preferred equity

     61,158          61,862  

Common stock

     1,750          1,750  

Surplus

     1,623,323          1,617,990  

Retained earnings

     1,402,549          1,392,508  

Accumulated other comprehensive loss

     (11,577        (24,244

Treasury stock, at cost

     (176,179        (158,576
  

 

 

      

 

 

 

Total stockholders’ equity

     2,901,024          2,891,290  
  

 

 

      

 

 

 

Total liabilities and stockholders’ equity

   $ 24,806,197        $ 24,226,920  
  

 

 

      

 

 

 

Preferred shares issued

     62,826          63,549  

Preferred shares authorized (par value $1.00 per share)

     750,000          750,000  

Common shares issued

     175,012,686          175,012,686  

Common shares authorized (par value $0.01 per share)

     250,000,000          250,000,000  

Treasury shares of common stock

     11,867,756          10,874,182  

See accompanying notes to consolidated financial statements.

 

3


ITEM 1. Financial Statements Continued:

ASSOCIATED BANC-CORP

Consolidated Statements of Income

(Unaudited)

 

     Three Months Ended March 31,  
                 2014                              2013              
     (In Thousands, except per share data)  

INTEREST INCOME

     

Interest and fees on loans

   $ 143,387      $ 145,527  

Interest and dividends on investment securities

     

Taxable

     26,257        21,613  

Tax exempt

     6,971        6,965  

Other interest

     1,449        1,247  
  

 

 

    

 

 

 

Total interest income

     178,064        175,352  

INTEREST EXPENSE

     

Interest on deposits

     6,159        8,541  

Interest on Federal funds purchased and securities sold under agreements to repurchase

     305        410  

Interest on other short-term funding

     116        332  

Interest on long-term funding

     6,511        8,416  
  

 

 

    

 

 

 

Total interest expense

     13,091        17,699  
  

 

 

    

 

 

 

NET INTEREST INCOME

     164,973        157,653  

Provision for credit losses

     5,000        3,300  
  

 

 

    

 

 

 

Net interest income after provision for credit losses

     159,973        154,353  

NONINTEREST INCOME

     

Trust service fees

     11,711        10,910  

Service charges on deposit accounts

     16,400        16,829  

Card-based and other nondeposit fees

     12,509        11,950  

Insurance commissions

     12,317        11,763  

Brokerage and annuity commissions

     4,033        3,516  

Mortgage banking, net

     6,361        17,765  

Capital market fees, net

     2,322        2,583  

Bank owned life insurance income

     4,320        2,970  

Asset gains, net

     728        836  

Investment securities gains, net

     378        300  

Other

     2,442        2,578  
  

 

 

    

 

 

 

Total noninterest income

     73,521        82,000  

NONINTEREST EXPENSE

     

Personnel expense

     97,698        97,907  

Occupancy

     15,560        15,662  

Equipment

     6,276        6,167  

Technology

     12,724        11,508  

Business development and advertising

     5,062        4,537  

Other intangible amortization

     991        1,011  

Loan expense

     2,787        3,284  

Legal and professional fees

     4,188        5,345  

Losses other than loans

     544        384  

Foreclosure / OREO expense

     1,896        2,422  

FDIC expense

     5,001        5,432  

Other

     14,931        13,956  
  

 

 

    

 

 

 

Total noninterest expense

     167,658        167,615  
  

 

 

    

 

 

 

Income before income taxes

     65,836        68,738  

Income tax expense

     20,637        21,350  
  

 

 

    

 

 

 

Net income

     45,199        47,388  

Preferred stock dividends

     1,244        1,300  
  

 

 

    

 

 

 

Net income available to common equity

   $ 43,955      $ 46,088  
  

 

 

    

 

 

 

Earnings per common share:

     

Basic

   $ 0.27      $ 0.27  

Diluted

   $ 0.27      $ 0.27  

Average common shares outstanding:

     

Basic

     161,467        168,234  

Diluted

     162,188        168,404  

See accompanying notes to consolidated financial statements.

 

4


ITEM 1: Financial Statements Continued:

ASSOCIATED BANC-CORP

Consolidated Statements of Comprehensive Income

(Unaudited)

 

     Three Months Ended March 31,  
             2014                     2013          
     (In Thousands)  

Net income

   $ 45,199     $ 47,388  

Other comprehensive income (loss), net of tax:

    

Investment securities available for sale:

    

Net unrealized gains (losses)

     20,627       (9,931

Reclassification adjustment for net gains realized in net income

     (378     (300

Income tax (expense) benefit

     (7,786     3,950  
  

 

 

   

 

 

 

Other comprehensive income (loss) on investment securities available for sale

     12,463       (6,281

Defined benefit pension and postretirement obligations:

    

Amortization of prior service cost

     15       17  

Amortization of actuarial losses

     316       1,073  

Income tax expense

     (127     (421
  

 

 

   

 

 

 

Other comprehensive income on pension and postretirement obligations

     204       669  
  

 

 

   

 

 

 

Total other comprehensive income (loss)

     12,667       (5,612
  

 

 

   

 

 

 

Comprehensive income

   $ 57,866     $ 41,776  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


ITEM 1. Financial Statements Continued:

ASSOCIATED BANC-CORP

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

 

    Preferred
Equity
    Common
Stock
    Surplus     Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Total  
    ($ in Thousands, except per share data)  

Balance, December 31, 2012

  $ 63,272     $ 1,750     $ 1,602,136     $ 1,281,811     $ 48,603     $ (61,173   $ 2,936,399  

Comprehensive income:

             

Net income

    —         —         —         47,388       —         —         47,388  

Other comprehensive loss

    —         —         —         —         (5,612     —         (5,612
             

 

 

 

Comprehensive income

                41,776  
             

 

 

 

Common stock issued:

             

Stock-based compensation plans, net

    —         —         9       (16,724     —         18,892       2,177  

Purchase of treasury stock

    —         —         —         —         —         (33,125     (33,125

Cash dividends:

             

Common stock, $0.08 per share

    —         —         —         (13,483     —         —         (13,483

Preferred stock

    —         —         —         (1,300     —         —         (1,300

Stock-based compensation expense, net

    —         —         3,762       —         —         —         3,762  

Tax benefit of stock options

    —         —         59       —         —         —         59  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2013

  $ 63,272     $ 1,750     $ 1,605,966     $ 1,297,692     $ 42,991     $ (75,406   $ 2,936,265  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2013

  $ 61,862     $ 1,750     $ 1,617,990     $ 1,392,508     $ (24,244   $ (158,576   $ 2,891,290  

Comprehensive income:

             

Net income

    —         —         —         45,199       —         —         45,199  

Other comprehensive income

    —         —         —         —         12,667       —         12,667  
             

 

 

 

Comprehensive income

                57,866  
             

 

 

 

Common stock issued:

             

Stock-based compensation plans, net

    —         —         376       (19,173     —         24,596       5,799  

Purchase of treasury stock

    —         —         —         —         —         (42,199     (42,199

Cash dividends:

             

Common stock, $0.09 per share

    —         —         —         (14,639     —         —         (14,639

Preferred stock

    —         —         —         (1,244     —         —         (1,244

Purchase of preferred stock

    (704     —           (102         (806

Stock-based compensation expense, net

    —         —         4,412       —         —         —         4,412  

Tax benefit of stock options

    —         —         545       —         —         —         545  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2014

  $ 61,158     $ 1,750     $ 1,623,323     $ 1,402,549     $ (11,577   $ (176,179   $ 2,901,024  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

6


ITEM 1. Financial Statements Continued:

ASSOCIATED BANC-CORP

Consolidated Statements of Cash Flows

(Unaudited)

 

     Three Months Ended March 31,  
             2014                     2013          
     ($ in Thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 45,199     $ 47,388  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for credit losses

     5,000       3,300  

Depreciation and amortization

     13,094       11,968  

Recovery of valuation allowance on mortgage servicing rights, net

     (156     (5,216

Amortization of mortgage servicing rights

     2,725       4,989  

Amortization of other intangible assets

     991       1,011  

Amortization and accretion on earning assets, funding, and other, net

     6,537       14,069  

Tax impact of stock based compensation

     545       59  

Gain on sales of investment securities, net

     (378     (300

Gain on sales of assets and impairment write-downs, net

     (728     (836

Gain on mortgage banking activities, net

     (4,100     (15,493

Mortgage loans originated and acquired for sale

     (203,764     (681,410

Proceeds from sales of mortgage loans held for sale

     224,348       779,022  

Increase in interest receivable

     (3,009     (3,226

Decrease in interest payable

     (6,474     (7,276

Net change in other assets and other liabilities

     (6,165     (14,637
  

 

 

   

 

 

 

Net cash provided by operating activities

     73,665       133,412  
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Net increase in loans

     (555,979     (179,438

Purchases of:

    

Available for sale securities

     (273,627     (511,419

Premises, equipment, and software, net of disposals

     (10,848     (16,223

FHLB stock

     (111     —    

Held to maturity securities

     (18,857     (13,240

Other assets

     (850     (797

Proceeds from:

    

Sales of available for sale securities

     80,025       61,457  

Prepayments, calls, and maturities of available for sale securities

     180,880       403,763  

FHLB stock

     —         14,399  

Prepayments, calls, and maturities of other assets

     11,036       9,385  

Sales of loans originated for investment

     —         12,172  
  

 

 

   

 

 

 

Net cash used in investing activities

     (588,331     (219,941
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net increase in deposits

     242,760       481,429  

Net increase (decrease) in short-term funding

     506,980       (557,387

Repayment of long-term funding

     (155,009     (100,076

Purchase of preferred stock

     (806     —    

Cash dividends on common stock

     (14,639     (13,483

Cash dividends on preferred stock

     (1,244     (1,300

Purchase of treasury stock

     (42,199     (33,125
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     535,843       (223,942
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     21,177       (310,471

Cash and cash equivalents at beginning of period

     602,245       737,873  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 623,422     $ 427,402  
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid for interest

   $ 19,578     $ 24,946  

Cash paid for income taxes

     4,165       —    

Loans and bank premises transferred to other real estate owned

     6,343       12,408  

Capitalized mortgage servicing rights

     1,725       5,902  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

7


ITEM 1. Financial Statements Continued:

ASSOCIATED BANC-CORP

Notes to Consolidated Financial Statements

These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with U.S. generally accepted accounting principles have been omitted or abbreviated. The information contained in the consolidated financial statements and footnotes in Associated Banc-Corp’s 2013 annual report on Form 10-K, should be referred to in connection with the reading of these unaudited interim financial statements.

NOTE 1: Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and comprehensive income, changes in stockholders’ equity, and cash flows of Associated Banc-Corp (individually referred to herein as the “Parent Company,” and together with all of its subsidiaries and affiliates, collectively referred to herein as the “Corporation”) for the periods presented, and all such adjustments are of a normal recurring nature. The consolidated financial statements include the accounts of all subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

Certain amounts in the consolidated financial statements of prior periods have been reclassified to conform with the current period’s presentation. The consolidated statements of income were modified from prior periods’ presentation to conform with the current period presentation, which shows a new provision for credit losses line item comprised of the provision for loan losses and the provision for unfunded commitments. In prior periods’ presentation, the provision for unfunded commitments was reported as a component of losses other than loans in the consolidated statements of income. The presentation of the consolidated balance sheets remains unchanged with the allowance for loan losses presented as a valuation allowance with the related loan asset, while the allowance for unfunded commitments is included in accrued expenses and other liabilities.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to significant change include the determination of the allowance for credit losses, goodwill impairment assessment, mortgage servicing rights valuation, and income taxes. Management has evaluated subsequent events for potential recognition or disclosure.

NOTE 2: New Accounting Pronouncements Adopted

In July 2013, the FASB issued an amendment to clarify the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 and should be applied prospectively. The Corporation adopted the accounting standard during the first quarter of 2014, as required, with no material impact on its results of operations, financial position, or liquidity.

NOTE 3: Earnings Per Common Share

Earnings per share are calculated utilizing the two-class method. Basic earnings per share are calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares

 

8


outstanding adjusted for the dilutive effect of common stock awards (outstanding stock options, unvested restricted stock, and outstanding stock warrants). Presented below are the calculations for basic and diluted earnings per common share.

 

     Three Months Ended March 31,  
                 2014                             2013              
     (In Thousands, except per share data)  

Net income

   $ 45,199     $ 47,388  

Preferred stock dividends

     (1,244     (1,300
  

 

 

   

 

 

 

Net income available to common equity

   $ 43,955     $ 46,088  
  

 

 

   

 

 

 

Common shareholder dividends

     (14,488     (13,377

Unvested share-based payment awards

     (151     (107
  

 

 

   

 

 

 

Undistributed earnings

   $ 29,316     $ 32,604  
  

 

 

   

 

 

 

Undistributed earnings allocated to common shareholders

   $ 29,126     $ 32,375  

Undistributed earnings allocated to unvested share-based payment awards

     190       229  
  

 

 

   

 

 

 

Undistributed earnings

   $ 29,316     $ 32,604  
  

 

 

   

 

 

 

Basic

    

Distributed earnings to common shareholders

   $ 14,488     $ 13,377  

Undistributed earnings allocated to common shareholders

     29,126       32,375  
  

 

 

   

 

 

 

Total common shareholders earnings, basic

   $ 43,614     $ 45,752  
  

 

 

   

 

 

 

Diluted

    

Distributed earnings to common shareholders

   $ 14,488     $ 13,377  

Undistributed earnings allocated to common shareholders

     29,126       32,375  
  

 

 

   

 

 

 

Total common shareholders earnings, diluted

   $ 43,614     $ 45,752  
  

 

 

   

 

 

 

Weighted average common shares outstanding

     161,467       168,234  

Effect of dilutive common stock awards

     721       170  
  

 

 

   

 

 

 

Diluted weighted average common shares outstanding

     162,188       168,404  
  

 

 

   

 

 

 

Basic earnings per common share

   $ 0.27     $ 0.27  
  

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.27     $ 0.27  
  

 

 

   

 

 

 

Options to purchase approximately 3 million shares were outstanding for both March 31, 2014 and March 31, 2013, but excluded from the calculation of diluted earnings per common share as the effect would have been anti-dilutive.

 

9


NOTE 4: Stock-Based Compensation

At March 31, 2014, the Corporation had one stock-based compensation plan, the 2013 Incentive Compensation Plan. The plan provides that restricted stock awards and stock options will immediately become fully vested upon retirement from the Corporation of those colleagues whose retirements meet the early retirement or normal retirement definitions under the plan (“retirement eligible colleagues”). All stock awards granted under this plan have an exercise price that is equal to the closing price of the Corporation’s stock on the grant date.

The Corporation may issue restricted common stock and restricted common stock units to certain key employees (collectively referred to as “restricted stock awards”). The shares of restricted stock are restricted as to transfer, but are not restricted as to dividend payment or voting rights. Restricted stock units receive dividend equivalents but do not have voting rights. The transfer restrictions primarily lapse over three or four years, depending upon whether the awards are service-based or performance-based. Service-based awards are contingent upon continued employment or meeting the requirements for retirement, and performance-based awards are based on earnings per share performance goals and continued employment or meeting the requirements for retirement.

The fair value of stock options granted is estimated on the date of grant using a Black-Scholes option pricing model, while the fair value of restricted stock awards is their fair market value on the date of grant. The fair values of stock options and restricted stock awards are amortized as compensation expense on a straight-line basis over the vesting period of the grants. Compensation expense recognized is included in personnel expense in the consolidated statements of income.

Assumptions are used in estimating the fair value of stock options granted. The weighted average expected life of the stock option represents the period of time that stock options are expected to be outstanding and is estimated using historical data of stock option exercises and forfeitures. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on the implied volatility of the Corporation’s stock. The following assumptions were used in estimating the fair value for options granted in the first three months of 2014 and full year 2013.

 

     2014     2013  

Dividend yield

     2.00     2.00

Risk-free interest rate

     2.00     0.99

Weighted average expected volatility

     20.00     34.35

Weighted average expected life

     6 years        6 years   

Weighted average per share fair value of options

   $ 3.00     $ 3.80  

The Corporation is required to estimate potential forfeitures of stock grants and adjust compensation expense recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.

 

10


A summary of the Corporation’s stock option activity for the year ended December 31, 2013 and for the three months ended March 31, 2014, is presented below.

 

Stock Options

   Shares     Weighted Average
Exercise Price
     Weighted Average
Remaining
Contractual Term
     Aggregate Intrinsic
Value
(000s)
 

Outstanding at December 31, 2012

     8,640,558     $ 18.88        

Granted

     1,020,979       14.02        

Exercised

     (642,202     13.43        

Forfeited or expired

     (985,092     21.49        
  

 

 

   

 

 

       

Outstanding at December 31, 2013

     8,034,243     $ 18.37        6.03      $ 20,838  
  

 

 

   

 

 

       

Options exercisable at December 31, 2013

     4,923,720     $ 21.48        4.62        8,580  
  

 

 

   

 

 

       

Outstanding at December 31, 2013

     8,034,243     $ 18.37        

Granted

     1,389,452       17.45        

Exercised

     (368,965     13.71        

Forfeited or expired

     (408,865     26.34        
  

 

 

   

 

 

       

Outstanding at March 31, 2014

     8,645,865     $ 18.05        6.62      $ 23,581  
  

 

 

   

 

 

       

Options exercisable at March 31, 2014

     5,649,013     $ 19.51        5.34        15,290  
  

 

 

   

 

 

       

The following table summarizes information about the Corporation’s nonvested stock option activity for the year ended December 31, 2013, and for the three months ended March 31, 2014.

 

Stock Options

   Shares     Weighted Average
Grant Date Fair Value

Nonvested at December 31, 2012

     4,036,595     $5.11

Granted

     1,020,979     3.80

Vested

     (1,680,981   5.10

Forfeited

     (266,070   5.05
  

 

 

   

Nonvested at December 31, 2013

     3,110,523     $4.69
  

 

 

   

Granted

     1,389,452     3.00

Vested

     (1,451,304   4.96

Forfeited

     (51,819   4.85
  

 

 

   

Nonvested at March 31, 2014

     2,996,852     $3.77
  

 

 

   

For the three months ended March 31, 2014 the intrinsic value of stock options exercised was $1 million. For the year ended December 31, 2013, the intrinsic value of stock options exercised was $2 million. The total fair value of stock options that vested was $7 million for the first three months of 2014 and $9 million for the year ended December 31, 2013. For both the three months ended March 31, 2014 and 2013, the Corporation recognized compensation expense of $2 million for the vesting of stock options. For the full year 2013, the Corporation recognized compensation expense of $8 million for the vesting of stock options. Included in compensation expense for 2014 was approximately $250,000 of expense for the accelerated vesting of stock options granted to retirement eligible colleagues. At March 31, 2014, the Corporation had $10 million of unrecognized compensation expense related to stock options that is expected to be recognized over the remaining requisite service periods that extend predominantly through fourth quarter 2018.

 

11


The following table summarizes information about the Corporation’s restricted stock awards activity for the year ended December 31, 2013, and for the three months ended March 31, 2014.

 

Restricted Stock

   Shares    

Weighted Average
Grant Date Fair Value

Outstanding at December 31, 2012

     932,425     $13.60

Granted

     1,276,868       14.03

Vested

     (626,480     13.68

Forfeited

     (71,048     13.92
  

 

 

   

Outstanding at December 31, 2013

     1,511,765     $13.92
  

 

 

   

Granted

     1,116,086       17.41

Vested

     (477,210     13.94

Forfeited

     (21,566     14.00
  

 

 

   

Outstanding at March 31, 2014

     2,129,075     $15.74
  

 

 

   

The Corporation amortizes the expense related to restricted stock awards as compensation expense over the vesting period specified in the grant. Restricted stock awards granted during 2013 to executive officers will vest ratably over a three year period, while restricted stock awards granted during 2014 will vest ratably over a four year period. Restricted stock awards granted to non-executives during 2014 and 2013 will vest ratably over a four year period. Expense for restricted stock awards of approximately $3 million and $2 million was recognized for the three months ended March 31, 2014 and 2013, respectively. The Corporation recognized approximately $7 million of expense for restricted stock awards for the full year 2013. Included in compensation expense for 2014 was approximately $950,000 of expense for the accelerated vesting of restricted stock awards granted to retirement eligible colleagues. The Corporation had $29 million of unrecognized compensation costs related to restricted stock awards at March 31, 2014 that is expected to be recognized over the remaining requisite service periods that extend predominantly through fourth quarter 2018.

The Corporation issues shares from treasury, when available, or new shares upon the exercise of stock options or the granting of restricted stock awards. The Board of Directors has authorized management to repurchase shares of the Corporation’s common stock each quarter in the market, to be made available for issuance in connection with the Corporation’s employee incentive plans and for other corporate purposes. The repurchase of shares will be based on market and investment opportunities, capital levels, growth prospects, and regulatory constraints. Such repurchases may occur from time to time in open market purchases, block transactions, private transactions, accelerated share repurchase programs, or similar facilities.

 

12


NOTE 5: Investment Securities

The amortized cost and fair values of investment securities available for sale and held to maturity were as follows.

 

March 31, 2014:

   Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Fair value  
     ($ in Thousands)  

Investment securities available for sale:

          

U.S. Treasury securities

   $ 1,001      $ 1      $ —       $ 1,002  

Obligations of state and political subdivisions (municipal securities)

     640,433        25,539        (628     665,344  

Residential mortgage-related securities:

          

Government-sponsored enterprise (“GSE”)

     3,767,991        60,240        (58,989     3,769,242  

Private-label

     2,699        16        (18     2,697  

GNMA commercial mortgage-related securities

     839,488        1,703        (27,624     813,567  

Asset-backed securities (1)

     21,318        —          (36     21,282  

Other securities (debt and equity)

     4,720        62        (8     4,774  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities available for sale

   $ 5,277,650      $ 87,561      $ (87,303   $ 5,277,908  
  

 

 

    

 

 

    

 

 

   

 

 

 

Investment securities held to maturity:

          

Obligations of state and political subdivisions (municipal securities)

   $ 193,759      $ 2,372      $ (2,985   $ 193,146  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities held to maturity

   $ 193,759      $ 2,372      $ (2,985   $ 193,146  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) The asset-backed securities position is largely comprised of senior, floating rate, tranches of student loan securities issued by SLM Corp and guaranteed under the Federal Family Education Loan Program.

 

December 31, 2013:

   Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Fair value  
     ($ in Thousands)  

Investment securities available for sale:

          

U.S. Treasury securities

   $ 1,001      $ 1      $ —       $ 1,002  

Obligations of state and political subdivisions (municipal securities)

     653,758        23,855        (1,533     676,080  

Residential mortgage-related securities:

          

GSE

     3,855,467        61,542        (78,579     3,838,430  

Private-label

     3,035        16        (37     3,014  

GNMA commercial mortgage-related securities

     673,555        1,764        (27,842     647,477  

Asset-backed securities (1)

     23,049        10        —         23,059  

Other securities (debt and equity)

     60,711        855        (43     61,523  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities available for sale

   $ 5,270,576      $ 88,043      $ (108,034   $ 5,250,585  
  

 

 

    

 

 

    

 

 

   

 

 

 

Investment securities held to maturity:

          

Obligations of state and political subdivisions (municipal securities)

   $ 175,210      $ 401      $ (5,722   $ 169,889  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities held to maturity

   $ 175,210      $ 401      $ (5,722   $ 169,889  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

13


The amortized cost and fair values of investment securities available for sale and held to maturity at March 31, 2014, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Available for Sale     Held to Maturity  
($ in Thousands)    Amortized Cost      Fair Value     Amortized Cost      Fair Value  

Due in one year or less

   $ 23,534      $ 23,714     $ —        $ —    

Due after one year through five years

     202,811        212,978       230        231  

Due after five years through ten years

     404,168        418,321       82,187        81,033  

Due after ten years

     15,623        16,054       111,342        111,882  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total debt securities

     646,136        671,067       193,759        193,146  

Residential mortgage-related securities:

          

GSE

     3,767,991        3,769,242       —          —    

Private label

     2,699        2,697       —          —    

GNMA commercial mortgage-related securities

     839,488        813,567       —          —    

Asset-backed securities

     21,318        21,282       —          —    

Equity securities

     18        53       —          —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investment securities

   $ 5,277,650      $ 5,277,908     $ 193,759      $ 193,146  
  

 

 

    

 

 

   

 

 

    

 

 

 

Ratio of Fair Value to Amortized Cost

        100.00        99.7

The following represents gross unrealized losses and the related fair value of investment securities available for sale and held to maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2014.

 

    Less than 12 months     12 months or more     Total  

March 31, 2014:

  Number of
Securities
  Unrealized
Losses
    Fair
Value
    Number of
Securities
   Unrealized
Losses
    Fair
Value
    Unrealized
Losses
    Fair
Value
 
        ($ in Thousands)  

Investment securities available for sale:

                

Obligations of state and political subdivisions (municipal securities)

    86   $ (620   $ 36,357       1    $ (8   $ 271     $ (628   $ 36,628  

Residential mortgage-related securities:

                

GSE

    86     (36,552     1,439,729     19      (22,437     555,664       (58,989     1,995,393  

Private-label

      1     (17     1,917       2      (1     38       (18     1,955  

GNMA commercial mortgage-related securities

    17     (12,541     425,310       7      (15,083     209,336       (27,624     634,646  

Asset backed securities

      2     (36     21,282     —        —         —         (36     21,282  

Other debt securities

      3     (8     1,492     —        —         —         (8     1,492  
   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ (49,774   $ 1,926,087        $ (37,529   $ 765,309     $ (87,303   $ 2,691,396  
   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

   

 

 

 

Investment securities held to maturity:

                

Obligations of state and political subdivisions (municipal securities)

  168   $ (2,377   $ 76,708     25    $ (608   $ 11,272     $ (2,985   $ 87,980  
   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ (2,377   $ 76,708        $ (608   $ 11,272     $ (2,985   $ 87,980  
   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

   

 

 

 

The Corporation reviews the investment securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment. A determination as to whether a security’s decline in fair value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Some factors the Corporation may consider in the other-than-temporary impairment analysis include, the length of time and extent to which the security has been in an unrealized loss position, changes in security ratings, financial condition and near-term prospects of the issuer, as well as security and industry specific economic conditions. In addition, with regards to its debt securities, the Corporation may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds, and the value of any underlying collateral. For certain debt securities in unrealized loss positions, the Corporation prepares cash flow analyses to compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security.

 

14


Based on the Corporation’s evaluation, management does not believe any unrealized loss at March 31, 2014 represents an other-than-temporary impairment as these unrealized losses are primarily attributable to changes in interest rates and the current market conditions, and not credit deterioration. The unrealized losses reported for residential mortgage-related securities relate to private-label residential mortgage-related securities as well as residential mortgage-related securities issued by government-sponsored enterprises such as the Federal National Mortgage Association (“FNMA”) and the Federal Home Loan Mortgage Corporation (“FHLMC”). The unrealized losses reported for commercial mortgage-related securities relate to government agency issued securities, Government National Mortgage Association (“GNMA”). The Corporation currently does not intend to sell nor does it believe that it will be required to sell the securities contained in the above unrealized losses table before recovery of their amortized cost basis.

The following is a summary of the credit loss portion of other-than-temporary impairment recognized in earnings on debt securities for the year ended December 31, 2013 and the three months ended March 31, 2014, respectively.

 

     Private-label
Mortgage-
Related
    Trust Preferred        
     Securities     Debt Securities     Total  
     ($ in Thousands)  

Balance of credit-related other-than-temporary impairment at December 31, 2012

   $ (532   $ (6,336   $ (6,868

Reduction due to credit impaired securities sold

     532       57       589  
  

 

 

   

 

 

   

 

 

 

Balance of credit-related other-than-temporary impairment at December 31, 2013

   $ —       $ (6,279   $ (6,279

Reduction due to credit impaired securities sold

     —         765       765  
  

 

 

   

 

 

   

 

 

 

Balance of credit-related other-than-temporary impairment at March 31, 2014

   $ —       $ (5,514   $ (5,514
  

 

 

   

 

 

   

 

 

 

For comparative purposes, the following represents gross unrealized losses and the related fair value of investment securities available for sale and held to maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2013.

 

    Less than 12 months     12 months or more     Total  

December 31, 2013:

  Number of
Securities
  Unrealized
Losses
    Fair Value     Number of
Securities
  Unrealized
Losses
    Fair Value     Unrealized
Losses
    Fair Value  
        ($ in Thousands)  

Investment securities available for sale:

               

Obligations of state and political subdivisions (municipal securities)

  113   $ (1,525   $ 47,044       1   $ (8   $ 273     $ (1,533   $ 47,317  

Residential mortgage-related securities:

               

GSE

  106     (57,393     1,887,784     15     (21,186     421,082       (78,579     2,308,866  

Private label

      2     (37     2,105       1     —         35       (37     2,140  

GNMA commercial mortgage-related securities

    19     (23,854     443,462     —       (3,988     45,950       (27,842     489,412  

Other debt securities

      5     (43     6,452       1     —         —         (43     6,452  
   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ (82,852   $ 2,386,847       $ (25,182   $ 467,340     $ (108,034   $ 2,854,187  
   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Investment securities held to maturity:

               

Obligations of state and political subdivisions (municipal securities)

  298   $ (5,339   $ 124,435     10   $ (383   $ 5,010     $ (5,722   $ 129,445  
   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ (5,339   $ 124,435       $ (383   $ 5,010     $ (5,722   $ 129,445  
   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank Stocks: The Corporation is required to maintain Federal Reserve stock and FHLB stock as a member of both the Federal Reserve System and the FHLB, and in amounts as required by these institutions. These equity securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other marketable equity securities and their fair value is equal to amortized cost. The Corporation had FHLB stock of $110 million at both March 31, 2014 and December 31, 2013 and Federal Reserve Bank stock of $71 million at both March 31, 2014 and December 31, 2013.

The Corporation reviewed these securities for impairment, including but not limited to, consideration of operating performance, the severity and duration of market value declines, as well as its liquidity and funding position. After evaluating all of these considerations, the Corporation believes the cost of these investments will be recovered and no impairment has been recorded on these securities during 2013 or the first three months of 2014.

NOTE 6: Loans, Allowance for Credit Losses, and Credit Quality

The period end loan composition was as follows.

 

     March 31,
2014
     December 31,
2013
 
     ($ in Thousands)  

Commercial and industrial

   $ 5,222,141      $ 4,822,680  

Commercial real estate — owner occupied

     1,098,089        1,114,715  

Lease financing

     52,500        55,483  
  

 

 

    

 

 

 

Commercial and business lending

     6,372,730        5,992,878  

Commercial real estate — investor

     3,001,219        2,939,456  

Real estate construction

     969,617        896,248  
  

 

 

    

 

 

 

Commercial real estate lending

     3,970,836        3,835,704  
  

 

 

    

 

 

 

Total commercial

     10,343,566        9,828,582  

Home equity

     1,762,002        1,825,014  

Installment

     393,321        407,074  

Residential mortgage

     3,942,555        3,835,591  
  

 

 

    

 

 

 

Total consumer

     6,097,878        6,067,679  
  

 

 

    

 

 

 

Total loans

   $ 16,441,444      $ 15,896,261  
  

 

 

    

 

 

 

A summary of the changes in the allowance for credit losses was as follows.

 

     Three Months Ended
March 31, 2014
    Year Ended
December 31, 2013
 
     ($ in Thousands)  

Allowance for Loan Losses:

    

Balance at beginning of period

   $ 268,315     $ 297,409  

Provision for loan losses

     5,000       10,000  

Charge offs

     (11,361     (88,061

Recoveries

     5,962       48,967  
  

 

 

   

 

 

 

Net charge offs

     (5,399     (39,094
  

 

 

   

 

 

 

Balance at end of period

   $ 267,916     $ 268,315  
  

 

 

   

 

 

 

Allowance for Unfunded Commitments:

    

Balance at beginning of period

   $ 21,900     $ 21,800  

Provision for unfunded commitments

     —         100  
  

 

 

   

 

 

 

Balance at end of period

   $ 21,900     $ 21,900  
  

 

 

   

 

 

 

Allowance for Credit Losses

   $ 289,816     $ 290,215  
  

 

 

   

 

 

 

 

16


The level of the allowance for loan losses represents management’s estimate of an amount appropriate to provide for probable credit losses in the loan portfolio at the balance sheet date. In general, the change in the allowance for loan losses is a function of a number of factors, including but not limited to changes in the loan portfolio, net charge offs, trends in past due and impaired loans, and the level of potential problem loans. Management considers the allowance for loan losses a critical accounting policy, as assessing these numerous factors involves significant judgment.

The allowance for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities (including unfunded loan commitments and letters of credit) and is included in accrued expenses and other liabilities on the consolidated balance sheets. The determination of the appropriate level of the allowance is based upon an evaluation of the unfunded credit facilities, including an assessment of historical commitment utilization experience and credit risk grading of the loan. Net adjustments to the allowance for unfunded commitments are included in provision for credit losses in the consolidated statements of income. See Note 12 for additional information on the allowance for unfunded commitments.

A summary of the changes in the allowance for loan losses by portfolio segment for the three months ended March 31, 2014, was as follows.

 

$ in Thousands   Commercial
and
industrial
    Commercial
real
estate - owner
occupied
    Lease
financing
    Commercial
real
estate - investor
    Real estate
construction
    Home
equity
    Installment     Residential
mortgage
    Total  

Balance at Dec 31, 2013

  $ 104,501     $ 19,476     $ 1,607     $ 58,156     $ 23,418     $ 32,196     $ 2,416     $ 26,545     $ 268,315  

Provision for loan losses

    9,593       (97     374       (3,325     (2,341     495       96       205       5,000  

Charge offs

    (5,334     (163     —         (302     (271     (3,581     (307     (1,403     (11,361

Recoveries

    2,609       287       —         1,333       158       1,134       194       247       5,962  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at Mar 31, 2014

  $ 111,369     $ 19,503     $ 1,981     $ 55,862     $ 20,964     $ 30,244     $ 2,399     $ 25,594     $ 267,916  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses:

                 

Ending balance impaired loans individually evaluated for impairment

  $ 6,978     $ 1,322     $ —       $ 3,983     $ 203     $ 4     $ —       $ 259     $ 12,749  

Ending balance impaired loans collectively evaluated for impairment

  $ 3,667     $ 1,864     $ 69     $ 4,141     $ 1,947     $ 13,095     $ 448     $ 11,829     $ 37,060  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans

  $ 10,645     $ 3,186     $ 69     $ 8,124     $ 2,150     $ 13,099     $ 448     $ 12,088     $ 49,809  

Ending balance all other loans collectively evaluated for impairment

  $ 100,724     $ 16,317     $ 1,912     $ 47,738     $ 18,814     $ 17,145     $ 1,951     $ 13,506     $ 218,107  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 111,369     $ 19,503     $ 1,981     $ 55,862     $ 20,964     $ 30,244     $ 2,399     $ 25,594     $ 267,916  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance impaired loans individually evaluated for impairment

  $ 31,526     $ 21,580     $ —       $ 28,790     $ 3,930     $ 427     $ —       $ 9,966     $ 96,219  

Ending balance impaired loans collectively evaluated for impairment

  $ 34,738     $ 16,734     $ 172     $ 50,841     $ 5,691     $ 31,630     $ 1,140     $ 57,737     $ 198,683  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans

  $ 66,264     $ 38,314     $ 172     $ 79,631     $ 9,621     $ 32,057     $ 1,140     $ 67,703     $ 294,902  

Ending balance all other loans collectively evaluated for impairment

  $ 5,155,877     $ 1,059,775     $ 52,328     $ 2,921,588     $ 959,996     $ 1,729,945     $ 392,181     $ 3,874,852     $ 16,146,542  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 5,222,141     $ 1,098,089     $ 52,500     $ 3,001,219     $ 969,617     $ 1,762,002     $ 393,321     $ 3,942,555     $ 16,441,444  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The allocation methodology used by the Corporation includes allocations for specifically identified impaired loans and loss factor allocations (used for both criticized and non-criticized loan categories), with a component primarily based on historical loss rates and a component primarily based on other qualitative factors. Management allocates the allowance for loan losses by pools of risk within each loan portfolio. The allocation of the allowance for loan losses by loan portfolio is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular category. The total allowance for loan losses is available to absorb losses from any segment of the loan portfolio.

 

17


For comparison purposes, a summary of the changes in the allowance for loan losses by portfolio segment for the year ended December 31, 2013, was as follows.

 

$ in Thousands   Commercial
and
industrial
    Commercial
real
estate - owner
occupied
    Lease
financing
    Commercial
real
estate - investor
    Real estate
construction
    Home
equity
    Installment     Residential
mortgage
    Total  

Balance at Dec 31, 2012

  $ 97,852     $ 27,389     $ 3,024     $ 63,181     $ 20,741     $ 56,826     $ 4,299     $ 24,097     $ 297,409  

Provision for loan losses

    12,930       (1,778     (1,429     (2,140     541       (8,213     (2,127     12,216       10,000  

Charge offs

    (35,146     (6,474     (206     (9,846     (3,375     (20,629     (1,389     (10,996     (88,061

Recoveries

    28,865       339       218       6,961       5,511       4,212       1,633       1,228       48,967  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at Dec 31, 2013

  $ 104,501     $ 19,476     $ 1,607     $ 58,156     $ 23,418     $ 32,196     $ 2,416     $ 26,545     $ 268,315  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses:

                 

Ending balance impaired loans individually evaluated for impairment

  $ 7,994     $ 1,019     $ —       $ 3,932     $ 254     $ 123     $ —       $ 315     $ 13,637  

Ending balance impaired loans collectively evaluated for impairment

  $ 3,923     $ 1,936     $ 29     $ 3,963     $ 2,162     $ 13,866     $ 487     $ 11,872     $ 38,238  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans

  $ 11,917     $ 2,955     $ 29     $ 7,895     $ 2,416     $ 13,989     $ 487     $ 12,187     $ 51,875  

Ending balance all other loans collectively evaluated for impairment

  $ 92,584     $ 16,521     $ 1,578     $ 50,261     $ 21,002     $ 18,207     $ 1,929     $ 14,358     $ 216,440  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 104,501     $ 19,476     $ 1,607     $ 58,156     $ 23,418     $ 32,196     $ 2,416     $ 26,545     $ 268,315  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance impaired loans individually evaluated for impairment

  $ 29,343     $ 24,744     $ —       $ 32,367     $ 3,777     $ 929     $ —       $ 10,526     $ 101,686  

Ending balance impaired loans collectively evaluated for impairment

  $ 40,893     $ 17,929     $ 69     $ 50,175     $ 6,483     $ 33,871     $ 1,360     $ 56,947     $ 207,727  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans

  $ 70,236     $ 42,673     $ 69     $ 82,542     $ 10,260     $ 34,800     $ 1,360     $ 67,473     $ 309,413  

Ending balance all other loans collectively evaluated for impairment

  $ 4,752,444     $ 1,072,042     $ 55,414     $ 2,856,914     $ 885,988     $ 1,790,214     $ 405,714     $ 3,768,118     $ 15,586,848  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,822,680     $ 1,114,715     $ 55,483     $ 2,939,456     $ 896,248     $ 1,825,014     $ 407,074     $ 3,835,591     $ 15,896,261  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


The following table presents commercial loans by credit quality indicator at March 31, 2014.

 

     Pass      Special
Mention
     Potential
Problem
     Impaired      Total  
     ($ in Thousands)  

Commercial and industrial

   $ 4,923,304      $ 123,546      $ 109,027      $ 66,264      $ 5,222,141  

Commercial real estate — owner occupied

     938,769        56,221        64,785        38,314        1,098,089  

Lease financing

     46,892        2,371        3,065        172        52,500  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and business lending

     5,908,965        182,138        176,877        104,750        6,372,730  

Commercial real estate — investor

     2,835,903        50,895        34,790        79,631        3,001,219  

Real estate construction

     951,759        3,367        4,870        9,621        969,617  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate lending

     3,787,662        54,262        39,660        89,252        3,970,836  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

   $ 9,696,627      $ 236,400      $ 216,537      $ 194,002      $ 10,343,566  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents commercial loans by credit quality indicator at December 31, 2013.

 

     Pass      Special
Mention
     Potential
Problem
     Impaired      Total  
     ($ in Thousands)  

Commercial and industrial

   $ 4,485,160      $ 153,615      $ 113,669      $ 70,236      $ 4,822,680  

Commercial real estate — owner occupied

     959,849        55,404        56,789        42,673        1,114,715  

Lease financing

     52,733        897        1,784        69        55,483  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and business lending

     5,497,742        209,916        172,242        112,978        5,992,878  

Commercial real estate — investor

     2,740,255        64,230        52,429        82,542        2,939,456  

Real estate construction

     877,911        2,814        5,263        10,260        896,248  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate lending

     3,618,166        67,044        57,692        92,802        3,835,704  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

   $ 9,115,908      $ 276,960      $ 229,934      $ 205,780      $ 9,828,582  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents consumer loans by credit quality indicator at March 31, 2014.

 

     Performing      30-89 Days
Past Due
     Potential
Problem
     Impaired      Total  
     ($ in Thousands)  

Home equity

   $ 1,719,075      $ 9,819      $ 1,051      $ 32,057      $ 1,762,002  

Installment

     390,912        1,269        —          1,140        393,321  

Residential mortgage

     3,868,263        4,498        2,091        67,703        3,942,555  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

   $ 5,978,250      $ 15,586      $ 3,142      $ 100,900      $ 6,097,878  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents consumer loans by credit quality indicator at December 31, 2013.

 

     Performing      30-89 Days
Past Due
     Potential
Problem
     Impaired      Total  
     ($ in Thousands)  

Home equity

   $ 1,777,421      $ 10,680      $ 2,113      $ 34,800      $ 1,825,014  

Installment

     404,514        1,150        50        1,360        407,074  

Residential mortgage

     3,758,688        6,118        3,312        67,473        3,835,591  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

   $ 5,940,623      $ 17,948      $ 5,475      $ 103,633      $ 6,067,679  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Factors that are important to managing overall credit quality are sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early identification of potential problems, and appropriate allowance for loan losses, nonaccrual and charge off policies.

For commercial loans, management has determined the pass credit quality indicator to include credits that exhibit acceptable financial statements, cash flow, and leverage. If any risk exists, it is mitigated by the loan structure, collateral, monitoring, or control. For consumer loans, performing loans include credits that are performing in accordance with the original contractual terms. Loans are

 

19


considered past due if the required principal and interest payments have not been received as of the date such payments were due. Special mention credits have potential weaknesses that deserve management’s attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credit. Potential problem loans are considered inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged. These loans generally have a well-defined weakness, or weaknesses that may jeopardize liquidation of the debt and are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. Lastly, management considers a loan to be impaired when it is probable that the Corporation will be unable to collect all amounts due according to the original contractual terms of the note agreement, including both principal and interest. Management has determined that commercial and consumer loan relationships that have nonaccrual status or have had their terms restructured in a troubled debt restructuring meet this impaired loan definition. Commercial loans classified as special mention, potential problem, and impaired are reviewed at a minimum on a quarterly basis, while pass and performing rated credits are reviewed on an annual basis or more frequently if the loan renewal is less than one year or if otherwise warranted.

 

20


The following table presents loans by past due status at March 31, 2014.

 

     30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days or More
Past Due *
     Total Past Due      Current      Total  
     ($ in Thousands)  

Accruing loans

                 

Commercial and industrial

   $ 3,484      $ 642      $ 16      $ 4,142      $ 5,179,511      $ 5,183,653  

Commercial real estate — owner occupied

     5,292        50        —          5,342        1,066,012        1,071,354  

Lease financing

     567        —          —          567        51,761        52,328  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and business lending

     9,343        692        16        10,051        6,297,284        6,307,335  

Commercial real estate — investor

     5,582        1,606        —          7,188        2,960,420        2,967,608  

Real estate construction

     295        384        —          679        962,271        962,950  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate lending

     5,877        1,990        —          7,867        3,922,691        3,930,558  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     15,220        2,682        16        17,918        10,219,975        10,237,893  

Home equity

     8,114        1,705        68        9,887        1,729,630        1,739,517  

Installment

     1,004        265        586        1,855        390,551        392,406  

Residential mortgage

     3,968        530        53        4,551        3,889,099        3,893,650  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     13,086        2,500        707        16,293        6,009,280        6,025,573  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total accruing loans

   $ 28,306      $ 5,182      $ 723      $ 34,211      $ 16,229,255      $ 16,263,466  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual loans

                 

Commercial and industrial

   $ 3,395      $ 1,613      $ 4,131      $ 9,139      $ 29,349      $ 38,488  

Commercial real estate — owner occupied

     1,040        987        3,641        5,668        21,067        26,735  

Lease financing

     29        —          10        39        133        172  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and business lending

     4,464        2,600        7,782        14,846        50,549        65,395  

Commercial real estate — investor

     1,832        3,915        17,037        22,784        10,827        33,611  

Real estate construction

     21        24        2,529        2,574        4,093        6,667  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate lending

     1,853        3,939        19,566        25,358        14,920        40,278  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     6,317        6,539        27,348        40,204        65,469        105,673  

Home equity

     1,824        2,216        11,678        15,718        6,767        22,485  

Installment

     86        200        133        419        496        915  

Residential mortgage

     3,817        3,536        24,194        31,547        17,358        48,905  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     5,727        5,952        36,005        47,684        24,621        72,305  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonaccrual loans

   $ 12,044      $ 12,491      $ 63,353      $ 87,888      $ 90,090      $ 177,978  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

                 

Commercial and industrial

   $ 6,879      $ 2,255      $ 4,147      $ 13,281      $ 5,208,860      $ 5,222,141  

Commercial real estate — owner occupied

     6,332        1,037        3,641        11,010        1,087,079        1,098,089  

Lease financing

     596        —          10        606        51,894        52,500  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and business lending

     13,807        3,292        7,798        24,897        6,347,833        6,372,730  

Commercial real estate — investor

     7,414        5,521        17,037        29,972        2,971,247        3,001,219  

Real estate construction

     316        408        2,529        3,253        966,364        969,617  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate lending

     7,730        5,929        19,566        33,225        3,937,611        3,970,836  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     21,537        9,221        27,364        58,122        10,285,444        10,343,566  

Home equity

     9,938        3,921        11,746        25,605        1,736,397        1,762,002  

Installment

     1,090        465        719        2,274        391,047        393,321  

Residential mortgage

     7,785        4,066        24,247        36,098        3,906,457        3,942,555  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     18,813        8,452        36,712        63,977        6,033,901        6,097,878  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 40,350      $ 17,673      $ 64,076      $ 122,099      $ 16,319,345      $ 16,441,444  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* The recorded investment in loans past due 90 days or more and still accruing totaled $723 thousand at March 31, 2014 (the same as the reported balances for the accruing loans noted above).

 

21


The following table presents loans by past due status at December 31, 2013.

 

     30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days or More
Past Due *
     Total Past Due      Current      Total  
     ($ in Thousands)  

Accruing loans

                 

Commercial and industrial

   $ 3,390      $ 3,436      $ 1,199      $ 8,025      $ 4,776,936      $ 4,784,961  

Commercial real estate — owner occupied

     1,015        2,091        —          3,106        1,081,945        1,085,051  

Lease financing

     —          —          —          —          55,414        55,414  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and business lending

     4,405        5,527        1,199        11,131        5,914,295        5,925,426  

Commercial real estate — investor

     9,081        14,134        —          23,215        2,878,645        2,901,860  

Real estate construction

     836        1,118        —          1,954        887,827        889,781  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate lending

     9,917        15,252        —          25,169        3,766,472        3,791,641  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     14,322        20,779        1,199        36,300        9,680,767        9,717,067  

Home equity

     8,611        2,069        346        11,026        1,788,821        1,799,847  

Installment

     885        265        637        1,787        404,173        405,960  

Residential mortgage

     5,253        865        168        6,286        3,781,673        3,787,959  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     14,749        3,199        1,151        19,099        5,974,667        5,993,766  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total accruing loans

   $ 29,071      $ 23,978      $ 2,350      $ 55,399      $ 15,655,434      $ 15,710,833  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual loans

                 

Commercial and industrial

   $ 998      $ 1,764      $ 9,765      $ 12,527      $ 25,192      $ 37,719  

Commercial real estate — owner occupied

     2,482        1,724        11,125        15,331        14,333        29,664  

Lease financing

     —          —          69        69        —          69  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and business lending

     3,480        3,488        20,959        27,927        39,525        67,452  

Commercial real estate — investor

     3,408        899        20,466        24,773        12,823        37,596  

Real estate construction

     2,376        —          2,267        4,643        1,824        6,467  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate lending

     5,784        899        22,733        29,416        14,647        44,063  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     9,264        4,387        43,692        57,343        54,172        111,515  

Home equity

     1,725        1,635        14,331        17,691        7,476        25,167  

Installment

     129        24        289        442        672        1,114  

Residential mortgage

     3,199        3,257        26,201        32,657        14,975        47,632  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     5,053        4,916        40,821        50,790        23,123        73,913  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonaccrual loans

   $ 14,317      $ 9,303      $ 84,513      $ 108,133      $ 77,295      $ 185,428  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

                 

Commercial and industrial

   $ 4,388      $ 5,200      $ 10,964      $ 20,552      $ 4,802,128      $ 4,822,680  

Commercial real estate — owner occupied

     3,497        3,815        11,125        18,437        1,096,278        1,114,715  

Lease financing

     —          —          69        69        55,414        55,483  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and business lending

     7,885        9,015        22,158        39,058        5,953,820        5,992,878  

Commercial real estate — investor

     12,489        15,033        20,466        47,988        2,891,468        2,939,456  

Real estate construction

     3,212        1,118        2,267        6,597        889,651        896,248  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate lending

     15,701        16,151        22,733        54,585        3,781,119        3,835,704  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     23,586        25,166        44,891        93,643        9,734,939        9,828,582  

Home equity

     10,336        3,704        14,677        28,717        1,796,297        1,825,014  

Installment

     1,014        289        926        2,229        404,845        407,074  

Residential mortgage

     8,452        4,122        26,369        38,943        3,796,648        3,835,591  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     19,802        8,115        41,972        69,889        5,997,790        6,067,679  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 43,388      $ 33,281      $ 86,863      $ 163,532      $ 15,732,729      $ 15,896,261  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* The recorded investment in loans past due 90 days or more and still accruing totaled $2 million at December 31, 2013 (the same as the reported balances for the accruing loans noted above).

 

22


The following table presents impaired loans at March 31, 2014.

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     YTD
Average
Recorded
Investment
     YTD Interest
Income
Recognized*
 
     ($ in Thousands)  

Loans with a related allowance

              

Commercial and industrial

   $ 56,650      $ 62,196      $ 10,645      $ 58,237      $ 347  

Commercial real estate — owner occupied

     21,746        24,807        3,186        21,918        164  

Lease financing

     172        10        69        10        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and business lending

     78,568        87,013        13,900        80,165        511  

Commercial real estate — investor

     66,402        76,331        8,124        66,761        529  

Real estate construction

     7,972        11,841        2,150        8,228        43  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate lending

     74,374        88,172        10,274        74,989        572  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     152,942        175,185        24,174        155,154        1,083  

Home equity

     31,742        36,421        13,099        32,014        336  

Installment

     1,140        1,392        448        1,167        14  

Residential mortgage

     59,396        63,493        12,088        59,786        416  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     92,278        101,306        25,635        92,967        766  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 245,220      $ 276,491      $ 49,809      $ 248,121      $ 1,849  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans with no related allowance

              

Commercial and industrial

   $ 9,614      $ 16,994      $ —        $ 11,622      $ 9  

Commercial real estate — owner occupied

     16,568        19,084        —          16,786        5  

Lease financing

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and business lending

     26,182        36,078        —          28,408        14  

Commercial real estate — investor

     13,229        17,725        —          13,311        45  

Real estate construction

     1,649        2,078        —          1,707        3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate lending

     14,878        19,803        —          15,018        48  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     41,060        55,881        —          43,426        62  

Home equity

     315        315        —          315        3  

Installment

     —          —          —          —          —    

Residential mortgage

     8,307        8,426        —          8,353        27  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     8,622        8,741        —          8,668        30  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 49,682      $ 64,622      $ —        $ 52,094      $ 92  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

              

Commercial and industrial

   $ 66,264      $ 79,190      $ 10,645      $ 69,859      $ 356  

Commercial real estate — owner occupied

     38,314        43,891        3,186        38,704        169  

Lease financing

     172        10        69        10        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and business lending

     104,750        123,091        13,900        108,573        525  

Commercial real estate — investor

     79,631        94,056        8,124        80,072        574  

Real estate construction

     9,621        13,919        2,150        9,935        46  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate lending

     89,252        107,975        10,274        90,007        620  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     194,002        231,066        24,174        198,580        1,145  

Home equity

     32,057        36,736        13,099        32,329        339  

Installment

     1,140        1,392        448        1,167        14  

Residential mortgage

     67,703        71,919        12,088        68,139        443  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     100,900        110,047        25,635        101,635        796  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 294,902      $ 341,113      $ 49,809      $ 300,215      $ 1,941  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Interest income recognized included $1 million of interest income recognized on accruing restructured loans for the three months ended March 31, 2014.

 

23


The following table presents impaired loans at December 31, 2013.

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     YTD
Average
Recorded
Investment
     YTD Interest
Income
Recognized*
 
     ($ in Thousands)  
Loans with a related allowance               

Commercial and industrial

   $ 57,857      $ 65,443      $ 11,917      $ 61,000      $ 1,741  

Commercial real estate — owner occupied

     22,651        25,072        2,955        24,549        995  

Lease financing

     69        69        29        76        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and business lending

     80,577        90,584        14,901        85,625        2,736  

Commercial real estate — investor

     64,647        68,228        7,895        68,776        2,735  

Real estate construction

     8,815        12,535        2,416        9,796        236  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate lending

     73,462        80,763        10,311        78,572        2,971  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     154,039        171,347        25,212        164,197        5,707  

Home equity

     34,707        40,344        13,989        36,623        1,518  

Installment

     1,360        1,676        487        1,753        100  

Residential mortgage

     60,157        69,699        12,187        62,211        1,861  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     96,224        111,719        26,663        100,587        3,479  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 250,263      $ 283,066      $ 51,875      $ 264,784      $ 9,186  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans with no related allowance

              

Commercial and industrial

   $ 12,379      $ 19,556      $ —        $ 14,291      $ 306  

Commercial real estate — owner occupied

     20,022        22,831        —          20,602        315  

Lease financing

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and business lending

     32,401        42,387        —          34,893        621  

Commercial real estate — investor

     17,895        25,449        —          19,354        130  

Real estate construction

     1,445        1,853        —          1,576        13  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate lending

     19,340        27,302        —          20,930        143  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     51,741        69,689        —          55,823        764  

Home equity

     93        92        —          94        2  

Installment

     —          —          —          —          —    

Residential mortgage

     7,316        8,847        —          7,321        185  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     7,409        8,939        —          7,415        187  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 59,150      $ 78,628      $ —        $ 63,238      $ 951  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

              

Commercial and industrial

   $ 70,236      $ 84,999      $ 11,917      $ 75,291      $ 2,047  

Commercial real estate — owner occupied

     42,673        47,903        2,955        45,151        1,310  

Lease financing

     69        69        29        76        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and business lending

     112,978        132,971        14,901        120,518        3,357  

Commercial real estate — investor

     82,542        93,677        7,895        88,130        2,865  

Real estate construction

     10,260        14,388        2,416        11,372        249  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate lending

     92,802        108,065        10,311        99,502        3,114  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     205,780        241,036        25,212        220,020        6,471  

Home equity

     34,800        40,436        13,989        36,717        1,520  

Installment

     1,360        1,676        487        1,753        100  

Residential mortgage

     67,473        78,546        12,187        69,532        2,046  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     103,633        120,658        26,663        108,002        3,666  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 309,413      $ 361,694      $ 51,875      $ 328,022      $ 10,137  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Interest income recognized included $6 million of interest income recognized on accruing restructured loans for the year ended December 31, 2013.

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments, unless the loan is well secured and in the process of collection. Additionally, whenever management becomes aware of

 

24


facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on nonaccrual status immediately, rather than delaying such action until the loans become 90 days past due. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is reversed, amortization of related deferred loan fees or costs is suspended, and income is recorded only to the extent that interest payments are subsequently received in cash and a determination has been made that the principal and interest of the loan is collectible. If collectability of the principal and interest is in doubt, payments received are applied to loan principal.

While an asset is in nonaccrual status, some or all of the cash interest payments received may be treated as interest income on a cash basis as long as the remaining recorded investment in the asset (i.e., after charge off of identified losses, if any) is deemed to be fully collectible. The determination as to the ultimate collectability of the asset’s remaining recorded investment must be supported by a current, well documented credit evaluation of the borrower’s financial condition and prospects for repayment, including consideration of the borrower’s sustained historical repayment performance and other relevant factors. A nonaccrual loan is returned to accrual status when all delinquent principal and interest payments become current in accordance with the terms of the loan agreement, the borrower has demonstrated a period of sustained performance, and the ultimate collectability of the total contractual principal and interest is no longer in doubt. A sustained period of repayment performance generally would be a minimum of six months.

Troubled Debt Restructurings (“Restructured Loans”):

Loans are considered restructured loans if concessions have been granted to borrowers that are experiencing financial difficulty. The concessions granted generally involve the modification of terms of the loan, such as changes in payment schedule or interest rate, which generally would not otherwise be considered. Restructured loans can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on accrual status, depending on the individual facts and circumstances of the borrower. Nonaccrual restructured loans are included and treated with all other nonaccrual loans. In addition, all accruing restructured loans are reported as troubled debt restructurings, which are considered and accounted for as impaired loans. Generally, restructured loans remain on nonaccrual until the customer has attained a sustained period of repayment performance under the modified loan terms (generally a minimum of six months). However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and whether the loan should be returned or maintained on accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains on nonaccrual status. The Corporation had a $14 million recorded investment in loans modified in a troubled debt restructuring for the three months ended March 31, 2014, of which, $2 million were in accrual status and $12 million were in nonaccrual pending a sustained period of repayment.

As of March 31, 2014 and December 31, 2013, there were $74 million and $60 million, respectively, of nonaccrual restructured loans, and $117 million and $124 million, respectively, of performing restructured loans, included within impaired loans. All restructured loans are considered impaired in the calendar year of restructuring. In subsequent years, a restructured loan may cease being classified as impaired if the loan was modified at a market rate and has performed according to the modified terms for at least six months. A loan that has been modified at a below market rate will return to performing status if it satisfies the six month performance requirement; however, it will remain classified as a restructured loan. The following table presents nonaccrual and performing restructured loans by loan portfolio.

 

     March 31, 2014      December 31, 2013  
     Performing
Restructured
Loans
     Nonaccrual
Restructured
Loans *
     Performing
Restructured
Loans
     Nonaccrual
Restructured
Loans *
 
     ($ in Thousands)  

Commercial and industrial

   $ 27,776      $ 8,781      $ 32,517      $ 6,900  

Commercial real estate — owner occupied

     11,579        15,697        13,009        10,999  

Commercial real estate — investor

     46,020        14,619        44,946        18,069  

Real estate construction

     2,954        2,558        3,793        2,065  

Home equity

     9,572        7,785        9,633        5,419  

Installment

     225        419        246        451  

Residential mortgage

     18,798        24,372        19,841        15,682  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 116,924      $ 74,231      $ 123,985      $ 59,585  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* Nonaccrual restructured loans have been included with nonaccrual loans.

 

25


The following table provides the number of loans modified in a troubled debt restructuring by loan portfolio during the three months ended March 31, 2014 and 2013, and the recorded investment and unpaid principal balance as of March 31, 2014 and 2013.

 

     Three Months Ended March 31, 2014      Three Months Ended March 31, 2013  
     Number of
Loans
     Recorded
Investment
(1)
     Unpaid
Principal
Balance (2)
     Number of
Loans
     Recorded
Investment
(1)
     Unpaid
Principal
Balance (2)
 
     ($ in Thousands)  

Commercial and industrial

     8      $ 3,446      $ 7,218        22      $ 2,844      $ 5,315  

Commercial real estate — owner occupied

     4        5,298        5,781        3        2,217        2,228  

Commercial real estate — investor

     4        1,643        1,676        5        2,035        2,087  

Real estate construction

     —          —          —          5        1,960        1,980  

Home equity

     30        935        1,218        28        1,301        1,385  

Installment

     1        10        20        1        175        175  

Residential mortgage

     21        2,750        2,920        25        1,564        1,842  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     68      $ 14,082      $ 18,833        89      $ 12,096      $ 15,012  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents post-modification outstanding recorded investment.
(2) Represents pre-modification outstanding recorded investment.

Restructured loan modifications may include payment schedule modifications, interest rate concessions, maturity date extensions, modification of note structure (A/B Note), non-reaffirmed Chapter 7 bankruptcies, principal reduction, or some combination of these concessions. During the three months ended March 31, 2014, restructured loan modifications of commercial and industrial, commercial real estate, and real estate construction loans primarily included maturity date extensions and payment schedule modifications. Restructured loan modifications of home equity and residential mortgage loans primarily included maturity date extensions, interest rate concessions, payment schedule modifications, non-reaffirmed Chapter 7 bankruptcies, or a combination of these concessions for the three months ended March 31, 2014.

The following table provides the number of loans modified in a troubled debt restructuring during the previous 12 months which subsequently defaulted during the three months ended March 31, 2014 and 2013, as well as the recorded investment in these restructured loans as of March 31, 2014 and 2013.

 

     Three Months Ended March 31, 2014      Three Months Ended March 31, 2013  
     Number of Loans      Recorded Investment      Number of Loans      Recorded Investment  
     ($ in Thousands)  

Commercial and industrial

     —         $ —           7      $ 1,170  

Commercial real estate — owner occupied

     —           —           1        74  

Commercial real estate — investor

     —           —           3        1,781  

Real estate construction

       1        161        —           —     

Home equity

       7        388        3        109  

Installment

       1        10        —           —     

Residential mortgage

     12        1,761        3        624  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     21      $ 2,320        17      $ 3,758  
  

 

 

    

 

 

    

 

 

    

 

 

 

All loans modified in a troubled debt restructuring are evaluated for impairment. The nature and extent of the impairment of restructured loans, including those which have experienced a subsequent payment default, is considered in the determination of an appropriate level of the allowance for loan losses.

 

26


NOTE 7: Goodwill and Other Intangible Assets

Goodwill: Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The impairment testing process is conducted by assigning net assets and goodwill to each reporting unit. An initial qualitative evaluation is made to assess the likelihood of impairment and determine whether further quantitative testing to calculate the fair value is necessary. When the qualitative evaluation indicates that impairment is more likely than not, quantitative testing is required whereby the fair value of each reporting unit is calculated and compared to the recorded book value, “step one.” If the calculated fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired and “step two” is not considered necessary. If the carrying value of a reporting unit exceeds its calculated fair value, the impairment test continues (“step two”) by comparing the carrying value of the reporting unit’s goodwill to the implied fair value of goodwill. The implied fair value is computed by adjusting all assets and liabilities of the reporting unit to current fair value with the offset adjustment to goodwill. The adjusted goodwill balance is the implied fair value of the goodwill. An impairment charge is recognized if the carrying value of goodwill exceeds the implied fair value of goodwill.

The Corporation conducted its annual impairment testing in May 2013, utilizing a qualitative assessment. Factors that management considered in this assessment included macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management strategy, and changes in the composition or carrying amount of net assets. In addition, management considered the significant increases in both the Corporation’s common stock price and in the overall bank common stock index (based on the Nasdaq bank index), as well as the Corporation’s improving earnings per common share trend over the past year. Based on these assessments, management concluded that the 2013 annual qualitative impairment assessment indicated that it is more likely than not that the estimated fair value exceeded the carrying value (including goodwill) for each reporting unit. Therefore, a step one quantitative analysis was not required. There were no impairment charges recorded in 2013 or through March 31, 2014. It is possible that a future conclusion could be reached that all or a portion of the Corporation’s goodwill may be impaired, in which case a non-cash charge for the amount of such impairment would be recorded in earnings. Such a charge, if any, would have no impact on tangible capital and would not affect the Corporation’s “well-capitalized” designation.

At March 31, 2014, the Corporation had goodwill of $929 million, including goodwill of $428 million assigned to the Commercial Banking reporting unit and goodwill of $501 million assigned to the Consumer Banking reporting unit. There was no change in the carrying amount of goodwill for the three months ended March 31, 2014, and the year ended December 31, 2013.

Other Intangible Assets: The Corporation has other intangible assets that are amortized, consisting of core deposit intangibles, other intangibles (primarily related to customer relationships acquired in connection with the Corporation’s insurance agency acquisitions), and mortgage servicing rights. For core deposit intangibles and other intangibles, changes in the gross carrying amount, accumulated amortization, and net book value were as follows.

 

     Three Months Ended
March 31, 2014
    Year Ended
December 31, 2013
 
     ($ in Thousands)  

Core deposit intangibles:

    

Gross carrying amount

   $ 36,230     $ 36,230  

Accumulated amortization

     (32,336     (31,565
  

 

 

   

 

 

 

Net book value

   $ 3,894     $ 4,665  
  

 

 

   

 

 

 

Amortization during the period

   $ 771     $ 3,122  

Other intangibles:

    

Gross carrying amount

   $ 19,283     $ 19,283  

Accumulated amortization

     (12,984     (12,764
  

 

 

   

 

 

 

Net book value

   $ 6,299     $ 6,519  
  

 

 

   

 

 

 

Amortization during the period

   $ 220     $ 921  

The Corporation sells residential mortgage loans in the secondary market and typically retains the right to service the loans sold. Upon sale, a mortgage servicing rights asset is capitalized, which represents the then current fair value of future net cash flows

 

27


expected to be realized for performing servicing activities. Mortgage servicing rights, when purchased, are initially recorded at fair value. As the Corporation has not elected to subsequently measure any class of servicing assets under the fair value measurement method, the Corporation follows the amortization method. Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income, and assessed for impairment at each reporting date. Mortgage servicing rights are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value, and are included in other intangible assets, net, in the consolidated balance sheets.

The Corporation periodically evaluates its mortgage servicing rights asset for impairment. Impairment is assessed based on fair value at each reporting date using estimated prepayment speeds of the underlying mortgage loans serviced and stratifications based on the risk characteristics of the underlying loans (predominantly loan type and note interest rate). As mortgage interest rates fall, prepayment speeds are usually faster and the value of the mortgage servicing rights asset generally decreases, requiring additional valuation reserve. Conversely, as mortgage interest rates rise, prepayment speeds are usually slower and the value of the mortgage servicing rights asset generally increases, requiring less valuation reserve. A valuation allowance is established, through a charge to earnings, to the extent the amortized cost of the mortgage servicing rights exceeds the estimated fair value by stratification. If it is later determined that all or a portion of the temporary impairment no longer exists for a stratification, the valuation is reduced through a recovery to earnings. An other-than-temporary impairment (i.e., recoverability is considered remote when considering interest rates and loan pay off activity) is recognized as a write-down of the mortgage servicing rights asset and the related valuation allowance (to the extent a valuation allowance is available) and then against earnings. A direct write-down permanently reduces the carrying value of the mortgage servicing rights asset and valuation allowance, precluding subsequent recoveries. See Note 12 for a discussion of the recourse provisions on serviced residential mortgage loans. See Note 13 which further discusses fair value measurement relative to the mortgage servicing rights asset.

A summary of changes in the balance of the mortgage servicing rights asset and the mortgage servicing rights valuation allowance was as follows.

 

     Three Months Ended
March 31, 2014
    Year Ended
December 31, 2013
 
     ($ in Thousands)  

Mortgage servicing rights:

    

Mortgage servicing rights at beginning of period

   $ 64,193     $ 61,425  

Additions

     1,725       18,256  

Amortization

     (2,725     (15,488
  

 

 

   

 

 

 

Mortgage servicing rights at end of period

   $ 63,193     $ 64,193  
  

 

 

   

 

 

 

Valuation allowance at beginning of period

     (913     (15,476

Recoveries, net

     156       14,563  
  

 

 

   

 

 

 

Valuation allowance at end of period

     (757     (913
  

 

 

   

 

 

 

Mortgage servicing rights, net

   $ 62,436     $ 63,280  
  

 

 

   

 

 

 

Fair value of mortgage servicing rights

   $ 71,987     $ 74,444  

Portfolio of residential mortgage loans serviced for others (“servicing portfolio”)

     8,084,000       8,084,000  

Mortgage servicing rights, net to servicing portfolio

     0.77     0.78

Mortgage servicing rights expense (1)

   $ 2,569     $ 925  

 

(1) Includes the amortization of mortgage servicing rights and additions/recoveries to the valuation allowance of mortgage servicing rights, and is a component of mortgage banking, net, in the consolidated statements of income.

 

28


The following table shows the estimated future amortization expense for amortizing intangible assets. The projections of amortization expense are based on existing asset balances, the current interest rate environment, and prepayment speeds as of March 31, 2014. The actual amortization expense the Corporation recognizes in any given period may be significantly different depending upon acquisition or sale activities, changes in interest rates, prepayment speeds, market conditions, regulatory requirements, and events or circumstances that indicate the carrying amount of an asset may not be recoverable.

 

Estimated amortization expense:

   Core
Deposit
Intangibles
     Other
Intangibles
     Mortgage
Servicing
Rights
 
     ($ in Thousands)  

Nine months ending December 31, 2014

   $ 2,097      $ 659      $ 7,685  

Year ending December 31, 2015

     1,404        839        8,777  

Year ending December 31, 2016

     281        803        7,345  

Year ending December 31, 2017

     112        770        6,171  

Year ending December 31, 2018

     —           740        5,197  

Year ending December 31, 2019

     —           441        4,397  

Beyond 2019

     —           2,047        23,621  
  

 

 

    

 

 

    

 

 

 

Total Estimated Amortization Expense

   $ 3,894      $ 6,299      $ 63,193  
  

 

 

    

 

 

    

 

 

 

NOTE 8: Short and Long-Term Funding

The components of short-term funding (funding with original contractual maturities of one year or less) and long-term funding (funding with original contractual maturities greater than one year) were as follows.

 

     March 31,
2014
     December 31,
2013
 
     ($ in Thousands)  

Short-Term Funding

     

Federal funds purchased

   $ 391,075      $ 56,195  

Securities sold under agreements to repurchase

     548,179        419,247  
  

 

 

    

 

 

 

Federal funds purchased and securities sold under agreements to repurchase

     939,254        475,442  

FHLB advances

     225,000        200,000  

Commercial paper

     83,652        65,484  
  

 

 

    

 

 

 

Other short-term funding

     308,652        265,484  
  

 

 

    

 

 

 

Total short-term funding

   $ 1,247,906      $ 740,926  
  

 

 

    

 

 

 

Long-Term Funding

     

FHLB advances

   $ 2,500,288      $ 2,500,297  

Senior notes, at par

     430,000        585,000  

Other long-term funding and capitalized costs

     1,752        1,970  
  

 

 

    

 

 

 

Total long-term funding

   $ 2,932,040      $ 3,087,267  
  

 

 

    

 

 

 

Total short and long-term funding

   $ 4,179,946      $ 3,828,193  
  

 

 

    

 

 

 

Short-term funding:

The FHLB advances included in short-term funding are those with original contractual maturities of one year or less. The securities sold under agreements to repurchase represent short-term funding which is collateralized by securities of the U.S. Government or its agencies and mature daily.

Long-term funding:

FHLB advances: At March 31, 2014, the long-term FHLB advances had a weighted-average interest rate of 0.11%, compared to 0.10% at December 31, 2013. During the fourth quarter of 2013, the Corporation executed $2.5 billion of five year, variable rate FHLB advances that are putable, at our option, without penalty after six months. The FHLB advances are indexed to the FHLB

 

29


discount note plus 6 basis points and reprice at varying intervals, including $1.0 billion repricing at four week intervals, $750 million repricing at 13 week intervals, and $750 million repricing daily. The advances offer flexible, low cost, long-term funding that improves the Corporation’s liquidity profile.

Senior notes: In March 2011, the Corporation issued $300 million of senior notes at a discount. In September 2011, the Corporation issued an additional $130 million of senior notes at a premium. The 2011 senior note issuances mature on March 28, 2016 and have a fixed coupon interest rate of 5.125%. In September 2012, the Corporation issued $155 million of senior notes at a discount. The Corporation redeemed the 2012 senior notes during February 2014.

NOTE 9: Income Taxes

The Corporation recognized income tax expense of $21 million for both the first quarter of 2014 and the first quarter of 2013. The effective tax rate was 31.35% for the first quarter of 2014, compared to an effective tax rate of 31.06% for the first quarter of 2013.

NOTE 10: Derivative and Hedging Activities

The Corporation facilitates customer borrowing activity by providing various interest rate risk management solutions through its capital markets area. To date, all of the notional amounts of customer transactions have been matched with a mirror swap with another counterparty. The Corporation may also use derivative instruments to hedge the variability in interest payments or protect the value of certain assets and liabilities recorded on its consolidated balance sheet from changes in interest rates. The predominant derivative and hedging activities include interest rate-related instruments (swaps and caps), foreign currency exchange forwards, written options, purchased options, and certain mortgage banking activities. The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amounts to be exchanged between the counterparties. The Corporation is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. To mitigate the counterparty risk, interest rate-related instruments generally contain language outlining collateral pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits which are determined from the credit ratings of each counterparty. The Corporation was required to pledge $39 million of investment securities as collateral at March 31, 2014, and pledged $42 million of investment securities as collateral at December 31, 2013. Under the Dodd-Frank legislation, as of June 10, 2013, the Corporation must clear all LIBOR interest rate swaps through a clearing house. As such, the Corporation is required to pledge cash collateral for the margin. At March 31, 2014, the Corporation posted cash collateral for the margin of $9 million, compared to $6 million at December 31, 2013.

The Corporation’s derivative and hedging instruments are recorded at fair value on the consolidated balance sheets. The fair value of the Corporation’s interest rate-related instruments is determined using discounted cash flow analysis on the expected cash flows of each derivative and also includes a nonperformance / credit risk component (credit valuation adjustment). See Note 13 for additional fair value information and disclosures.

 

30


The table below identifies the balance sheet category and fair values of the Corporation’s derivative instruments not designated as hedging instruments.

 

                       Weighted Average  
($ in Thousands)    Notional
Amount
     Fair
Value
    Balance Sheet
Category
   Receive
Rate(1)
    Pay
Rate(1)
    Maturity  

March 31, 2014

              

Interest rate-related instruments — customer and mirror

   $ 1,805,140      $ 40,078     Trading assets      1.59     1.59     44 months   

Interest rate-related instruments — customer and mirror

     1,805,140        (42,843   Trading liabilities      1.59     1.59     44 months   

Interest rate lock commitments (mortgage)

     131,294        791     Other assets      —          —          —     

Forward commitments (mortgage)

     148,750        512     Other assets      —          —          —     

Foreign currency exchange forwards

     49,084        744     Trading assets      —          —          —     

Foreign currency exchange forwards

     41,241        (607   Trading liabilities      —          —          —     

Purchased options (time deposit)

     114,716        7,490     Other assets      —          —          —     

Written options (time deposit)

     114,716        (7,490   Other liabilities      —          —          —     

December 31, 2013

              

Interest rate-related instruments — customer and mirror

   $ 1,821,787      $ 42,980     Trading assets      1.63     1.63     45 months   

Interest rate-related instruments — customer and mirror

     1,821,787        (45,815   Trading liabilities      1.63     1.63     45 months   

Interest rate lock commitments (mortgage)

     102,225        416     Other assets      —          —          —     

Forward commitments (mortgage)

     135,000        1,301     Other assets      —          —          —     

Foreign currency exchange forwards

     25,747        748     Trading assets      —          —          —     

Foreign currency exchange forwards

     24,413        (655   Trading liabilities      —          —          —     

Purchased options (time deposit)

     115,953        7,328     Other assets      —          —          —     

Written options (time deposit)

     115,953        (7,328   Other liabilities      —          —          —     

 

(1) Reflects the weighted average receive rate and pay rate for the interest rate swap derivative financial instruments only.

The table below identifies the income statement category of the gains and losses recognized in income on the Corporation’s derivative instruments not designated as hedging instruments.

 

     Income Statement Category of
Gain /(Loss) Recognized in Income
   Gain /(Loss)
Recognized in Income
 
          ($ in Thousands)  

Three Months Ended March 31, 2014

     

Interest rate-related instruments — customer and mirror, net

   Capital market fees, net    $ 70  

Interest rate lock commitments (mortgage)

   Mortgage banking, net      375  

Forward commitments (mortgage)

   Mortgage banking, net      (789

Foreign currency exchange forwards

   Capital market fees, net      44  

Three Months Ended March 31, 2013

     

Interest rate-related instruments — customer and mirror, net

   Capital market fees, net    $ 381  

Interest rate lock commitments (mortgage)

   Mortgage banking, net      (2,526

Forward commitments (mortgage)

   Mortgage banking, net      (696

Foreign currency exchange forwards

   Capital market fees, net      29  

Free standing derivatives

The Corporation enters into various derivative contracts which are designated as free standing derivative contracts. These derivative contracts are not designated against specific assets and liabilities on the balance sheet or forecasted transactions and, therefore, do not qualify for hedge accounting treatment. Such derivative contracts are carried at fair value on the consolidated balance sheet with changes in the fair value recorded as a component of Capital market fees, net, and typically include interest rate-related instruments (swaps and caps).

Free standing derivatives are entered into primarily for the benefit of commercial customers through providing derivative products which enables the customer to manage their exposures to interest rate risk. The Corporation’s market risk from unfavorable movements in interest rates related to these derivative contracts is generally economically hedged by concurrently entering into offsetting derivative contracts. The offsetting derivative contracts have identical notional values, terms and indices.

 

31


Mortgage derivatives

Interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments, and the fair value of these commitments is recorded on the consolidated balance sheets with the changes in fair value recorded as a component of mortgage banking, net.

Foreign currency derivatives

The Corporation provides foreign exchange services to customers. The Corporation may enter into a foreign currency forward to mitigate the exchange rate risk attached to the cash flows of a loan or as an offsetting contract to a forward entered into as a service to our customer.

Written and purchased option derivatives (time deposit)

The Corporation has periodically entered into written and purchased option derivative instruments to facilitate an equity linked time deposit product (the “Power CD”). During September 2013, the Corporation terminated its Power CD product. The Power CD was a time deposit that provided the purchaser a guaranteed return of principal at maturity plus a potential equity return (a written option), while the Corporation received a known stream of funds based on the equity return (a purchased option). The written and purchased options are mirror derivative instruments which are carried at fair value on the consolidated balance sheets.

 

32


NOTE 11: Balance Sheet Offsetting

Interest Rate-Related Instruments (“Interest Agreements”)

The Corporation enters into interest rate-related instruments to facilitate the interest rate risk management strategies of commercial customers. The Corporation mitigates this risk by entering into equal and offsetting interest rate-related instruments with highly rated third party financial institutions. The interest agreements are free-standing derivatives and are recorded at fair value in the Corporation’s consolidated balance sheet. The Corporation is party to master netting arrangements with its financial institution counterparties; however, the Corporation does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all interest agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral, usually in the form of investment securities, is posted by the counterparty with net liability positions in accordance with contract thresholds. See Note 10 for additional information on the Corporation’s derivative and hedging activities.

Securities Sold Under Agreements to Repurchase (“Repurchase Agreements”)

The Corporation enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Corporation may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Corporation to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability in the Corporation’s consolidated balance sheet, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts (i.e., there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities). The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Corporation be in default (e.g., fails to make an interest payment to the counterparty). In addition, the Corporation does not enter into reverse repurchase agreements; therefore, there is no such offsetting to be done with the repurchase agreements.

 

33


The following table presents the assets and liabilities subject to an enforceable master netting arrangement as of March 31, 2014 and December 31, 2013. The swap agreements we have with our commercial customers are not subject to an enforceable master netting arrangement, and therefore, are excluded from this table.

 

     Gross      Gross amounts      Net amounts     

Gross amounts not offset

in the balance sheet

       
     amounts
recognized
     offset in the
balance sheet
     presented in
the balance sheet
     Financial
instruments
    Collateral     Net
amount
 
     ($ in Thousands)  

March 31, 2014

               

Derivative assets:

               

Interest rate-related instruments

   $ 2,069      $ —        $ 2,069      $ (2,068   $ —       $ 1  

Derivative liabilities: